United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______
Commission File No. 0-22088
NEVADA 88-0300760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1175 W. MOANA LANE, SUITE 200
RENO, NEVADA 89509
(Address of principal (Zip code)
executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined by rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of voting and non-voting common equity held by nonaffiliates as of June 30, 2003, based on the closing price as reported on The Nasdaq Stock Market(SM) of $9.25 per share, was approximately $39,271,745.
As of March 8, 2004, Registrant had 9,343,661 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. None.
Portions of the Proxy Statement for Registrant's 2004 Annual Meeting of Stockholders, which Proxy Statement shall be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K WHICH EXPRESS THE "BELIEF", "ANTICIPATION", "INTENTION", "EXPECTATION", OR "SCHEDULES" AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT, AND STATEMENTS AS TO BUSINESS OPPORTUNITIES, MARKET CONDITIONS, COST ESTIMATIONS AND OPERATING PERFORMANCE INSOFAR AS THEY MAY APPLY PROSPECTIVELY, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
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 the tropically-themed Atlantis Casino Resort, a hotel/casino facility in Reno, Nevada (the "Atlantis"). Unless otherwise indicated, "Monarch" or the "Company" refers to Monarch Casino & Resort, Inc. and its Golden Road subsidiary. Monarch was incorporated in 1993 under Nevada law for the purpose of acquiring all of the stock of Golden Road. The principal asset of Monarch is the stock of Golden Road, which holds all of the assets of the Atlantis. Our principal executive offices are located at 1175 West Moana Lane, Suite 200, Reno, Nevada 89509, telephone (775) 825-3355.
AVAILABLE INFORMATION
Our website address is www.monarchcasino.com. We make available free 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, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
THE ATLANTIS CASINO RESORT
Through our Golden Road subsidiary, we own and operate the tropically- themed Atlantis Casino Resort, which is located approximately three miles south of downtown in the generally more affluent and rapidly growing south area of Reno, Nevada. The Atlantis features approximately 51,000 square feet of casino space interspersed with waterfalls, giant artificial palm trees, thatched-roof huts, and other tropical decor; a hotel and a motor lodge with 980 guest rooms; nine food outlets; an enclosed pool with waterfall; an outdoor pool; a health spa; two retail outlets offering clothing and traditional gift shop merchandise; a full service salon for men and women; an 8,000 square-foot family entertainment center; and approximately 25,000 square feet of banquet, convention and meeting room space.
The Reno-Sparks Convention Center is located across the street from the Atlantis, the only hotel-casino within easy walking distance. The Reno-Sparks Convention Center underwent a $105 million expansion and renovation completed in late July 2002 that increased its exhibition, meeting room, ballroom, and lobby space by more than 50%, from approximately 380,000 to approximately 600,000 square feet.
ATLANTIS CASINO
The Atlantis casino offers approximately 1,450 slot and video poker machines; 37 table games, including blackjack, craps, roulette and others; a sports book (which is operated by an unaffiliated party pursuant to a lease arrangement with us); Keno; and a poker room.
The following table summarizes the components of our casino revenues for the periods shown:
Years ended December 31,
--------------------------
2003 2002 2001
------ ------ ------
Slot & video poker..................... 78.2% 74.8% 77.3%
Table games............................ 18.8% 22.5% 19.8%
Keno, poker room and sports book rent.. 3.0% 2.7% 2.9%
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The Atlantis offers what we believe are higher than average payout rates on slot machines relative to other northern Nevada casinos and has adopted liberal rules for its blackjack games, including the use of single decks of cards at many tables and allowing players to "double down" on the first two cards. We seek to attract high-end players through high quality amenities and services and by extension of gaming credit after a careful credit history evaluation.
HOTEL AND MOTOR LODGE
The Atlantis includes three contiguous high-rise hotel towers with 831 rooms and suites, and a low-rise motor lodge with another 149 rooms, for a total of 980 guest rooms. The first of the three hotel towers, which was completed in April 1991, contains 160 rooms and suites in 13 stories, and underwent a $2.8 million complete interior renovation completed early in the third quarter of 2002. The second hotel tower was completed in September 1994 and contains 283 rooms and suites in 19 stories and is undergoing an estimated $3.9 million complete interior renovation that was commenced in November 2003 with an expected April 2004 completion date. The third tower was completed in June 1999 and contains 388 rooms and suites in 28 stories. The rooms on the top seven floors in the newest tower are nearly 20% larger than the standard guest rooms and offer private elevator access, upscale accommodations, and a private concierge service.
The Atlantis hotel rooms feature upbeat, colorful interior decorations and furnishings consistent with the Atlantis' tropical theme, as well as nine-foot ceilings (most standard hotel rooms have eight-foot ceilings), which create an open and spacious feel. The newest hotel tower features a four-story waterfall with an adjacent swimming pool in a climate controlled, five-story glass enclosure, which shares an outdoor third floor pool deck with an outdoor swimming pool and whirlpool. A full service salon (the "Salon at Atlantis") overlooks the swimming pool area and offers hair, nails, skincare and body treatment services for men and women. A health spa is located adjacent to the swimming areas. The hotel also features glass elevators rising the full 19 and 28 stories, respectively, of the two taller hotel towers, providing panoramic views of the Reno area and the Sierra Nevadas, a mountain range separating Nevada from California.
The 149-room motor lodge is a two-story structure located adjacent to the hotel. The motor lodge rooms, which are also decorated and furnished in a manner consistent with the Atlantis' tropical theme, are smaller than the tower hotel rooms and have standard eight-foot ceilings. We believe the motor lodge rooms appeal to value conscious travelers who still want to enjoy the experience and amenities of a first-class hotel-casino resort.
The average occupancy rate and average daily room rate at the Atlantis for the following periods were:
Years ended December 31,
--------------------------
2003 2002 2001
------ ------ ------
Occupancy rate......................... 92.3% 92.9% 91.1%
Average daily room rate................ $57.82 $55.29 $53.48
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We continually monitor and adjust hotel room rates based upon demand and other competitive factors. Our Average Daily Room Rate ("ADR") has also been impacted by rooms sold at discounted rates to select wholesale operators for tour and travel packages.
RESTAURANTS AND DINING
The Atlantis has seven restaurants, one snack bar, and one gourmet coffee bar, as described below.
- The 640-seat Toucan Charlie's Buffet & Grill, which offers a wide
variety of standard hot food selections, salads and seafood; specialty
substations featuring made-to-order items, such as Mongolian barbecue,
fresh Southwest and Asian specialties, and meats roasted in wood-fired
rotisserie ovens; and two salad stations
- The 135-seat, aquatic-themed Atlantis Seafood Steakhouse gourmet
restaurant
- The 218-seat, upscale MonteVigna Italian Ristorante, featuring a
centrally located wine cellar and seasonal outdoor terrace
- The Oyster Bar restaurant in the Sky Terrace offering fresh seafood,
soups and bisques made to order
- The new Sushi Bar, also in the Sky Terrace, offering a variety of fresh
raw and cooked sushi specialties, including all-you-can-eat lunch and
dinner menus. Combined, the Oyster Bar and Sushi Bar can accommodate
up to 120 guests
- The 178-seat 24-hour Purple Parrot coffee shop
- The 104-seat Cafe Alfresco restaurant serving pizzas prepared in a
wood-fired, brick oven
- A gourmet coffee bar, offering specialty coffee drinks and pastries and
desserts made fresh daily in the Atlantis bakery
- A snack bar and soda fountain serving ice cream and arcade-style
refreshments
THE SKY TERRACE
The Sky Terrace is a unique structure with a diamond-shaped, blue glass body suspended approximately 55 feet above street level and spanning 160 feet across South Virginia Street. The Sky Terrace connects the Atlantis with additional parking on a 16-acre site owned by us across South Virginia Street from the Atlantis. The structure rests at each end on two 100-foot tall Grecian columns with no intermediate support pillars. The tropically-themed interior of the Sky Terrace contains the Oyster Bar, a video poker bar, banks of slot machines, a lounge area with oversized leather sofas and chairs and, since May 2003, a sushi bar. The Sushi Bar replaced the coffee and pastry bar that was previously located adjacent to the lounge area.
Operations at the Atlantis are conducted 24 hours a day, every day of the year. The Atlantis' business is moderately seasonal in nature, with higher revenues during the summer months and lower revenues during the winter months.
ATLANTIS IMPROVEMENTS
We have continuously invested in upgrading the Atlantis. Our capital expenditures at the Atlantis were $8.4 million in 2003, $6.5 million in 2002, and $4.5 million in 2001. A summary of capital expenditures for the last three years is as follows (in millions):
2003 2002 2001
-------- -------- --------
Cash acquisitions of property and equipment... $8.0 $4.8 $3.3
Property and equipment acquired through
trade payables............................... - 0.1 -
Financed purchases of property and equipment.. 0.4 1.6 1.2
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Total capital expenditures.................... $8.4 $6.5 $4.5
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During 2003, capital expenditures consisted primarily of the construction and opening of the new Sushi Bar and Salon at Atlantis, renovations to the second hotel tower, and continued acquisitions of and upgrades to gaming equipment. During 2002, capital expenditures consisted primarily of renovations to the first hotel tower, renovations and upgrade to the hotel front desk and VIP services area, a total renovation of the Cafe Alfresco, and continued acquisitions of and upgrades to gaming equipment. In 2001, capital expenditures were primarily for the renovation of hotel room suites in the third tower and acquisition and upgrades of slot machines, computer information systems and furniture, fixtures and equipment.
In 2004, we are planning construction of a new driveway that will be shared between the Atlantis and the adjacent Sierra Marketplace Shopping Center (the "Shopping Center") that is owned and controlled by affiliates of our controlling stockholders. A new traffic signal will be erected at mid- block on South Virginia Street, serving the new driveway. As part of this project, we will lease a 37,368 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at a monthly rent of $25,000, subject to increase every 60 months based on the Consumer Price Index. We will also use part of the common area of the Shopping Center and will pay our proportional share of the common area expense of the Shopping Center. We have the option to renew the lease for 3 five-year terms, and at the end of the extension period, we have the option to purchase the leased section of the Shopping Center at a price to be determined based on a MAI Appraisal. The leased space will be used by us for pedestrian and vehicle access to the Atlantis, and we will have use of a portion of the parking spaces at the Shopping Center. We are responsible for two thirds of the construction costs of the project, up to a maximum of $1.2 million. We anticipate this project will be completed in Summer of 2004 (see Part III - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004).
We remain committed to implementing renovations and upgrades and will consider all capital expenditure projects proposed by our executive officers and key employees.
EXPANSION POTENTIAL
Our expansion potential is twofold. First, we could expand our existing casino, which the City of Reno has approved, thereby giving us more room to add 500 more slot machines. The City of Reno has also approved the expansion of the hotel by 520 rooms as well as the construction of a parking garage with 1,831 spaces. Second, we could expand by developing the 16-acre parcel that we own across the street from the Atlantis. This site is connected to the Atlantis by the Sky Terrace and is currently used for parking and special events related to the Atlantis. Our 16-acre parcel meets all current Reno zoning requirements in the event we decide to build another resort casino or entertainment facility. We currently have no plans for the expansion or development of either site, but we constantly monitor industry demands and prudent development opportunities for our property.
In 2003, we entered into an option agreement with an affiliate of our controlling stockholders to purchase property in South Reno for development of a new hotel casino. Commencement of any development of the property will require completion of property due diligence and receipt of numerous approvals, including master plan changes and zone changes, neither of which can be assured. Through the current property owner, we have filed an application with the City of Reno for master plan change and zone change for 13 acres of the property.
MARKETING STRATEGY
Our revenues and operating income are principally dependent on the level of gaming activity at the Atlantis casino. Our predominant marketing goal is to utilize all of the Atlantis facilities to generate additional casino play. Our secondary goal is to maximize revenues from our hotel, restaurants, cocktail lounges, convention and meeting rooms and other amenities.
Our marketing efforts are directed toward three broad consumer groups:
Reno area residents, leisure travelers, and conventioneers. We believe the
Atlantis' location outside the downtown area, near the airport and across the
street from the Reno-Sparks Convention Center makes the facility appealing to
all three groups.
RENO AREA RESIDENTS. The Atlantis' proximity to rapidly growing, generally more affluent, south Reno residential areas provides a significant source of middle to upper-middle income gaming customers. We market to Reno area residents (referred to from time to time as "Locals") on the basis of the Atlantis location and accessibility, convenient surface parking, gaming values, ambiance, friendly efficient service, and quality and relative value of its food and beverage offerings, entertainment, and promotions.
We believe local gaming customers prefer slot and video poker machines to table games, and prefer video poker machines to reel-spinning (or electronically simulated reel-spinning) slot machines. Accordingly, the Atlantis provides a diverse selection of video poker machines. Moreover, we believe that Reno area residents seek out and frequent casinos with higher
payout rates on slot and video poker machines and more liberal rules on table games relative to other northern Nevada casinos. We believe the Atlantis offers higher than average payout rates on slot machines, and we have adopted liberal rules for its blackjack games, including the use of single decks of cards at many tables and allowing players to "double down" on the first two cards. We have also implemented "Club Paradise," a frequent player club, to encourage Locals' repeat play at our casino.
LEISURE TRAVELERS. Reno is a popular gaming and vacation destination that enjoys direct freeway access to nearly all major northern California population centers and non-stop air service from most large cities in the western United States, as well as many midwest and southern population centers such as Chicago, Minneapolis and Dallas. The principal segments of Reno's leisure traveler market are independent travelers, package tour and travel customers, and high-end players. We attempt to maximize our gaming revenues and hotel occupancy through a balanced marketing approach that addresses each market segment.
Independent travelers make reservations directly with hotels of their choice or through independent travel agents. We believe this market segment is largely comprised of individuals who drive and, to a lesser extent, fly to Reno from a specific region, primarily northern California and the Pacific Northwest. We strive to attract the middle to upper-middle income strata of this consumer segment through advertising and direct marketing in select regions. This segment represents a significant portion of the Atlantis' customers, especially those visiting on weekends.
The package tour and travel segment consists of visitors who utilize travel packages offered by wholesale operators. We market to this segment through relationships with select wholesalers, primarily to generate customer visits and supplement mid-week occupancy.
We welcome direct on-line reservations on the Atlantis' website (http://www.atlantiscasino.com). We are also featured on major package tour and travel websites.
We market to high-end players selectively through direct sales. We utilize complimentary rooms, food and beverage, special events and the extension of gaming credit to attract high-end players.
CONVENTIONEERS. Convention business, like package tour and travel, generates mid-week customer visits and supplements occupancy during low-demand periods. Conventioneers also typically pay higher average room rates than non- conventioneers. We selectively seek convention and meeting groups that we believe will materially enhance the Atlantis' occupancy and daily room rates, as well as those we believe will be more likely to gamble. As the only hotel- casino within easy walking distance of the Reno-Sparks Convention Center, the Atlantis is, in our view, uniquely positioned to capitalize on this expanding segment. We believe the $105 million expansion and remodeling of the Reno- Sparks Convention Center, completed in late July 2002, has created and we expect will continue to create additional customer traffic for the Atlantis from a market segment that is presently underserved in the Reno area.
We market to all customer segments, including conventioneers, on the basis of the location, quality and ambiance of the Atlantis facility, gaming values, friendly efficient service, and the quality and relative value of its rooms, food and beverage offerings, entertainment, and promotions.
Our frequent player club, "Club Paradise," allows our customers to be eligible to receive rewards and privileges based on the amount of their play, while allowing us to track their play through a computerized system. We use this information to determine appropriate levels of complimentary awards, and in our direct marketing efforts. We believe that Club Paradise significantly enhances our ability to build customer loyalty and generate repeat customer visits.
COMPETITION
Competition in the Reno area gaming market is intense. Based on information obtained from the December 31, 2003 Gaming Revenue Report published by the Nevada State Gaming Control Board, there are approximately 11 casinos in the Reno area which generate more than $12.0 million each in annual gaming revenues.
We believe that the Atlantis' competition for Locals comes primarily from other large-scale casinos located outside of downtown Reno that offer amenities that appeal to middle to upper-middle income customers, and secondarily with those casinos located in downtown Reno that offer similar amenities. We compete for Locals primarily on the basis of the desirability of our location, the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its food and beverage offerings, entertainment offerings, promotions, and gaming values. We believe the Atlantis' proximity to residential areas in south Reno and its abundant surface parking afford it an advantage over the casinos located in downtown Reno in attracting Locals.
We believe that the Atlantis' primary competition for leisure travelers comes from other large-scale casinos, including those located in downtown Reno and those located away from downtown Reno, that offer amenities that appeal to middle to upper-middle income customers. We compete for leisure travelers on the basis of the desirability of our location, the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its rooms and food and beverage offerings, entertainment offerings, promotions, and gaming values. We believe that our location away from downtown Reno is appealing to many customers who prefer to avoid the more congested downtown area; however, the Atlantis' location is a disadvantage in that it does not afford us the ability to generate walk-in traffic (except with respect to persons attending events at the Convention Center), which is a significant source of customers for some casinos located in downtown Reno.
We believe that the Atlantis' primary competition for conventioneers comes from other large-scale hotel casinos in the Reno area that actively target the convention market segment, and secondarily from other cities on the U.S. West Coast with large convention facilities and substantial hotel capacity, including Las Vegas. We compete for conventioneers based on the desirability of our location, the quality and ambiance of the Atlantis facility, meeting and banquet rooms designed to appeal to conventions and groups, friendly efficient service, and the quality and relative value of its rooms and food and beverage offerings. We believe that the Atlantis' proximity to the Convention Center affords it a distinct competitive advantage in attracting conventioneers.
The Atlantis also competes for gaming customers with hotel casino operations located in other parts of Nevada, especially Las Vegas and Lake Tahoe, and with hotel casinos, Indian casinos, and riverboat casinos located elsewhere throughout the United States and the world. We believe that the Atlantis also competes to a lesser extent with state-sponsored lotteries, off- track wagering, card parlors, and other forms of legalized gaming, particularly in northern California and the Pacific Northwest.
The constitutional amendment approved by California voters allowing the expansion of Indian gaming in the form of casinos in California has had an impact on casino revenues in Nevada in general, and many analysts have predicted the impact will be more significant on the Reno-Lake Tahoe market. The extent of this impact is difficult to predict, but we believe that the impact on us has been mitigated to an extent due to the Atlantis' emphasis on Reno area residents as a significant base of its business and the future potential of convention business due to its proximity to the renovated and expanded Reno-Sparks Convention Center. Other Reno area casinos may intensify their marketing efforts to Reno area residents if they suffer business losses due to increased pressure from California Indian casinos which may impact our customer base and, consequently, revenues. However, we believe our numerous amenities such as a wide array of restaurants, a video arcade, banquet facilities and surface parking are a key factor in our ability to attract Locals which competitor facilities will not easily be able to match without major capital expenditures.
Certain experienced Nevada gaming operators have agreements to build and manage Indian casino facilities near Sacramento, one of Reno's key feeder markets. One major facility near Sacramento has been operating since June 2003 and has been very successful, adversely impacting many hotel casinos in Reno. Once these facilities receive all the required permits and are built, they could provide an alternative to Reno area casinos, especially during certain winter periods when auto travel through the Sierra Nevadas is hampered.
We believe that the legalization of unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis' key marketing areas, such as San Francisco or Sacramento, could have a material adverse impact on our business.
REGULATION AND LICENSING
The ownership and operation of casino gaming facilities in Nevada are subject to the 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 the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board, and the Reno City Council, referred to as the Nevada Gaming Authorities.
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things:
- the prevention of unsavory or unsuitable persons from having a direct
or indirect involvement with gaming at any time or in any capacity;
- the establishment and maintenance of responsible accounting practices
and procedures;
- the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities;
- the prevention of cheating and fraudulent practices; and
- providing a source of state and local revenues through taxation and
licensing fees.
Changes in such laws, regulations and procedures could have an adverse effect on our gaming operations.
Golden Road, our subsidiary which operates the Atlantis, is required to be licensed by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. We are registered by the Nevada Gaming Commission as a publicly traded corporation, or Registered Corporation. As such, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information that the Nevada Gaming Commission may require. No person may become a stockholder of, or receive any percentage of profits from, Golden Road without first obtaining licenses and approvals from the Nevada Gaming Authorities. Golden Road and we have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Golden Road or us in order to determine whether that individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of Golden Road must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Our officers, directors and key employees who are actively and directly involved in gaming activities of Golden Road may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. Applicants for licensing 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 of suitability or licensure, the Nevada Gaming Authorities also have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with Golden Road or us, the companies involved would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by us must be reported to, or approved by, the Nevada Gaming Commission.
If it were determined that we violated the Nevada Act, our gaming licenses and registrations with the Nevada Gaming Commission could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, the Nevada Gaming Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada. The limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our gaming operations.
Any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of our voting securities determined if the Nevada Gaming Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Gaming Act requires any person who acquires more than 5% of our voting securities to report the acquisition to the Nevada Gaming Commission. The Nevada Act requires that beneficial owners of more than 10% of our voting securities apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada Gaming Control Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of our voting securities may apply to the Nevada Gaming Commission for a waiver of such finding of suitability if the institutional investor holds the voting securities for investment purposes only. An institutional investor is not deemed to hold voting securities for investment purposes unless they were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action that the Nevada Gaming Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include:
- voting on all matters voted on by stockholders;
- making financial and other inquiries of management of the type
normally made by securities analysts for informational purposes and
not to cause a change in its management, policies or operations; and
- such other activities as the Nevada Gaming Commission may determine to
be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or the Chairman of the Nevada State Gaming Control Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us, we:
- pay that person any dividend or interest upon voting securities,
- allow that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person,
- pay remuneration in any form to that person for services rendered or
otherwise, or
- fail to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities for cash at fair market value.
The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals if, without the prior approval of the Nevada Gaming Commission, it:
- pays to the unsuitable person any dividend, interest, or any
distribution;
- recognizes any voting right by such unsuitable person in connection
with such securities;
- pays the unsuitable person remuneration in any form; or
- makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar transaction.
We are required to maintain a current stock ledger in Nevada and the Nevada Gaming Authorities may examine the ledger at any time. If any securities are held in trust by an agent or a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Gaming Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Act.
We may not make a public offering of our securities without the prior approval of the Nevada Gaming Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for purposes of constructing, acquiring or financing gaming facilities. Any approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Gaming Commission or the Nevada Gaming Control Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.
Changes in our control through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Gaming Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to:
- assure the financial stability of corporate gaming operators and their
affiliates;
- preserve the beneficial aspects of conducting business in the
corporate form; and
- promote a neutral environment for the orderly governance of corporate
affairs.
We are, in certain circumstances, required to receive approval from the Nevada Gaming Commission before we can make exceptional repurchases of voting securities above their current market price and before we can consummate a corporate acquisition opposed by management. The Nevada Act also requires prior approval of a plan of recapitalization proposed by our board of directors in response to a tender offer made directly to a Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation.
Licensee fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either:
- a percentage of the gross revenues received;
- the number of gaming devices operated; or
- the number of table games operated.
A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, a manufacturer or a distributor also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons, referred to as Licensees, and who is or proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada State Gaming Control Board of their participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.
EMPLOYEES
As of March 8, 2004, we had approximately 1,792 employees. None of our employees are covered by collective bargaining agreements. We believe that our relationship with our employees is good.
ITEM 2. PROPERTIES
Our properties consist of:
(a) The approximately 13-acre site in Reno, Nevada on which the Atlantis is situated, including the hotel towers, casino, restaurant facilities and surrounding parking is, in part or in whole, held subject to a trust deed encumbrance in favor of financial institutions totaling approximately $46.4 million as of March 8, 2004.
(b) An approximately 16-acre site adjacent to the Atlantis and connected to the Atlantis by the Sky Terrace, which includes approximately 11 acres of paved parking used for customer, employee and valet parking. The remainder of the site is undeveloped. This site is compliant with all casino zoning requirements and is suitable and available for future expansion of the Atlantis facilities, parking, or complimentary resort casino and/or entertainment amenities. We have not determined the ultimate use of this site. These 16 acres are also held subject to the trust deed encumbrance described in ITEM 2 (a) above.
(c) A 37,368 square-foot section of the shopping center next door to the Atlantis to be used for a new driveway entrance.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1994, and May 10, 1994, complaints in purported class action lawsuits (William Poulos v. Caesars World, Inc. et al., Case No. 94-478-Civ-Orl-22, and William H. Ahern v. Caesars World, Inc. et al., Case No. 94-532-Civ-Orl-22, respectively) were filed in the United States District Court for the Middle District of Florida (the "Florida Complaints")
and were subsequently transferred to the United States District Court for the District of Nevada, Southern Division (the "Nevada District Court"). On September 26, 1995, a complaint in a purported class action lawsuit (Larry Schrier v. Caesars World, Inc. et al., Case No. 95-923-LDG (RJJ)) was filed in Nevada District Court (along with the Florida Complaints, the "Complaints"). The Complaints allege that manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company, have engaged in a course of conduct intended to induce persons to play such games based on a false belief concerning how the gaming machines operate, as well as the extent to which there is an opportunity to win on a given play. The Complaints charge Defendants with violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seek damages in excess of $1 billion without any substantiation of that amount. The Nevada District Court consolidated the actions (and one other action styled William Poulos v. American Family Cruise Line, NV et al., Case No. CV -S-95-936-LDG (RLH), in which the Company is not a named defendant). The Plaintiffs moved to certify two classes of plaintiffs, essentially encompassing all persons in the U.S. who have played one or more of the defendants' video poker or electronic slot machines in the prior ten years. That motion was opposed by the defendants and subsequently, the court ruled in favor of the defendants and denied the class certification motion. The plaintiffs have appealed from that ruling. The appeal has been fully briefed, an oral hearing took place on January 15, 2004 and the parties are awaiting the response of the Ninth Circuit Court of Appeals. Management believes that denial of class certification will be upheld upon appeal, and further that the substantive allegations in the Complaints are without merit. Management intends to defend vigorously against the allegations.
We commenced certain litigation in April 2003 against the City of Reno and other interested parties petitioning the Second Judicial District Court of Nevada to (i) review the City of Reno's decision to enter into an agreement for the acquisition and relocation of the Old Reno Casino in downtown Reno, (ii) condemn the real property occupied by the Old Reno Casino, (iii) declare the agreement null and void and (iv) preclude the City of Reno from condemning the real property. The litigation has been settled by all parties. In February 2004, the parties entered into a settlement agreement, and the District Court dismissed the case in February 2004. The terms of the confidential settlement agreement included a restriction from relocating the former Old Reno Casino gaming license within an identified geographic area near the Atlantis Casino Resort in Reno.
We are party to other claims that arise in the normal course of business. Management believes that the outcomes of such claims will not have a material adverse impact on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during the fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Our common stock trades on The Nasdaq Stock Market(SM) under the symbol MCRI. The following table sets forth the high and low bid prices of our common stock, as reported by The Nasdaq Stock Market(SM), during the periods indicated.
2003 2002
---------------- ----------------
High Low High Low
------- ------- ------- -------
First quarter........... $13.450 $ 7.710 $11.700 $ 7.400
Second quarter.......... $ 9.540 $ 7.490 $15.610 $ 9.000
Third quarter........... $11.310 $ 8.900 $14.780 $10.360
Fourth quarter.......... $11.530 $ 9.380 $14.430 $12.010
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As of March 8, 2004, there were approximately 102 holders of record of our common stock, and approximately 788 beneficial stockholders.
We have never paid dividends. We presently intend to retain earnings and use free cash to finance our operating activities, for maintenance capital expenditures and to reduce debt. We do not anticipate declaring cash dividends in the foreseeable future. Our bank loan agreement also contains provisions that require the achievement of certain financial ratios before we can pay or declare dividends to our stockholders. See Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5."
Securities Authorized for Issuance Under Equity Compensation Plans. See
Part III, Item 12 - Security Ownership of Certain Beneficial Owners and
Management.
(b) Not applicable.
(c) On March 10, 2003, we announced a plan to repurchase up to 250,000 shares, or 2.6%, of our common stock in open market transactions. The repurchases may be made from time to time depending on market conditions and availability of funds. The repurchases are to be made with our cash (see our Current Report filed on Form 8-K dated March 10, 2003). During 2003, we purchased 180,000 shares of our common stock pursuant to this stock repurchase program. Our bank loan agreement requires achievement of certain financial ratios before we can repurchase our common stock.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
----------------------------------------------------
(In thousands except per share amounts) 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------
OPERATING RESULTS
Casino revenues $74,956 $70,773 $64,908 $59,373 $48,345
Other revenues 59,741 57,641 54,461 51,713 43,227
------- ------- ------- ------- -------
Gross revenues 134,697 128,414 119,369 111,086 91,572
Promotional allowances (18,746) (17,376) (14,853) (14,170) (12,707)
------- ------- ------- ------- -------
Net revenues 115,951 111,038 104,516 96,916 78,866
Income from operations 17,209<F1> 17,196<F2> 14,132<F3> 9,550<F4> 3,798<F5>
Income (loss) before income
tax 14,572 13,033 6,888 1,386 (945)
Net income (loss) $ 9,606 $ 8,603 $ 4,602 $ 960 $ (585)
======= ======= ======== ======= =======
----------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss)
Basic $ 1.02 $ 0.91 $ 0.49 $ 0.10 $ (0.06)
Diluted $ 1.02 $ 0.90 $ 0.49 $ 0.10 $ (0.06)
Weighted average number of common shares
and potential common shares outstanding
Basic 9,379 9,458 9,436 9,436 9,436
Diluted 9,412 9,521 9,480 9,477 9,436
----------------------------------------------------------------------------------------------
OTHER DATA
Depreciation and amortization $10,797 $10,320 $10,085 $10,101 $ 7,738
Interest expense, net $ 2,638 $ 3,934 $ 7,243 $ 8,165 $ 4,742
Capital expenditures <F6> $ 8,406 $ 6,534 $ 4,488 $ 3,866 $46,132
----------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $115,877 $117,480 $121,064 $126,391 $131,654
Current maturities of long-term debt $ 6,060 $ 8,279 $ 8,106 $ 7,538 $ 7,334
Long-term debt, less current maturities $ 41,125 $ 52,000 $ 64,237 $ 73,481 $ 82,236
Stockholders' equity <F7> $ 48,723 $ 40,301 $ 31,430 $ 26,829 $ 25,869
<F1> 2003 includes a $133 thousand gain on disposal of fixed assets.
<F2> 2002 includes a $35 thousand gain on disposal of fixed assets.
<F3> 2001 includes a $25 thousand gain on disposal of fixed assets.
<F4> 2000 includes a $139 thousand gain on disposal of fixed assets.
<F5> 1999 includes a $184 thousand loss on disposal of fixed assets.
<F6> Includes amounts financed with debt or capitalized lease obligations.
<F7> We paid no dividends during the five year period ended December 31, 2003.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Monarch Casino & Resort, Inc., through its wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("Golden Road"), owns and operates the tropically-themed Atlantis Casino Resort, a hotel/casino facility in Reno, Nevada (the "Atlantis"). Monarch was incorporated in 1993 under Nevada law for the purpose of acquiring all of the stock of Golden Road. The principal asset of Monarch is the stock of Golden Road, which holds all of the assets of the Atlantis.
Our sole operating asset, the Atlantis, is a hotel/casino resort located in Reno, Nevada. Our business strategy is to maximize the Atlantis' revenues, operating income and cash flow primarily through our casino, our food and beverage operations, our hotel operations and other revenue sources. We derive our revenues by appealing to middle to upper-middle income Reno residents, emphasizing slot machine play in our casino. We capitalize on the Atlantis' location, offer service, value and an appealing theme to our guests, focus on repeat customers, and utilize hands-on management of operations, costs and efficiencies.
Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING RESULTS SUMMARY
During 2003, we exceeded the following previously reported results:
casino revenues, hotel revenues, net revenues, net income and earnings per
share.
Percentage
Increase / (Decrease)
---------------------
2003 2002 2001 03 vs 02 02 vs 01
------ ------ ------ ---------- ----------
(In millions, except earnings per share)
Casino revenues......................... $ 75.0 $ 70.8 $ 64.9 5.9% 9.0%
Food and beverage revenues.............. 34.5 33.6 32.0 2.5% 5.3%
Hotel revenues.......................... 21.2 20.3 19.0 4.6% 6.7%
Other revenues.......................... 4.0 3.7 3.5 8.5% 6.1%
Net revenues............................ 116.0 111.0 104.5 4.4% 6.2%
Income from operations.................. 17.2 17.2 14.1 0.1% 21.7%
Net income.............................. 9.6 8.6 4.6 11.7% 87.0%
Earnings per share - diluted............ 1.02 0.90 0.49 13.3% 83.7%
Operating margin........................ 14.8% 15.5% 13.5% (0.7) pts 2.0 pts
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Net revenues in 2003 increased 4.4% over 2002 due to increases in all our revenue segments including casino, food and beverage, hotel and other revenues, which increased 5.9%, 2.5%, 4.6% and 8.5%, respectively, over 2002.
We attribute our improved results to our experienced management team, the superb location of the Atlantis in the more affluent and growing south part of Reno, the quality of our product that drives repeat business, our focus on marketing primarily to Reno-area residents, and our steadily declining interest expense resulting from lower prevailing interest rates and overall reductions in our outstanding debt.
In 2003, our income from operations remained relatively flat over 2002, while our net income and earnings per diluted share increased 11.7% and 13.3%, respectively.
Some significant items that affected our 2003 results are listed below. These items are discussed in greater detail elsewhere in our discussion of operating results and in the Liquidity and Capital Resources section.
- Selling, general and administrative ("SG&A") expenses in 2003 increased
7.3% over 2002 and included costs related to the recently settled
litigation against the City of Reno and other third parties (see Part I
- Item 3. Legal Proceedings).
- An increased gaming tax imposed by the State of Nevada took effect on August 1, 2003, and added costs that we did not incur in 2002.
- Total operating expenses for 2003 increased 5.2% over 2002 while net revenues increased only 4.4% over the same period; the stronger increase in operating expenses was mainly due to increased SG&A and caused income from operations to remain relatively unchanged in 2003 as compared to 2002.
- Interest and stockholder guarantee fee expenses decreased 33.0% compared to 2002 due to lower prevailing interest rates combined with continuously decreasing outstanding debt.
CAPITAL SPENDING AND DEVELOPMENT
We seek to continuously upgrade and maintain the Atlantis in order to present a fresh product to our guests and to maintain high quality standards.
Capital expenditures at the Atlantis totaled approximately $8.4 million, $6.5 million, and $4.5 million in 2003, 2002, and 2001, respectively. Capital expenditures in 2003 consisted primarily of the May opening of the Sushi Bar, the construction and November opening of the Salon at Atlantis, November commencement of the second hotel tower room upgrades and renovation, the acquisition of a new player tracking and slot accounting system to be installed commencing January 2004, continued slot machine conversion to the ticket-in, ticket-out coinless slot system, and continued acquisition of and upgrades to gaming equipment. In 2002, capital expenditures consisted primarily of renovations to Atlantis' first hotel tower, renovations and upgrades to the hotel front desk and VIP services area, a total renovation of the Cafe Alfresco, and continued acquisitions of and upgrades to gaming equipment. In 2001, capital expenditures consisted primarily of renovations of hotel room suites in the Atlantis' third tower, continued acquisitions of and upgrades to slot machines, computer information system equipment and various other furniture, fixtures and equipment to upgrade existing facilities.
In 2004, we are planning construction of a new driveway that will be shared between the Atlantis and the adjacent Sierra Marketplace Shopping Center that is owned and controlled by affiliates of our controlling
stockholders (the "Shopping Center"). A new traffic signal will be erected at mid-block on South Virginia Street, serving the new driveway. As part of this project, we have leased a 37,368 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at a monthly rent of $25,000, subject to increase every 60 months based on the Consumer Price Index. We are also to use part of the common area of the Shopping Center and will pay our proportional share of the common area expense of the Shopping Center. We have the option to renew the lease for 3 five-year terms, and at the end of the extension period, we have the option to purchase the leased section of the Shopping Center at a price to be determined based on a MAI Appraisal. The leased space will be used by us for pedestrian and vehicle access to the Atlantis, and we will have use of a portion of the parking spaces at the Shopping Center. We are responsible for two thirds of the construction costs of the project, up to a maximum of $1.2 million. We anticipate this project to be completed in Summer of 2004 (see Part III - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004).
Future cash needed to finance capital spending is expected to be made available from operating cash flow, the Credit Facility (see Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5.") and, if necessary, additional borrowings.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relating to anticipated expenses, capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to competitive industry conditions, expansion of Indian casinos in California, Reno-area tourism conditions, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), the regulation of the gaming industry (including actions affecting licensing), completion of capital expenditure projects, outcome of litigation, domestic or global economic conditions including those affected by the events of September 11, 2001 and the ongoing conflict in Iraq, and changes in federal or state tax laws or the administration of such laws.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with principles generally accepted in the United States. Certain of our policies, including the estimated lives assigned to our assets, the determination of bad debt, self insurance reserves, credit risk, and the calculation of income tax liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on historical experience, terms of existing contracts, observations of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. To
provide an understanding of the methodologies applied, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.
The consolidated financial statements include the accounts of Monarch and Golden Road. Intercompany balances and transactions are eliminated.
Self-insurance Reserves
The Company reviews self-insurance reserves at least quarterly. The amount of reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reviewing reports prepared by the third party plan administrator for any significant unpaid claims. The reserve is accrued at an amount that approximates amounts needed to pay both reported and unreported claims as of the balance sheet date, which management believes are adequate.
Inventories
Inventories, consisting primarily of food, beverages, and retail merchandise, are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.
Advertising Costs
All advertising costs are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Since inception, property and equipment have been depreciated principally on a straight line basis over the estimated service lives as follows:
Land improvements ........... 15-40 years Buildings ................... 30-40 years Building improvements ....... 15-40 years Furniture ................... 5-10 years Equipment ................... 5-20 years |
Expenditures for maintenance and repairs are expensed as incurred; expenditures for renewals and improvements are generally capitalized.
We periodically evaluate our fixed and other long-term assets for impairment to ensure that they are appropriately valued.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the difference between wins and losses. Additionally, net win is reduced by a provision for anticipated payouts on slot participation fees, progressive jackpots and any pre-arranged marker discounts.
Promotional Allowances
The retail value of hotel, food and beverage services provided to customers without charge is included in gross revenue and deducted as promotional allowances.
Income Taxes
Income taxes are recorded in accordance with the liability method specified by Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements: (a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.
Concentrations of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of bank deposits and trade receivables. We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising our customer base. We believe we are not exposed to any significant credit risk on cash and accounts receivable.
Stockholder Guarantee Fees
All of our bank debt was personally guaranteed by our three largest stockholders since December 29, 1997. Effective January 1, 2001, until February 20, 2004, we compensated the guarantors at the rate of 2% per annum of the quarterly average outstanding bank debt amount. For the twelve months ended December 31, 2003, and 2002, we recorded interest expense in the amounts of approximately $1.0 million and $1.3 million, respectively, for these guarantee fees. The individuals who guaranteed our bank debt were not required to guarantee the New Credit Facility (as defined below). Therefore, we will no longer incur such guarantee fee expenses.
DISCUSSION OF RESULTS OF OPERATIONS
2003 Compared with 2002
For the year ended December 31, 2003, we earned net income of $9.6 million, or $1.02 per diluted share, on net revenues of $116.0 million, compared to a net income of $8.6 million, or $0.90 per diluted share, on net revenues of $111.0 million for the year ended December 31, 2002. Our net revenues for 2003 are the highest in our Company's history. Our income from operations totaled $17.2 million for 2003, relatively unchanged when compared to $17.2 million for 2002. Net income for the year 2003 constitutes a record high for our Company. Interest and stockholder guarantee fee expenses declined 33.0% from 2002, and was a major factor in the increase in net income. We believe the Atlantis continued to benefit in 2003 from the rapid growth occurring in the residential and commercial areas south of the Atlantis in Reno, and from the increasing popularity of the Atlantis with visitors to the Reno area.
Casino revenues totaled $75.0 million in 2003, up 5.9% from $70.8 million in 2002, driven by increases in slot, Keno and poker game win. Revenue from slot and video poker machines ("slot machines") increased approximately 10.7% in 2003 compared to 2002. We believe that increased slot machine play was due to more effective marketing and continued upgrade of facilities and equipment in 2003 and 2002. Despite an approximate 6.5% increase in table game drop, table game win decreased approximately 11.3% in 2003 compared to 2002 due to higher than normal winnings by our guests during 2003. Keno and poker room revenues combined increased approximately 16.7% in 2003 over 2002. Keno write increased approximately 4.7% in 2003 compared to 2002 while poker revenue increased approximately 19.9% compared to 2002 due to more effective marketing. Casino operating expenses were 39.1% of casino revenues in 2003, unchanged when compared to 2002.
Food and beverage revenues increased 2.5% to $34.5 million in 2003 from $33.6 million in 2002, primarily due to a 0.8% increase in average revenue per cover combined with a 3.1% increase in the number of covers served. Food and beverage operating expenses decreased to 51.3% of food and beverage revenues in 2003 compared to 52.3% in 2002, due to increased revenue per cover and more efficient operations which were partially offset by a slight increase in cost of sales.
Hotel revenues totaled $21.2 million in 2003, an increase of 4.6% from $20.3 million in 2002. The increase reflects an increase in average daily occupied room rate partially offset by a slight decrease in occupancy rate during the twelve month period of 2003 compared to the same period in 2002. Year 2003 revenues also include a $3.00 per occupied room energy surcharge that was also assessed during 2002. The Atlantis' average daily room rate ("ADR") was $57.82 in 2003, compared to $55.29 in 2002. The average occupancy rate at the Atlantis was 92.3% in 2003 compared to 92.9% in 2002. Hotel operating expenses increased slightly to 32.9% of hotel revenues in 2003, compared to 32.2% in 2002. This increase in operating expenses as a percentage of hotel revenues resulted primarily from increased employee healthcare costs.
Promotional allowances increased to $18.7 million, or 13.9% of gross revenues, in 2003 compared to $17.4 million, or 13.5% of gross revenues, in 2002. The increase is attributable to expanded efforts to increase revenues.
Other revenues increased approximately 8.5% in 2003 to $4.0 million from $3.7 million in 2002, reflecting an increase in sales from both retail gift shops and a slight increase in revenue from the entertainment fun center. Other expenses were approximately 31.7% of other revenues in 2003, an improvement from 34.0% in 2002, primarily due to continued operating efficiencies of operating the two gift shops and the entertainment fun center.
Selling, general and administrative ("SG&A") expenses totaled $32.7 million, or 28.2% of net revenues, in 2003 compared to $30.4 million, or 27.4% of net revenues, in 2002. The increase in these expenses as a percentage of revenues reflects increased energy costs, increased marketing and promotional costs and increased employee healthcare costs. Selling, general and administrative expenses for 2003 also included costs incurred as a result of the recently settled litigation against the City of Reno and other third parties (see Part I - Item 3. "Legal Proceedings"). These litigation costs were not incurred in 2002.
Depreciation and amortization expense was $10.8 million in 2003, an increase of 4.6% from $10.3 million in 2002.
Interest and stockholder guarantee fee expenses for 2003 totaled
approximately $2.6 million, down 33.0% from $3.9 million in 2002, due to
reduced interest rates and lower debt outstanding. Guarantee fees paid to our
three principal stockholders totaled approximately $1.0 million in 2003 and
$1.3 million in 2002. The individuals who guaranteed the Company's Original
Credit Facility (defined in "The Credit Facility" below) did not provide such
guarantees for the New Credit Facility (also defined in "The Credit Facility"
below) and, therefore, the Company will no longer be required to pay such fees
in the future. At December 31, 2003, all of our interest-bearing debt was
related to a reducing revolving credit facility with floating interest rates
tied to a base rate approximately equal to the prime rate or LIBOR (at our
option) plus a margin which fluctuates according to our ratio of funded debt to
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(See
Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note
5."). An increase in interest rates could have a material effect on our
financial results.
2002 Compared with 2001
For the year ended December 31, 2002, we earned net income of $8.6 million, or $0.90 per share, on net revenues of $111.0 million, compared to a net income of $4.6 million, or $0.49 per share, on net revenues of $104.5 million for the year ended December 31, 2001. Our net revenues for 2002 constitute record highs for any of our prior comparable twelve month periods. Our income from operations totaled $17.2 million for 2002 compared to $14.1 million for 2001. Net income for the year 2002 constitute record highs for any of our prior comparable twelve month periods, due to more efficient operations and reduced interest expense. Forty seven percent of our increase in net revenue flowed to operating income. This combined with a 45.7% reduction in interest expense over 2001 were major factors in the increase in net income. We believe the Atlantis continued to benefit in 2002 from the rapid growth occurring in the residential and industrial communities south of the Atlantis in Reno, and from the increasing popularity of the Atlantis with visitors to the Reno area.
Casino revenues totaled $70.8 million in 2002, up 9.0% from $64.9 million in 2001, driven by increases in slot, table games, Keno and poker game win. Revenue from slot and video poker machines ("slot machines") increased approximately 5.6% in 2002 compared to 2001 due to increased play as a result of more effective marketing and continued upgrade of facilities and equipment in 2001 and 2002. Table game win increased approximately 23.5% in 2002 compared to 2001 due to an approximate 5.9% increase in table game drop and a higher win percentage in year 2002 compared to year 2001. Keno and poker room revenues combined increased approximately 1.3% in 2002 over 2001 primarily due to an approximate 1.6% increase in poker revenue. Keno write increased approximately 6.4% in 2002 compared to 2001 due to more effective marketing. Casino operating expenses were 39.1% of casino revenues in 2002, compared to 40.1% in 2001. The decrease was due to continued efficiency of operations and a higher table game win percentage in year 2002.
Food and beverage revenues increased in 2002, up 5.3% to $33.6 million from $32.0 million in 2001, primarily due to a 3.9% increase in average revenue per cover combined with a 2.1% increase in the number of covers served. Food and beverage operating expenses decreased to 52.3% of food and beverage revenues in 2002 compared to 56.9% in 2001, due to increased revenue per cover, lower cost of sales and more efficient operations.
Hotel revenues totaled $20.3 million in 2002, an increase of 6.7% from $19.0 million in 2001. The increase reflects an increase in average daily occupied room rate along with an increase in occupancy rate during the twelve month period of 2002 compared to the same period in 2001. Year 2002 revenues also include a $3.00 per occupied room energy surcharge that was also assessed during the period April 2001 through December 2001. The Atlantis' average daily room rate ("ADR") was $55.29 in 2002, compared to $53.48 in 2001. The average occupancy rate at the Atlantis was 92.9% in 2002 compared to 91.1% in 2001. Hotel operating expenses decreased to 32.2% of hotel revenues in 2002, compared to 37.5% in 2001. This decrease in operating expenses as a percentage of hotel revenues resulted from a higher ADR, a decrease in bad debt expense and more efficient operations.
Promotional allowances increased to $17.4 million, or 13.5% of gross revenues, in 2002 compared to $14.9 million, or 12.4% of gross revenues, in 2001. The increase is attributable to expanded efforts to increase revenues.
Other revenues increased approximately 6.1% in 2002 to $3.7 million from $3.5 million in 2001, reflecting an increase in sales from the entertainment fun center and the logo gift shop. Other expenses were approximately 34.0% of other revenues in 2002, a decrease from 37.4% in 2001, primarily due to continued operating efficiencies of operating the two gift shops and the entertainment fun center.
Selling, general and administrative ("SG&A") expenses totaled $30.4 million, or 27.4% of net revenues, in 2002 compared to $27.7 million, or 26.5% of net revenues, in 2001. The increase in these expenses as a percentage of revenues reflects increased energy costs and increased marketing and promotional costs.
Depreciation and amortization expense was $10.3 million in 2002, up slightly when compared to $10.1 million in 2001.
Interest expense for 2002 totaled $3.9 million, down 45.7% from $7.2 million in 2001, due to reduced interest rates and lower debt outstanding. Interest expense for 2002 and 2001 included guarantee fees paid to our three principal stockholders. These guarantee expenses totaled approximately $1.3 million in 2002 compared to $1.5 million in 2001. At December 31, 2002, all of our interest-bearing debt was related to a reducing revolving credit facility with floating interest rates tied to a base rate approximately equal to the prime rate or LIBOR (at our option) plus a margin which fluctuates according to our ratio of funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(See Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5."). An increase in interest rates could have a material effect on our financial results.
In 2002, we also incurred approximately $228 thousand in non-recurring expenses associated with a secondary stock offering by certain principal stockholders. These expenses included legal, accounting, printing and road show charges.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with net cash provided by operating activities. For the years 2003, 2002, and 2001, net cash provided by operating activities totaled $22.4 million, $20.0 million, and $14.7 million, respectively. During each of the three years, net cash provided by operating activities was sufficient to fund our day-to-day operating expenses.
Net cash used in investing activities, which consisted of acquisitions of property and equipment, totaled $7.8 million, $4.9 million, and $3.2 million in 2003, 2002, and 2001, respectively. Total capital expenditures, including amounts financed, were $8.4 million, $6.5 million, and $4.5 million in 2003, 2002, and 2001, respectively.
Net cash used in financing activities totaled $14.8 million in 2003, with the funds being used primarily to reduce long-term debt. Net cash used in financing activities totaled $13.5 million in 2002 and $9.9 million in 2001.
COMMITMENTS AND CONTINGENCIES
Our contractual cash obligations as of December 31, 2003, after giving effect to the execution of the New Credit Facility (as defined below), over the next five years are as follows:
Payments Due by Period
--------------------------------------------------
Contractual Cash Less than 1 to 3 4 to 5
Obligations Total 1 year years years
--------------------------------------------------
Long-Term Debt $47,184,591 $ 6,059,591 $19,500,000 $21,625,000
Operating Leases(1) 3,476,892 1,546,261 1,190,631 740,000
Purchase Obligations(2) 4,700,000 4,700,000 - -
----------- ----------- ----------- -----------
Total Contractual Cash
Obligations $53,361,483 $12,305,852 $20,690,631 $22,365,000
(1) Operating leases include an up-to $1.2 million one-time construction cost in 2004 representing
our portion of the new driveway, and approximately $370,000 per year in lease and common expense
payments to the shopping center adjacent to the Atlantis (see Capital Spending and Development).
(2) Our open purchase order commitments total approximately $4.7 million. Of the total purchase
order commitments, approximately $1.7 million are cancelable by the Company upon providing a 30-
day notice.
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On March 10, 2003, we announced a plan to repurchase up to 250,000 shares, or 2.6%, of our common stock in open market transactions. The repurchases may be made from time to time depending on market conditions and availability of funds. The repurchases are to be made with our cash (see our Current Report filed on Form 8-K dated March 10, 2003). During 2003, we purchased 180,000 shares of our common stock pursuant to this stock repurchase program. The New Credit Facility (as defined below) requires achievement of certain financial ratios before we can repurchase our common stock.
We commenced certain litigation in April 2003 against the City of Reno and other interested parties petitioning the Second Judicial District Court of Nevada to (i) review the City of Reno's decision to enter into an agreement for the acquisition and relocation of the Old Reno Casino in downtown Reno,
(ii) condemn the real property occupied by the Old Reno Casino, (iii) declare the agreement null and void and (iv) preclude the City of Reno from condemning the real property. This litigation has been settled by all parties. In February 2004, the parties entered into a settlement agreement, and the District Court dismissed the case in February 2004. The terms of the confidential settlement agreement included a restriction from relocating the former Old Reno Casino gaming license within an identified geographic area near the Atlantis Casino Resort in Reno.
We believe that our existing cash balances, cash flow from operations, equipment financing, and refinancing sources for our debt obligations will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure requirements; however, our operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or obtaining additional equity capital.
THE CREDIT FACILITY Until February 20, 2004, we had a reducing revolving term loan credit facility with a consortium of banks that originally was in the amount of $80 million but that had been reduced to $46 million at payoff (the "Original Credit Facility").
On February 20, 2004, the Original Credit Facility was refinanced (the "New Credit Facility") for $50 million, which includes a $46 million payoff for the unpaid balance of the Original Credit Facility. The amount of the New Credit Facility may be increased by up to $30 million on a one-time basis and if requested by us before the second anniversary of the closing date, as defined. At our option, borrowings under the New Credit Facility will accrue interest at a rate designated by the agent bank at its base rate (the "Base Rate") or at the London Interbank Offered Rate ("LIBOR") for one, two, three or six month periods. The rate of interest paid by us will include a margin added to either the Base Rate or to LIBOR that is tied to our ratio of funded debt to EBITDA (the "Leverage Ratio"). Depending on our Leverage Ratio, this margin can vary between 0.25 percent and 1.25 percent above the Base Rate, and between 1.50 percent and 2.50 percent above LIBOR (under the Original Credit Facility, this margin varied between 0.00 percent and 2.00 percent above the Base Rate, and between 1.50 percent and 3.50 percent above LIBOR). At December 31, 2003, the applicable margin was the Base Rate plus 0.0%, and the applicable LIBOR margin was LIBOR plus 1.5%. At December 31, 2003, the Base Rate was 4.00% and the LIBOR rate was 1.12%. At December 31, 2003, the Company had $1.0 million in Base Rate loans outstanding and had one LIBOR loan outstanding totaling $46.0 million, for a total obligation of $47.0 million.
We may utilize proceeds from the New Credit Facility for working capital needs and general corporate purposes relating to the Atlantis and for ongoing capital expenditure requirements at the Atlantis.
The New Credit Facility is secured by liens on substantially all of the real and personal property of the Atlantis, and is guaranteed by Monarch. The Original Credit Facility was guaranteed individually by certain executives of the Company. These individuals were not required to provide any personal guarantees for the New Credit Facility and, therefore, we will no longer incur guarantee fee expenses.
The New Credit Facility contains covenants customary and typical for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of our assets and covenants restricting our ability to merge, transfer ownership of Monarch, incur additional indebtedness, encumber assets, and make certain investments. The New Credit Facility also contains covenants requiring us to maintain certain financial ratios, and provisions restricting transfers between Monarch and its affiliates. The New Credit Facility also contains provisions requiring the achievement of certain financial ratios before we can repurchase our common stock. We do not consider the covenants to restrict our operations.
The maturity date of the New Credit Facility is February 23, 2009. Beginning June 30, 2004, the maximum principal available under the Credit Facility will be reduced by an aggregate of $30.875 million in equal increments of $1.625 million per quarter with the remaining balance due at the maturity date. We may prepay borrowings under the New Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid under the New Credit Facility may be reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available. We may also permanently reduce the maximum principal available under the New Credit Facility at any time so long as the amount of such reduction is at least $500 thousand and a multiple of $50 thousand.
We paid various fees and other loan costs upon the closing of the refinancing of the New Credit Facility that will be amortized over the term of the New Credit Facility using the straight-line method.
Annual maturities of long-term debt, after giving effect to the execution of the New Credit Facility, as of December 31, 2003, are as follows:
Year ending December 31,
2004 ......................... $ 6,059,591
2005 ......................... 6,500,000
2006 ......................... 6,500,000
2007 ......................... 6,500,000
2008 ......................... 6,500,000
Thereafter ................... 15,125,000
------------
$ 47,184,591
============
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STOCKHOLDER GUARANTEE FEES. From December 29, 1997 until February 20, 2004, all of our bank debt was personally guaranteed by our three largest stockholders. Effective January 1, 2001 and until February 20, 2004, we compensated the guarantors at the rate of 2% per annum of the quarterly average outstanding bank debt. For the twelve months ended December 31, 2003, and 2002, we recorded interest expense in the amounts of approximately $1.0 million and $1.3 million, respectively, for these guarantee fees. The individuals who guaranteed our bank debt were not required to guarantee the New Credit Facility, and, as a result, we will no longer incur these expenses.
SHORT-TERM DEBT. At December 31, 2003, we had approximately $185,000 outstanding in slot purchase contracts outstanding. These contracts have original terms of 12 months or less and do not bear any interest.
STATEMENT ON FORWARD LOOKING INFORMATION
Certain information included herein contains statements that may be considered forward-looking, such as statements relating to projections of future results of operations or financial condition, expectations for our casino, and expectations of the continued availability of capital resources. Any forward-looking statement made by us necessarily is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and are subject to change. Actual results of our operations may vary materially from any forward-looking statement made by us or on our behalf. Forward-looking statements should not be regarded as representation by us or any other person that the forward-looking statements will be achieved. Undue reliance should not be placed on any forward-looking statements. Some of the contingencies and uncertainties to which any forward-looking statement contained herein is subject include, but are not limited to, the following:
EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS
The terrorist attacks that took place in the United States on September 11, 2001, were unprecedented events that created economic and business uncertainties, especially for the travel and tourism industry. The potential for future terrorist attacks, the national and international responses, and other acts of war or hostility, including the ongoing conflict in Iraq, have created economic and political uncertainties that could materially adversely affect our business, results of operations, and financial condition in ways we cannot predict.
OUR BUSINESS MAY BE ADVERSELY IMPACTED IF THE RENO ECONOMY DECLINES.
We heavily market to and rely upon business from Reno area residents. In recent years, Reno has enjoyed robust business growth and has attracted a number of technology, product distribution and marketing companies. These businesses have created jobs and helped fuel residential development, including the southwest Reno metropolitan area near the Atlantis. Should there be negative changes in the business and job conditions in Reno, our locals business, which is the most substantial part of our overall business, could be adversely impacted.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WEAKENED ECONOMIC CONDITIONS IN NORTHERN CALIFORNIA AND THE PACIFIC NORTHWEST
Because California and the Pacific Northwest are significant markets for our leisure traveler and conventioneer customers, our business may be adversely impacted in the event of weakened economic conditions in those geographical markets.
FAILURE OF THE RENO-SPARKS CONVENTION CENTER TO BOOK AND ATTRACT CONVENTION BUSINESS COULD ADVERSELY IMPACT OUR BUSINESS
The Atlantis is the closest hotel-casino to the Reno-Sparks Convention Center, which completed a $105 million expansion and renovation in late July 2002. If the expanded Reno-Sparks Convention Center does not succeed in booking the anticipated level of conventions, our future results of operations could be adversely impacted.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY EXPANDED NATIVE AMERICAN GAMING OPERATIONS IN CALIFORNIA AND THE PACIFIC NORTHWEST
Our largest source of leisure traveler customers is California and the Pacific Northwest, including a large number who drive to Reno from the San Francisco and Sacramento metropolitan areas. Since a California constitutional amendment passed in 1999, development has commenced on several large-scale Native American-owned casino facilities in that state, some of which are located close to our key markets. Our business may be adversely impacted if the California casinos attract patrons who would otherwise travel to Reno. This risk may be greater during winter months when interstate highways may be subject to weather-related travel restrictions.
THE GAMING INDUSTRY IS HIGHLY COMPETITIVE AND INCREASED COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE OPERATIONS
The gaming industry is highly competitive. As competitive pressures from California Native American casinos increase, other Reno area casinos may intensify their targeting of the Reno area resident market, which is one of our key markets. Increased competitive pressures in the local market could adversely impact our ability to continue to attract local residents to the Atlantis, or require us to use more expensive and therefore less profitable promotions to compete more efficiently.
In addition, Native American gaming facilities in California and other jurisdictions in some instances operate under regulatory requirements less stringent than those imposed on Nevada licensed casinos, which could afford them a competitive advantage in our markets. Moreover, increases in the popularity of, and competition from, Internet and other account wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home, could have a material adverse effect on our business, financial condition, operating results and prospects.
ADVERSE WINTER WEATHER CONDITIONS IN THE SIERRA NEVADAS AND RENO-LAKE TAHOE AREA COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Adverse winter weather conditions, particularly snowfall, can deter our customers from traveling or make it difficult for them to frequent the Atlantis. Adverse winter weather would most significantly affect our drive-in customers from northern California and the Pacific Northwest. If the Reno area itself were to experience prolonged adverse winter weather conditions, our results of operations and financial condition could also be materially adversely affected.
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY HIGH-END PLAYERS' WINNINGS
Although high-end players are not the major focus of our marketing efforts, we have selectively targeted them since opening our newest tower in 1999. Should one or more of these high-end players win large sums in our casino or should a material amount of credit extended to such players not be repaid, our results of operations could be adversely impacted.
THE FARAHI FAMILY OWNS A MAJORITY OF OUR COMMON STOCK AND CONTROLS OUR AFFAIRS
Messrs. John, Bob and Ben Farahi, our Chief Executive Officer, President, and Chief Financial Officer, respectively, as well as the Co-Chairmen of our Board of Directors, own approximately 47.6% of our outstanding common stock as of March 8, 2004. Their sister, Jila Shabanian (nee Farahi), through her trust, owns approximately 6.6%. Accordingly, the Farahi family has the ability to control our operations and affairs, including the election of the entire Board of Directors and, except as otherwise provided by law, other matters submitted to a vote of the stockholders, including a merger, consolidation or sale of the assets of Monarch.
A CHANGE IN CONTROL COULD RESULT IN THE ACCELERATION OF OUR DEBT OBLIGATIONS
Certain changes in control could result in the acceleration of the repayment of our bank debt. This acceleration could be triggered in the event the Farahi family sells enough of their stock to result in another stockholder acquiring more than 50% of our shares or upon their deaths if their respective heirs must sell a substantial number of our shares to obtain funds to pay estate tax liabilities. We cannot assure you that we would be able to repay indebtedness whose maturity is accelerated as a result of such a change in control, and such an inability would materially adversely affect our financial condition.
IF WE LOSE OUR KEY PERSONNEL, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED
We depend on the continued performances of John Farahi, Bob Farahi and Ben Farahi, our Chief Executive Officer, our President, and our Chief Financial Officer, respectively, and their management team. If we lose the services of the Farahi brothers, or our other senior Atlantis management personnel, and cannot replace such persons in a timely manner, our business could be materially adversely affected.
OUR BUSINESS IS SUBJECT TO RESTRICTIONS AND LIMITATIONS IMPOSED BY GAMING REGULATORY AUTHORITIES THAT COULD ADVERSELY AFFECT US
The ownership and operation of casino gaming facilities are subject to extensive state and local regulation. The State of Nevada and the applicable local authorities require various licenses, registrations, permits and approvals to be held by us and our subsidiary. The Nevada Gaming Commission may, among other things, limit, condition, suspend, revoke or decline to renew a license or approval to own the stock of our Nevada subsidiary for any cause deemed reasonable by such licensing authority. If we violate gaming laws or regulations, substantial fines could be levied against us, our subsidiary and the persons involved, and we could be forced to forfeit a portion of our assets. The suspension, revocation or non-renewal of any of our licenses or the levy on us of substantial fines or forfeiture of assets would have a material adverse effect on our business, financial condition and results of operations.
To date, we have obtained all governmental licenses, findings of suitability, registrations, permits and approvals necessary for the operation of our current gaming activities. However, gaming licenses and related approvals are deemed to be privileges under Nevada law. We cannot assure you that our existing licenses, permits and approvals will be maintained or extended.
IF THE STATE OF NEVADA OR THE CITY OF RENO INCREASES GAMING TAXES AND FEES, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
State and local authorities raise a significant amount of revenue through taxes and fees on gaming activities. From time to time, legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, worsening economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes. If the State of Nevada or the City of Reno were to increase gaming taxes and fees, our results of operations could be adversely affected.
A significant portion of our revenues and operating income are generated from patrons who are residents of northern California. A change in general economic conditions or the extent and nature of casino gaming in California, Washington or Oregon could adversely affect our operating results. On September 10, 1999, California lawmakers approved a constitutional amendment that would give Indian tribes the right to offer slot machines and a range of house-banked card games. On March 7, 2000, California voters approved the constitutional amendment. Several Native American casinos have opened in Northern California since passage of the constitutional amendment. A large Native American casino facility in one of our primary feeder markets in the Sacramento area opened for business in June of 2003. There potentially could be other new Native American casinos opening in the Northern California market, as well as other markets that we currently serve, that could have an impact on our financial position and results of operations.
Other states are also considering legislation enabling the development and operation of casinos or casino-like operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The objective of FIN 46 is to improve the financial reporting by companies involved with variable interest entities. FIN 46 changes certain consolidation requirements by requiring a variable interest entity to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company has determined that all variable interest entities it holds at December 31, 2003 do not require consolidation under the provisions of FIN 46 as the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity's residual returns.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market risks and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not have any cash or cash equivalents as of December 31, 2003 that are subject to market risks.
We have substantial variable interest rate debt in the amount of approximately $47.0 million as of December 31, 2003, and $59.5 million as of December 31, 2002, which is subject to market risks.
A one percent increase in interest rates would have resulted in an increase in interest expense of approximately $524 thousand in 2003 and $644 thousand in 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Monarch Casino & Resort, Inc.:
We have audited the accompanying consolidated balance sheet of Monarch Casino & Resort, Inc. and Subsidiary (the "Company") as of December 31, 2003, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Las Vegas, Nevada
February 13, 2004, except for Note 5, as to which the date is February 20, 2004
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INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Monarch Casino & Resort, Inc.:
We have audited the accompanying consolidated balance sheet of Monarch Casino & Resort, Inc, and Subsidiary (the "Company") as of December 31, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2002 and 2001. Our audits also included the consolidated financial statement schedule in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Reno, Nevada February 18, 2003 |
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues
Casino................................ $ 74,955,744 $ 70,772,939 $ 64,907,920
Food and beverage..................... 34,498,613 33,646,938 31,960,713
Hotel................................. 21,236,808 20,303,439 19,022,188
Other................................. 4,005,426 3,690,180 3,478,171
------------ ------------ ------------
Gross revenues..................... 134,696,591 128,413,496 119,368,992
Less promotional allowances........... (18,746,078) (17,375,926) (14,853,399)
------------ ------------ ------------
Net revenues....................... 115,950,513 111,037,570 104,515,593
------------ ------------ ------------
Operating expenses
Casino................................ 29,321,060 27,690,033 26,036,133
Food and beverage..................... 17,701,143 17,591,945 18,171,412
Hotel................................. 6,991,581 6,543,610 7,133,937
Other................................. 1,270,624 1,254,179 1,300,419
Selling, general and administrative... 32,659,258 30,441,900 27,656,572
Depreciation and amortization......... 10,797,494 10,320,403 10,085,331
------------ ------------ ------------
Total operating expenses........... 98,741,160 93,842,070 90,383,804
------------ ------------ ------------
Income from operations............. 17,209,353 17,195,500 14,131,789
------------ ------------ ------------
Other expense
Interest expense, net................. (1,607,840) (2,633,917) (5,742,985)
Stockholder guarantee fee expense..... (1,030,010) (1,300,446) (1,500,345)
Stock transaction expense............. - (228,020) -
------------ ------------ ------------
Total other expense................ (2,637,850) (4,162,383) (7,243,330)
------------ ------------ ------------
Income before income taxes......... 14,571,503 13,033,117 6,888,459
Provision for income taxes.............. 4,965,580 4,429,771 2,286,695
------------ ------------ ------------
Net income ........................ $ 9,605,923 $ 8,603,346 $ 4,601,764
============ ============ ============
EARNINGS PER SHARE OF COMMON STOCK
Net income
Basic.............................. $ 1.02 $ 0.91 $ 0.49
Diluted............................ $ 1.02 $ 0.90 $ 0.49
Weighted average number of
common shares and potential
common shares outstanding
Basic.............................. 9,379,446 9,457,669 9,436,275
Diluted............................ 9,412,459 9,521,353 9,479,830
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2003 2002
------------ ------------
ASSETS
Current assets
Cash........................................ $ 9,711,310 $ 9,961,484
Receivables, net............................ 2,818,727 2,724,726
Federal income tax refund receivable........ 756,698 176,321
Inventories................................. 1,245,967 993,260
Prepaid expenses............................ 2,234,773 1,961,763
Deferred income taxes....................... 542,457 492,457
------------ ------------
Total current assets..................... 17,309,932 16,310,011
------------ ------------
Property and equipment
Land........................................ 10,339,530 10,339,530
Land improvements........................... 3,226,913 3,191,371
Buildings................................... 78,955,538 78,955,538
Building improvements....................... 6,304,642 6,262,903
Furniture and equipment..................... 63,230,354 58,086,570
------------ ------------
162,056,977 156,835,912
Less accumulated
depreciation and amortization.............. (63,618,047) (55,985,653)
------------ ------------
Net property and equipment............... 98,438 930 100,850,259
Other assets, net............................. 128,263 319,817
------------ ------------
$115,877,125 $117,480,087
============ ============
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt........ $ 6,059,591 $ 8,279,095
Accounts payable............................ 8,407,887 6,227,124
Accrued expenses............................ 6,707,257 6,146,440
------------ ------------
Total current liabilities................ 21,174,735 20,652,659
Long-term debt, less current maturities....... 41,125,000 52,000,000
Deferred income taxes......................... 4,854,587 4,526,744
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000
shares authorized; none issued............. - -
Common stock, $.01 par value, 30,000,000
shares authorized; 9,536,275 issued;
9,340,328 outstanding at 12/31/03;
9,474,830 outstanding at 12/31/02.......... 95,363 95,363
Additional paid-in capital.................. 17,432,635 17, 381,517
Treasury stock, 195,947 shares at 12/31/03
61,445 shares at 12/31/02, at cost.......... (1,437,614) (202,692)
Retained earnings........................... 32,632,419 23,026,496
------------ ------------
Total stockholders' equity............... 48,722,803 40,300,684
------------ ------------
$115,877,125 $117,480,087
============ ============
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
-------------------- Additional
Shares Paid-in Retained Treasury
Outstanding Amount Capital Earnings Stock Total
----------- -------- ------------ ----------- ----------- ------------
Balance, January 1, 2001 9,436,275 $ 95,363 $17,241,788 $ 9,821,386 $ (329,875) $26,828,662
Net income - - - 4,601,764 - 4,601,764
----------- -------- ------------ ----------- ----------- ------------
Balance, December 31, 2001 9,436,275 95,363 17,241,788 14,423,150 (329,875) 31,430,426
Exercise of stock options 38,555 - 139,729 - 127,183 266,912
Net income - - - 8,603,346 - 8,603,346
----------- -------- ------------ ----------- ----------- ------------
Balance, December 31, 2002 9,474,830 95,363 17,381,517 23,026,496 (202,692) 40,300,684
Exercise of stock options 45,498 - 51,118 - 192,478 243,596
Stock repurchase (180,000) - - - (1,427,400)
(1,427,400)
Net income - - - 9,605,923 - 9,605,923
----------- -------- ------------ ----------- ----------- ------------
Balance, December 31, 2003 9,340,328 $ 95,363 $17,432,635 $32,632,419 $(1,437,614) $48,722,803
=========== ======== ============ =========== =========== ============
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income .................................. $ 9,605,923 $ 8,603,346 $ 4,601,764
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.............. 10,797,494 10,320,403 10,085,331
Amortization of deferred loan costs........ 179,427 179,425 179,426
Provision for bad debts.................... 742,407 634,934 1,239,368
Gain on disposal of assets................. (133,301) (34,647) (24,848)
Deferred income taxes...................... 277,842 189,516 1,306,714
Changes in assets and liabilities
Receivables, net........................... (1,416,785) 279,057 (1,434,382)
Inventories................................ (252,708) (17,118) 123,144
Prepaid expenses........................... (273,009) (502,959) 395,065
Other assets............................... 10,684 (16,113) 8,766
Accounts payable........................... 2,180,763 (221,963) (1,785,132)
Accrued expenses........................... 682,322 584,387 11,962
------------ ------------ ------------
Net cash provided by
operating activities..................... 22,401,059 19,998,268 14,707,178
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets................. 154,869 48,979 59,117
Acquisition of property and equipment........ (7,996,678) (4,802,525) (3,383,643)
Changes in accounts payable construction..... - (147,481) 112,831
------------ ------------ ------------
Net cash used in investing activities..... (7,841,809) (4,901,027) (3,211,695)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options...... 122,092 126,116 -
Proceeds from long-term borrowings........... 1,000,000 500,000 1,500,000
Principal payments on long-term debt......... (14,504,116) (14,147,616) (11,393,738)
Purchase of Monarch common stock............. (1,427,400) - -
------------ ------------ ------------
Net cash used in financing activities..... (14,809,424) (13,521,500) (9,893,738)
------------ ------------ ------------
Net (decrease) increase in cash........... (250,174) 1,575,741 1,601,745
Cash at beginning of year...................... 9,961,484 8,385,743 6,783,998
------------ ------------ ------------
Cash at end of year............................ $ 9,711,310 $ 9,961,484 $ 8,385,743
============ ============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest....................... $ 2,421,094 $ 3,927,016 $ 7,799,686
Cash paid for income taxes................... $ 5,146,612 $ 4,105,760 $ 1,750,000
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase of property
and equipment in the following amounts...... $ 409,612 $ 1,583,868 $ 1,217,901
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Monarch Casino & Resort, Inc. ("Monarch"), a Nevada corporation, was incorporated in 1993. Monarch's wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("Golden Road"), operates the Atlantis Casino Resort (the "Atlantis"), a hotel/casino facility in Reno, Nevada. Unless stated otherwise, the "Company" refers collectively to Monarch and its Golden Road subsidiary.
The consolidated financial statements include the accounts of Monarch and Golden Road. Intercompany balances and transactions are eliminated.
Use of Estimates
In preparing these financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the year. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on the previously reported net income.
Self-insurance Reserves
The Company reviews self-insurance reserves at least quarterly. The amount of reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reviewing reports prepared by the third party plan administrator for any significant unpaid claims. The reserve is accrued at an amount that approximates amounts needed to pay both reported and unreported claims as of the balance sheet date, which management believes are adequate.
Capitalized Interest
The Company capitalizes interest costs associated with debt incurred in connection with major construction projects. When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company's average cost of borrowed money. Interest capitalization is ceased when the project is substantially complete. The Company did not record capitalized interest during the years ended December 31, 2003, 2002, and 2001.
Related Party Transactions
During 2002, the Company incurred one-time expenses of approximately $228,000 for legal, accounting, printing and road show costs associated with a secondary stock offering by principal stockholders.
Stockholder Guarantee Fees
All of the Company's bank debt was personally guaranteed by the Company's three largest stockholders since December 29, 1997. Effective January 1, 2001, until February 20, 2004, the Company compensated the guarantors at the rate of 2% per annum of the quarterly average outstanding bank debt amount. For the twelve months ended December 31, 2003, and 2002, the Company recorded interest expense in the amounts of approximately $1.0 million and $1.3 million, respectively, for these guarantee fees. The individuals who guaranteed our bank debt were not required to guarantee the New Credit Facility (as defined in NOTE 5. - LONG-TERM DEBT). Therefore, the Company will no longer incur such guarantee fee expenses.
Inventories
Inventories, consisting primarily of food, beverages, and retail merchandise, are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Since inception, property and equipment have been depreciated principally on a straight line basis over the estimated service lives as follows:
Land improvements ........... 15-40 years Buildings ................... 30-40 years Building improvements ....... 15-40 years Furniture ................... 5-10 years Equipment ................... 5-20 years |
In accordance with SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets," the Company evaluates the carrying value of its long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable from related future undiscounted cash flows. Indicators which could trigger an impairment review include legal and regulatory factors, market conditions and operational performance. Any resulting impairment loss, measured as the difference between the carrying amount and the fair value of the assets, could have a material adverse impact on the Company's financial condition and results of operations.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the difference between wins and losses. Additionally, net win is reduced by a provision for anticipated payouts on slot participation fees, progressive jackpots and any pre-arranged marker discounts.
Promotional Allowances
The retail value of hotel, food and beverage services provided to customers without charge is included in gross revenue and deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses as follows:
Years ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Food and beverage....... $ 9,744,346 $ 8,810,054 $ 8,151,675
Hotel................... 1,766,016 1,648,735 1,298,431
Other................... 269,246 197,906 154,451
----------- ----------- -----------
$11,779,608 $10,656,695 $ 9,604,557
=========== =========== ===========
|
Advertising Costs
All advertising costs are expensed as incurred. Advertising expense, which is included in selling, general & administrative expense, was $3,249,065, $3,240,402, and $3,137,197 for 2003, 2002, and 2001, respectively.
Income Taxes
Income taxes are recorded in accordance with the liability method specified by Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements: (a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.
Stock Based Compensation
The Company maintains three stock option plans, which are described more fully in Note 7. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations in accounting for its plans. No stock-based compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. If the Company had elected to recognize compensation cost on the fair market value at the grant dates for awards under the stock option plans, consistent with the method prescribed by Statement of Financial Accounting Standards ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," (and as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which the Company adopted for the fiscal year ended December 31, 2002), net income and income per share would have been changed to the pro forma amounts indicated below:
Years ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Net income, as reported $9,605,923 $8,603,346 $4,601,764
Stock based employee compensation
expensed determined under the fair
value based method for all awards,
net of related tax effects (39,923) (135,359) (117,961)
---------- ---------- ----------
Pro forma net income $9,566,000 $8,467,987 $4,483,803
========== ========== ==========
Basic earnings per share
As reported $ 1.02 $ 0.91 $ 0.49
Pro forma $ 1.02 $ 0.90 $ 0.48
Diluted earnings per share
As reported $ 1.02 $ 0.90 $ 0.49
Pro forma $ 1.02 $ 0.89 $ 0.47
|
Earnings Per Share
The Company reports "basic" earnings per share and "diluted" earnings per share in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing reported net earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the additional dilution for all potentially dilutive securities such as stock options.
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):
Years ended December 31,
------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ --------- ------ --------- ------ ---------
Net income
Basic..................... 9,379 $ 1.02 9,458 $ 0.91 9,436 $ 0.49
Effect of dilutive
stock options........... 33 - 63 (0.01) 44 -
------ -------- ------ ------- ------ -------
Diluted................... 9,412 $ 1.02 9,521 $ 0.90 9,480 $ 0.49
====== ======== ====== ======= ====== =======
|
The following options were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and their inclusion would be antidilutive:
2003 2002 2001
------------ ------------ -----------
Options to purchase shares of
common stock (in thousands).... 19 14 3
Exercise prices.................. $10.90-14.37 $11.99-14.37 $5.94
Expiration dates (mo./yr.)....... 6/07-11/13 6/07-8/12 9/03
|
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107 "Disclosures About Fair Value of Financial Instruments." The estimated fair value of the Company's financial instruments has been determined by the Company, using available market information and valuation methodologies. However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.
The fair value of long-term debt approximates fair value based on the current borrowing rates offered to the Company for debt of the same remaining maturities.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of bank deposits and trade receivables. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company believes it is not exposed to any significant credit risk on cash and accounts receivable.
Certain Risks and Uncertainties
A significant portion of the Company's revenues and operating income are generated from patrons who are residents of northern California. A change in general economic conditions or the extent and nature of casino gaming in California, Washington or Oregon could adversely affect the Company's operating results. On September 10, 1999, California lawmakers approved a constitutional amendment that gave Indian tribes the right to offer slot machines and a range of house-banked card games. On March 7, 2000, California voters approved the constitutional amendment. Several Native American casinos have opened in Northern California since passage of the constitutional amendment. A large Native American casino facility opened in one of our primary feeder markets in the Sacramento area in June of 2003. There potentially could be other new Native American casinos opening in the Northern California market, as well as other markets the Company currently serves, that could have an impact on the Company's financial position and results of operations.
The Company also relies on non-conventioneer visitors partially comprised of individuals flying into the Reno area. The tragic events of September 11, 2001 combined with the ongoing conflict with Iraq and the threat of further terrorist attacks could have an adverse effect on the Company's revenues from this segment as consumers may need time to restore their confidence in air and other leisure travel. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that created economic and business uncertainties, especially for the travel and tourism industry. The potential for future terrorist attacks, the national and international responses, and other acts of war or hostility including the ongoing war with Iraq, have created economic and political uncertainties that could materially adversely affect our business, results of operations, and financial condition in ways we cannot predict.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The objective of FIN 46 is to improve the financial reporting by companies involved with variable interest entities. FIN 46 changes certain consolidation requirements by requiring a variable interest entity to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company has determined that all variable interest entities it holds at December 31, 2003 do not require consolidation under the provisions of FIN 46 as the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity's residual returns.
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
-------------------------
2003 2002
----------- -----------
Casino....................... $ 2,964,684 $ 2,741,776
Hotel........................ 655,100 675,171
Other........................ 229,561 195,744
----------- -----------
3,849,345 3,612,691
Less allowance for
doubtful accounts.......... (1,030,618) (887,965)
----------- -----------
$ 2,818,727 $ 2,724,726
=========== ===========
|
The Company recorded bad debt expense of $742,407, $634,934, and $1,239,368, in 2003, 2002, and 2001, respectively.
NOTE 3. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
-------------------------
2003 2002
----------- -----------
<C
Accrued salaries, wages
and related benefits............ $ 3,459,596 $ 2,934,892
Progressive slot machine
and other gaming accruals....... 1,341,454 1,577,273
Accrued gaming taxes.............. 310,691 276,826
Accrued interest.................. 139,431 102,103
Other accrued liabilities......... 1,456,085 1,255,346
----------- -----------
$ 6,707,257 $ 6,146,440
=========== ===========
|
NOTE 4. LEASE COMMITMENTS
The Company leases certain furniture and equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance, and certain other operating costs of the leased property. The leases on most of the properties contain renewal provisions.
In 2004, the Company is planning construction of a new driveway that will be shared between the Atlantis and the adjacent Sierra Marketplace Shopping Center that is owned and controlled by affiliates of the Company's controlling stockholders (the "Shopping Center"). A new traffic signal will be erected at mid-block on South Virginia Street, serving the new driveway. As part of this project, the Company has leased a 37,368 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at a monthly rent of $25,000, subject to increase every 60 months based on the Consumer Price Index. The Company is also to use part of the common area of the Shopping
Center and will pay its proportional share of the common area expense of the Shopping Center. The Company has the option to renew the lease for 3 five-year terms, and at the end of the extension period, the Company has the option to purchase the leased section of the Shopping Center at a price to be determined based on a MAI Appraisal. The leased space will be used by the Company for pedestrian and vehicle access to the Atlantis, and the Company will have use of a portion of the parking spaces at the Shopping Center. The Company is responsible for two thirds of the construction costs of the project, up to a maximum of $1.2 million. The Company anticipates this project to be completed in Summer of 2004 (see Part III - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004).
Following is a summary of future minimum payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2003:
Operating
Leases
-------------
Year ending December 31,
2004 .............................. $1,546,261
2005 .............................. 450,631
2006 .............................. 370,000
2007 .............................. 370,000
2008 .............................. 370,000
Thereafter ........................ 3,885,000
-------------
Total minimum lease payments .......... $6,991,892
=============
|
All of the Company's capital lease obligations were paid as of December 31, 2003 and 2002.
Assets purchased through capital leases are included in Furniture and Equipment as follows:
December 31,
-------------------------
2003 2002
----------- -----------
Furniture and equipment .......... $ 221,061 $ 221,061
Accumulated amortization ......... (154,018) (110,013)
----------- -----------
$ 67,043 $ 110,048
=========== ===========
|
Rental expense for operating leases amounted to $185,304, $176,065, and $184,656, in 2003, 2002, and 2001, respectively, as reported in selling, general and administrative expenses in the statement of income.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
---------------------------
2003 2002
------------- ------------
Amounts outstanding under bank reducing revolving
credit facility(the "Original Credit Facility"),
collateralized by substantially all property and
equipment of Golden Road and guaranteed by Monarch and
its three largest stockholders, with floating interest
rates tied to a base rate approximately equal to the prime
rate or LIBOR (at the Company's option) plus a margin which
fluctuates according to the Company's ratio of funded debt
to Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA"). The weighted average interest rate
was approximately 2.62% at December 31, 2003, and 2.92% at
December 31, 2002. Prior to the refinancing of the Original
Credit Facility (see below), the loan was to mature in June
2004, with all unpaid interest and principal due and payable
at that time.................................................. $ 47,000,000 $59,500,000
Slot purchase contracts, collateralized by equipment.
Contracts are non-interest bearing and all mature within
twelve months................................................. 184,591 779,095
------------ -----------
$ 47,184,591 $60,279,095
Less current maturities........................................ (6,059,591) (8,279,095)
------------ -----------
$ 41,125,000 $52,000,000
============ ===========
|
THE CREDIT FACILITY.
On February 20, 2004, the Original Credit Facility was refinanced (the "New Credit Facility") for $50 million, which includes a $46 million payoff for the unpaid balance of the Original Credit Facility. The amount of the New Credit Facility may be increased by up to $30 million on a one-time basis and if requested by the Company before the second anniversary of the closing date, as defined. At the Company's option, borrowings under the New Credit Facility will accrue interest at a rate designated by the agent bank at its base rate (the "Base Rate") or at the London Interbank Offered Rate ("LIBOR") for one, two, three or six month periods. The rate of interest paid by the Company will include a margin added to either the Base Rate or to LIBOR that is tied to the Company's ratio of funded debt to EBITDA (the "Leverage Ratio"). Depending on the Company's Leverage Ratio, this margin can vary between 0.25 percent and 1.25 percent above the Base Rate, and between 1.50 percent and 2.50 percent above LIBOR (under the Original Credit Facility, this margin varied between 0.00 percent and 2.00 percent above the Base Rate, and between 1.50 percent and 3.50 percent above LIBOR). At December 31, 2003, the applicable margin was the Base Rate plus 0.0%, and the applicable LIBOR margin was LIBOR plus 1.5%. At December 31, 2003, the Base Rate was 4.00% and the LIBOR rate was 1.12%. At December 31, 2003, the Company had $1.0 million in Base Rate loans outstanding and had one LIBOR loan outstanding totaling $46.0 million, for a total obligation of $47.0 million.
The Company may utilize proceeds from the New Credit Facility for working capital needs and general corporate purposes relating to the Atlantis and for ongoing capital expenditure requirements at the Atlantis.
The New Credit Facility is secured by liens on substantially all of the real and personal property of the Atlantis, and is guaranteed by Monarch. The Original Credit Facility was guaranteed individually by certain executives of the Company. These individuals were not required to provide any personal guarantees for the New Credit Facility and, therefore, the Company will no longer incur guarantee fee expenses.
The New Credit Facility contains covenants customary and typical for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of the Company's assets and covenants restricting the Company's ability to merge, transfer ownership of Monarch, incur additional indebtedness, encumber assets, and make certain investments. The New Credit Facility also contains covenants requiring the Company to maintain certain financial ratios, and provisions restricting transfers between Monarch and its constituents. The New Credit Facility also contains provisions requiring the achievement of certain financial ratios before the Company can repurchase its common stock. Management does not consider the covenants to restrict the Company's operations.
The maturity date of the New Credit Facility is February 23, 2009. Beginning June 30, 2004, the maximum principal available under the Credit Facility is reduced by an aggregate of $30.875 million in equal increments of $1.625 million per quarter with the remaining balance due at the maturity date. The Company may prepay borrowings under the New Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid under the New Credit Facility may be reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available. The Company may also permanently reduce the maximum principal available under the New Credit Facility at any time so long as the amount of such reduction is at least $500 thousand and a multiple of $50 thousand.
The Company paid various fees and other loan costs upon the closing of the refinancing of the New Credit Facility that will be amortized over the term of the New Credit Facility using the straight-line method.
Annual maturities of long-term debt as of December 31, 2003, after giving effect to the execution of the New Credit Facility, are as follows:
Year ending December 31,
2004 ......................... $ 6,059,591
2005 ......................... 6,500,000
2006 ......................... 6,500,000
2007 ......................... 6,500,000
2008 ......................... 6,500,000
Thereafter ................... 15,125,000
------------
$ 47,184,591
============
|
NOTE 6. INCOME TAX
Income tax provision consists of the following:
Years ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Current provision..................... $ 4,687,667 $ 4,240,255 $ 1,904,759
Deferred provision.................... 277,913 189,516 381,936
----------- ----------- -----------
$ 4,965,580 $ 4,429,771 $ 2,286,695
=========== =========== ===========
|
The difference between the Company's provision for federal income taxes as presented in the accompanying Consolidated Statements of Income, and the provision for income taxes computed at the statutory rate is comprised of the items shown in the following table as a percentage of pre-tax earnings.
Years ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Income tax at the statutory rate...... 35.0% 34.0% 34.0%
Non-deductible expenses............... 0.2% 1.2% 0.5%
Tax credits........................... (1.1)% (1.2)% (1.3)%
----------- ----------- -----------
34.1% 34.0% 33.2%
=========== =========== ===========
|
The components of the deferred income tax assets and liabilities at December 31, 2003 and 2002, as presented in the Consolidated Balance Sheets, are as follows:
2003 2002
----------- -----------
CURRENT ASSETS
Compensation and benefits............ $ 344,500 $ 261,720
Bad debt reserves.................... 185,700 301,908
Accrued gaming liabilities........... 96,600 89,525
Accrued other liabilities............ (84,343) (160,696)
----------- -----------
Deferred income tax asset $ 542,457 $ 492,457
=========== ===========
NONCURRENT LIABILITIES
Impairment of assets................. $ (72,260) $ (70,196)
Depreciation......................... (4,467,841) (4,179,005)
Land basis........................... (285,706) (277,543)
Other................................ (28,780) -
----------- -----------
Deferred income tax liability $(4,854,587) $(4,526,744)
=========== ===========
|
NOTE 7. BENEFIT PLANS
Savings Plan - Effective November 1, 1995, the Company adopted a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may defer up to 15% of their pre-tax compensation, but not more than statutory limits. The Company contributes twenty five cents for each dollar contributed by a participant, with a maximum contribution of 4% of a participant's compensation. The Company's matching contributions were approximately $45,370, $32,678, and $31,916 in 2003, 2002, and 2001, respectively.
Stock Option Plans - The Company maintains three stock option plans, consisting of the Directors' Stock Option Plan, the Executive Long-term Incentive Plan, and the Employee Stock Option Plan (the "Plans"), which collectively provide for the granting of options to purchase up to 775,000 common shares. The exercise price of stock options granted under the plans is established by the respective plan committees, but the exercise price may not be less than the market price of the Company's common stock on the date the option is granted. Options expire five to ten years from the grant date. The Plans were amended by majority stockholder approval at the Company's 2003 Annual Meeting of Stockholders on June 12, 2003. The amendment per majority approval extended the terms of the existing stock compensation plans, increased the amount of option shares authorized for issue under the existing stock compensation plans, extended the life of stock options granted under the existing Directors' Stock Option Plan and permitted the Directors' Plan Committee to extend the term of any existing option grants under the Directors' Stock Option Plan, and revised the description of employees eligible to receive options and the conditions that determine the purchase price of stock options under the existing Executive Long-Term Incentive Stock Option Plan. By their amended terms, the Plans will expire in June, 2013.
The Company has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148, but applies APB No. 25 and related interpretations in accounting for its plans. No stock-based compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.
The fair value of the Company's stock options, as presented in Note 1, was
estimated as of the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions for 2003, 2002, and 2001:
dividend yield of 0.0% for all periods; expected volatility of 41.9%, 58.7%,
and 70.4%, respectively; a weighted average risk free interest rate of 2.80%,
3.83%, and 4.36%, respectively; and expected holding periods ranging from three
to nine years.
Presented below is a summary of the status of the Company's stock options and the related transactions.
Weighted Average
Shares Exercise Price
-------- ----------------
Outstanding at December 31, 2000.... 153,550 $3.19
Granted............................ 28,200 5.14
Exercised.......................... - -
Forfeited/expired.................. (21,850) (4.95)
-------- ----------------
Outstanding at December 31, 2001.... 159,900 3.38
Granted............................ 34,150 10.52
Exercised.......................... (38,555) (3.27)
Forfeited/expired.................. (11,666) (4.88)
-------- ----------------
Outstanding at December 31, 2002.... 143,829 4.99
Granted............................ 24,150 8.51
Exercised.......................... (45,498) (2.69)
Forfeited/expired.................. (10,000) (11.93)
-------- ----------------
Outstanding at December 31, 2003.... 112,481 $6.07
======== ================
Weighted average fair value of
options granted during 2003......... $ 8.51
========
2002......... $10.52
========
2001......... $ 5.14
========
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Stock Options Stock Options
Outstanding Exercisable
------------------------- -------------------------
Weighted
Average Weighted Weighted
Contractual Average Average
Range of Life (in Exercise Exercise
Exercise Prices Shares years) Price Shares Price
---------------- --------- ----------- ----------- ---------- ----------
$2.88 to $4.81 45,414 3.2 $ 3.01 24,416 $ 3.12
$5.06 to $7.79 47,917 6.7 $ 6.34 22,917 $ 6.40
$10.90 to $14.37 19,150 6.4 $12.66 9,150 $14.37
--------- ---------
Total 112,481 56,483
========= =========
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NOTE 8. COMMITMENTS AND CONTINGENCIES
Self Insurance - The Company is self-insured for health care claims for eligible active employees. Benefit plan administrators assist the Company in determining its liability for self-insured claims, and such claims are not discounted. The Company is also self-insured for workman's compensation. Both plans limit the Company's maximum liability under stop-loss agreements with insurance companies. The maximum liability for health care claims under the stop-loss agreement is $75,000 per claim. The maximum liability for workman's compensation under the stop-loss agreement is $300,000 per claim.
On March 10, 2003, we announced a plan to repurchase up to 250,000 shares, or 2.6%, of our common stock in open market transactions. The repurchases may be made from time to time depending on market conditions and availability of funds. The repurchases are to be made with our cash. During 2003, we purchased 180,000 shares of our common stock pursuant to this stock repurchase program.
The Company commenced certain litigation in April 2003 against the City of Reno and other interested parties petitioning the Second Judicial District Court of Nevada to (i) review the City of Reno's decision to enter into an agreement for the acquisition and relocation of the Old Reno Casino in downtown Reno, (ii) condemn the real property occupied by the Old Reno Casino, (iii) declare the agreement null and void and (iv) preclude the City of Reno from condemning the real property. In February 2004, the parties entered into a settlement agreement, and the District Court dismissed the case in February 2004. The terms of the confidential settlement agreement included a restriction from relocating the former Old Reno Casino gaming license within an identified geographic area near the Company's Atlantis Casino Resort in Reno. The outcome of this litigation did not have a material impact on the financial statements of the Company.
The Company is a defendant in various pending legal proceedings. In the opinion of management, all pending claims in such litigation will not, in the aggregate, have a material adverse effect on the Company's financial position or results of operations.
In 2003, the Company entered into an option agreement with an affiliate of its controlling stockholders to purchase property in South Reno for development of a new hotel casino. Commencement of any development of the property will require completion of property due diligence and receipt of numerous approvals, including master plan changes and zone changes, neither of which can be assured. Through the current property owner, the Company has filed an application with the City of Reno for master plan change and zone change for 13 acres of the property.
In 2004, we are planning construction of a new driveway that will be shared between the Atlantis and the adjacent Sierra Marketplace Shopping Center that is owned and controlled by affiliates of our controlling stockholders (the "Shopping Center"). A new traffic signal will be erected at mid-block on South Virginia Street, serving the new driveway. As part of this project, we have leased a 37,368 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at a monthly rent of $25,000, subject to increase every 60 months based on the Consumer Price Index. We are also to use part of the common area of the Shopping Center and will pay our proportional share of the common area expense of the Shopping Center. We have the option to renew the lease for 3 five-year terms, and at the end of the
extension period, we have the option to purchase the leased section of the Shopping Center at a price to be determined based on a MAI Appraisal. The leased space will be used by us for pedestrian and vehicle access to the Atlantis, and we will have use of a portion of the parking spaces at the Shopping Center. We are responsible for two thirds of the construction costs of the project, up to a maximum of $1.2 million. We anticipate this project to be completed in Summer of 2004 (see Part III - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004).
NOTE 9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2003
---------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------- ------------- ------------- ------------- -------------
Net revenues ............. $ 27,164,928 $ 29,075,070 $ 31,446,693 $ 28,263,822 $115,950,513
Operating expenses ....... $ 23,649,979 $ 24,863,622 $ 25,260,680 $ 24,966,879 $ 98,741,160
Income from operations ... $ 3,514,949 $ 4,211,448 $ 6,186,013 $ 3,296,943 $ 17,209,353
Net income ............... $ 1,837,927 $ 2,331,109 $ 3,665,814 $ 1,771,073 $ 9,605,923
Income per share of
common stock
Basic ................ $ 0.19 $ 0.25 $ 0.39 $ 0.19 $ 1.02
Diluted .............. $ 0.19 $ 0.25 $ 0.39 $ 0.19 $ 1.02
|
2002
---------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------- ------------- ------------- ------------- -------------
Net revenues ............. $ 25,796,201 $ 27,628,872 $ 30,651,581 $ 26,960,916 $111,037,570
Operating expenses ....... $ 22,289,803 $ 22,850,271 $ 24,435,648 $ 24,266,348 $ 93,842,070
Income from operations ... $ 3,506,398 $ 4,778,601 $ 6,215,933 $ 2,694,568 $ 17,195,500
Net income ............... $ 1,585,084 $ 2,252,166 $ 3,467,460 $ 1,298,636 $ 8,603,346
Income per share of
common stock
Basic ................ $ 0.17 $ 0.24 $ 0.37 $ 0.14 $ 0.91
Diluted .............. $ 0.17 $ 0.24 $ 0.36 $ 0.14 $ 0.90
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report (the "Evaluation Date"), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plan Information.
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
--------------------- -------------------- -------------------- ------------------------
Equity compensation
plans approved by
security holders <F1> 112,481 $6.07 662,519
Equity compensation
plans not approved - - -
by security holders
-------------------- -------------------- ------------------------
Total 112,481 $6.07 662,519
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<F1> Includes the 1993 Directors' Stock Option Plan, 1993 Employee Stock Option Plan and 1993 Executive Long-Term Incentive Plan, as amended. |
Additional information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on May 26, 2004.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II of this report:
Report of Independent Auditors - Ernst & Young LLP
Independent Auditors' Report - Deloitte & Touche LLP
Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001.
Consolidated Balance Sheets at December 31, 2003, and 2002.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002, and 2001.
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
2. Financial Statements Schedules
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
beginning costs and at end
Year ended December 31, of year expenses Deductions<F1> Other of year
----------------------- ---------- ---------- ---------- ----- ----------
2001
Allowance for doubtful
accounts................... 1,314,258 1,239,368 (1,628,543) - 925,083
2002
Allowance for doubtful
accounts................... 925,083 634,934 (672,052) - 887,965
2003
Allowance for doubtful
accounts................... 887,965 742,407 (599,754) - 1,030,618
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<F1> The Company reviews receivables monthly and accordingly adjusts the allowance for doubtful accounts monthly. The Company records actual uncollectible write-offs annually. The amount charged to Costs and Expenses reflects the bad debt expense recorded in the consolidated statement of income, while the amount recorded for Deductions reflects the adjustment to actual allowance for doubtful accounts reserve at the end of the period.
(b) Reports on Form 8-K
On March 8, 2004, we filed a Current Report on Form 8-K reporting the payoff of the Original Credit Facility and the signing of the New Credit Facility.
On February 20, 2004, we filed a Current Report on Form 8-K reporting that we had issued a press release announcing the results for the fiscal quarter and fiscal year ended December 31, 2003.
On February 6, 2004, we filed a Current Report on Form 8-K reporting that we had issued a press release announcing the settlement of our lawsuit against the City of Reno and other interested parties we had commenced in April of 2003.
On October 31, 2003, we filed a Current Report on Form 8-K reporting that we had issued a press release announcing results for the quarter ended September 30, 2003.
On October 8, 2003, we filed a Current Report on Form 8-K reporting a change in our certifying accountant. Our Audit Committee elected not to engage Deloitte & Touche LLP as our independent public accountants for the current year's audit, and engaged Ernst & Young LLP as our new independent accountants as of October 1, 2003.
(c) 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.
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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 filed as an exhibit to this Form 10-K.
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.
10.01 Construction and Reducing Revolving Credit Agreement, dated as of
December 29, 1997, among Golden Road Motor Inn, Inc. as Borrower,
Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and
Behrouz Farahi as guarantors, 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 January
14, 1998, Exhibit 10.01.
10.02 First Amendment to Construction and Reducing Revolving Credit
Agreement, dated as of January 9, 1998, among Golden Road Motor
Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi,
Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as
defined therein, and Wells Fargo Bank as administrative and
collateral Agent for the Lenders, Swingline Lender and L/C Issuer
is incorporated herein by reference to the Company's Form 10-K
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report (SEC File 0-22088) for the fiscal year ended December 31,
1997, Item 14(c), Exhibit 10.02.
10.03 Second Amendment to Construction and Reducing Revolving Credit
Agreement, dated as of June 12, 1998, among Golden Road Motor Inn,
Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi,
Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as
defined therein, and Wells Fargo Bank as administrative and
collateral Agent for the Lenders, Swingline Lender and L/C Issuer
is incorporated herein by reference to the Company's Form 10-Q
report (SEC File 0-22088) for the fiscal quarter ended June 30,
1998, Item 6(a), Exhibit 10.01.
10.04 Term Loan Agreement, entered as of the 23rd day of July, 1998, by
and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino
& Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as
guarantors, and U.S. Bank National Association as Term Lender is
incorporated herein by reference to the Company's Form 10-Q report
(SEC File 0-22088) for fiscal quarter ended September 30, 1998,
Item 6(a), Exhibit 10.01.
10.05 Schedule to Master Loan Agreement, dated as of December 16, 1998;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1998, Item 14(c), Exhibit
10.05.
10.06 Nonstandardized 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.
10.07 Recordkeeping Service Agreement between Monarch Casino & Resort,
Inc. and Travelers Recordkeeping dated June 29, 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 10.22.
10.08 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.
10.09 Business Loan Agreement between Golden Road Motor Inn, Inc. and
Colonial Bank, dated November 17, 1999; Promissory Note by Golden
Road Motor Inn, Inc. in favor of Colonial Bank, dated November 17,
1999; Commercial Guaranty issued by John Farahi in favor of
Colonial Bank, dated November 17, 1999; Commercial Guaranty issued
by Bahram Farahi in favor of Colonial Bank, dated November 17,
1999; and Commercial Guaranty issued by Ben Farahi, dated
November 17, 1999 is incorporated herein by reference to the
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Company's Form 10-K report (SEC File 0-22088) for the fiscal year
ended December 31, 1999, Item 14(c), Exhibit 10.14.
10.10 Schedule to Master Loan Agreement, dated as of April 1, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.15.
10.11 Schedule to Master Loan Agreement, dated as of April 19, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.16.
10.12 Schedule to Master Loan Agreement, dated as of May 5, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.17.
10.13 Schedule to Master Loan Agreement, dated as of May 24, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.18.
10.14 Schedule to Master Loan Agreement, dated as of June 23, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.19.
10.15 Agreement dated November 3, 1999 between Golden Road Motor Inn,
Inc. and First Security Leasing Company of Nevada is incorporated
herein by reference to the Company's Form 10-Q report (SEC File
0-22088) for the fiscal quarter ended September 30, 2000, Item
6(a), Exhibit 10.01.
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10.16 Agreement dated November 3, 1999 between Golden Road Motor Inn,
Inc. and First Security Leasing Company of Nevada is incorporated
herein by reference to the Company's Form 10-Q report (SEC File
0-22088) for the fiscal quarter ended September 30, 2000, Item
6(a), Exhibit 10.02.
10.17 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.
10.18 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 filed herewith.
10.19 Purchase Option Agreement dated as of September 15, 2003 between
South Hills Investment Company as Seller and Monarch Casino and
Resort, Inc. as Buyer is filed herewith.
21.01 Amended and Restated List of Subsidiaries of Monarch Casino &
Resort, Inc. is incorporated herein by reference to the Company's
Form 10-K report (SEC File 0-22088) for the fiscal year ended
December 31, 1999, Item 14(c), Exhibit 21.01.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
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.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MONARCH CASINO & RESORT, INC.
(Registrant)
Date: March 11, 2004 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer and Chief
Financial Officer (Principal Financial
Officer and Duly Authorized Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------ ----------------------------------- ----
/S/ JOHN FARAHI Co-Chairman of the Board of Directors, March 11, 2004
------------------ Chief Executive Officer (Principal
John Farahi Executive Officer) and Director
/S/ BOB FARAHI Co-Chairman of the Board of Directors, March 11, 2004
------------------ President, and Director
Bob Farahi
/S/ BEN FARAHI Co-Chairman of the Board of Directors, March 11, 2004
------------------ Secretary, Treasurer, Chief Financial
Ben Farahi Officer (Principal Financial Officer
and Principal Accounting Officer) and
Director
/S/ CRAIG. F.
SULLIVAN Director March 11, 2004
------------------
Craig F. Sullivan
/S/ RONALD R.
ZIDECK Director March 11, 2004
------------------
Ronald R. Zideck
/S/ CHARLES W.
SCHARER Director March 11, 2004
------------------
Charles W. Scharer
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EXIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ben Farahi, Chief Financial Officer of Monarch Casino & Resort, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Monarch Casino & Resort, Inc., a Nevada Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control and reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 11, 2004
By: /s/ Ben Farahi
---------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
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EXHIBIT 31.2
I, John Farahi, Chief Executive Officer of Monarch Casino & Resort, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Monarch Casino & Resort, Inc., a Nevada Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control and reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 11, 2004
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
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EXHIBIT INDEX
Exhibit Page
Number Description Number
----------- ------------------------------------------------------------------ --------
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 filed as an exhibit to this Form 10-K.
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.
10.01 Construction and Reducing Revolving Credit Agreement, dated as of
December 29, 1997, among Golden Road Motor Inn, Inc. as Borrower,
Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and
Behrouz Farahi as guarantors, 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 January
14, 1998, Exhibit 10.01.
10.02 First Amendment to Construction and Reducing Revolving Credit
Agreement, dated as of January 9, 1998, among Golden Road Motor
Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi,
Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as
defined therein, and Wells Fargo Bank as administrative and
collateral Agent for the Lenders, Swingline Lender and L/C Issuer
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 10.02.
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10.03 Second Amendment to Construction and Reducing Revolving Credit
Agreement, dated as of June 12, 1998, among Golden Road Motor Inn,
Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi,
Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as
defined therein, and Wells Fargo Bank as administrative and
collateral Agent for the Lenders, Swingline Lender and L/C Issuer
is incorporated herein by reference to the Company's Form 10-Q
report (SEC File 0-22088) for the fiscal quarter ended June 30,
1998, Item 6(a), Exhibit 10.01.
10.04 Term Loan Agreement, entered into as of the 23rd day of July,
1998, by and among Golden Road Motor Inn, Inc., as Borrower,
Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and
Behrouz Farahi as guarantors, and U.S. Bank National Association
as Term Lender is incorporated herein by reference to the
Company's Form 10-Q report (SEC File 0-22088) for the fiscal
quarter ended September 30, 1998, Item 6(a), Exhibit 10.01.
10.05 Schedule to Master Loan Agreement, dated as of December 16, 1998;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1998, Item 14(c), Exhibit
10.05.
10.06 Nonstandardized 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.
10.07 Recordkeeping Service Agreement between Monarch Casino & Resort,
Inc. and Travelers Recordkeeping dated June 29, 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 10.22.
10.08 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.
10.09 Business Loan Agreement between Golden Road Motor Inn, Inc. and
Colonial Bank, dated November 17, 1999; Promissory Note by Golden
Road Motor Inn, Inc. in favor of Colonial Bank, dated November 17,
1999; Commercial Guaranty issued by John Farahi in favor of
Colonial Bank, dated November 17, 1999; Commercial Guaranty issued
by Bahram Farahi in favor of Colonial Bank, dated November 17,
1999; and Commercial Guaranty issued by Ben Farahi, dated
November 17, 1999 is incorporated herein by reference to the
Company's Form 10-K report (SEC File 0-22088) for the fiscal year
ended December 31, 1999, Item 14(c), Exhibit 10.14.
10.10 Schedule to Master Loan Agreement, dated as of April 1, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.15.
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10.11 Schedule to Master Loan Agreement, dated as of April 19, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.16.
10.12 Schedule to Master Loan Agreement, dated as of May 5, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.17.
10.13 Schedule to Master Loan Agreement, dated as of May 24, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.18.
10.14 Schedule to Master Loan Agreement, dated as of June 23, 1999;
Master Loan Agreement, dated as of October 3, 1998; and
Guaranties, dated as of September 9, 1998, by and among Golden
Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc.,
John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and
U.S. Bank Leasing and Financial as Lender is incorporated herein
by reference to the Company's Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1999, Item 14(c),
Exhibit 10.19.
10.15 Agreement dated November 3, 1999 between Golden Road Motor Inn,
Inc. and First Security Leasing Company of Nevada is incorporated
herein by reference to the Company's Form 10-Q report (SEC File
0-22088) for the fiscal quarter ended September 30, 2000, Item
6(a), Exhibit 10.01.
10.16 Agreement dated November 3, 1999 between Golden Road Motor Inn,
Inc. and First Security Leasing Company of Nevada is incorporated
herein by reference to the Company's Form 10-Q report (SEC File
0-22088) for the fiscal quarter ended September 30, 2000, Item
6(a), Exhibit 10.02.
10.17 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.
10.18 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 filed herewith.
10.19 Purchase Option Agreement dated as of September 15, 2003 between
South Hills Investment Company as Seller and Monarch Casino and
Resort, Inc. as Buyer is filed herewith.
21.01 Amended and Restated List of Subsidiaries of Monarch Casino &
Resort, Inc. is incorporated herein by reference to the Company's
Form 10-K report (SEC File 0-22088) for the fiscal year ended
December 31, 1999, Item 14(c), Exhibit 21.01.
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23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
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
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Nos. 333-85412, 333-85418 and 333-85420 pertaining to the Employees Savings Plans of Monarch Casino & Resort, Inc. of our report dated February 13, 2004, except for Note 5, as to which the date is February 20, 2004, with respect to the Consolidated Financial Statements and schedules of Monarch Casino & Resort, Inc. included in the 2003 Annual Report on Form 10-K for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Las Vegas, Nevada
February 13, 2004, except for Note 5, as to which the date is February 20, 2004
|
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-85412, 333-85418 and 333-85420 of Monarch Casino & Resort, Inc., on Form S-8 of our report dated February 18, 2003, appearing in this Annual Report on Form 10-K of Monarch Casino & Resort, Inc., for the year ended December 31, 2003.
/s/ Deloitte & Touche LLP Reno, Nevada March 8, 2004 |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Monarch Casino & Resort, Inc., (the "Company") for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Farahi, Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates indicated and result of operations of the Company for the periods indicated.
/S/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
March 11, 2004
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EXHIBIT 32.2
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Monarch Casino & Resort, Inc., (the "Company") for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ben Farahi, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates indicated and result of operations of the Company for the periods indicated.
/S/ BEN FARAHI
--------------
BEN FARAHI
Chief Financial Officer, Secretary and
Treasurer
March 11, 2004
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EXHIBIT 10.18
LEASE AGREEMENT AND OPTION TO PURCHASE
THIS LEASE AGREEMENT AND OPTION TO PURCHASE is made and entered into this 29th day of January, 2004, between Biggest Little Investments, L.P., a Delaware limited partnership, hereinafter referred to as "LESSOR," and Golden Road Motor Inn, Inc., a Nevada corporation, hereinafter referred to "LESSEE."
ARTICLE 1
GRANT AND TERM
1.1 AGREEMENT TO LEASE. LESSOR hereby leases the hereinafter described real property to LESSEE, and LESSEE hereby leases said real property from LESSOR for the term and according to the terms, covenants, agreements, representations and conditions set forth herein.
1.2 PROPERTY. The subject property is all that certain property described in Exhibit "A" attached hereto and located in the City of Reno, County of Washoe, State of Nevada, hereinafter referred to as the "Property", including the improvements to be constructed by LESSOR. The Property is part of a Shopping Center to be known as The Village, and formerly known as the Sierra Marketplace Shopping Center (hereinafter "Shopping Center".) LESSOR represents that this Lease is subject only to the easements and encumbrances of record against the Property as shown in the Title Report (described below).
1.3 TERM. The term ("Term") of this Lease shall be fifteen (15) years commencing on the Commencement Date (defined below) and expiring at 5:00 p.m. on the last day of the Term, unless sooner terminated under any provisions hereof. The Term of this Lease and the LESSEE'S obligation to pay rent, as provided in Section 1.4 below, shall commence (hereinafter "Commencement Date") on the first to occur of the following events:
A. Following completion of the Improvements (defined below), the date on which the Property is approved for use by the appropriate governmental agency.
B. The date on which the LESSEE shall open the Property for pedestrian and vehicle traffic to the public.
In the event that the Commencement Date does not occur on the first day of the month, then the Term shall commence on the first day of the month next succeeding the Commencement Date, provided LESSEE shall pay Minimum Monthly Rent and Additional Rent as provided in Article 2 below, for the fractional month from the Commencement Date through the first day of the next succeeding month on a per diem basis, calculated on the basis of a thirty (30)-day month, in advance. All Lease expirations, renewal dates, notices of options to renew, and any other provision relating to the commencement of the Term of this Lease shall be determined by reference to (i) the Commencement Date where same occurs of the first day of the month, or (ii) on the first day of the next succeeding month where the Commencement Date does not occur on the first day of the month.
1.4 OPTIONS TO EXTEND LEASE PERIOD. LESSOR hereby grants to LESSEE three
(3) successive options to renew the Term of this Lease for additional five (5)
year terms each. The first renewal option is granted at the expiration of this
original Lease Term, provided LESSEE is not in default
under this Lease. The two (2) additional options to extend and renew this Lease for successive five (5) year terms each, are exercisable in the event LESSEE properly exercised the prior option and provided LESSEE is not in default under this Lease at the time thereof. Said renewal terms shall be collectively referred to herein as "Renewal Terms" and individually referred to as "Renewal Term." Each option to renew this Lease shall be exercised by LESSEE giving written notice thereof to LESSOR at least ninety (90) days prior to expiration of the original term or the Renewal Terms of this Lease, but not before 180 days prior to said expiration. All of the terms and provisions of this Lease shall continue in full force and effect and shall apply in all respects to all Renewal Terms and all references in this Lease to Term shall hereinafter include the Renewal Terms. During each Renewal Term, the Minimum Monthly Rent shall be adjusted upward and increased as provided in Section 2.1 hereof.
1.5 LESSOR'S FAILURE TO COMPLETE IMPROVEMENTS. In the event the traffic control signal on South Virginia Street at the access point to the Property and the other build-to-suit improvements to be constructed by LESSOR pursuant to Article 3 below, are not completed on or before December 31, 2004, this Lease may be terminated by LESSEE upon not less than ten (10) days prior written notice to LESSOR.
1.6 LEASEHOLD POLICY OF TITLE INSURANCE. LESSOR has delivered to LESSEE a
preliminary title report prepared by Western Title Company, Inc. (Order No.:
00138583) dated as of December 15, 2003 (the "Title Report"). LESSOR
represents that the Title Report is for the Shopping Center. Within 45 days
after the mutual execution and delivery of this Lease, LESSEE, in LESSEE'S sole
discretion and at its sole expense, may cause a title company to issue a
leasehold policy of title insurance for the Property (hereinafter "Leasehold
Title Policy"), insuring that LESSEE is leasing the Property subject only to
such exceptions acceptable to LESSEE and the standard printed exceptions
included within a Leasehold Title Policy. In the event that LESSEE is unable
to have a Leasehold Title Policy issued which is acceptable to LESSEE within
the 45 day period stated herein, this Lease may be terminated by LESSEE upon
not less than ten (10) days prior written notice to LESSOR. In the event that
a Leasehold Title Policy is not issued within said 45 day period and LESSEE
does not provide notice of Lease termination to LESSOR within ten (10) days
thereafter, LESSEE shall be deemed to have accepted this Lease subject to only
those exceptions contained in the Title Report and this Lease shall continue in
full force and effect in accordance with its terms.
ARTICLE 2
RENT AND OTHER CHARGES
2.1 RENT. As and for rent for the Property, LESSEE shall pay LESSOR monthly rent as follows:
A. MINIMUM MONTHLY RENT. The Minimum Monthly Rent shall be $25,000.00
per month for the first sixty (60) months, which shall be increased every sixty
(60) months on the day and the month on which the Commencement Date occurs in
each consecutive sixty (60) month period following the Commencement Date
(hereinafter "Anniversary Date"), as provided in Section 2.1(B) below.
B. ADJUSTMENTS TO MINIMUM MONTHLY RENT. The Minimum Monthly Rent is subject to increase on the first day of the sixty-first (61) calendar month following the month during which the Commencement Date occurs and on each
Anniversary Date thereafter for the duration of the Term. The base for
computing the increase (hereinafter "Beginning Index") is the All Urban
Consumers Index, U.S. Cities Average, All Items category published by the
United States Department of Labor, Bureau of Labor Statistics (hereinafter
"Index"), which is in effect for the month in which the Commencement Date
occurs. The Index published and in effect the three (3) months preceding each
Anniversary Date (hereinafter "Comparison Index") is used in determining the
amount of the increase from one sixty (60) month period to the next. Beginning
on the first Anniversary Date, and thereafter on each subsequent Anniversary
Date, the Minimum Monthly rent as indicated in Section 2.1(A) will be increased
by multiplying the Minimum Monthly Rent in effect during the preceding sixty
(60) month period by a fraction, the numerator being the Comparison Index and
the denominator being the Beginning Index. In no event, however, will the
amount of Minimum Monthly Rent for one sixty (60) month period be less than the
Minimum Monthly Rent for the preceding sixty (60) month period. Further the
cost of living adjustment will be applied to the Minimum Monthly Rent amount
only.
i. If, in the future, the Index shall be changed then the Index shall be converted in accordance with the conversion factor published by the United Stated Department of Labor, Bureau of Labor Statistics. In the event the Index is discontinued or revised during the Term hereof, such other governmental index or computation with which it is replaced shall be used in order to obtain substantially the same result that would be obtained if the Index had not been discontinued or revised.
ii. No later than five (5) days after each Anniversary Date, LESSOR will give LESSEE written notice of the adjusted Minimum Monthly Rent payable for the next succeeding five (5) year period; provided, however, failure of LESSOR to give such notice shall not be construed as a waiver of any increase in the Minimum Monthly Rent.
C. PAYMENT OF RENT. Rent shall be payable in advance and shall be due and payable on the first (1st) day of each month, commencing on the Commencement Date, as provided in Section 2.1 (B) above. Rent shall be paid to LESSOR at the address provided herein for service of notice, unless otherwise directed in writing by the LESSOR.
2.2 ADDITIONAL RENT. All charges payable by LESSEE hereunder, other than Minimum Monthly Rent, are collectively referred to as "Additional Rent." Unless this Lease provides otherwise, all Additional Rent shall be paid with the next monthly installment of Minimum Monthly Rent. The term "Rent" shall mean Minimum Monthly Rent and Additional Rent.
2.3 REAL PROPERTY TAXES.
A. PAYMENT OF TAXES. LESSEE agrees to pay LESSEE'S pro rata share of all Real Property Taxes, as hereinafter defined, which may be levied or assessed by any lawful authority against the land on which buildings are located and improvements thereon in the Shopping Center. LESSEE shall pay its share of such Real Property Taxes upon receipt of a statement from LESSOR delineating LESSEE'S share of same, which share shall be paid within ten (10) days after receipt of LESSOR'S statement. LESSEE hereby agrees for purposes of this Lease that LESSEE'S proportionate share of such Real Property Taxes is 7.28%. All Real Property Taxes for the year in which this Lease commences shall be apportioned and adjusted.
B. DEFINITION OF "REAL PROPERTY TAXES". "Real Property Taxes" means:
(i) any fee, license fee, license tax, business license fee, commercial rental
tax, levy, charge, assessment, penalty or tax (other than inheritance or estate
taxes) imposed by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agriculture, lighting, drainage or other improvement district thereof, as
against any legal or equitable interest of LESSOR in the Property; (ii) any tax
on the LESSOR'S right to receive, or the receipt of, rent or income from the
Property or against LESSOR S business of leasing the Property; (iii) any tax or
charge for fire protection, streets, sidewalks, road maintenance, refuse or
other services provided to the Property by any governmental agency; (iv) any
tax imposed upon this transaction or based upon a reassessment of the Property
due to a change in ownership or transfer of all or part of LESSOR'S interest in
the Property; and (v) any charge or fee replacing any tax previously included
within the definition of Real Property Taxes. "Real Property Taxes" shall not,
however, include LESSOR'S federal or state income, franchise, inheritance,
estate taxes or any real property transfer taxes.
2.4 PERSONAL PROPERTY TAXES.
A. LESSEE shall pay prior to delinquency all taxes charged against the trade fixtures, furnishings, equipment or any other personal property belonging to LESSEE. LESSEE shall use its best efforts to have such personal property taxed separately from the Property.
B. If any such taxes on LESSEE'S personal property are levied against LESSOR or LESSOR'S property, or if the assessed value of the Property is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of LESSEE, then LESSOR, after written notice to LESSEE, shall have the right to pay the taxes based upon such increased assessments, regardless of the validity thereof, but only under proper protest if requested by LESSEE in writing. If LESSOR shall do so, then LESSEE shall, upon demand, repay to LESSOR the taxes levied against LESSOR, or the proportion of such taxes resulting from such increase in the assessment. In any such event, however, LESSEE, at LESSEE'S sole cost and expense, shall have the right, in the name of LESSOR and with LESSOR'S full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest; any amount so recovered to belong to LESSEE.
C. If any of LESSEE'S personal property is taxed with the Property, LESSEE shall pay LESSOR the taxes for the personal property within fifteen (15) days after LESSEE receives a written statement from LESSOR for such personal property taxes.
2.5 UTILITIES. LESSEE shall pay, directly to the appropriate supplier,
the cost of all natural gas, heat, light, power, sewer service, telephone,
water, refuse disposal and other utilities and services supplied to the
Property, unless LESSOR elects to include the cost of any or all of such
utilities and services as a Shopping Center Operating Cost as defined in
Section 2.8. LESSEE shall pay such charges within ten (10) days of
notification of the amount by the LESSOR. LESSOR reserves the right to install
and maintain, at LESSOR'S sole expense, separate meters for any public utility
servicing the Property for which a separate meter is not presently installed.
LESSEE may also elect, at LESSEE's sole expense, to
install and maintain separate meters for any public utility servicing the Property for which a separate meter is not presently installed.
2.6 COST OF MAINTAINING PROPERTY. LESSOR shall maintain and repair the Property in a good, clean and presentable condition and state of repair as provided in Section 4.6 below, and LESSEE shall pay to LESSOR, as Additional Rent, sixty six and 66/100 percent (66.66%) of the cost of maintaining and repairing the Property, with LESSOR to pay the remaining thirty three and 34/100 percent (33.34%) of the cost of maintaining and repairing the Property; provided that the cost of maintaining the Property under this section shall not include costs or expenses which are an Operating Cost as defined in Section 2.8 below.
2.7 LESSEE'S PRO RATA SHARE OF OPERATING COST. LESSEE will also pay to LESSOR, as further Additional Rent, a proportionate share of the Shopping Center's Operating Cost (hereinafter defined). LESSOR and LESSEE hereby agree for purposes of this Lease that LESSEE'S proportionate share ("Proportionate Share") of such Shopping Center's Operating Costs is 7.28%. Notwithstanding the foregoing, if during the Lease Term LESSOR permits any tenant or parcel owner in the Shopping Center to perform any item of Shopping Center Operating Cost for its sole benefit and at its sole expense in lieu of LESSOR'S performance thereof (which Shopping Center Operating Cost item is typically provided by LESSOR to all tenants of the Shopping Center and the cost of which would be included in Shopping Center Operating Cost pursuant to Section 2.7), then LESSOR shall have the right, but not the obligation to equitably allocate the Shopping Center Operating Cost of such specific Shopping Center Operating Cost item so that only those tenants in the Shopping Center that directly or indirectly benefit from such Shopping Center Operating Cost item shall pay such Shopping Center Operating Cost (such tenants shall be hereinafter referred to as "Cost Pool Tenants."). In the event of a change in the square footage of the Shopping Center, LESSEE's Proportionate Share of the Operating Cost shall be recalculated on the basis of 16,961 square feet (which LESSOR and LESSEE agree represents the square footage of the building demolished by LESSOR as part of the build-to-suit improvements required under Article 3 hereof) to the square footage of the entire Shopping Center.
2.8 OPERATING COST DEFINED. For the purpose of this Article 2, the term "Operating Cost" means the total cost and expense incurred in connection with the operation, repair, management, maintenance and replacement (provided, however, if the benefit or useful life of any such repair or replacement extends beyond the Lease Term, the useful life of such repair or replacement shall be prorated over the remaining portion of the Lease Term, and LESSEE shall be liable only for that portion of the cost which is applicable to the Lease Term) of all Common Areas within the Shopping Center including, without limitation, general maintenance and repair of all improvements; expenses incurred by LESSOR under Section 4.6(A) hereof; gardening and landscaping; snow, water and ice removal and control; security services; liability, property damage and all other insurance carried by LESSOR under Section 6.2 with types of coverage and in amounts determined by LESSOR; repairs; asphalt repairs, resurfacing and striping; painting of improvements; servicing of common grease interceptors; holiday decorations; snow and ice removal; utilities serving the improvements and Common Areas; sanitary control; pest control; signage operation, repair and replacement costs; removal of trash, rubbish, garbage and other refuse; reasonable reserves for replacements and repairs; a property management fee consistent with prevailing rates charged in the industry (not to exceed five percent (5%) of gross Shopping Center
rents); bookkeeping; advertising and promotional fees; Real Property Taxes; all personal property taxes assessed for any reason on the personal property used in connection with the Shopping Center; costs of equipment and machinery used to maintain or operate the Common Areas and any depreciation of the cost thereof (including financing); and the cost of personnel to implement such services, to direct parking, and to police the Common Areas.
Notwithstanding the foregoing, in no event shall the following items be included as an Operating Cost: items for which the responsibility of repairing or maintaining or replacement is the direct responsibility of a particular tenant under their respective lease with LESSOR, amounts reimbursed by insurance proceeds, or warranties; utilities or other expenses paid directly by tenants to suppliers; ground rents; payments on any mortgage, or deed-of-trust; leasing commissions; the cost of negotiating or enforcing leases of other tenants; fines, penalties, and late fees or similar costs incurred by LESSOR; depreciation; costs of or arising from LESSOR'S charitable or political contributions; costs, including but not limited to attorneys' fees associated with the operation of the business of the partnership or entity that constitutes LESSOR as the same are distinguished from the costs of operation of the Shopping Center, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of LESSOR'S interest in the Shopping Center or any part thereof, costs of any disputes between LESSOR and its employees, disputes of LESSOR with Shopping Center management or personnel, or outside fees paid in connection with disputes with other tenants; costs incurred in removing and storing the property of former tenants or occupants of the Shopping Center; lease "takeover" expenses, including, but not limited to, the expenses incurred by LESSOR with respect to space located in another building of the Shopping Center of any kind or nature in connection with the leasing of space in the Shopping Center; costs incurred in connection with the original construction of the Shopping Center, or; any costs, fees, dues, contributions or similar expenses for industry associations or similar organizations.
2.9 COLLECTION OF THE OPERATING COST. LESSOR shall have the right to collect LESSEE'S Proportionate Share (as defined in Section 2.7) of Operating Cost and all other Additional Rent provided for under this Article 2 including, without limitation, insurance premiums and Real Property Taxes, on a monthly basis. Such amounts shall be based on LESSOR'S reasonable estimate of the costs, charges or premiums next due, and shall be paid by LESSEE as Additional Rent upon the basis and at the times described herein. LESSOR shall provide to LESSEE a yearly expense estimate statement (hereinafter "Estimate Statement") which shall set forth LESSOR'S reasonable estimate of the total amount due from Tenant for the current or next ensuing Lease Year for Lessee's Proportionate Share of the Operating Cost. LESSEE shall pay to LESSOR with each installment of Minimum Monthly Rent an amount equal to one-twelfth (1/12th) of the estimated amount due from LESSEE as set forth in the Estimate Statement. At any time during any Lease Year, LESSOR may provide a new Estimate Statement to Tenant indicating any additional amount due from LESSEE and LESSEE agrees to pay such amount to LESSOR within fifteen (15) days after notification of the amount of the deficiency. LESSEE'S failure to pay such deficiency to LESSOR within such fifteen (15)-day period shall constitute a breach of this Lease and entitle LESSOR to any and all remedies available under this Lease and applicable law. Such estimated payments shall be paid to LESSOR with no obligation to pay the LESSEE interest thereon. Should LESSEE dispute any amount billed to LESSEE as Lessee's Proportionate Share of the Operating Cost, LESSEE may withhold the disputed portion of the
billing, and timely pay the undisputed portion. Upon notice of dispute, LESSOR will expediently provide the information necessary to establish the legitimacy of the disputed amount. Upon resolution, should it be determined that any portion of the withheld amount was due to LESSOR, LESSEE shall immediately pay to LESSOR said amount, together with interest at the rate of nine percent (9%) per annum, from the date on which the payment was originally due. Within a reasonable period of time after the end of each Lease Year hereunder, LESSOR shall give to LESSEE a year-end statement (hereinafter "Annual Statement") which shall indicate all of Lessee's Proportionate Share of the Operating Cost and other amounts due from LESSEE hereunder for the previous Lease Year, and the amounts paid by LESSEE relating thereto. If the amount paid by LESSEE is less than the amount owed by LESSEE, LESSEE agrees to pay such deficiency to LESSOR within fifteen (15) days after receipt of the Annual Statement. If the amount paid by LESSEE for the prior Lease Year exceeds the amount required to be paid by LESSEE, such overage shall be credited to amounts due from LESSEE for the next Lease Year. If LESSEE defaults under this Lease, LESSOR may apply any funds in the impound account to any obligation then due under this Lease without waiving any other remedy available under the Lease or applicable law.
2.10 LESSEE'S RIGHT TO AUDIT OPERATING COSTS. LESSEE and its agents will have the right to examine LESSOR'S books and records relating to the Operating Cost, at LESSOR'S office, and after providing at least fifteen (15) days prior written notice to LESSOR, according to this section so long as (a) there is no breach of or event of default under the Lease at the time that the LESSEE examines LESSOR'S books and records; (b) LESSEE has fully and promptly paid its Rent, including Lessee's Proportionate Share of the Operating Cost; (c) LESSEE, its agents and contractors agree that they will not divulge the contents of LESSOR'S books and records, or the result of their examination; (d) LESSEE, its agents and contractors agree that they will give LESSOR, at no cost, a copy of their draft and final reports of their examination of LESSOR'S books and records; (e) LESSEE requests the examination of LESSOR'S books and records within one (1) year after receipt of the statement of the Operating Cost with regard to which LESSEE wishes to examine LESSOR'S books and records; (f) LESSEE has not examined LESSORS'S books and records within the twelve (12) months preceding LESSEE'S request; and (g) LESSEE shall not have the right to examine any books or records that contain trade secrets (i.e. leases of other tenants, rent rolls, etc.). If LESSEE'S examination reveals that it has overpaid Lessee's Proportionate Share of the Operating Cost, then the overpayment credit will be applied to the next accruing Rent under the Lease. If LESSEE'S audit indicates that it has overpaid Lessee's Proportionate Share of the Operating Cost by more than five percent (5%), in addition to the rent credit provided in this Section, LESSEE shall be entitled to a credit against the next accruing Rent for the reasonable costs of the audit. Otherwise, the expense of LESSEE'S audit shall be borne by LESSEE. LESSEE will not have the right to terminate the Lease on account of an overpayment. If LESSEE'S examination reveals that it has underpaid Lessee's Proportionate Share of the Operating Cost, then the underpayment amount will be paid along with the next accruing Rent under the Lease.
2.11 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by LESSEE to LESSOR which is not paid when due shall bear interest from the due date of such amount at the lower of (i) ten percent (10%) per annum, or (ii) the maximum legal interest rate permitted by law. However, interest shall not be payable on late charges to be paid by LESSEE under this Lease. The payment of interest on such amounts shall not excuse or cure any default by LESSEE under this Lease.
ARTICLE 3
BUILD-TO-SUIT IMPROVEMENTS
3.1 IMPROVEMENTS TO THE PROPERTY. LESSOR will cause the existing building located nearest the southwest corner of the Property (most recently leased by Wynan's Furniture) to be demolished and will cause to be constructed improvements on and adjacent to the Property consisting of a traffic control signal on South Virginia Street at the access point to the Property, paved driveways for ingress and egress to adjacent property owned by LESSEE and the remainder of LESSOR'S Shopping Center, parking areas, pedestrian walkways and landscaping, consistent with the Preliminary Plans and Specifications which are attached hereto as (Exhibit "B") and by this reference made a part hereof (hereinafter "Improvements"). The Improvements shall conform to the Preliminary Plans and Specifications (Exhibit "B"), unless modification is necessary to comply with local building codes or other requirements of local municipal authorities.
A. LESSEE and LESSOR have approved and agreed upon Preliminary Plans and Specifications and Preliminary Cost Estimates for the Improvements to the Property.
B. As soon as received from the contractor or designer, LESSOR shall deliver to LESSEE copies of the Final Plans and Specifications and Working Drawings (based upon the approved Preliminary Plans and Specifications and Preliminary Cost Estimates) covering the construction of the driveway and other Improvements that are a part of the Property. LESSOR shall obtain approval of the Final Plans and Specifications and Working Drawings from all appropriate governmental agencies, and after they have been approved a copy of them shall be initialed and dated by the parties. LESSOR shall exercise due diligence in attempting to obtain such approval.
C. LESSOR shall construct the Improvements in accordance with the Final Plans and Specifications and Working Drawings. LESSOR agrees to secure all necessary permits for the construction. LESSOR agrees that such construction shall be completed in a good workman-like manner; that materials and workmanship will be of such quality as is usual and customary in the Washoe County, Nevada, area; that such construction shall be free of mechanic's liens; that such construction shall comply with applicable building and safety codes and comport with the Final Plans and Specifications as set forth above.
D. LESSEE shall pay sixty six and 66/100 percent (66.66%) of all construction costs for said Improvements, or a maximum of $1,200,000.00, whichever amount is lower. LESSOR agrees to be responsible for all remaining costs of constructing said Improvements. LESSEE shall pay its share of the construction costs in progress installments based on billings supported by invoices or the terms of construction contracts.
E. Within 15 days after LESSOR notifies LESSEE that the Improvements have been substantially completed and are available for inspection by Lessee, whether or not LESSEE is then in possession of the Property, LESSEE shall deliver to LESSOR a list of items that LESSEE deems it necessary under the Final Plans and Specifications and Working Drawings that LESSOR completes or corrects in order for the Property to be acceptable to LESSEE. LESSOR shall immediately commence to complete or correct such items, except for items that LESSOR disputes as not being within the scope of the Improvements. If LESSEE does not deliver the list to LESSOR within the 15 day period, LESSEE shall be
deemed to have approved the Property and approved construction of the Improvements as completed.
F. LESSEE'S taking possession of the Property and acceptance of the Property shall not constitute a waiver of any claim under Section 3.1(E) or a waiver of any warranty or of any defect in regard to workmanship or material of the Improvements ("Construction Defect"). LESSEE shall have the period of time contained within LESSOR'S warranty from the contractor within which to notify LESSOR of any Construction Defect covered by said warranty. In the event of a Construction Defect, it is LESSOR's duty to fully enforce all legal remedies to achieve cure.
ARTICLE 4
USE OF PROPERTY
4.1 SIGNAGE. LESSEE shall pay for all signs and maintenance and removal of said signs located or constructed on the Property. All sign design, color, layout, graphics, location and size shall first be submitted to LESSOR for approval prior to fabrication. All signs shall be constructed and installed by contractors qualified to fabricate and install commercial signs. No signs shall be installed until after LESSOR has approved the construction drawings and specifications of the signs, including all connections. LESSOR agrees to apply for any necessary permits or zoning changes for signs to be located or erected on the Property, at LESSEE's expense. LESSEE shall maintain all signs in a neat and attractive condition.
4.2 USE OF PROPERTY.
A. The Property shall be used by LESSEE solely for the purpose of pedestrian and vehicle ingress and egress to the resort and casino located on the adjacent real property and uses reasonably related or incidental thereto and for landscaping features. LESSEE shall not use, or permit to be used, any portion of the Property for any purpose other than those stated above.
B. LESSOR shall maintain the Property in a clean and sanitary condition and shall comply with all laws, health and policy requirements with respect to the Property and appurtenances and agrees to hold LESSEE harmless from all fines, penalties and costs for violations, or noncompliances by LESSOR of said laws, requirements, or regulations, and from all liability arising out of any such violations or noncompliance, unless said liability results from the conduct of LESSEE.
C. LESSEE shall not permit upon the Property any unlawful acts, or any condition, act or thing constituting a nuisance, nor do or permit any act which shall annoy, harass, disturb or imperil others; and shall abide by all laws, ordinances and regulations of the City of Reno, County of Washoe, the State of Nevada, and the United States of America, including without limitation, the Americans with Disabilities Act, 42 U.S.C. 12101-12213 (and any rules and regulations, restrictions, guidelines, requirements or publications promulgated or published pursuant thereto, collectively referred to as the "ADA") and LESSEE agrees to hold LESSOR harmless from all fines, penalties and costs for violations, or noncompliances by LESSEE, of said laws, requirements, or regulations, and from all liability arising out of any such violations or noncompliance.
D. LESSEE shall not use the Property for any purpose deemed hazardous by any insurance company carrying insurance thereof.
4.3 HAZARDOUS MATERIALS.
A. INDEMNITY BY LESSEE. LESSEE shall not cause or permit any Hazardous Material (as hereinafter defined) to be brought upon, kept, or used in or about the Property by LESSEE, its agents, employees, contractors or invitees. If (i) LESSEE breaches the obligations stated in the preceding sentence, (ii) the presence of Hazardous Material on the Property or on or in the soil or ground water under or adjacent to the Property caused or permitted by LESSEE, its agents, employees, contractors or invitees results in contamination of the Property or such soil or ground water, (iii) contamination of the Property or such soil or ground water by Hazardous Material otherwise occurs for which LESSEE is legally liable to LESSOR for damage resulting therefrom, or (iv) contamination occurs elsewhere in connection with the transportation by LESSEE of Hazardous Material to or from the Property, then LESSEE shall indemnify, protect, defend and hold LESSOR harmless from any and all claims, judgment, damages, penalties, fines, costs, expenses, liabilities or losses (including, without limitation, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the term of this Lease as a result of such contamination. The foregoing obligation of LESSEE to indemnify, protect, defend and hold LESSOR harmless includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, restoration or other response work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present as a result of any action or inaction on the part of LESSEE, its agents, employees, contractors or invitees in any improvements constituting the Property or the soil or ground water on, under or adjacent to the Property or elsewhere in connection with the transportation by LESSEE of Hazardous Material to or from the Property. Without limiting the foregoing, if the presence of any Hazardous Material on or in the Property or the soil or ground water under or adjacent to the Property caused or permitted by LESSEE, or its agents, employees, contractors or invitees, results in any contamination of the Property, LESSEE shall promptly take all actions at its sole expense as are necessary to return the Property or such soil or ground water to the condition existing prior to the introduction of any such Hazardous Material to the Property or to such soil or ground water.
B. INDEMNITY BY LESSOR. LESSOR shall not cause or permit any Hazardous Material (as hereinafter defined) to be brought upon, kept, or used in or about the Property by LESSOR, its agents, employees, contractors or invitees. As to any contamination of the Property by Hazardous Material which exists as of the Lease Commencement Date hereof or if (i) LESSOR breaches the obligations stated in the preceding sentence, (ii) the presence of Hazardous Material on the Property or on or in the soil or ground water under or adjacent to the Property caused or permitted by LESSOR, its agents, employees, contractors or invitees results in contamination of the Property or such soil or ground water, (iii) contamination of the Property or such soil or ground water by Hazardous Material otherwise occurs for which LESSOR is legally liable to LESSEE for damage resulting therefrom, or (iv) contamination occurs elsewhere in connection with the transportation by LESSOR of Hazardous Material; then LESSOR shall indemnify, protect, defend and hold LESSEE harmless from any and all claims, judgment, damages, penalties, fines, costs, expenses, liabilities or losses (including, without limitation, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the term of this Lease as a result of such contamination. The foregoing obligation of LESSOR to
indemnify, protect, defend and hold LESSEE harmless includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, restoration or other response work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present as a result of any action or inaction on the part of LESSOR, its agents, employees, contractors or invitees in any improvements constituting the Property or the soil or ground water on, under or adjacent to the Property or elsewhere in connection with the transportation by LESSOR of Hazardous Material. Without limiting the foregoing, if the presence of any Hazardous Material on or in the Property or the soil or ground water under or adjacent to the Property caused or permitted by LESSOR, or its agents, employees, contractors or invitees results in any contamination of the Property, LESSOR shall promptly take all actions at its sole expense as are necessary to return the Property or such soil or ground water to the condition existing prior to the introduction of any such Hazardous Material to the Property or to such soil or ground water.
C. HAZARDOUS MATERIAL DEFINED. As used herein, the term "Hazardous
Material" means any hazardous or toxic substance, chemical, toxicant,
pollutant, contaminant, material or waste which is or becomes regulated by any
local governmental authority, the State of Nevada or the United States
Government for the protection of health or the environment. The term "Hazardous
Material" includes, without limitation, any material or substance that is (i)
defined as a "hazardous waste" under NRS 459.400 et seq. (Disposal of Hazardous
Waste) or NRS 459.700 et seq. (Transportation of Hazardous Waste); (ii)
petroleum; (iii) asbestos; (iv) designated as a "hazardous substance" pursuant
to Section 311 of the Water Pollution Control Act (33 U.S.C. 1321), (v) defined
as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation
and Recovery Act, 42 U.S.C. 6901 et seq. (42 U.S.C. 6903), (vi) defined as a
"hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.
(42 U.S.C. 6901), (vii) defined as a "regulated substance" pursuant to
Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage
Tanks), 42 U.S.C. 6991 et seq., (viii) defined as a "hazardous chemical
substance or mixture" or "imminently hazardous chemical substance or mixture"
within the meaning of the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.,
(ix) defined as a "hazardous air pollutant" within the meaning of the Federal
Clean Air Act, 42 U.S.C. 7400 et seq., (x) defined as a "toxic pollutant" or
"oil or hazardous substance" within the meaning of the Federal Water Pollution
Control Act, 33 U.S.C. 1250 et seq., (xi) defined as a "contaminant" within the
meaning of the Safe Drinking Water Act, 42 U.S.C. 300i, or (xii) defined as a
"chemical known to the state to cause cancer or reproductive toxicity."
4.4 NO PARTNERSHIP. This Lease shall in no way be deemed to be or considered evidence that a partnership or joint venture exists between LESSOR and LESSEE.
4.5 COMPLIANCE WITH GOVERNMENT REGULATIONS AND REQUIREMENTS. LESSOR shall make any and all such improvements, alterations, repairs or do any other act to or upon the Property as shall be required by any applicable statute, law, ordinance or regulation, including, but not limited to those relating to environmental quality or hazardous waste, by any competent governmental authority. The cost of any and all such improvements, alterations, repairs or other acts shall be borne by LESSEE and LESSOR as provided in Section 2.6 above, except as otherwise provided in this Lease.
4.6 CONDITION OF PROPERTY; ALTERATIONS, REPAIRS AND MAINTENANCE.
A. LESSOR shall maintain and repair the Property in a good, clean and presentable condition. Except for such items as are included in Section 2.8, the cost of any and all such maintenance and repairs shall be borne by LESSEE and LESSOR as provided in Section 2.6 above. LESSOR'S obligation to maintain and repair the Property shall include the following:
i. The routine and ordinary maintenance of the landscaping, irrigation system and grounds, including weed control and cleaning; and
ii. The routine and ordinary maintenance of the parking lot, driveways and pedestrian walkways, including snow removal.
iii. Any major repair or replacement of the parking lot, driveways and pedestrian walkways.
B. LESSEE shall not make any alterations or improvements to or upon the Property without LESSOR'S prior written consent thereto, which consent shall not be unreasonably withheld, provided that LESSEE may, from time to time, make minor alterations to the Improvements with LESSOR'S consent. All alterations and improvements shall be accomplished in a good workmanlike manner and in strict compliance with all county and state ordinances, requirements and regulations pertaining thereto.
C. LESSEE agrees to pay when due all sums of money for any labor, services, materials or supplies, furnished to or for LESSEE on or about the Property. LESSEE shall not allow or permit the filing or placement of any materialman, mechanics or other liens upon the Property. In the event that such a lien is filed, LESSEE will cause such lien to be fully discharged and released. In the event LESSEE desires to contest any lien, LESSEE must post a bond sufficient to discharge the lien. LESSEE agrees to indemnify LESSOR against all liability, loss, damage, costs or expenses, including attorney's fees, on account of claims, or liens for laborers or materialmen or others who performed work or supplied materials or supplies to LESSEE. At least ten (10) days before undertaking any alteration, improvement or construction permitted by this section, LESSEE will notify LESSOR so that LESSOR may record a notice of nonresponsibility with the County Recorder of Washoe County.
D. Upon the completion of any alterations or improvements, such alterations and improvements to the Property shall become or remain a part of the Property. Furnishings, equipment and trade fixtures of LESSEE, which are not part of any building thereon, remain the LESSEE'S property and are excepted from this clause and provision.
E. LESSEE shall return the Property to LESSOR at the expiration or earlier termination of this Lease in good and sanitary order, condition and repair, free of rubble and debris, broom clean, reasonable wear and tear excepted. All damage to the Property caused by the removal of such trade fixtures and other personal property that LESSEE is permitted to remove under the terms of this Lease and/or such restoration shall be repaired by LESSEE at its sole cost and expense prior to termination.
4.7 QUIET ENJOYMENT AND LANDLORD'S RIGHT OF ENTRY.
A. QUIET ENJOYMENT. If and so long as LESSEE shall pay the Rents specified herein and observe and perform all covenants, agreements and obligations required by it to be observed and performed hereunder, LESSEE shall peaceably and quietly hold and enjoy the Property for the Term without hindrance or interruption by LESSOR or any other person or persons lawfully or equitably claiming by, through, or under LESSOR, subject, nevertheless, to the terms and conditions of this Lease and the mortgages and other matters to which this Lease is subordinate. LESSOR expressly reserves the right as to the Shopping Center at any time to do, or permit to be done, any or all of the following; add or remove buildings or structures; change the number and location of buildings and structures; change building dimensions; change the number of floors in any of the buildings or structures; enclose any mall; add to, alter or remove partially or wholly any structure or structures used to enclose any plaza area; change the identity and type of stores and tenancies and the dimensions thereof; change the name of the Shopping Center in which the Property is located; change the address or designation of the Property; provide subterranean and multiple level parking decks; convert common areas into leaseable areas; change the means of access to and egress from the Shopping Center, except for the access driveway at the new traffic control signal on South Virginia Street which LESSOR shall not change or alter without LESSEE's prior written consent; and expand or reduce the size of the Shopping Center; provided, however, that no such changes shall deny or materially interfere with the reasonable visibility of, ingress to, or egress from the Property and that no heavy industrial use will be permitted by LESSOR within the Shopping Center, including, but not limited to, truck and heavy equipment repair facilities.
B. RIGHT OF ENTRY. LESSOR, or LESSOR'S agents or representatives may enter and be present upon the Property at any time for purposes of discharging LESSOR's obligations hereunder to maintain and repair the Property.
4.8 INDEMNITY.
A. LESSEE, as a material part of the consideration to be tendered to LESSOR, shall indemnify, defend, protect and hold harmless LESSOR against all actions, claims, demands, damages, liabilities, losses, penalties, or expenses of any kind which may be brought or imposed upon LESSOR or which LESSOR may pay or incur by reason of injury to person or property or business, from whatever cause, all or in any way connected with the acts and omissions of LESSEE, and LESSEE'S use of the Property or breach of any provision of this Lease, including without limitation any liability or injury to the person or property or business of LESSEE, its agents, officers, employees or invitees. LESSEE agrees to indemnify, defend and protect LESSOR, and hold it harmless from any and all liability, loss, cost or obligation on account of, or arising out of, any such injury or loss however occurring, including breach of the provisions of this Lease and the negligence of the parties hereto. Nothing contained herein shall obligate LESSEE to indemnify LESSOR against its own sole or gross negligence or willful acts, for which LESSOR shall indemnify LESSEE.
B. LESSOR, as a material part of the consideration to be tendered to LESSEE, shall indemnify, defend, protect and hold harmless LESSEE against all actions, claims, demands, damages, liabilities, losses, penalties, or expenses of any kind which may be brought or imposed upon LESSEE or which
LESSEE may pay or incur by reason of injury to person or property or business, all or in any way connected with the acts and omissions of LESSOR, and the condition of the Property or the Improvements thereon or the condition of the Shopping Center, including without limitation any liability or injury to the person or property or business of LESSOR, its agents, officers, employees or invitees. LESSOR agrees to indemnify, defend and protect LESSEE and hold it harmless from any and all liability, loss, cost or obligation on account of, or arising out of, any such injury or loss however occurring, including breach of the provisions of this Lease and the negligence of the parties hereto. Nothing contained herein shall obligate LESSOR to indemnify LESSEE against its own sole or gross negligence or willful acts, for which LESSEE shall indemnify LESSOR.
4.9 RULES AND REGULATIONS.
A. LESSEE agrees as follows:
i. The plumbing facilities shall not be used for any other purpose
than that for which they are constructed, and no foreign substance of any kind
shall be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of this provision shall be borne by LESSEE, who
shall, or whose employees, agents or invitees shall have caused it.
ii. LESSEE shall not burn any trash or garbage of any kind in or about the Property or the Shopping Center.
iii. All public entrances and exits to the Property shall be kept unobstructed and open to the public at all times.
iv. LESSEE shall not cause or permit any obnoxious or foul odors that disturb the public or other tenants. Should such odors be evident, LESSEE shall be required to take immediate steps to remedy the same upon written notice from LESSOR.
B. LESSOR reserves the right from time to time to amend or supplement the foregoing rules and regulations, and to adopt and promulgate additional rules and regulations applicable to the Property and Shopping Center. Reasonable notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to the LESSEE.
C. LESSEE agrees to comply with all such rules and regulations upon reasonable notice to LESSEE from LESSOR.
D. In the event any violation of any of the above rules and regulations continues after five (5) days following notice to the LESSEE of such violation, beginning on such fifth day LESSEE shall, in addition to any and all other remedies of LESSOR provided in this Lease for default by LESSEE, pay as liquidated damages, the sum of Two Hundred Fifty Dollars ($250.00) per day for each violation for each day any such violation continues. The parties hereto agree that the aforementioned sum is a reasonable amount as liquidated damages, the actual damage caused by such conduct being extremely difficult to measure.
ARTICLE 5
PARKING AND COMMON USE AREAS AND FACILITIES
5.1 CONTROL OF COMMON AREAS BY LESSOR. "Common Areas" means all areas, space, equipment and special services provided by LESSOR (excluding the Property) for the common or joint use and benefit of the occupants of the Shopping Center, their employees, agents, servants, customers and other invitees, including, without limitation, parking areas, access roads, driveways, retaining walls, landscaped areas, truck service-ways or tunnels, loading docks, pedestrian malls, courts, stairs, ramps and sidewalks, comfort and first aid stations, and parcel pick-up stations. All Common Areas shall at all times be subject to the exclusive control and management of LESSOR, and LESSOR shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to the Common Areas. LESSOR shall have the right to construct, maintain and operate lighting facilities on all Common Areas and improvements; to police the same; from time to time to change the area, level, location and arrangement of parking areas and other facilities hereinabove referred to; to restrict parking by tenants, their officers, agents and employees to employee parking areas; to enforce parking charges only to the extent required by governmental or quasi-governmental entities (by operation of meters or otherwise), with appropriate provisions for free parking ticket validating by tenants; to close all or any portion of the Common Areas or facilities to such extent as may, in the opinion of LESSOR'S counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein; to close temporarily all or any portion of the parking areas or facilities: to discourage non-customer parking: and to do and perform such other acts in and to said areas and improvements as, in the use of good business judgment, the LESSOR shall determine to be advisable with a view to the improvement of the convenience and use thereof by tenants, their officers, agents, employees and customers. LESSOR will operate and maintain the Common Areas in such manner as LESSOR, in its sole discretion, shall determine from time to time. Without limiting the scope of such discretion, LESSOR shall have the full right and authority to employ all personnel necessary for the proper operation and maintenance of the Common Areas and facilities.
5.2 USE OF COMMON AREAS. The use and occupation by LESSEE of the Property shall include the use of the Common Areas in common with others entitled to the use thereof, subject however to the terms and conditions of this Lease and to reasonable rules and regulations for the use thereof as prescribed from time to time by LESSOR. Notwithstanding any other provision of this Lease, LESSOR and LESSEE agree that LESSEE shall have the right to use approximately 7.28% of the parking areas within the Common Areas, which such parking areas shall be designated by mutual agreement, for vehicle parking for the invitees, customers and guests of the resort and casino operated by LESSEE, its successors, assigns or affiliates on the adjacent real property.
ARTICLE 6
INSURANCE
6.1 LIABILITY INSURANCE. During the Lease Term, LESSEE shall maintain a policy of commercial general liability insurance, insuring LESSEE against liability resulting out of the ownership, use, occupancy or maintenance of the Property, the sidewalks in front of the Property, and the business operated by LESSEE and any subtenants of LESSEE on the Property. The initial amount of such insurance shall be at least TWO Million Dollars
($2,000,000.00) combined single limit bodily injury, property damage and personal injury, and shall be subject to periodic increase based upon inflation, increased liability awards, recommendations of professional insurance advisers, and other relevant factors. However, the amount of such insurance shall not limit LESSEE's liability nor relieve LESSEE of any obligation hereunder. The policy shall name LESSOR as an additional insured. In addition LESSEE, at LESSEE'S expense, shall carry adequate workers' compensation insurance coverage and provide written evidence thereof to LESSOR. LESSEE shall pay all premiums for the general liability insurance policy covering the Property prior to delinquency.
6.2 HAZARD AND RENTAL INCOME INSURANCE. During the Lease Term, LESSOR shall maintain policies of insurance covering loss of or damage to the Shopping Center improvements, including the Improvements to the Property, in the amount of its full replacement cost, excluding LESSEE'S trade fixtures and personal property. Such polices shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, and may include endorsements or coverage for special extended perils (special form), sprinkler leakage, inflation guard, and any other perils (including flood and earthquake), which Landlord deems necessary. LESSEE shall, at LESSEE'S expense, maintain such primary or additional insurance on its fixtures, equipment and personal property as LESSEE deems necessary to protect its interest. During the Lease Term, LESSOR shall also maintain as an Operating Cost a rental income insurance policy, with loss payable to LESSOR in an amount equal to one year's Minimum Monthly Rent (as adjusted periodically), plus estimated Real Property Taxes and insurance premiums. Tenant shall not do or permit to be done anything which invalidates any such insurance policies. If said insurance policies cover improvements or real property other than the Shopping Center, LESSOR shall also deliver to LESSEE a statement of the amount of the premiums applicable to the Property showing, in reasonable detail, how such amount was computed. If the Lease Term expires before the expiration of the insurance policy period, LESSEE'S liability for insurance premiums shall be prorated on an annual basis. LESSEE shall be liable for its pro rata share of the payment of any deductible amount under LESSOR'S insurance policies as an item of Operating Cost.
6.3 INCREASE IN FIRE INSURANCE PREMIUM. LESSEE agrees that it will not keep, use, manufacture, assemble, sell or offer for sale in or upon the Property any article which may be prohibited by the standard form of fire insurance policy. LESSEE agrees to pay any increase in premiums for fire and extended coverage insurance that may be charged during the Term of this Lease on the amount of such insurance which may be carried by LESSOR on the Property, resulting from the acts or omission of the LESSEE, its agents, servants or employees, or the use or occupancy of the Property by the LESSEE or from the type of materials or products stored, manufactured, assembled or sold by LESSEE in the Property, whether or not LESSOR has consented to the same. In determining whether increased premiums are the result of LESSEE'S use of the Property, a schedule, issued by the organization making the insurance rate on the property, showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up the fire insurance rate on the Property.
6.4 WAIVER OF SUBROGATION. LESSOR and LESSEE each hereby waive any and all rights of recovery against the other or against the officers, employees, agents and representatives of the other, on account of loss or damage occasioned to such waiving party or its property or the property of others
under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage. LESSOR and LESSEE shall, upon the policies of insurance required under this Lease, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease.
ARTICLE 7
OPTION TO PURCHASE
7.1 PURCHASE OPTION. LESSOR hereby grants to LESSEE an option to purchase (hereinafter "Purchase Option") the Property subject to the restrictions set forth in Section 7.6(C)(i), together with the Easements described in Section 7.6(e)(ii), (collectively, the "Property Interests") at the expiration of the third and final five (5) year Renewal Term of this Lease Agreement as provided in Section 1.4, as specifically provided in this Article.
7.2 EXERCISE OF PURCHASE OPTION. LESSEE may exercise the Purchase Option by delivering written notice (hereinafter "Exercise Notice") to LESSOR at least one hundred and twenty (120 ) days prior to the expiration date of the third and final Renewal Term of this Lease as provided in Section 1.4, but not before one hundred and eighty (180) days prior to expiration of said third Renewal Term of this Lease. LESSEE may only exercise the Purchase Option in the event that LESSEE has properly exercised all three (3) options to extend and renew the Lease as provided in Section 1.4 and is not in default under this Lease at the time thereof. In the event LESSOR sells, transfers or assigns its interest in the Shopping Center or its interest is acquired by any beneficiary of a deed of trust or purchaser at a foreclosure sale during the Term of this Lease and prior to LESSEE'S exercise of the Purchase Option as otherwise provided herein, at LESSEE'S election the Purchase Option will accelerate and LESSEE may exercise the Purchase Option by delivering written notice to the buyer, transferee, assignee or other successor to LESSOR's interest in the Shopping Center within ninety (90) days of LESSEE receiving notice of the sale, transfer, assignment or other acquisition of LESSOR's interest in the Shopping Center. In the event that LESSEE elects to accelerate the Purchase Option as provided herein as the result of a sale, transfer, assignment or other acquisition of LESSOR'S interest in the Property, the Purchase Price for the Property Interests, as defined and determined in Section 7.5 below, shall be adjusted and increased by the amount which represents the unamortized value of the building demolished by LESSOR as part of the build-to-suit improvements required under Article 3 hereof as set forth on Schedule 1 attached hereto as of the date of the Closing of the purchase of the Property Interests. The value of said demolished building shall be amortized in equal annual prorata amounts over thirty (30) years commencing on the Commencement Date. In the event LESSOR sells, transfers or assigns its interest in the Shopping Center or its interest is acquired by any beneficiary of a deed of trust or purchaser at a foreclosure sale during the Term of this Lease and LESSEE does not elect for the Purchase Option to accelerate, this Lease and the Purchase Option will continue in full force and effect in accordance with their terms. In the event the Purchase Option is not accelerated and is exercised by LESSEE during the third and final Renewal term of the Lease, at which time the value of the demolished building will have been fully amortized as provided herein, no adjustment will be made on account of said demolished building. The date on which the Exercise Notice is delivered to LESSOR or the person or entity entitled thereto hereunder shall be the "Exercise Date."
7.3 FAILURE TO EXERCISE. In the event LESSEE shall fail to exercise the Purchase Option as provided herein, this Purchase Option shall terminate, and except as otherwise provided hereunder, the parties shall have no further rights or obligations in relation to this Purchase Option. Upon termination of the Lease, LESSEE shall have no obligation to restore the Property to its condition prior to the build-to-suit improvements made pursuant to Article 3 hereof.
7.4 EXERCISE IRREVOCABLE. Unless LESSEE delivers to LESSOR a written rescission notice on or before the expiration of 10 business days after the final determination of the Purchase Price pursuant to the procedure set forth in Section 7.5, the exercise of the Purchase Option shall be irrevocable and, after exercise of the Purchase Option and expiration of such 10 business day period, LESSEE shall be obligated to purchase the Property on the terms provided herein, subject to satisfaction of all closing conditions.
7.5 PURCHASE PRICE. The total purchase price for the Property Interests
shall be payable in cash at Closing (as hereinafter defined.) The purchase
price shall be determined following LESSEE's exercise of the Purchase Option.
The purchase price of the Property Interests (hereinafter "Purchase Price")
shall be determined by using the valuation procedure (hereinafter "Valuation
Procedure") set forth in this Section 7.5. Within five (5) business days of
the Exercise Date, LESSEE's independent Committee of the Board of Directors (or
if LESSEE is a subsidiary of Monarch Casino & Resort, Inc., Monarch's committee
of independent Board of Directors will perform the duties required by this
paragraph) shall order a Member Appraisal Institute (hereinafter "M.A.I.")
appraisal of the Property Interests to be conveyed (hereinafter "Valuation.")
Within five (5) business days of the Exercise Date, LESSOR shall commence the
preparation of a separate Valuation of the Property Interests. If each
Valuation is within ten percent (10%) of the other, the average of the two (2)
Valuations shall be determined and said average will be the Purchase Price. If
the Valuations differ by more than ten (10) percent, the two (2) M.A.I.
appraisers shall select a third (3rd) M.A.I. appraiser so as to produce a third
(3rd) Valuation of the Property Interests. From the total of three (3)
Valuations, the two (2) closest Valuations shall be averaged and said average
shall be the Purchase Price. Any signage located on the Property which was
installed at LESSEE's expense shall not be included or considered in
determining the Valuation of the Property Interests for purposes of
establishing the Purchase Price under this Section. The Purchase Price as
determined under this Section, in addition, shall be adjusted and decreased by
the amount which LESSEE can demonstrate that it paid for improvements, except
signage, to the Property during the five (5) year period immediately preceding
the Exercise Date.
7.6 CLOSING.
A. DATE AND PLACE. The Closing of the sale of the Property Interests by LESSOR to LESSEE (the "Closing") shall occur not later than one hundred and twenty (120) days after the Exercise Date.
B. ESCROW AGENT. LESSEE shall elect and identify the Escrow Agent to be utilized for the Closing.
C. SELLER'S OBLIGATIONS AT CLOSING. At the Closing, LESSOR shall
deliver, or cause to be delivered, to LESSEE, the following:
i. Grant Bargain and Sale Deed. LESSOR shall execute and deliver to Escrow Agent for recording a Grant, Bargain and Sale Deed in form and content acceptable to LESSEE and LESSOR, fully executed and acknowledged by LESSOR, conveying fee simple title to the Property to LESSEE, excluding water rights, free and clear of any and all liens or encumbrances. LESSOR and LESSEE agree that said Grant, Bargain and Sale Deed shall contain a restriction that no buildings or habitable structures shall be constructed or erected on the Property and that the Property shall be used exclusively for landscaping features and related improvements, driveways and pedestrian walkways for ingress, egress and regress to and from the adjacent public streets, traffic signal and the adjacent parcel to the south of the Property. The Property as conveyed by LESSOR to LESSEE by said Grant Bargain and Sale Deed shall be a separate legal parcel, which separate legal parcel shall be created by LESSOR at LESSOR'S sole cost and expense.
ii. Easement. LESSOR shall execute and deliver to Escrow Agent for recording a Deed or other instrument, in form and content acceptable to LESSEE and LESSOR, fully executed and acknowledged by LESSOR, conveying and granting to LESSEE, for the benefit of LESSEE and its tenants, employees, agents, customers, and invitees, and for the benefit of the Property being purchased by and conveyed to LESSEE, a non-exclusive easement appurtenant to said Property, for the purposes of ingress, egress and regress by pedestrians and vehicular traffic to and from any portion of the Shopping Center and the adjacent public streets, over and across the Common Areas of the Shopping Center, as such are constituted from time to time (LESSOR to ensure that said Common Areas remain adequate to continue to afford LESSEE ingress and egress over and across the Shopping Center), and for LESSEE'S use of the Common Areas of the Shopping Center in common with others entitled to the use thereof, subject to the reasonable rules and regulations for the use thereof as prescribed from time to time by LESSOR, which easement shall include the right to use approximately 7.28% of the parking areas within the Common Areas for vehicle parking as provided in Section 5.2. This easement shall obligate LESSEE to continue to pay LESSOR Lessee's Proportionate Share of the Shopping Center's Operating Costs provided in Sections 2.7, 2.8, 2.9 and 2.10 hereof, the terms of which shall be included within said easement. This easement to be granted by LESSOR to LESSEE shall run with the land and shall be binding upon each and all of the owners of any part of the Shopping Center and Property and upon all persons claiming under them.
iii. Owner's Title Policy. LESSOR shall cause the Escrow Agent to issue and deliver to LESSEE an ALTA Standard coverage owner's policy of title insurance ("Owner's Title Policy") in the amount of the Purchase Price, insuring that LESSEE is owner of the Property Interests (including the non- exclusive easement burdening the Shopping Center as described in Section 7.6(C)(ii) above) subject only to exceptions approved by LESSEE at the commencement of the Lease as provided in Section 1.6, reasonable easements for the development and improvement of the Shopping Center, non-delinquent taxes and assessments and the standard printed exceptions included within such an Owner's Title Policy.
iv. Other Instruments. LESSOR shall execute and deliver such other documents as are customarily executed in the State of Nevada in connection with the conveyance of real property, including all required closing statements, releases, affidavits, evidences of authority to execute the documents, and any other instruments that may be reasonably required by the Escrow Agent.
v. Possession. LESSOR shall deliver possession of the Property to LESSEE at Closing.
vi. Failure of Closing Conditions. In the event LESSOR fails to perform or satisfy any of its obligations at Closing on or before Closing, LESSEE shall at any time thereafter have the right to terminate its exercise of the Purchase Option and withdraw from this purchase transaction, by written notice to LESSOR. Any such election by LESSEE to terminate the Purchase Option shall release LESSEE from all obligations under this Purchase Option, but shall not release LESSOR from liability for breach of this Lease, if any.
D. LESSEE'S OBLIGATIONS AT CLOSING.
i. Payment of the Purchase Price. At the Closing, LESSEE shall pay the Purchase Price in cash (or by Certified Check, Cashier's Check, wire transfer of funds into a local bank account indicated by LESSOR, all of which shall constitute "cash" for purposes of this Option), subject to any adjustments for prorations or other credits provided for in the Purchase Option.
ii. Easement. LESSEE shall execute and deliver to Escrow Agent for recording a Deed or other instrument, in form and content acceptable to LESSOR and LESSEE, fully executed and acknowledged by LESSEE, conveying and granting to LESSOR, for the benefit of LESSOR and its tenants, employees, agents, customers, and invitees and the customers, employees, agents and invitees of such tenants, and for the benefit of the Shopping Center, a non-exclusive easement appurtenant to said Shopping Center, for the purposes of ingress, egress and regress of pedestrians and vehicular traffic to and from the adjacent public streets, over and across the Property, as such is constituted from time to time; provided that the Property will remain adequate to continue to afford LESSOR ingress and egress over and across the Property. This easement to be granted by LESSEE to LESSOR shall run with the land and shall be binding upon each and all of the owners of any part of the Property and Shopping Center and upon all persons claiming under them.
iii. Other Instruments. LESSEE shall execute and deliver such other documents as are customarily executed in the State of Nevada in connection with the conveyance of real property, including all required closing statements, releases, affidavits, evidences of authority to execute the documents, and any other instruments that may be reasonably required by the Escrow Agent.
E. PRORATIONS. All real estate taxes and interest on assessments relating to the Property for the year of the Closing shall be prorated as of the date of Closing between LESSOR and LESSEE. LESSEE shall take title to the Property subject to any outstanding unpaid assessments. If the amount of taxes for that year are not known at the time of Closing, the prorations shall be based on an estimate of the taxes for the year of Closing, and when the tax information becomes available, LESSOR of LESSEE may request reimbursement from the other party for any excess amount charged to that party at the Closing. Likewise, any other amounts normally prorated between sellers and purchasers, if any, shall be prorated between LESSOR and LESSEE as of the date of Closing.
F. CLOSING COSTS. LESSOR and LESSEE each agree to pay the following costs at Closing:
i. Paid by LESSOR. LESSOR agrees to pay the cost of preparing the Grant, Bargain and Sale Deed; the premium for the Owner's Title Policy; the real property transfer taxes or documentation taxes; the cost of preparing and recording any releases and other documents necessary to convey the Property Interests in accordance with this Option; one-half (1/2) of any escrow or closing fees charged by the Escrow Agent; LESSOR'S attorney's fees and any other similar closing costs customarily paid by a seller of real property.
ii. Paid by LESSEE. LESSEE agrees to pay the recording fee for the Grant, Bargain and Sale Deed; one-half (1/2) of any escrow or closing fees charged by the Escrow Agent; LESSEE'S attorney's fees and any other similar closing costs customarily paid by a purchaser of real property.
ARTICLE 8
ASSIGNMENT OR SUBLETTING AND PLEDGING.
8.1 LESSORS CONSENT REQUIRED.
A. LESSEE may not assign, transfer or convey any of its rights or liabilities under this Lease, to any third person or entity, without the prior written consent of LESSOR, which consent shall not be unreasonably withheld.
B. LESSEE may not, under any circumstances, sublet or underlet the Property, or any part thereof, without the prior consent of LESSOR.
C. LESSEE shall reimburse LESSOR as additional rent for LESSOR'S reasonable costs and attorneys' fees incurred in conjunction with the processing and documentation of any proposed assignment or subletting of the Property, whether or not consent is granted.
D. LESSEE may, however, pledge, hypothecate or otherwise apply its interests in this Lease Agreement as collateral for loans, which shall not constitute a transfer or assignment subject to the provisions of this Article.
E. Notwithstanding Sections 8.1(A) and 8.1(B) or any other provision of this Lease to the contrary, Lessee may assign, transfer or sublease (collectively, a "Transfer") all or any part of its rights and obligations under the Lease or in the Property to an Affiliate of Lessee without Lessor's consent; provided, however, that Lessee shall not be released from liability under this Lease in connection with a Transfer except as otherwise provided in Subsection F below. An "Affiliate of Lessee" means any person or entity directly or indirectly controlling, controlled by or under common control with, Lessee. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" shall mean the possession, whether direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership or control of voting securities, by contract or otherwise, or the power to elect at least fifty percent (50%) of the directors, managers, members or persons exercising similar authority with respect to such persons or entities.
F. If LESSOR consents and LESSEE transfers or assigns its interest in the Property and Lease Agreement, LESSEE shall remain firstly liable for the performance of this Lease and all of the terms and provisions hereof except
in conjunction with LESSEE's transfer of its resort and casino located on real property adjacent to the Property as provided herein below. In no event shall any such assignment or subletting relieve LESSEE from its full obligation to perform each, every and all of the provisions of this Lease Agreement, except that a transfer or assignment of LESSEE's interest in the Property and Lease Agreement which is in conjunction with a sale or transfer of LESSEE's resort and casino located on real property adjacent to the Property, shall relieve, release and discharge LESSEE from liability and obligations under this Lease from and after the effective date of the transfer or assignment.
ARTICLE 9
DEFAULTS: REMEDIES
9.1 COVENANTS AND CONDITIONS. LESSEE'S performance of each of LESSEE'S obligations under this Lease is a condition as well as a covenant. LESSEE's right to continue in possession of the Property is conditioned upon full performance of all such conditions. Time is of the essence in the performance of all covenants and conditions.
9.2 DEFAULTS. LESSEE shall be in material default under this Lease:
A. If LESSEE abandons or vacates the Property;
B. If LESSEE fails to pay Rent or any other charge required to be paid by LESSEE, within 15 days of when due;
C. If LESSEE fails to perform any of LESSEE'S nonmonetary obligations under this Lease for a period of thirty (30) days after written notice from LESSOR; provided that if more time is required to complete such performance, LESSEE shall not be in default if LESSEE commences such performance within the thirty (30)-day period and thereafter diligently pursues its completion. However, LESSOR shall not be required to give such notice if LESSEE'S failure to perform constitutes a non-curable breach of this Lease. The notice required by this Section is intended to satisfy any and all notice requirements imposed by law on LESSOR prior to the commencement of an unlawful detainer action and is not in addition to any such requirement;
9.3 DEFAULT BY LESSOR. LESSOR shall not be in default unless LESSOR fails to perform obligations required of LESSOR within a reasonable time, but in no event later than thirty (30) days after written notice by LESSEE to LESSOR and to the holder of any first mortgage or deed of trust covering the Property whose name and address shall have theretofore been furnished to LESSEE in writing, specifying wherein LESSOR has failed to perform such obligation; provided, however, that if the nature of LESSOR'S obligation is such that more than thirty (30) days are required for performance, then LESSOR shall not be in default if LESSOR commences performance within such thirty (30)-day period and thereafter diligently prosecutes the same to completion. In the event LESSOR fails to perform an obligation required of it hereunder in the time periods allowed under this Section and following notice from LESSEE, LESSEE may, but shall not be obligated to, perform any obligation of LESSOR under this Lease. LESSEE shall be entitled to a credit against the next accruing rent for all reasonable costs and expenses paid or incurred by LESSEE in performing LESSOR's obligations as provided in this Section, including without limitation, reasonable attorneys' fees incurred.
9.4 REMEDIES. On the occurrence of any default by LESSEE hereunder, LESSOR may, at any time thereafter, with or without notice or demand and without limiting LESSOR in the exercise of any right or remedy which LESSOR may have:
A. Terminate LESSEE'S right to possession of the Property by any lawful means, in which case this Lease shall terminate and LESSEE shall immediately surrender possession of the Property to LESSOR. In such event LESSOR shall have the immediate right to re-enter the Property and remove all persons and property and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of LESSEE, all without service of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby; and LESSOR shall be entitled to recover from LESSEE all damages incurred by LESSOR by reason of LESSEE'S default, including (i) the worth at the time of the award of all Minimum Monthly Rent, Additional Rent and other charges which were earned or were payable at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Minimum Monthly Rent, Additional Rent and other charges which would have been earned or were payable after termination until the time of the award exceeds the amount of such rental loss that LESSEE proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Minimum Monthly Rent, Additional Rent and other charges which would have been payable for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate LESSOR for all the detriment proximately caused by LESSEE'S failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom whether provided by this Lease or allowed by applicable law, including, but not limited to, any costs or expenses incurred by LESSOR in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, LESSOR'S reasonable attorneys' fees, and any real estate commissions or other such fees paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of nine percent (9%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If LESSEE shall have abandoned the Property, LESSOR shall have the option of (i) retaking possession of the Property and recovering from LESSEE the amount specified in this Section 9.4(a), or (ii) proceeding under Section 9.4(b);
B. Maintain LESSEE'S right to possession, in which case this Lease shall continue in effect whether or not LESSEE shall have abandoned the Property. In such event, LESSOR shall be entitled to enforce all of LESSOR'S rights and remedies under this Lease, including the right to recover the Rent as it becomes due hereunder. LESSEE acknowledges that LESSOR may continue the Lease in effect after LESSEE'S breach and abandonment and recover Rent as it becomes due;
C. Pursue any other remedy now or hereafter available to LESSOR under the laws or judicial decisions of the state in which the Property is located.
9.5 THE RIGHT TO RELET THE PREMISES. Should LESSOR elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time without terminating this Lease, make such alterations and repairs as may be necessary in order to relet the Property, and relet the Property or any part thereof for such term or terms (which may be for a term extending beyond the Term of this Lease) and at such rent or rents and upon such other terms and conditions as LESSOR in its sole discretion may deem advisable; upon each such reletting, all rent received by the LESSOR from such reletting shall be applied, first, to the repayment of any indebtedness other than rent due hereunder from LESSEE to LESSOR; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorneys' fees and of costs of such alterations and repairs; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by LESSOR and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month are less than that to be paid during that month by LESSEE hereunder, LESSEE shall pay any such deficiency to LESSOR. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said Property by LESSOR shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to LESSEE or unless the termination thereof be decreed by a court of competent jurisdiction.
9.6 LANDLORD'S RIGHT TO CURE. LESSOR may, but shall not be obligated to, cure any default by LESSEE after complying with the notice provisions herein set forth, and whenever LESSOR elects, all costs and expenses paid or incurred by LESSOR in curing such default, including without limitation reasonable attorneys' fees, shall be so much Additional Rent due on demand with interest as provided in Article 2.
9.7 CUMULATIVE REMEDIES. LESSOR'S exercise of any right or remedy shall not prevent it from exercising any other right or remedy.
9.8 LATE CHARGES. LESSEE hereby acknowledges that late payment by LESSEE to LESSOR of Rent and other sums due hereunder will cause LESSOR to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and costly to ascertain. Such costs include, but are not limited to, processing, administrative and accounting charges, and late charges which may be imposed on LESSOR by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Rent or any other sum due from LESSEE shall not be received by LESSOR or LESSOR'S designee within fifteen (15) days after such amount shall be due, LESSEE shall pay to LESSOR a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs LESSOR will incur as a consequence of late payment by LESSEE. Acceptance of such late charge by LESSOR shall in no event constitute a waiver of LESSEE'S default with respect to such overdue amount, nor prevent LESSOR from exercising any of the other rights and remedies granted hereunder.
ARTICLE 10
DAMAGE TO PROPERTY; CONDEMNATION.
10.1 DAMAGE TO THE PROPERTY. In the event that the Property or Shopping Center is totally or partially damaged or destroyed by fire or other casualty or occurrence, LESSOR shall cause the damage to the Property to be repaired
and restored to the same condition as it was in immediately before such damage or destruction. If (a) such damage results from a cause not insured, or (b) the cost of repair or restoration exceeds the amount of insurance proceeds received by LESSOR and available for restoration of the Property, and LESSEE elects for the Property to be repaired or restored, LESSOR shall repair and restore the Property and LESSEE shall pay sixty six and 66/100 percent and (66.66%) of difference between the amount of insurance proceeds and the costs of repair and restoration and LESSOR shall pay the remaining repair costs not covered by insurance. LESSOR shall cause the Property to be rebuilt and restored with all due diligence and, during any periods of reconstruction, LESSOR shall use its best efforts and take all reasonable steps to provide reasonable temporary access for vehicular and pedestrian ingress and egress to LESSEE's adjacent parcel from South Virginia Street. During the time that the repair or restoration is being completed, LESSEE'S Rent shall be abated for any portion of the Property which cannot be used by LESSEE. In the event that the repair and restoration cannot be completed to LESSEE's satisfaction, then LESSEE may elect to terminate the Lease by giving written notice to the LESSOR. If the time restoration exceeds six months, LESSEE may at its option terminate the Lease.
10.2 CONDEMNATION OF PROPERTY. If any part or the whole of the Property shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, and in the event that such partial taking or condemnation shall render the Property not reasonably suitable for the uses of LESSEE, then LESSOR shall use its best efforts and take all reasonable steps to make other property within the Shopping Center available for LESSEE to lease for vehicular and pedestrian ingress and egress to LESSEE's adjacent parcel. In the event of a partial taking or condemnation which is not extensive enough to render the Property unsuitable for the uses of LESSEE, then LESSOR shall with all due diligence restore the Property to a condition comparable to its condition at the time of such condemnation less the portion lost in the taking, and this Lease shall continue in full force and effect. During the time that the restoration is being completed or in the event that a portion of the land constituting the Property is removed by the partial condemnation, LESSEE'S rent shall be abated for any portion of the Property which cannot be used by LESSEE. In the event that substitute property restoration of the Property cannot be completed to LESSEE's satisfaction, then LESSEE may elect to terminate the Lease by giving written notice to the LESSOR.
10.3 DISTRIBUTION OF CONDEMNATION AWARD. Any condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to LESSEE, only the amount of any award specifically designated for loss of or damage to LESSEE'S rights and interests in the Property and the LESSEE hereby assigns any other rights which the LESSOR may have now or in the future to any other award to the LESSOR; and (c) third, to LESSOR, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. LESSEE shall have the right to pursue its claim against the condemning authority for any damages which it suffers in connection with any eminent domain proceeding.
ARTICLE 11
ESTOPPEL CERTIFICATES, SUBORDINATION AND MORTGAGEE PROTECTION
11.1 ESTOPPEL CERTIFICATES. Within ten (10) days of request therefor by LESSOR, LESSEE shall execute a written certificate, in the form presented by LESSOR, acknowledging and certifying to matters requested by LESSOR, including without limitation, the following; (a) that LESSEE is in full and complete possession of the Property, such possession having been delivered by LESSOR or its predecessor and accepted by LESSEE; (b) that any improvements required to be furnished by LESSOR by the terms of this Lease have been completed in all respects to the satisfaction of LESSEE; (c) that this Lease is in full force and effect and has not been amended, modified, supplemented, or superseded except as specifically noted; (d) that there is no existing default on the part of LESSOR in the performance of any covenant, agreement or condition contained in the Lease to be performed by LESSOR; (e) that the LESSEE does not have any actual or pending claim against the LESSOR; (f) that no Rents or other charges have been prepaid by LESSEE; and (g) that the addressee of said certificate may rely on the representations therein made; and certifying as to the dates of commencement and termination of the Term, the date on which Rents commenced to accrue under this Lease, and the date through which Rents and other charges hereunder have been paid. Commencement and termination dates of this Lease, that it is in full force and effect, has not been modified (or if it has, stating such modifications) and providing any other pertinent information as LESSOR or their agent might reasonably request. Failure to comply with this Article shall be a material breach of this Lease by LESSEE giving LESSOR all rights and remedies under Article 10 hereof, as well as a right to damages caused by the loss of a loan or sale which may result from such failure by LESSEE.
11.2 FINANCIAL STATEMENTS. If LESSOR desires to finance or refinance the Shopping Center, the Property, or any part thereof, LESSEE hereby agrees, within ten (10) days of request therefor by LESSOR, to deliver to any lender designated by LESSOR such financial statements of LESSEE, its guarantors and its parent company, if any, as may be reasonably required by such party. Such statements shall include the past three (3) years' financial statements of LESSEE. All such financial statements shall be received by LESSOR in confidence and shall be used only for the purposes herein set forth.
11.3 ATTORNMENT. LESSEE shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under any mortgage or deed of trust made by LESSOR covering the Property, attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the LESSOR under this Lease.
11.4 SUBORDINATION/SUPERIORITY. The rights and interests of LESSEE under this Lease shall be subject and subordinate to any mortgage, trust deed or deed of trust that is or may hereafter by placed upon the Shopping Center, or any part thereof containing the Property and to any and all advances to be made thereunder and to the interest thereon and all renewals, amendments, modifications, replacements and extensions thereof, if the mortgagee or trustee or secured party named in such mortgage or trust deed or deed of trust shall elect to subject and subordinate the rights and interests of LESSEE under this Lease to the lien of its mortgage, trust deed or deed of trust and shall agree by an instrument in form satisfactory to LESSEE and which recognizes the priority of LESSEE's Purchase Option in writing to recognize this Lease in the event of foreclosure, if and so long as LESSEE is not in default hereunder. Any mortgagee or trustee of the Shopping Center or
any part thereof containing the Property may elect to give certain rights and interests of LESSEE under this Lease priority over the lien of its mortgage, trust deed, or deed of trust. In the event of either such election and upon notification by such mortgagee or trustee to that effect to LESSEE, the rights and interests of LESSEE under this Lease shall be deemed to be subordinate to or have priority over, as the case may be, the lien of said mortgage or deed of trust whether this Lease is dated prior to or subsequent to the date of said mortgage or deed of trust. LESSEE shall, within ten (10) days following the request of LESSOR or such secured party, execute and deliver whatever instruments may be required for such purposes. Failure to do so shall constitute an event of default and a material breach of this Lease.
11.5 MORTGAGEE PROTECTION. LESSEE agrees to give any mortgagee or trustee of a deed of trust (hereinafter "mortgagee") of the Shopping Center, by registered or certified mail, a copy of any notice of default served upon the LESSOR by LESSEE, provided that prior to such notice LESSEE has been notified in writing (by way of service on LESSEE of a copy of an Assignment of Rents and Leases, or otherwise) of the address of such mortgagee. LESSEE further agrees that if LESSOR shall have failed to cure such default within thirty (30) days after such notice to LESSOR (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if LESSOR has commenced within such thirty days and is diligently pursuing the remedies or steps necessary to cure or correct such default), then the mortgagee shall have an additional thirty (30) days within which to cure or correct such default (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if such mortgagee has commenced within such thirty days and is diligently pursuing the remedies or steps necessary to cure or correct such default, including without limitation commencement of foreclosure proceedings if necessary to effect such a cure). Until the time allowed as aforesaid for the mortgagee to cure such default has expired without cure, LESSEE shall have no right to, and shall not, terminate this Lease on account of LESSOR'S default. This provision inures to the express benefit of LESSOR
ARTICLE 12
SURRENDER AND HOLDOVER
12.1 SURRENDER OF PROPERTY AT TERMINATION OF LEASE. LESSEE shall, upon the termination of this Lease, after the last day of the Term or any extension thereof or upon any earlier termination of such Term, surrender and yield up to LESSOR the Property and all improvements thereto in the condition in which it was required to be kept under this Lease, and the LESSOR and LESSEE will have no further obligations under this Lease, except the LESSEE'S obligation to pay Rent for the period prior to the termination of this Lease and the LESSOR's and LESSEE'S obligations on termination of this Lease for an event of default as set forth herein. LESSOR shall upon the termination of this Lease, reconcile the Additional Rents paid by LESSEE for Real Property Taxes under Section 2.3, Utilities under Section 2.5, and the cost of maintaining the Property under section 2.6, with the actual taxes paid and costs of Utilities and maintenance incurred and shall make any refunds owing to LESSEE. Such reconciliation and refund for Additional Rents shall not include Operating Costs, which shall be reconciled as provided in Section 2.9.
12.2 HOLDING OVER. Any holding over after expiration hereof, with the consent of LESSOR, shall be construed as a month-to-month tenancy in accordance with the terms hereof, as applicable.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 WAIVER. Any forbearance, failure or delay by LESSOR or LESSEE in exercising any right, power or remedy hereunder shall not be deemed a waiver of that right, power or remedy or any other right, power or remedy LESSOR or LESSEE may have.
13.2 TIME OF ESSENCE. Time is of the essence to this Lease Agreement.
13.3 ATTORNEYS' FEES. If either party shall institute any action or proceeding relating to the provisions of this Lease, or any default or breach hereunder, then and in that event, the prevailing party shall be entitled to reasonable expenses and attorneys' fees and disbursements incurred therein.
13.4 CORPORATE AUTHORITY. As LESSEE is a corporation, the individual executing this Lease on behalf of said corporation shall represent and warrant that he or she is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Further, LESSEE shall, within thirty (30) days after LESSOR'S request, deliver to LESSOR a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease.
13.5 SUCCESSORS AND ASSIGNS. The terms, conditions and covenants of this Lease shall be binding upon and shall inure to the benefit of each of the parties hereto, its successors or assigns and shall run with the land; subject, however, to the provisions hereinabove relating to assignment, conveying, subletting and pledging this Lease or the Property.
13.6 REAL ESTATE BROKERS. LESSOR and LESSEE each represent and warrant to the other party that it has not authorized or employed, or acted by implication to authorize or employ, any real estate broker or salesman to act for it in connection with this Lease. LESSOR and LESSEE shall each indemnify, defend and hold the other party harmless from and against any and all claims by any real estate broker or salesman whom the indemnifying party authorized or employed, or acted by implication to authorize or employ, to act for the indemnifying party in connection with this Lease.
13.7 SERVICE OF NOTICE. Except as otherwise provided herein, every notice, approval, consent or other communication authorized or required by this Lease shall be in writing and shall be deemed given forty-eight (48) hours after deposit in the United States mail, postage prepaid, certified mail, return receipt requested, and addressed to:
LESSOR: Biggest Little Investments, L.P.
c/o Maxum LLC
1175 West Moana Lane Suite 200
Reno, NV 89509
LESSEE: Golden Road Motor Inn, Inc.
Atlantis Casino and Resort
3800 S. Virginia Street
Reno, NV 89503
Attn: Chief Executive Officer
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13.8 ENTIRE AGREEMENT AND MISCELLANEOUS PROVISIONS.
A. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such paragraphs of the Lease or in any way affect the Lease.
B. This Lease supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the lease and occupancy of the Property and contains all of the covenants, agreements and other obligations between the said parties in respect to the lease or occupancy of the Property.
C. No waiver, alterations or modifications of this Lease or any agreements in connection herewith shall be valid, unless in writing duly executed by all parties.
D. This Lease is the result of negotiations between the parties and has been agreed to by both LESSOR and LESSEE after prolonged negotiations and shall not be construed against the party responsible for having it reduced to writing.
E. This Lease is to be governed by and construed in accordance with the laws of the State of Nevada as exist from time to time.
F. If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstance shall, at any time, or to any extent, be invalid or unenforceable, the remainder of the Lease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant, condition and provision of the Lease shall be valid and enforceable to the fullest extent permitted by law.
G. As a material inducement to LESSEE to enter this Lease, and in consideration of the payment of Rent during the first 5 years of the Term, LESSOR covenants that for a period of 5 years from the Commencement Date, no non-restricted gaming operations (the "Restriction") may by conducted within the Shopping Center by anyone other than LESSEE. At LESSEE's option prior to the expiration of said 5 year period, LESSEE may purchase from LESSOR an extension (the "Extended Restriction") of the prohibition on the conduct of non-restricted gaming operations within the Shopping Center by anyone other than LESSEE. The purchase price for the Extended Restriction shall be determined by an independent appraisal of the value of the Extended Restriction in the manner set forth for determination of the Purchase Price for the Property Interests set forth in Section 7.5 above.
H. LESSEE may record against the Property and Shopping Center a memorandum to be executed by LESSOR and LESSEE providing notice of: (i) the existence of this Lease Agreement, (ii) LESSEE's rights to use the Common Areas of the Shopping Center as provided in Section 5.2 hereof, (iii) LESSEE's Purchase Option as provided in Article 7 hereof, and (iv) the Restriction and the Extended Restriction as provided in Section 13.8 hereof.
LESSOR: LESSEE:
BIGGEST LITTLE INVESTMENTS, L.P. GOLDEN ROAD MOTOR INN, INC.,
a Delaware limited partnership a Nevada Corporation.
By:/s/Ben Farahi By:/s/ Bob Farahi
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Ben Farahi Bob Farahi
Its:Managing Member of Its: President
the General Partner
Dated: 01/29/04 Dated: 01/29/04
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STATE OF NEVADA )
) ss:
COUNTY OF WASHOE )
On this 29th day of January, 2004, before me a Notary Public, personally appeared Ben Farahi who acknowledged to me that he/she executed the foregoing instrument on behalf of Biggest Little Investments, L.P.
By: /s/ELIZABETH E. FRANKS
----------------------
Elizabeth E. Franks
NOTARY PUBLIC
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STATE OF NEVADA )
) ss:
COUNTY OF WASHOE )
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On this 29th day of January, 2004, before me a Notary Public, personally appeared Bahram Farahi who acknowledged to me that he/she executed the foregoing instrument on behalf of Golden Road Motor Inn, Inc.
By: /s/ ELIZABETH E. FRANKS
-----------------------
Elizabeth E. Franks
NOTARY PUBLIC
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EXHIBIT 10.19
PURCHASE OPTION AGREEMENT
THIS IS A PURCHASE OPTION AGREEMENT ("Agreement") dated September 15, 2003, between South Hills Investment Company, a Nevada general partnership (herein called "SELLER"), and Monarch Casino & Resort, Inc., a Nevada corporation or its nominee (herein called "BUYER").
1. OPTION. In consideration of Forty Five Thousand Dollars ($45,000.00) ("Option Consideration") received by SELLER, payable as provided in Article 7.3 and other good and valuable consideration, the receipt of which is acknowledged, SELLER hereby grants to BUYER the option ("Option") to purchase approximately thirteen (13) acres of real property located on South Virginia Street, in Reno, County of Washoe, State of Nevada, said land described on Exhibit A attached hereto and made a part hereof, with the exact legal description to be determined by survey; together with all easements, rights and appurtenances thereto, all buildings and improvements now located thereon, and all of SELLER's right, title and interest in all public ways adjoining the same (herein, with the land, collectively "Premises").
2. PRICE. The purchase price shall be determined at the time the Option is exercised. The purchase price of the Premises ("Purchase Price") shall be determined using the valuation procedure ("Valuation Procedure") set forth in this Article 2. Within five (5) business days of the Exercise Date (as defined in Section 4), the BUYER's independent Committee of the Board of Directors (or, if BUYER is a subsidiary of Monarch Casino & Resort, Inc., Monarch's committee of independent Board of Directors will perform the duties required by this paragraph) shall order a Member Appraisal Institute ("M.A.I.") appraisal of the Premises (a "Valuation"). Within five (5) business days of the Exercise Date, SELLER shall commence the preparation of a separate Valuation of the Premises. If each Valuation is within ten percent (10%) of the other, the average of the two (2) Valuations shall be determined and said average will be the Purchase Price. If the Valuations differ by more than ten percent (10%), the two (2) M.A.I. appraisers shall select a third (3rd) M.A.I. appraiser so as to produce a third (3rd) Valuation of the Premises. From the total of three (3) Valuations, the two (2) closest Valuations shall be averaged and said average shall be the Purchase Price. In the event that transferable water rights are appurtenant and transferable with the Premises, up to one (1) acre foot per acre of water rights will be valued as part of the Premises and with no increase in the Purchase Price, shall be transferred to BUYER along with the Premises. If the Premises have appurtenant and transferable water rights in excess of one (1) acre foot per acre of water rights ("Excess Water Rights"), the value of such Excess Water Rights shall be calculated at its fair market value and may, if elected by BUYER, be purchased at fair market value, or if not purchased by BUYER, such Excess Water Rights will be retained by SELLER. In no event can the Purchase Price of the Premises be less than Eight Dollars ($8.00) per square foot or more than Twelve Dollars ($12.00) per square foot. If the Valuation is determined to be less than Eight Dollars ($8.00) per square foot, BUYER will pay Eight Dollars ($8.00) per square foot. If the Valuation is determined to be greater than Twelve Dollars ($12.00) per square foot, BUYER shall pay Twelve Dollars ($12.00) per square foot. BUYER is in no manner obligated to purchase the Premises. The Premises shall be appraised in the Valuation Procedure as is, including the existing commercial zoning, but the Valuation Procedure shall discount and not consider the valuation effect of any of the approvals, master plan or zone changes to be sought by the parties after the date of this Agreement.
3. PERIOD. BUYER may exercise the Option by giving SELLER notice at any time from the date hereof through September 15, 2004 ("Primary Period"). BUYER may extend the period during which the Option is exercisable for an additional period through September 15, 2005 ("Extension Period") by giving SELLER notice prior to the end of the Primary Period and paying SELLER the additional consideration of Sixty Thousand Dollars ($60,000.00).
4. ESCROW. First American Title Company of Nevada shall be the designated title company and will act as the escrow agent ("Escrow Agent") for completion of the purchase. The date on which BUYER gives notice exercising the Option is the exercise date ("Exercise Date"). Within thirty (30) days after the Exercise Date SELLER shall deliver to Escrow Agent a recordable grant, bargain, sale deed in the form of Exhibit B hereto which will convey the Premises to BUYER or BUYER's nominee in fee simple, free of all tenancies, liens, encumbrances, restrictions and defects of title except current property taxes not in default, and those exceptions which, in BUYER's sole opinion, are deemed acceptable in accordance with the provisions of Article 8. On or before the date of closing, BUYER shall deposit with Escrow Agent the Purchase Price, less all consideration paid for the Option and for any extension thereof. In the event the Valuation Procedure has not been completed, the closing date shall be extended to a date five (5) business days after the Purchase Price is finally established under Article 2 above.
5. AREA B OPTION. Inclusive in the consideration already provided in Article 1 received by SELLER, SELLER hereby grants to BUYER the option to purchase the property marked as area B ("Area B") on the map attached hereto as Exhibit B, which Area B is not currently part of the Premises (hereinafter, the "Area B Option"). The purchase price for Area B ("Area B Purchase Price") shall follow the same Valuation Procedure as detailed in Article 2. The Valuation Procedure of Area B Purchase Price shall be calculated by determining the discrete fair market value of Area B and will not be averaged with the determined value of the Premises. As a condition precedent to exercise of the Area B Option, BUYER must exercise the Option (as detailed in Article 1). BUYER may only exercise the Area B Option by giving SELLER notice simultaneously with exercise of the Option.
6 .RIGHT OF FIRST REFUSAL. For a period of eight (8) years after the closing of the exercise of the Option, and if the Option B is not exercised, should SELLER receive, a "bona fide proposal" (as defined below) (hereinafter, the "Area B Proposal") to (i) purchase all or part of Area B; (ii) lease all or part of Area B; (iii) develop Area B, or (iv) do any combination of the foregoing, then the following procedure must be followed: SELLER shall send BUYER a true, correct and complete copy of the Area B Proposal to BUYER and notify BUYER, if it is fact SELLER's good faith intention to accept, of SELLER's intention to accept the same (collectively, the "First Refusal Notice"). BUYER shall have the right within fifteen (15) days after BUYER's receipt of the First Refusal Notice (the "First Refusal Period") to accept the terms of the proposal set forth in the First Refusal Notice in writing and within the same time as set forth in the Area B Proposal, to complete the transaction set forth in the Area B Proposal in BUYER's own name (including any nominee of BUYER), for the same consideration set forth in the Area B Proposal and on the same terms specified in the Area B Proposal. Notwithstanding the previous sentence, BUYER'S right to exercise the right of first refusal is conditioned on its exercise of the Option. If BUYER shall not so elect within said fifteen (15) days, SELLER may complete the Area B Proposal with the party submitting the Area B Proposal (but not to a third party) provided the Area B Proposal is completed on the terms and
conditions and for the price set forth in the Area B Proposal. Notwithstanding anything to the contrary contained herein, this Right of First Refusal shall in no way restrict SELLER's right, power or authority to mortgage Area B until the First Refusal Notice is given. If the BUYER believes that the Area B Proposal is not a "bonafide proposal", then BUYER shall give written notice of the same, including a detailed explanation of the reason supporting such position. Within five (5) business days of the delivery by BUYER to SELLER of the notice, the parties shall meet and attempt to resolve the dispute. If no resolution can be reached, the parties agree to submit the matter to private, binding arbitration to be conducted by a mutually acceptable Reno-area arbitrator who shall act on an expedited basis, with both parties agreeing to be bound by the arbitrator's decision. As used herein, "bona fide proposal" means that the proposal must be submitted with adequate detail to clearly identify the proponent, must be on terms and conditions that at the time of the proposal are similar to terms that would otherwise be obtained from a reasonable third party, and set forth in sufficient detail to allow BUYER to evaluate the terms and conditions.
7. SPECIAL PROVISIONS.
7.1 Survey/Site Assessment. For a period commencing with the date of this Agreement and ending sixty (60) days thereafter (the "Due Diligence Period"), BUYER, its agents and contractors, shall have the right to enter upon the Premises and Area B for the purpose of conducting a topographical survey and a site assessment of the Premises and Area B. The site assessment may include, but not be limited to, subsurface soil and water tests, as well as the testing of any underground storage tanks and related equipment upon the Premises and Area B. BUYER, its agents or contractors, shall also have the right to make inquiries of governmental agencies concerning potentially hazardous substances on the Premises and on Area B. By the end of the Due Diligence Period, if, in BUYER's sole opinion, any survey, governmental inquiry, or site assessment reveals conditions that are unsatisfactory to BUYER, BUYER may withdraw from this transaction in accordance with the provisions of Article 11 hereof. In the event of such withdrawal, no costs incurred under this Article shall be reimbursed to either party. BUYER waives any right to demand performance of SELLER to cure any matters within this paragraph at or prior to Closing; the transaction described in this Agreement is a "as is" sale.
If either SELLER or BUYER shall enter the Premises and Area B while owned by the other to perform assessments or corrective action pursuant to this Article 7.1, such entering party, for itself, its employees, agents and contractors, shall assume all risks involved in entering upon the Premises and Area B for the performance of such activities and shall indemnify and hold the other harmless from and against all loss or expense by reason of any liability due to bodily injury, death of persons or damage to property sustained by any party arising out of or caused by the negligence of such entering party, its employees, agents or contractors, in the exercise of any of such entering party's rights under this Article 7.1. Notwithstanding the foregoing, SELLER must notify BUYER of known conditions that are dangerous or hazardous.
7.2 Zoning/Permits/Licenses. Upon execution of this Agreement, BUYER may apply to the appropriate governing bodies for zoning, permits and licenses required to authorize the use, construction and operation of the Premises as a hotel casino in accordance with BUYER's plans and specifications. SELLER agrees to execute all instruments and documents reasonably necessary to enable BUYER to secure such authorizations.
7.3 Payment of Option Consideration. Three (3) days after the expiration of the Due Diligence Period, if BUYER elects to proceed, then BUYER shall pay to SELLER the Option Consideration, and the Option Consideration shall then be non-refundable, except in the event of default by SELLER.
8. CONDITION OF TITLE. Not later than ten (10) days after the date of this Agreement, SELLER shall obtain a preliminary title report with extended coverage ("Title Commitment") on the Premises and Area B in the amount of the Purchase Price from First American Title Company of Nevada ("Title Company"). If the Title Commitment reveals any title exceptions, encumbrances or conditions which are unacceptable to BUYER, BUYER shall give notice thereof to SELLER not later than thirty (30) days from the date of this Agreement, and SELLER shall have thirty (30) days after receipt of such notice in which (a) to cure same to BUYER's satisfaction and furnish a later report showing the defect cured or removed, or (b) if such exceptions, encumbrances or conditions can be cured solely by payment of additional title insurance premiums, to arrange for satisfaction of same out of SELLER's proceeds at closing. In the event SELLER is unable or unwilling to cure the unacceptable exceptions, encumbrances or conditions within the aforesaid period, BUYER may withdraw from this transaction in accordance with the provisions of Article 11 hereof. If, at closing, SELLER is unable to deliver title to the Premises in the same condition as accepted by BUYER in accordance with the terms hereof, then BUYER shall elect as its sole remedy for such failure either (a) to waive such defects and accept title to the Premises and Area B "as is" or (b) to withdraw from this transaction in accordance with the provisions of Article 11 hereof and receive a full refund of the Option consideration paid under Article 1. BUYER may unilaterally extend the date for closing sixty (60) days to afford SELLER additional time within which to cure the unacceptable exceptions, encumbrances or conditions (without prejudice to BUYER's rights under any other provision of this Agreement).
9. CONDEMNATION. In the event SELLER or BUYER becomes aware that the Premises or Area B or any part thereof are or will become the subject of a condemnation proceeding, whether for public or quasi-public use, such party shall immediately give notice to the other and Escrow Agent of such proceeding. The date of receipt of such notice shall be referred to as the "Condemnation Notice Date." If condemnation proceedings have been instituted or threatened whereby the Premises or Area B or any part thereof are or will become the subject of a condemnation proceeding, BUYER shall have the right, at its option and exercisable by delivery of written notice to SELLER within 30 days of the Condemnation Notice Date: (a) to proceed with the Closing under the same time requirements as set forth below, but without a reduction in the Purchase Price on account of such condemnation proceeding, in accordance with the terms and conditions of this Agreement, in which event BUYER shall have the right to negotiate with the condemning authority for the condemnation award and to receive the benefits thereof (and SELLER shall assign and transfer to BUYER all of SELLER's rights, title and interest in and to any such condemnation award that has been made, or will be made, as a result of such condemnation proceedings, or (b) to withdraw from this transaction in accordance with the provisions of Article 11 hereof.
10 .CLOSING. Closing will occur on or before sixty (60) days after the Exercise Date (as defined in Article 4), on a date and at a time and place designated by BUYER.
(a) At closing, SELLER, at its sole cost and expense, will deliver the following to BUYER:
(1). A Grant, Bargain, Sale Deed in form and substance reasonably satisfactory to BUYER, fully executed and acknowledged by SELLER, conveying the Premises and, if applicable, Area B, to BUYER, subject only to the encumbrances accepted by BUYER pursuant to Article 8 hereof. At BUYER's election, the description used in the deed shall conform to the previously mentioned survey of the Premises and, if applicable, Area B.
(2) An owner's ALTA title policy in the Title Company's Extended Coverage form insuring BUYER for the full Purchase Price, that title to the Premises and, if applicable, Area B, is vested in fee simple, subject only to the printed exceptions in such Extended Coverage form, to those exceptions which BUYER agrees to accept in accordance with the provisions of Article 8 hereof, and to current property taxes not in default.
(3) Certificate meeting the requirements of 26 U.S.C. Section 1445- Non-Foreign Affidavit, executed and sworn to by SELLER.
(4) Such other instruments as are customarily executed to effectuate the conveyance of property similar to the Premises and, if applicable, Area B, with the effect that, after closing, BUYER will have succeeded to all of the rights, title, and interests of SELLER related to the Premises and, if applicable, Area B, and SELLER will no longer have any rights, title, or interests in and to the Premises and, if applicable, Area B.
(5) Possession of the Premises and, if applicable, Area B, free and clear of all tenancies of every kind and parties in possession, with all parts of the Premises and, if applicable, Area B, in substantially the same condition as on the date of this Agreement, except as provided herein. SELLER shall bear all risks of loss or damage to the Premises and, if applicable, Area B, occurring prior to closing.
(b) At closing, BUYER will deliver a check to SELLER in the amount of the Purchase Price of the Premises and, if applicable, Area B, plus any sums chargeable to BUYER under this Agreement, less (i) the Option Consideration (including any money paid to extend the Option) paid by BUYER, (ii) any sums chargeable to SELLER under this Agreement, and (iii) the amount of any liens and encumbrances subject to which BUYER elects to accept title.
(c) SELLER shall pay one half of the escrow charges, the CLTA title insurance premiums, one half of any recording fees, all of the documentary taxes imposed on the deed, and all of the real estate transfer taxes or fees. BUYER shall pay one half of the escrow charges, the difference in cost between the CLTA and the ALTA title insurance premiums and one half of the recording fees. Ad valorem and simiar taxes and assessments, as well as items of revenue, relating to the Premises, and if applicable, Area B shall be prorated between SELLER and BUYER as of the date of closing. If the actual amounts to be prorated are not known at closing, the prorations shall be computed on the basis of the best evidence then available; when actual figures are available a cash settlement shall be made between SELLER and BUYER. All installments of assessments due before that date of closing and all installments of assessments which have been imposed but shall not become due until after closing shall be considered due at closing and a lien on the
Premises and, if applicable, Area B shall be prorated and deferred to a later date, paid by SELLER at closing. The provisions of this Article 10(c) shall survive the closing.
11. WITHDRAWAL. BUYER may withdraw from this agreement and elect not to exercise the Option or the Area B Option at any time. BUYER's only liability for such withdrawal shall be an indemnification and hold harmless to SELLER for any damage done to the Premises or Area B in conjunction with BUYER's due diligence work under Article 7.1 hereof. If BUYER's decision to withdraw is due to a breach of SELLER's representations, warranties or covenants hereunder, BUYER may seek the remedies of specific performance or other remedies it may have in equity or law.
12. REPRESENTATIONS AND WARRANTIES OF SELLER. SELLER hereby makes the following representations and warranties to BUYER, as of the date hereof and the closing date, which representations and warranties shall survive closing hereunder:
(a) As of the date hereof, SELLER shall have good and marketable fee simple title to the Premises and, if applicable, Area B free and clear of all mortgages, encumbrances, pledges, liens and charges of every kind, nature or description.
(b) SELLER is a Nevada general partnership duly organized and validly existing under the laws of the State of Nevada and has all necessary power, right, authority and capacity to enter into and perform this Agreement in accordance with its terms.
(c) This Agreement has been duly executed by SELLER and constitutes the legal, valid, binding and enforceable obligation of SELLER.
(d) SELLER has no knowledge of any facts, rights, interest or claims affecting title to the Premises or Area B which are not shown by the public records.
(e) SELLER is not a "foreign person" as that term is defined in Section 1445(f)(3) of the Code and applicable regulations.
(f) To the best of SELLER's knowledge, there are no contracts or agreements with any public, quasi-public or private party affecting or with respect to the Premises or Area B (except for this Agreement), which are not shown by the public records.
(g) To the best of SELLER's knowledge, there are no assessments or levies on or with respect to the Premises or Area B other than those disclosed in the preliminary title report, and to SELLER's knowledge, none have been proposed.
(h) SELLER has not (i) made a general assignment for the benefit of creditors, (ii) filed any involuntary petition in bankruptcy or suffered the filing of any involuntary petition by SELLER's creditors, (iii) suffered appointment of a receiver to take possession of all or substantially all of SELLER's assets; (iv) suffered the attachment or other judicial seizure of all, or substantially all, of SELLER's assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or composition to its creditors generally.
(i) SELLER has no knowledge of any hazardous materials, toxic wastes, pollutants or contaminants that have been produced, stored, disposed of or discharged on the Premises or Area B, as the case may be, or any portion thereof, into any water body on the Premises or Area B, as the case may be, or into any ground water supplies under the Premises or Area B, as the case may be.
(j) To the best of SELLER's knowledge, SELLER has disclosed to BUYER all assessments, studies, sampling results, evaluations and other reports commissioned by or for SELLER or within SELLER's possession or control relating to the environmental condition of the Premises and Area B.
(k) SELLER has no knowledge of any parties that may be in possession of all or any portion of the Premises or Area B, as the case may be, as lessees, tenants at sufferance or trespassers.
(l) SELLER has no knowledge of any existing fact or condition that would result in the termination of access to and from the Premises or Area B, as the case may be, or the cessation of utilities necessary for the operation of a hotel casino.
(m) SELLER has no knowledge, nor has received any formal notice, of any pending condemnation or similar proceeding or assessment by any governmental authority that will affect the Premises or Area B, as the case may be, or any part thereof.
(n) SELLER has no knowledge of non-compliance with all applicable laws, ordinances, regulations, statutes, rules and restrictions relating to the Premises or Area B, as the case may be, or any part thereof.
(o) SELLER has no knowledge of any litigation, pending or threatened, that could affect, encumber or burden the Premises or Area B, as the case may be.
(p) Excluding work initiated by BUYER, all work, labor, services and materials furnished prior to the closing date to or in connection with the Premises or Area B, as the case may be, and any improvements constructed thereon prior to the closing date, will be discharged by SELLER prior to the closing date so that no mechanics', materialmen's or other lien may be filed against the Premises, Area B or such improvements.
(q) At Closing all taxes on the Premises or Area B, as the case may be, will been paid in full, and there will be no penalties or delinquency charges owing.
(r) SELLER has no knowledge that any condition surviving closing exists in the contract under which SELLER acquired the Premises and Area B that would in any way impair or affect BUYER's ability to develop or use the Premises.
(s) SELLER will keep the Premises in the same condition except as otherwise required hereunder, and will not develop, alter or otherwise change the condition of the Premises, however, SELLER may, at its discretion, develop, alter or otherwise change the condition of Area B.
Except for those matters that are otherwise waived or provided for elsewhere herein, if any of the foregoing representations and warranties cannot be made by SELLER at closing, BUYER may, notwithstanding the provisions hereof, elect as its sole remedy therefor: (a) to waive the warranty(ies) in question and close; or (b) to obtain an appropriate indemnity from SELLER in a form satisfactory to BUYER; or (c) to withdraw from this transaction in accordance with the provisions of Article 11 hereof.
13. REPRESENTATIONS AND WARRANTIES OF BUYER. BUYER hereby makes the following representations and warranties to SELLER, as of the date hereof and the closing date, which representations and warranties shall survive closing hereunder:
(a) BUYER is a Nevada corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has all necessary power, right, authority and capacity to enter into and perform this Agreement in accordance with its terms.
(b) This Agreement has been duly executed by BUYER and constitutes the legal, valid, binding and enforceable obligation of BUYER.
(c) This Agreement has been duly executed by BUYER and the execution and performance of this Agreement will not violate any agreement to which BUYER is a party or to which it may be bound.
14. INDEMNITY AND AGREEMENT TO DEFEND.
14.1. By SELLER. SELLER shall and does hereby indemnify and hold BUYER, its stockholders, directors, officers, employees and agents harmless from and against any loss or expense (including attorney's fees and costs of litigation) incurred as a result of any claim, action, demand, judgment or suit caused or alleged to have been caused by or happening in connection with the Premises or Area B prior to the date of closing, whether in tort, in contract or otherwise; including, but not limited to, fines, fees or sanctions asserted by or on behalf of any person or governmental authority arising from or in connection with SELLER's (or SELLER's predecessors-in-ownership) use or misuse, handling or mishandling, storage, spillage, discharge, seepage into water bodies or ground supplies, or release into the atmosphere of any hazardous material, pollutant or contaminant; and excluding, however, any matter arising out of work done by BUYER. SELLER shall conduct the defense of all such litigation at its sole cost and expense, using counsel approved by BUYER, and SELLER shall neither offer nor accept any settlement thereof without BUYER's prior written consent, which approval and/or consent shall not be unreasonably withheld. The provisions of this Article 14 shall survive closing hereunder.
14.2 By BUYER. BUYER shall and does hereby indemnify and hold SELLER, its partners, officers, employees and agents harmless from and against any loss or expense (including attorney's fees and costs of litigation) incurred as a result of any required payment, action, demand, judgment or suit caused or alleged to have been caused by or happening in connection with the filing of applications for master planning changes, zoning changes, annexation and special use permits related to the development of a hotel casino on the Premises or Area B prior to the date of closing, whether in tort, in contract or otherwise; including, but not limited to, fines, fees or sanctions asserted by or on behalf of any person or governmental authority arising from or in connection with BUYER's use or
misuse, handling or mishandling, storage, spillage, discharge, seepage into water bodies or ground supplies, or release into the atmosphere of any hazardous material, pollutant or contaminant; and excluding, however, any matter arising out of work done by SELLER. BUYER shall conduct the defense of all such litigation at its sole cost and expense, using counsel approved by SELLER, and BUYER shall neither offer nor accept any settlement thereof without SELLER's prior written consent, which approval and/or consent shall not be unreasonably withheld. The provisions of this Article 14 shall survive closing hereunder.
15 .DEFAULT.
15.1 By BUYER. If the sale and purchase contemplated by this Agreement is not consummated because of BUYER's default, SELLER shall retain the Option Consideration and any extension thereof as full liquidated damages for such default of BUYER, Title Company shall return any deposits made with it by either party and neither party shall have any further rights or obligations hereunder. The parties hereto acknowledge that it is impossible to more precisely estimate the damages to be suffered by SELLER upon BUYER's default, and the parties expressly acknowledge that retention of the Option Consideration is intended not as a penalty but as full liquidated damages. Subject to the indemnification set forth in Article 14.2, SELLER's right to retain the Option Consideration as full liquidated damages is SELLER's sole and exclusive remedy in the event of default hereunder by BUYER; and, in consideration of its retention of the Option Consideration, SELLER hereby waives and releases any right to (and hereby covenants that it shall not) (a) sue BUYER for specific performance of this Agreement or (b) claim that SELLER's actual damages exceed the Option Consideration. In the event the sale and purchase contemplated by this Agreement is not consummated because of BUYER's default, BUYER hereby waives and releases any right to (and hereby covenants that it shall not) sue SELLER to recover the Option Consideration or any part thereof on the ground that it is unreasonable in amount or that its retention by SELLER is a penalty and not agreed upon as reasonable liquidated damages.
15.2 By SELLER. If the sale and purchase contemplated by this Agreement is not consummated because of SELLER's default, BUYER shall elect as BUYER's remedy: (a) to withdraw from this transaction in accordance with the provisions of Article 11 hereof, (b) to seek and obtain specific performance of this Agreement, or (c) to pursue all other rights or remedies available at law or in equity including an action for damages.
INITIALS OF BUYER: INITIALS OF SELLER:
16. AGENTS. SELLER and BUYER, respectively, (a) represent to the other that this transaction was not brought about by any broker, finder or other agent consulted or engaged by either, and (b) agree to indemnify the other against any claim by any such broker, finder or other agent for fees in connection with this transaction.
17. ASSIGNMENT. BUYER may at any time assign this Agreement, but shall not be relieved thereby of any of its obligations hereunder.
18. NOTICES. Any notice hereunder shall be in writing and shall be deemed given when personally delivered or when deposited in the United States mail registered or certified with return receipt requested, postage or
charges prepaid, and addressed to the party for whom intended at such party's address set forth below, or at such other address as such party may have substituted therefor by proper notice to the other.
SELLER's address for notice: South Hills Investment Company
1175 West Moana Lane
Reno, Nevada 89509
BUYER'S address for notice: Monarch Casino & Resort, Inc.
Resident Agent:
Kummer Kaempfer Bonner & Renshaw
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
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19. EXECUTION-ENTIRETY-SUCCESSION. This Agreement shall not be binding on BUYER and SELLER unless and until it is signed on BUYER's behalf by a duly authorized representative of BUYER and duly delivered to SELLER and subsequently signed on SELLER's behalf by a duly authorized representative of SELLER. This Agreement comprises the entire Agreement, merges and supersedes all prior representations and understandings between SELLER and BUYER concerning the subject matter of this Agreement and shall bind and inure to the benefit of SELLER's heirs, administrators, executors, successors and assigns and BUYER's heirs, administrators, executors, successors and assigns.
20. SECTION 1031 TAX-DEFERRED EXCHANGE. SELLER and BUYER agree that one or both of the parties may at the closing assign to a credit worth assignee all of its rights and duties as purchaser under this Agreement so that the party may acquire the Premises and, if applicable, Area B from its assignee under this Article 20 pursuant to a tax-deferred exchange of real estate within the meaning of 26 U.S.C. Section 1031. The parties agree that the applicable party will execute such agreements and other documents as may be necessary, in the opinion of counsel for BUYER, to complete and otherwise effectuate such tax- deferred exchange in accordance with 26 U.S.C. Section 1031.
21. LITIGATION. In the event of litigation with respect to this agreement, the prevailing party shall be entitled to recover its costs and such expenses and fees (including reasonable attorney's fees) as shall be fixed by a court.
22. VENUE. In the event of a dispute arising out of this Agreement, the parties agree that sole jurisdiction shall lie in the District Courts of the State of Nevada located in Washoe County, Nevada or in the Federal District Court, District of Nevada located in Reno, Nevada.
EXECUTED by SELLER and BUYER as of the date first herein specified.
Monarch Casino & Resort, Inc. BUYER
By:
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Witness Name: Bahram Farahi
Title: President
South Hills Investment Company SELLER
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a Nevada general partnership
----------------------- By:-------------------------
Witness
Name:
Title:
Business ID No.:
/s/ David Farahi
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DAVID FARAHI
/s/ John Farahi
----------------
JOHN FARAHI
/S/ Bahram Farahi
-----------------
BAHRAM FARAHI
/s/ Ben Farahi
--------------
BEN FARAHI
/s/ Ben Farahi
-----------------------------
FARAHI INVESTMENT COMPANY
/S/ Joseph Marvizi
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JOSEPH MARVIZI
/S/
--------------------
SAYAREH HALLEGUA
/S/ John (E) Farahi
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JOHN (E) FARAHI
/S/ Judah Farahi
----------------
JUDAH FARAHI
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/S/ Yaghoub Saeedi
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YAGHOUB SAEEDI
/S/ Soleiman Saeedi
-------------------
SOLEIMAN SAEEDI
/S/
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So. Hills, a California Ltd.
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(Append appropriate acknowledgments)