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MCRI > SEC Filings for MCRI > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for MONARCH CASINO & RESORT INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Monarch Casino & Resort, Inc., through its direct and indirect wholly-owned subsidiaries, Golden Road Motor Inn, Inc. ("Golden Road"), Monarch Growth Inc. ("Monarch Growth"), Monarch Black Hawk, Inc. ("Monarch Black Hawk"), High Desert Sunshine, Inc. ("High Desert") and Golden North, Inc. ("Golden North"), owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the "Atlantis"); the Riviera Black Hawk Casino in Black Hawk, Colorado ("Riviera Black Hawk"); and real estate proximate to the Atlantis and Riviera Black Hawk.

Monarch's wholly owned subsidiary Monarch Interactive, Inc. ("Monarch Interactive") received approval from the Nevada Gaming Commission on August 23, 2012, which approval was extended on February 26, 2013 for six months pending commencement of operations, 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 February 26, 2013 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. 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 does not yet 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.

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 year ended December 31, 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 northern Nevada that began in the fourth quarter of 2007 continued to be felt in 2012. Aggressive marketing programs by our competitors 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 in Black Hawk, Colorado which is located approximately 40 miles from Denver, Colorado. Our initial focus with the Riviera Black Hawk is to maximize casino and food and beverage revenues. There is currently no hotel on the property. We have evaluated all aspects of operations and have begun to implement certain operational changes which we believe will enhance the guest experience and reduce costs. We have also begun to develop a master plan of future improvements to the Riviera Black Hawk, which we expect to include, among other things, a property-wide renovation, including renovations of all casino, restaurant, public areas, and, subject to our final evaluation, construction of a new multi-story parking facility, a hotel and related property amenities.

Results of Operations

Comparison of Operating Results for the Twelve Months Ended December 31, 2012 and 2011

Atlantis Operations:

For the year ended December 31, 2012, net revenue increased slightly to $140.9 million from $140.6 million for the same period of 2011, approximately $296 thousand or 0.2% due to higher casino, food and beverage and other revenues partially offset by lower hotel revenues and 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 increased slightly to 39.6% as compared to 39.3% in the prior year primarily due to higher Complimentaries partially offset by higher casino net revenue.

Food and beverage revenues increased 1.5% during the year driven by a 1.3% decrease in covers served combined with a 3.0% 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 46.3% in prior year to 43.4% for the current year.

Hotel revenue decreased 5.8% due to lower average daily room rate ("ADR") of $71.13 in 2012 compared to $74.22 in 2011 and lower hotel occupancy of 87.2% during 2012 compared to 89.1% during 2011. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $66.78 and $71.05 for the years ended December 31, 2012 and 2011, respectively. Hotel operating expenses as a percent of hotel revenues increased slightly to 27.3% in 2012 as compared to 27.2% for the comparable prior year period due to lower revenues partially offset by lower miscellaneous operating expenses.

Promotional allowances as a percentage of gross revenues increased to 18.3% during 2012 from 17.2% during 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 Riviera Black Hawk on April 26, 2012, and therefore, no information is given for the year ended December 30, 2011. The amounts of net revenue and operating income of Riviera Black Hawk included in the Company's consolidated statement of income, after elimination of intercompany transactions, for the year ended December 31, 2012 are as follows (in thousands):

Net revenues             $ 29,429
Income from operations   $  6,350
Net income               $  3,953

Corporate and Other Expenses:

Depreciation and amortization expense increased to $16.7 million in the year ended December 31, 2012 as compared to $13.4 million for the year ended December 31, 2011 primarily due to depreciation and amortization expense related to the addition of Riviera Black Hawk.

Selling, general and administrative expense ("SG&A Expense") for 2012 increased by $9.1 million over the prior year, $6.6 million of which represents SG&A Expense from the Black Hawk operation for which the prior year reflects no expense. The primary drivers of the remaining $2.5 million of increased Atlantis and Monarch Corporate SG&A Expense are: higher marketing expense of $1.7 million and higher salaries and benefits of $655 thousand, higher use tax expense of $670 thousand partially offset by lower license fees of $200 thousand, lower repairs and maintenance expense of $145 thousand, lower bad debt expense of $110 thousand and lower miscellaneous expenses of $100 thousand. The higher use tax expense is primarily 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 2012 and 2011, we incurred $2.2 million and $974 thousand, respectively, of non-recurring acquisition expense directly related to the acquisition of Riviera Black Hawk.

Because of borrowings required to complete the Riviera Black Hawk acquisition, the balance outstanding under our New Credit Facility increased from $24.7 million at December 31, 2011 to $81.1 million at December 31, 2012. As a result, interest expense increased to $2.0 million in 2012 from $914 thousand in 2011 (see "THE CREDIT FACILITY" below).

Comparison of Operating Results for the Periods Ended December 31, 2011 and 2010

For the year ended December 31, 2011, we earned net income of $5.7 million, or $0.35 per diluted share, on net revenues of $140.6 million, compared to net income of $8.2 million, or $0.51 per diluted share, on net revenues of $142.0 million for the year ended December 31, 2010. Income from operations totaled $9.8 million for 2011, a 30.4% decrease when compared to $14.0 million for 2010.

Casino revenues totaled $97.4 million in 2011, a decrease of 2.5% from the $99.8 million reported in 2010, driven primarily by a decrease in hold in table games which resulted in lower table games revenue. Casino operating expenses were 39.3% of casino revenues in 2011 compared to 38.9% in 2010. The increase was primarily due to the lower casino revenue combined with the cost of increased complimentary food, beverages and other services provided to casino patrons.


Food and beverage revenues increased 4.8% to $42.9 million in 2011 from $41.0 million in 2010, due primarily to a 9.3% increase in average revenue per cover, due to menu price increases, partially offset by a 1.3% decrease in the number of covers served. Food and beverage operating expenses as a percentage of food and beverage revenue increased slightly to 46.3% in 2011 from 46.1% in 2010 primarily due to higher food and other commodity prices.

Hotel revenues decreased to $21.4 million in 2011 from $21.8 million in 2010. There were fewer available rooms in 2011 due to the demolition of the stand-alone motor lodge in the fourth quarter of 2010. The Atlantis' ADR was $74.22 in 2011 compared to $69.06 in 2010. The average occupancy rate at the Atlantis was 89.1% compared to 85.4% in 2010. The higher ADR and occupancy rate was due to the demolition of the stand-alone motor lodge which left only premium quality hotel tower rooms remaining at the property. Hotel operating expenses remained relatively unchanged at 27.2% of hotel revenues in 2011, compared to 27.3% in 2010. In addition to the ADR, we charged guests a $10 per day resort fee in both years. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $71.05 and $58.98 for 2011 and 2010, respectively.

Promotional allowances increased to $29.1 million in 2011 compared to $28.4 million in 2010. As a percentage of gross revenue, the amount in 2011 increased to 17.2% as compared to 16.7% for 2010. The increase is attributable to higher promotional efforts to maintain existing, and generate additional, revenues.

Other revenues in 2011 increased to $8.0 million, or 1.5%, compared to 2010 primarily due to higher revenues from our spa and salon.

Selling, general and administrative ("SG&A") expenses decreased to $46.1 million in 2011 compared to $47.9 million in 2010 due primarily to lower utilities expense of $695 thousand, lower bad debt expense of $635 thousand, lower property tax of $259 thousand, lower rental and small equipment expense of $237 thousand. As a percentage of net revenue, SG&A decreased to 32.8% in 2011 as compared to 33.7% in 2010 due to the higher net revenue combined with lower SG&A expense.

During 2011, we incurred $974 thousand of non-recurring acquisition expense directly related to the acquisition of Black Hawk.

In the third quarter of 2011, the Company incurred a $3.5 million one-time, non-cash charge related to the demolition of a free standing building on a parcel it owns near the Atlantis.

Depreciation and amortization expense was $13.4 million in 2011, an increase of 0.7% compared to $13.3 million in 2010 due to continued reinvestment in the property during the year.

Interest expense decreased to $0.9 million in 2011 from $1.5 million in 2010 due to decreased borrowings under our credit facility combined with lower interest rates (see "THE CREDIT FACILITY" below).


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
years ended December 31, 2012 and 2011 were as follows:



                           Twelve Months Ended December 31,
                               2012                 2011
Capital Expenditures:
Atlantis                $        3,530,254    $       5,231,414
Black Hawk (a)                   6,798,661                    -
                        $       10,328,915    $       5,231,414



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

During the twelve months ended December 31, 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.

In addition to the above listed capital expenditures for Atlantis and Riviera Black Hawk, during 2011, we acquired a 1.5 acre land parcel in Black Hawk, Colorado for $8.4 million and paid a $3.8 million deposit related to the acquisition of the Riviera Black Hawk. The land parcel is contiguous to the Riviera Black Hawk.

Future cash needed to finance ongoing capital expenditures and the redesign and upgrade of the Black Hawk property, is expected to be available from operating cash flow, the New Credit Facility (see "THE CREDIT FACILITY" below) and, if necessary, additional borrowings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Certain of our policies, including the estimated useful lives assigned to our assets, the determination of the allowance for doubtful accounts, self-insurance reserves, the calculation of income tax liabilities and the calculation of share-based compensation, 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, observation 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 its subsidiaries. Intercompany balances and transactions are eliminated.

Allowance for Doubtful Accounts

The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, the Company also has receivables due from hotel guests which are primarily secured with a credit card at the time a customer checks in. An allowance for doubtful accounts is set up for all Company receivables based upon the Company's historical collection and write-off experience, unless situations warrant a specific identification of a necessary reserve related to certain receivables. The Company charges off its uncollectible receivables once all efforts have been made to collect such receivables. The book value of receivables approximates fair value due to the short-term nature of the receivables.


Self-insurance Reserves

We are currently self-insured up to certain stop loss amounts for Atlantis workers' compensation and certain medical benefit costs provided to all of our employees. As required by the state of Colorado, we are fully-insured for Black Hawk workers' compensation costs. The Company reviews self-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reports prepared by the third party plan administrator for any significant unpaid claims. The reserve is an amount estimated to pay both reported and unreported claims as of the balance sheet date. We believe changes in medical costs, trends in claims of our employee base, accident frequency and severity and other factors could materially affect the estimate for this reserve. Unforeseen developments in existing claims, or the possibility that our estimate of unreported claims differs materially from the actual amount of unreported claims, could result in the over or under estimation of our self-insurance reserve.

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 borrowing cost. Interest capitalization is ceased when the project is substantially complete. The Company did not capitalize interest during the years ended December 31, 2012, 2011 and 2010.

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. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of player's wagers that are contributed to the progressive jackpot award and 2) as jackpots are won for the portion of the progressive jackpot award contributed the Company.

Promotional Allowances

Our frequent player program allows members, through the frequency of their play at the casino, to earn and accumulate points which may be redeemed for a variety of goods and services ("Complimentaries"). Points may be applied toward hotel room stays, food and beverage consumption at the food outlets, gift shop items as well as goods and services at the spa and beauty salon and for cash in our Black Hawk property. Points earned may also be applied toward off-property events such as concerts, shows and sporting events.

We recognize Complimentaries expense at the time points are earned, which occurs commensurate with casino patron play. The amount of expense recognized is based on the estimated cost of the Complimentaries expected to be redeemed.

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 cost of the products and services earned is reported as casino operating expense.


Income Taxes

Income taxes are recorded in accordance with the liability method pursuant to authoritative guidance. 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.

Our income tax returns are subject to examination by tax authorities. We assess potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes. Under the accounting guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50.0% likelihood of being realized upon ultimate settlement. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure. The liability for unrecognized tax benefits is included in current and noncurrent tax liabilities, based on when expected to be recognized, within the consolidated balance sheets at December 31, 2012 and 2011.

Stock-based Compensation

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

The Black-Scholes valuation model requires the input of highly subjective assumptions which include the expected term of options granted, risk-free interest rates, expected volatility, and expected rates of dividends. We estimate an expected term for each stock option grant based on the weighted-average time between grant date and exercise date and the risk-free interest rate assumption was based on U.S. Treasury rates appropriate for the expected term. We use historical data and projections to estimate expected volatility and expected employee behaviors related to option exercises and forfeitures.

Changes in the assumptions used can materially affect the estimate of the stock options' fair value. In our judgment, the most volatile input for our Company has been the expected volatility assumption which has fluctuated significantly from 42.9% to 54.1 % and then again to 34.6% for the years ended December 31, 2010, 2011 and 2012, respectively.


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.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC Topic 350"). The Company tests its goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each year, or whenever events or circumstances make it more likely than not that impairment may have occurred. Impairment testing for goodwill is performed at the reporting unit level, and each of the Company's casino properties is considered to be a reporting unit. The Company's annual goodwill impairment testing utilizes a two-step process. In the first step, the estimated fair value of each reporting unit is compared with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its estimated fair value, then the goodwill of the reporting unit is considered to be impaired, and impairment is measured in the second step of the process. In the second step, the Company estimates the implied fair value of the reporting unit's goodwill by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit, as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. ASU No. 2011-08, Intangibles- Goodwill and Other (Topic 250): Testing Goodwill for Impairment (ASU 2011-08) gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test as appropriate.

Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations. As of December 31, 2012, we recorded goodwill totaling $25.1 million related to the purchase of Riviera Black Hawk, Inc.

Business Combinations

The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination) in a manner that is generally similar to the previous purchase method of accounting.

Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree, generally at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to acquisition expense as they are incurred.

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