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MCRI > SEC Filings for MCRI > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC

Form 10-Q for MONARCH CASINO & RESORT INC


9-Aug-2013

Quarterly Report


ITEM 2. 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"), and Golden East, Inc. ("Golden East") 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 ("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 (and is subject to potential further extension on August 22, 2013) 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.

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.

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

Atlantis: As in many other areas around the country, the northern Nevada market has been impacted by the economic decline which began in the fourth quarter of 2007. Since that time, aggressive marketing programs by our competitors have also posed challenges to us and statistics released by the Nevada Gaming Control Board demonstrate that the northern Nevada gaming market has shrunk in the aggregate. While recent statistics released by the Nevada Gaming Control Board have shown three months of slight growth in the Reno market, we anticipate that the ongoing macroeconomic climate nationally and in the northern Nevada market, combined with aggressive marketing programs of our competitors, will continue to apply pressure on Atlantis revenue. Despite these negative factors, revenue in all categories increased compared to the same quarter of 2012.

Riviera Black Hawk: Since the acquisition of Riviera Black Hawk, Inc. in April 2012, our focus has been 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 implemented certain operational changes which we believe will enhance the guest experience while also reducing costs. We are in the process of completely redesigning and upgrading the existing Black Hawk facility and received zoning approval on April 10, 2013 for our expansion plans, subject to certain conditions, from the Black Hawk City Council. The approved master plan nearly doubles the existing casino space and converts the facility into a full-scale, high end, resort through the addition of a 335 foot hotel tower with 507 guest rooms and suites, a resort quality spa and pool facility, four restaurants, additional bars, associated support facilities and a new ten story parking structure that, together with existing parking, provides 1,551 parking spaces. Once the detailed design and construction plans are completed, we intend to finalize the cost estimate and construction timeline for the expansion project and secure necessary financing. We remain on track to announce the cost estimate and construction timeline in late 2013.

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 totaled approximately $5.3 million and $5.1 million for the six month periods ended June 30, 2013 and 2012. During the six month period ended June 30, 2013, our capital expenditures related primarily to the redesign and upgrade of the Black Hawk facility as well as acquisition of gaming equipment to upgrade and replace existing equipment. The prior year capital

expenditures related primarily to purchases of gaming equipment and continued renovation and other general upgrades to both facilities.


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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 once acquired, leverage, construction risks, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, 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 June 30, 2013 and 2012

For the three months ended June 30, 2013, our net income totaled $6.1 million, or $0.37 per diluted share, an increase in net income of $4.3 million, or $0.26 per diluted share, reflecting an approximately 240% increase in both net income and diluted earnings per share. Net revenues totaled $49.7 million in the current quarter, an increase of $7.2 million over the 2012 second quarter. Income from operations for the three months ended June 30, 2013 totaled $10.2 million compared to $3.4 million for the same period in 2012.

Atlantis Operations:

Casino revenues increased over the comparable prior year quarter primarily due to growth in slot revenues partially offset by a decline in table games net win. Casino operating expenses as a percentage of casino revenue improved to 40.0% from 42.3% in the prior year's second quarter, primarily due to lower complimentaries.

Food and beverage revenues improved 2.7% during the quarter driven by a 3.9% increase in covers served offset by a 1.1% decrease in the average revenue per cover. Food and beverage operating expenses as a percentage of food and beverage revenue totaled 42.5% compared to 41.2% in the prior year second quarter. This increase was primarily the result of higher commodity costs.

Hotel revenue increased due to improved hotel occupancy of 93.7% during the second quarter of 2013 compared to 90.0% during the second quarter of 2012. We also experienced a 13.9% improvement in the average daily room rate ("ADR") to $83.91 in the second quarter of 2013 from $73.69 in the second quarter of 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $84.91 and $70.73 for the three month periods ended June 30, 2013 and 2012. Hotel operating expenses as a percent of hotel revenues improved to 26.7% for the second quarter of 2013 as compared to 28.7% for the second quarter of 2012 due to growth in hotel revenue.

Promotional allowances as a percentage of gross revenues totaled 17.1% during the second quarter of 2013 from 18.6% during the second quarter of 2012. This decrease was primarily the result of fewer promotional and discount programs than in the prior year.


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Black Hawk Operations:

The amounts of net revenue and operating income of Black Hawk included in the Company's unaudited condensed consolidated statement of income, after elimination of intercompany transactions, for the three month periods ended June 30, 2013 and June 30, 2012 (reflecting only operations since April 26, 2012) are as follows:

Amounts in millions

                            Three Months Ended June 30,
                              2013               2012
Net revenues             $          12.4     $         8.0
Income from operations   $           3.8     $         1.6
Net income               $           2.4     $         1.0

Corporate and Other Expenses:

Depreciation and amortization expense totaled $4.4 million in the second quarter of 2013 and $4.3 million in the second quarter of 2012. Increased depreciation is due to improvements made in both properties as well as a full quarter of Black Hawk depreciation were offset by lower depreciation of gaming equipment at Atlantis.

Selling, general and administrative expense ("SG&A Expense") was consistent at $12.6 million between the second quarters of 2013 and 2012. The Company recognized a non-recurring benefit of $0.6 million during the 2013 second quarter from the reversal of accrued sales tax expense related to complimentary and employee meals in response to a ruling by the Nevada Tax Commission (affecting the entire Nevada hotel-casino industry) that complimentary and employee meals are no longer subject to sales tax. An accrual for this same sales tax expense was made in the prior year quarter totaling $0.2 million. Offsetting this benefit were increased salaries and the addition of Black Hawk.

During the second quarter of 2012, we incurred $1.6 million of non-recurring acquisition expense, comprised primarily of professional fees, directly related to the acquisition of Black Hawk.

Interest expense decreased to $0.5 million compared to $0.6 million in the second quarter of 2012 due to lower average debt balances.

Comparison of Consolidated Operating Results for the Six-Month Periods Ended June 30, 2013 and 2012

For the six months ended June 30, 2013, our net income totaled $10.4 million, or $0.63 per diluted share, an increase in net income of $6.9 million, or $0.42 per diluted share, reflecting a 202.3% increase in net income and approximately 200% increase in diluted earnings per share. Net revenues totaled $95.3 million in the current year to date period, an increase of $19.9 million over the six month period ended June 30, 2012. Income from operations for the six months ended June 30, 2013 totaled $17.4 million compared to $6.2 million for the same period in 2012.

Atlantis Operations:

Casino revenues increased 1.8% in the six months ended June 30, 2013 compared to the same period of 2012. Casino operating expenses for the current six month period decreased 2.8% from the comparable prior year period. Casino operating expenses amounted to 40.7 % of casino revenues for the six months ended June 30, 2013 compared to 42.5% of casino revenues for the six months ended June 30, 2012. The improvement was driven by lower complimentaries as a result of strategic use of promotional programs.


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Food and beverage revenues increased 2.9% due to a 3.3% improvement in the number of covers served offset by a slight decrease of 0.5% in the average revenue per cover. Food and beverage operating expenses amounted to 43.0% of food and beverage revenues during the 2013 six month period compared to 42.1% for the same period in 2012. This increase was primarily the result of higher commodity costs.

Hotel revenues grew 20.7% during the six months ended June 30, 2013 due to improved hotel occupancy and average daily room rate ("ADR"). Hotel occupancy grew to 88.9% during the first six months of 2013, compared to 84.6% during the same period in 2012. ADR grew 15.0% to $81.14 in the current six month period from $70.54 for the first six months of 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available grew 21.4% to $78.29 for the six month period ended June 30, 2013 from $64.49 in the comparable 2012 period. Hotel operating expenses as a percent of hotel revenues improved to 26.4% for the first six months of 2013 from 29.1% for the same period of 2012 due primarily to the higher hotel revenue.

Promotional allowances as a percentage of gross revenues decreased to 17.5% of gross revenues for the first six months of 2013 compared to 18.7% for the same period in 2012. This decrease was the result of targeted promotional programs.

Black Hawk Operations:

The amounts of net revenue and operating income of Black Hawk included in the Company's unaudited condensed consolidated statement of income, after elimination of intercompany transactions, for the six month periods ended June 30, 2013 and 2012 (reflecting only operations since April 26, 2012) are as follows:

Amounts in millions

                            Six Months Ended June 30,
                              2013              2012
Net revenues             $         24.0     $        8.0
Income from operations   $          6.6     $        1.6
Net income               $          4.1     $        1.0

Corporate and Other Expenses:

Depreciation and amortization expense was $9.0 million in the first six months of 2013, $1.4 million higher than the $7.6 million in the same period last year primarily due to depreciation and amortization expense related to the addition of Black Hawk for the entire six months of 2013 compared to 2 months for 2012.

SG&A Expense for the first six months of 2013 increased by $2.3 million, $3.1 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 June 30, 2012. The primary driver offsetting this increase was the reversal of $0.6 million accrued sales tax expense related to complimentary and employee meals as a result of the ruling by the Nevada Tax Commission discussed above.

During the first six months of 2012, we incurred $1.7 million of non-recurring acquisition expense, comprised primarily of professional fees, directly related to the acquisition of Black Hawk. We did not incur any such expenses during 2013.


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Interest expense during the six month period ended June 30, 2013 totaled $1.1 million compared to $0.9 million during the same period of 2012 due to having higher outstanding balances during the full six month period in the current year compared to two months in the prior six month period.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 2013, net cash provided by operating activities totaled $19.0 million, an increase of $7.7 million or 68.5% compared to the same period last year. Higher net income was the primary driver of this increase as well as lower receivables. Offsetting these increases were lower accrued expenses.

Net cash used in investing activities totaled $5.3 million and $71.8 million in the six months ended June 30, 2013 and 2012, respectively. For the current and prior year periods, cash was used to acquire property and equipment. The prior year use of cash included cash paid to acquire Black Hawk.

The primary use of cash for financing activities during the six months ended June 30, 2013 was payments of long-term debt offset by proceeds from stock option exercises. The prior year period included borrowings made to complete the acquisition of Black Hawk offset by principal payments on long-term debt.

Under the Company's $100.0 million New Credit Facility, $64.8 million was outstanding as of June 30, 2013. The proceeds from the New Credit Facility were utilized to finance the acquisition of Black Hawk and may also be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements. The Company had $35.2 million available on the New Credit Facility as of June 30, 2013.

The maximum principal available under the New Credit Facility is reduced by $1.5 million per quarter beginning July 1, 2013. The Company may permanently reduce the maximum principal available at any time so long as the amount of such reduction is at least $0.5 million and a multiple of $50,000. Maturities of the Company's borrowings for each of the next three years and thereafter as of June 30, 2013 are as follows:

Amounts in millions

Year         Maturities
2013         $         -
2014                   -
2015                   -
Thereafter          64.8
             $      64.8

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.

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 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. Management does not consider the covenants to restrict normal functioning of day-to-day operations.


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We are in the process of completely redesigning and upgrading the existing Black Hawk facility and received zoning approval on April 10, 2013 for our expansion plans, subject to certain conditions, from the Black Hawk City Council. The approved master plan nearly doubles the existing casino space and converts the facility into a full-scale, high-end, resort through the addition of a 335 foot hotel tower with 507 guest rooms and suites, a resort quality spa and pool facility, four restaurants, additional bars, associated support facilities and a new ten story parking structure that, together with existing parking, provides 1,551 parking spaces. Once the detailed design and construction plans are completed, we intend to finalize the cost estimate and construction timeline for the expansion project and secure necessary financing. We remain on track to announce the cost estimate and construction timeline in late 2013.

OFF BALANCE SHEET ARRANGEMENTS

The Atlantis shares a driveway access with the Shopping Center adjacent to the Atlantis which is controlled by an entity whose owners include our controlling stockholders. We also leased an approximately 37,000 square-foot section of the Shopping Center for a minimum lease term of 15 years at an annual rent of $340,000, subject to increase upon renewal after each five year period 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 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 of which $1.35 million was paid by the Company. The cost of the driveway is being depreciated over the initial 15-year lease term; some components of the driveway are being depreciated over a shorter period of time. We paid approximately $170,400 in lease payments plus common area charges for the leased driveway space during the six months ended June 30, 2013.

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, 2012 ("2012 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 2012 Form 10-K filed on March 15, 2013.

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, have been experiencing the effects of several negative macroeconomic trends, including a broad economic recession, higher home mortgage defaults and declining residential real estate values. Some weak recovery appears underway, but it is not clear whether the recovery is permanent or temporary. The negative macroeconomic trends and conditions have adversely impacted 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.


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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 Black Hawk key feeder markets, could have a material adverse effect on our business.

COMMITMENTS AND CONTINGENCIES

Our contractual cash obligations as of June 30, 2013 and the next five years and thereafter are as follows:

Amounts in millions

                                                      Payments Due by Period (4)
                                              less than 1      1 to 3       3 to 5      greater than
                                  Total          year           years        years         5 years
Operating Leases (1)             $    2.4    $         0.4    $     0.7    $     0.7    $         0.6
Borrowings Under Credit
Facility (2)                         64.8                -            -         64.8                -
Purchase Obligations (3)              8.4              8.4            -            -                -
Total Contractual Cash
Obligations                      $   75.6    $         8.8    $     0.7    $    65.5    $         0.6



(1) Operating leases include leased storage, driveway usage and common area expenses for the Shopping Center adjacent to the Atlantis.

(2) The amount represents outstanding draws against the New Credit Facility as of June 30, 2013.

(3) Purchase obligations represent approximately $3.4 million of commitments related to capital projects and approximately $5.0 million of materials and supplies used in the normal operation of our business. Of the total purchase order and construction commitments, approximately $5.0 million are cancelable by us upon providing a 30-day notice.

(4) Because interest payments under our New Credit Facility are subject to factors that in our judgment vary materially, the amount of future interest payments is not presently determinable. These factors include: 1) future short-term interest rates; 2) our future leverage ratio which varies with EBITDA and our borrowing levels; and 3) the speed with which we deploy capital and other spending which in turn impacts the level of future borrowings. The interest rate under our Credit Facility is LIBOR, or a base rate (as defined in the Credit Facility agreement), plus an interest rate margin ranging from 1.25% to 2.50% depending on our leverage ratio. The interest rate is adjusted quarterly based on our leverage ratio which is calculated using operating results over the previous four quarters and borrowings at the end of the most recent quarter. Based on our leverage ratio, at June 30, 2013 pricing was LIBOR plus 2.0% and will be adjusted in subsequent quarters in accordance with our leverage ratio. At June 30, 2013, the one-month LIBOR rate was 0.19%.


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SALES AND USE TAX ON COMPLIMENTARY MEALS

In March 2008, the Nevada Supreme Court issued a decision in Sparks Nugget, Inc. vs. The State of Nevada Department of Taxation (the "Department"), holding that food purchased for subsequent use in the provision of complimentary and/or employee meals was exempt from use tax. As a result of this decision, refund claims were filed for use taxes paid over the period April 1997 through March 2000 and the period February 2005 through June 2008, on food purchased for subsequent use in complimentary

and employee meals at our Nevada casino property. We requested Refunds totaling . . .

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