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MCRI > SEC Filings for MCRI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC

Form 10-Q for MONARCH CASINO & RESORT INC


8-Nov-2012

Quarterly Report


ITEM 2. 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 Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the "Atlantis"). Monarch's wholly owned subsidiaries, High Desert Sunshine, Inc. ("High Desert") and Golden North, Inc. ("Golden North"), each own separate parcels of land located proximate to the Atlantis.

Monarch's wholly owned subsidiary Monarch Growth Inc. ("Monarch Growth"), formed in 2011, acquired Riviera Black Hawk, Inc. owner of the Riviera Black Hawk Casino (collectively, "Black Hawk") on April 26, 2012. Monarch Growth also owns a parcel of land in Black Hawk, Colorado contiguous to the Riviera Black Hawk Casino. Monarch was incorporated in 1993 under Nevada law for the purpose of acquiring all of the stock of Golden Road.

Monarch's wholly owned subsidiary Monarch Interactive, Inc. ("Monarch Interactive") was formed on January 4, 2012 and received approval from the Nevada Gaming Commission on August 23, 2012 for a license as an operator of interactive gaming. Before the license can be issued, a number of conditions must be met, within six months of the approval, and before operations can commence, the Company must enter into contracts with a licensed interactive gaming service provider with an approved system. None of these conditions have occurred, and Monarch Interactive is not currently engaged in any operating activities. In Nevada, legal interactive gaming is currently limited to intrastate poker.

Our operating assets are the Atlantis and the Riviera Black Hawk Casino. Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage operations and at the Atlantis, our hotel operations. The Riviera Black Hawk Casino does not have a hotel. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost efficiencies.


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

OPERATING RESULTS SUMMARY

Our operating results may be affected by, among other things, competitive factors, gaming tax increases, the commencement of new gaming operations, construction at our facilities, general public sentiment regarding travel, overall economic conditions and governmental policies affecting the disposable income of our patrons and weather conditions affecting our properties. In particular, our results for the quarter ended September 30, 2012 were impacted by non-recurring expenses in connection with the acquisition of Riviera Black Hawk, Inc. Consequently, our operating results for any quarter or year are not necessarily comparable and may not be indicative of future periods' results.

The following significant factors and trends should be considered in analyzing our operating performance:

Atlantis:

As in many other areas around the country, the impacts of the economic decline and weakness in Reno that began in the fourth quarter of 2007 continue to be felt in 2012. Aggressive marketing programs by our competitors have also posed challenges to us during that time. Furthermore, based on statistics released by the Nevada Gaming Control Board, the Reno gaming revenue market has shrunk in the aggregate. We anticipate that the ongoing macroeconomic weakness nationally and in the Reno market, combined with aggressive marketing programs of our competitors, will continue to apply downward pressure on Atlantis revenue.

Riviera Black Hawk:

On April 26, 2012, we acquired Riviera Black Hawk, Inc., the owner of the Riviera Black Hawk Casino in Black Hawk, Colorado which is located approximately 40 miles from Denver, Colorado. Our initial focus with the Riviera Black Hawk Casino is to maximize casino and food and beverage revenues. There is currently no hotel on the property. We have begun to evaluate all aspects of operations and to implement certain operational and management changes which we believe will enhance operations. We have also begun to develop a master plan of future improvements to the Riviera Black Hawk Casino, which we expect to include, among other things, a property-wide renovation, including renovations of all casino, restaurant, public areas, improvement of casino games, and, subject to our final evaluation, construction of a new multi-story parking facility, a hotel and related property amenities.

CAPITAL SPENDING AND DEVELOPMENT



We seek to continuously upgrade and maintain our facilities in order to present
a fresh, high quality product to our guests.  Capital expenditures during the
first nine months of 2012 and 2011 were as follows:



                           Nine Months Ended September 30,
                              2012                 2011
Capital Expenditures:
Atlantis                $       3,882,410    $       3,831,301
Black Hawk (a)                  4,071,945                    -
                        $       7,954,355    $       3,831,301


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(a) We acquired Riviera Black Hawk on April 26, 2012.

During the nine month period ended September 30, 2012 and 2011, capital expenditures at both the Atlantis and Riviera Black Hawk consisted primarily of the acquisition of gaming equipment to upgrade and replace existing equipment and other general upgrades to their respective facilities.

STATEMENT ON FORWARD-LOOKING INFORMATION

When used in this report and elsewhere by management from time to time, the words "believes", "anticipates" and "expects" and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and our business including our expansion, development activities, legal proceedings and employee matters. Certain important factors, including but not limited to, competition from other gaming operations, factors affecting our ability to compete, acquisitions of gaming properties, integration of our new property, leverage, construction risks, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, changes in taxation, and licensing and other regulatory risks, could cause our actual results to differ materially from those expressed in our forward-looking statements. Further information on potential factors which could affect our financial condition, results of operations and business including, without limitation, our expansion, development activities, legal proceedings and employee matters are included in our filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statement to reflect events or circumstances after the date hereof.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2012 and 2011

Atlantis Operations:

For the three months ended September 30, 2012, net revenue increased to $36.8 million from $36.2 million for the same period of 2011, approximately $656 thousand or 1.8% due to higher gaming and food and beverage revenues combined with higher promotional allowances due to an increase in the amount of complimentary food, beverage and other services provided to casino patrons ("Complimentaries").

The increase in casino revenues was primarily due to higher slot revenues. Casino operating expenses as a percentage of casino revenue decreased to 39.0% as compared to 39.6% in the prior year's third quarter primarily due to higher casino net revenue partially offset by higher Complimentaries.

Food and beverage revenues increased 2.0% during the quarter driven by a 1.4% increase in covers served combined with a 0.1% increase in the average revenue per cover. This increase in the average revenue per cover was the result of menu price increases in response to higher food commodity costs. These menu price increases contributed to an improvement in the food and beverage operating expenses as a percentage of food and beverage revenue from 47.2% in prior year's third quarter to 41.5% for the current year's third quarter.

Hotel revenue decreased due to lower average daily room rate ("ADR") of $78.02 for the third quarter of 2012 compared to $82.10 in the third quarter of 2011. This lower ADR was partially offset by higher hotel occupancy of 97.4% during the third quarter of 2012 compared to 94.9% during the third


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quarter of 2011. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $76.03 and $77.92 for the three month periods ended September 30, 2012 and 2011, respectively. Hotel operating expenses as a percent of hotel revenues decreased slightly to 23.9% for the third quarter of 2012 as compared to 24.5% for the third quarter of 2011 due to the miscellaneous expense reductions.

Promotional allowances as a percentage of gross revenues increased to 18.5% during the third quarter of 2012 from 16.9% during the third quarter of 2011. This increase was primarily the result of increased promotional and discount programs in response to the challenging economic environment and ongoing competitor promotional and discount programs.

Riviera Black Hawk Operations:

We acquired the Black Hawk on April 26, 2012, and therefore, no information is given for the three month period ended September 30, 2011. The amounts of net revenue and operating income of Riviera Black Hawk included in the Company's unaudited condensed consolidated statement of income, after elimination of intercompany transactions, for the three month period ended September 30, 2012 are as follows (numbers in thousands except per share amounts):

Net revenues             $ 11,032
Income from operations   $  2,701
Net income               $  1,675

Corporate and Other Expenses:

Depreciation and amortization expense increased to $4.7 million in the third quarter of 2012 as compared to $3.3 million for the third quarter of 2011 primarily due to depreciation and amortization expense related to the addition of Black Hawk.

Selling, general and administrative expense ("SG&A Expense") for the 2012 third quarter increased by $2.6 million, $2.2 million of which represents SG&A Expense from the Black Hawk operation for which the third quarter of the prior year reflects no expense. The primary drivers of the remaining $400 thousand of increased Atlantis SG&A Expense are: higher marketing expense of $740 thousand and higher use tax expense of $120 thousand partially offset by lower utilities of $245 thousand and bad debt expense of $250 thousand. The higher use tax expense is the result of a ruling from the Nevada Department of Taxation that complimentary meals are subject to use tax effective February 2012. Following Nevada casino industry practice, the Company did not recognize use tax on complimentary meals in the prior year.

During the third quarter of 2012, we incurred $455 thousand of non-recurring acquisition expense directly related to the acquisition of Black Hawk.

Because of borrowings required to complete the Black Hawk acquisition, the balance outstanding under our New Credit Facility increased from $16.0 million at September 30, 2011 to $82.1 million at September 30, 2012. As a result, interest expense increased from $160 thousand in the third quarter of 2011 to $480 thousand in the third quarter of 2012.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2012 and 2011

Atlantis Operations:

For the nine months ended September 30, 2012, net revenue increased slightly to $107.8 million from $106.6 million for the same period of the prior year, approximately $1.1 million or 1.1%. A 5.8%


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decrease in hotel revenue and higher promotional allowances were offset by increases in casino, food and beverage and other revenues.

Casino operating expenses amounted to 39.0% for both the nine month periods ended September 30, 2012 and 2011.

Food and beverage revenues increased 2.8% due to a 0.8% decrease in the number of covers served offset by 3.0% increase in the average revenue per cover. Food and beverage operating expenses amounted to 42.9% of food and beverage revenues during the first nine months of 2012, a decrease when compared to 46.2% for the same period in 2011. This decrease was primarily the result of higher menu prices in response to higher food commodity costs.

The decrease in hotel revenues was due to lower hotel occupancy and average daily room rate ("ADR"). Hotel occupancy decreased to 89.6% during the first nine months of 2012, as compared to 90.8% during the same period in 2011. We also experienced a decrease in the ADR from $76.38 during the first nine months of 2011 to $72.69 in the same period of 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $65.16 and $69.38 for the nine month periods ended September 30, 2012 and 2011, respectively. Hotel operating expenses as a percent of hotel revenues remained relatively flat at approximately 27.0% for the first nine months of 2012 and the same period of 2011.

Promotional allowances as a percentage of gross revenues increased to 18.1% for the first nine months of 2012 compared to 16.8% for the same period in 2011. This increase was primarily the result of increased promotional and discount programs that we initiated in response to the challenging economic environment and ongoing competitor promotional and discount programs.

Riviera Black Hawk Operations:

We acquired Riviera Black Hawk on April 26, 2012, and therefore no information is given for the nine month period ended September 30, 2011. The amounts of net revenue and operating income of Riviera Black Hawk included in the Company's unaudited condensed consolidated statement of income, after elimination of intercompany transactions, for the nine month period ended September 30, 2012 (reflecting only operations since April 26, 2012) are as follows (numbers in thousands except per share amounts):

Net revenues             $ 18,956
Income from operations   $  4,344
Net income               $  2,693

Corporate and Other Expenses:

Depreciation and amortization expense was $12.3 million in the first nine months of 2012, $2.2 million higher than the $10.1 million in the same period last year primarily due to depreciation and amortization expense related to the addition of Black Hawk.

SG&A Expense for the first nine months of 2012 increased by $6.5 million, $4.1 million of which represents SG&A Expense from the Black Hawk operation for the period from the date of the Black Hawk acquisition (April 26, 2012) through September 30, 2012. The primary drivers of the remaining $2.4 million of Atlantis operational increases are: higher marketing expense of $1.8 million, higher use tax expense of $560 thousand and higher bad debt expense of $160 thousand. The higher use tax expense is related to a recent ruling from the Nevada Department of Taxation that complimentary meals are subject to use tax effective February 2012. The Company did not recognize use tax on complimentary meals in the prior year.


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During the first nine months of 2012, we incurred $2.2 million of non-recurring acquisition expense, comprised primarily of professional fees, directly related to the acquisition of Black Hawk.

At September 30, 2012 we had $82.1 million of outstanding principal under our credit facility. Interest expense during the nine month period ended September 30, 2012 increased to $1.4 million as compared to $644 thousand during the same period of 2011. This increase was due to higher borrowings under our credit facility required to complete our acquisition of Black Hawk.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 2012, net cash provided by operating activities totaled $20.7 million, an increase of $3.1 million or 17.7% compared to the same period last year. This increase was primarily the result of higher net income, depreciation and amortization, accounts payable and federal income taxes all partially offset by higher accounts receivable, lower share based compensation, lower provision for bad debts, lower loss on disposal of assets, lower deferred income taxes, lower inventories, and lower prepaid expenses during the first nine months of 2012 as compared to the first nine months of the prior year.

Net cash used in investing activities totaled $74.7 million and $7.6 million in the nine months ended September 30, 2012 and 2011, respectively. The increase was primarily due to net cash paid to acquire Riviera Black Hawk and cash spent to acquire property and equipment.

Net cash of $57.4 million was provided by financing activities during the nine months ended September 30, 2012 due primarily to borrowings made to complete the acquisition of Black Hawk, Inc. For the nine months ended September 30, 2011, net cash used by financing activities was $12.8 million. During the first nine months of 2012 and 2011, we paid $17.0 million and $16.6 million, respectively, of the outstanding balance under our credit facility described below.

On November 15, 2011, the Company amended and restated its $60 million credit facility with a new facility (the "New Credit Facility"). The New Credit Facility was utilized by the Company for financing the acquisition of Riviera Black Hawk, Inc. and may be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements. The maximum available borrowings under the New Credit Facility are $100 million.

The maturity date of the New Credit Facility is November 15, 2016. Borrowings are secured by liens on substantially all of the real and personal property of Monarch, Golden Road, and Monarch Growth.

The New Credit Facility contains customary covenants 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 our ability to merge, transfer ownership of Monarch, incur additional indebtedness, encumber assets and make certain investments. The New Credit Facility contains covenants requiring that the Company maintain certain financial ratios and achieves a minimum level of Earnings-Before-Interest-Taxes-Depreciation and Amortization and other non-cash charges (Adjusted EBITDA) on a trailing four-quarter basis. It also contains provisions that restrict cash transfers between Monarch and its affiliates and contains provisions requiring the achievement of certain financial ratios before the Company can repurchase common stock or pay dividends. Management does not consider the covenants to restrict normal functioning of day-to-day operations.

As of September 30, 2012, the Company was required to maintain a leverage ratio, defined as consolidated debt divided by Adjusted EBITDA, of no more than 3.25:1 and a fixed charge coverage


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ratio (Adjusted EBITDA divided by fixed charges, as defined) of at least 1.15:1. As of September 30, 2012, the Company's leverage ratio was 2.03:1, and the fixed charge coverage ratio was 19.1:1.

The maximum principal available under the New Credit Facility is reduced by 1.5% per quarter beginning in the third quarter of 2013. The Company may permanently reduce the maximum principal available at any time so long as the amount of such reduction is at least $500 thousand and a multiple of $50 thousand. Maturities of the Company's borrowings for each of the three years and thereafter as of September 30, 2012 are as follows (amounts in thousands):

Year          Maturities
2013         $          -
2014                    -
2015                    -
Thereafter         82,100
             $     82,100

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 may be reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

The Company paid various one-time fees and other loan costs which totaled $1.6 million upon the closing of the New Credit Facility that are being amortized over the term of the New Credit Facility using the straight-line method which approximates the effective interest method.

At September 30, 2012, the Company had $82.1 million outstanding under the New Credit Facility. At that time its leverage ratio was such that pricing for borrowings under the New Facility was LIBOR plus 2.250%. At September 30, 2012 the one-month LIBOR interest rate was 0.21%. The carrying value of the debt outstanding under the New Facility approximates fair value because the interest fluctuates with the lender's prime rate or other market rates of interest.

We believe that our existing cash balances, cash flow from operations and borrowings available under the New Credit Facility will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure plans over the next twelve months; 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. See item 1A. "Risk Factors".

OFF BALANCE SHEET ARRANGEMENTS

A driveway was completed and opened on September 30, 2004, that is being shared between the Atlantis and a shopping center (the "Shopping Center") directly adjacent to the Atlantis. The Shopping Center is controlled by an entity whose owners include our controlling stockholders. As part of this project, in January 2004, we leased a 37,368 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at an annual rent of $300,000, subject to increase every year beginning in the 61st month based on the Consumer Price Index. We also use part of the common area of the Shopping Center and pay our proportional share of the common area expense of the Shopping Center. We have the option to renew the lease for three individual five-year terms, and at the end of the extension periods, we have the option to purchase the leased section of the Shopping Center at a price to be determined based on an MAI Appraisal. The leased space is being used by us for pedestrian and vehicle access to the Atlantis, and we may use a portion of the parking spaces at the Shopping Center. The total cost of the project was $2.0 million; we were responsible for two thirds of the total cost, or $1.35 million. The cost of the new driveway is being depreciated over the initial 15-year lease term; some components


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of the new driveway are being depreciated over a shorter period of time. We paid approximately $255,600 in lease payments for the leased driveway space at the Shopping Center during the nine month period ended September 30, 2012.

CRITICAL ACCOUNTING POLICIES

A description of our critical accounting policies and estimates can be found in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"). For a more extensive discussion of our accounting policies, see Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements in our 2011 Form 10-K filed on March 14, 2012.

OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS

The economies in northern Nevada, the Denver metropolitan area, and our feeder markets, like many other areas around the country, are experiencing the effects of several negative macroeconomic trends, including a broad economic recession, higher home mortgage defaults and declining residential real estate values. These negative trends could adversely impact discretionary incomes of our target customers, which, in turn has and is expected to continue to adversely impact our business. We believe that as recessionary pressures increase or continue for an extended period of time, target customers may further curtail discretionary spending for leisure activities and businesses may reduce spending for conventions and meetings, both of which would adversely impact our business. Management continues to monitor these trends and intends, as appropriate, to adopt operating strategies to attempt to mitigate the effects of such adverse conditions. We can make no assurances that such strategies will be effective.

The expansion of Native American casinos in California has had an impact on casino revenues in Nevada in general, and many analysts have continued to predict the impact will be more significant on the Reno-Lake Tahoe market. If other Reno-area casinos continue to suffer business losses due to increased pressure from California Native American casinos, such casinos may intensify their marketing efforts to northern Nevada residents as well, greatly increasing competitive activities for our local customers.

Higher fuel costs may deter California, Denver area, and other drive-in customers from coming to the Atlantis or the Riviera Black Hawk Casino.

We also believe that unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis' key feeder market areas, such as San Francisco or Sacramento, or in other areas near Denver, Colorado, the Riviera Black Hawk key feeder markets, could have a material adverse effect on our business.


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COMMITMENTS AND CONTINGENCIES



Our contractual cash obligations as of September 30, 2012 and the next five
years and thereafter are as follows:



                                                    Payments Due by Period (d)
. . .
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