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MCRI > SEC Filings for MCRI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for MONARCH CASINO & RESORT INC


8-Nov-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 Monarch Casino Black Hawk (formerly named Riviera Black Hawk) in Black Hawk, Colorado ("Black Hawk"); and real estate proximate to the Atlantis and Monarch Casino 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 and August 22, 2013, each for an additional six month period, 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 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 growth in the Reno/Sparks market for the 2013 eight months period (the latest statistic available), 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, Atlantis revenue in all categories increased compared to the same quarter of 2012.

Monarch Black Hawk: Since the acquisition of Monarch 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 recently opened our new buffet,


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which was an important step in our ongoing process of redesigning and upgrading the existing Monarch Black Hawk facility. On April 10, 2013, we received zoning approval for our expansion plans, subject to certain conditions, from the Black Hawk City Council. The approved master plan, once completed, would nearly double the existing casino space and would convert the facility into a full-scale, high end, resort through the addition of a 22-story hotel tower with 507 guest rooms and suites, an upscale spa and pool facility, four restaurants, additional bars, associated support facilities and a new ten story parking structure that, together with existing parking, would provide 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.

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 $8.2 million and $8.0 million for the nine month periods ended September 30, 2013 and 2012. During the nine month period ended September 30, 2013, our capital expenditures related primarily to the redesign and upgrade of the Monarch 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.

STATEMENT ON FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which are subject to change, including, but not limited to, comments relating to (i) future operating performance; (ii) economic and market conditions; (iii) plans, objectives and expectations regarding Monarch Black Hawk; (iv) integration of Monarch Black Hawk; and (v) plans, costs, financing, construction, completion and opening timelines of redesigned and expanded facilities at Black Hawk. Actual results and future events and conditions may differ materially from those described in any forward-looking statements. With respect to the Monarch Black Hawk redesign and expansion projects, important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation (i) construction factors, including delays, increased costs of labor and materials, availability of labor and materials, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues; (ii) access to available and reasonable financing on a timely basis, including the ability of the Company to restructure its credit facility on acceptable terms; and (iii) the effects of local and national economic, credit and capital market conditions on the economy, in general, and on the gaming industry, in particular.

Additional information concerning potential factors that could affect all forward looking statements, including the Company's financial results is included in the Company's Securities and Exchange Commission filings, which are available on the Company's website at www.monarchcasino.com.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2013 and 2012

For the three months ended September 30, 2013, our net income totaled $5.5 million, or $0.32 per diluted share, an increase in net income of $1.4 million, or $0.07 per diluted share, reflecting an


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approximately 33.4% increase in net income and 28% increase in diluted earnings per share. Net revenues totaled $49.0 million for the three months ended September 30, 2013, an increase of $3.0 million over the same period in 2012. Income from operations for the three months ended September 30, 2013 totaled $8.9 million compared to $6.9 million for the same period in 2012.

Atlantis Operations:

For the three months ended September 30, 2013, net revenue increased to $37.1 million from $34.9 million for the same period of 2012, approximately $2.2 million or 6.3%, which increase was due to higher gaming, food and beverage and hotel revenues combined with slightly lower promotional allowances ("Complimentaries").

The increase in casino revenues was primarily due to higher slot and table games revenues. Casino operating expenses as a percentage of casino revenue decreased to 41.2% as compared to 42.7% in the prior year's third quarter, primarily due to higher casino net revenue.

Food and beverage revenues increased 2.8% during the quarter driven by a 3.1% increase in the average revenue per cover and a 0.3% decrease in covers served. The increase in the average revenue per cover was the result of menu price increases made in response to higher food commodity costs. Food and beverage operating expenses as a percentage of food and beverage revenue increased from 40.0% in the prior year's third quarter to 42.4% for the current year's third quarter primarily due to an increase in payroll expenses and higher commodity prices.

Hotel revenue grew 6.9% in the third quarter of 2013, compared to the same period in 2012, due to the higher average daily room rate ("ADR") of $85.16 for the third quarter of 2013 compared to $79.09 in the third quarter of 2012. This higher ADR was partially offset by slightly lower hotel occupancy of 95.4% during the third quarter of 2013 compared to 96.1% during the third quarter of 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $87.10 and $81.45 for the three month periods ended September 30, 2013 and 2012, respectively. Hotel operating expenses as a percent of hotel revenues increased to 27.0% for the third quarter of 2013 as compared to 23.6% for the third quarter of 2012 primarily due higher supplies and payroll expenses.

Promotional allowances as a percentage of gross revenues decreased to 18.0% during the third quarter of 2013 from 19.3% during the third quarter of 2012.

Monarch Black Hawk Operations:

We acquired the Monarch Black Hawk on April 26, 2012, and therefore, this is the first full quarter with comparable prior year quarterly operating results.

For the three months ended September 30, 2013, net revenue increased to $11.9 million from $11.1 million for the same period of 2012, approximately $0.7 million or 6.4% due to higher food and beverage revenue combined with lower promotional allowances due to the replacement of cash back promotional awards with free play awards. We believe that Monarch Black Hawk revenues for the three months ended September 30, 2013 were negatively impacted by severe flooding that prevented access to the property for four days and created extended disruption in certain key Black Hawk feeder markets.

For the three months ended September 30, 2013, casino revenues decreased slightly compared to the same period of 2012. The decrease was due primarily to lower slot revenue, as a result of implementing free play. Casino operating expenses as a percentage of casino revenue increased to 37.5% as compared to 35.1% in the prior year's third quarter primarily due to an increase in operating supplies expense.


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Food and beverage revenues increased 11.3% during the quarter driven by a 14.5% increase in covers served partially offset by a 2.8% decrease in the average revenue per cover. Food and beverage operating expenses as a percentage of food and beverage revenue increased from 17.8% in prior year's third quarter to 25.0% for the current year's third quarter primarily due non-recurring expenses related to the opening of the new buffet combined with higher commodity prices and higher quality food offerings in the buffet.

Promotional allowances as a percentage of gross revenues decreased to 18.8% during the third quarter of 2013 from 23.3% during the third quarter of 2012. This decrease was primarily the result of changes in promotional and discount programs to provide convenience and a better experience to casino customers.

Corporate and Other:

Selling, general and administrative expense ("SG&A Expense") for the 2013 third quarter increased by $1.2 million. The primary drivers of the increased SG&A expense are: higher payroll and related expense of $325 thousand, higher marketing and advertising expenses of $200 thousand to promote the Monarch Black Hawk property, higher maintenance, repairs and utility expense of $215 thousand and the collection of a delinquent account receivable of $400 thousand that resulted in a reduction in bad debt expense in the prior year third quarter.

Depreciation and amortization expense decreased to $3.5 million in the third quarter of 2013 as compared to $4.6 million for the third quarter of 2012. $0.8 million of the decrease was due to assets from our 2008 expansion at Atlantis which became fully depreciated during the period and $0.2 million due to the Riviera trade name, formerly used by our Monarch Black Hawk property, which became fully amortized in April 2013.

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

As a result of lower outstanding debt, combined with a decrease in the interest rate, interest expense decreased to $0.4 million in the third quarter 2013 from $0.5 million in the third quarter of 2012.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2013 and 2012

For the nine months ended September 30, 2013, our net income totaled $15.9 million, or $0.95 per diluted share, an increase in net income of $8.3 million, or $0.48 per diluted share, reflecting a 110.0% increase in net income and approximately 102.1% increase in diluted earnings per share. Net revenues totaled $144.2 million in the current year to date period, an increase of $22.8 million over the nine month period ended September 30, 2012. Income from operations for the nine months ended September 30, 2013 totaled $26.3 million compared to $13.1 million for the same period in 2012.

Atlantis Operations:

For the nine months ended September 30, 2013, net revenue increased to $108.4 million from $102.2 million for the same period of the prior year, approximately $6.2 million or 6.0% due to higher gaming, food and beverage and hotel revenues combined with slightly lower Complimentaries.

Casino revenue for the nine months ended September 30, 2013 compared to the same period 2012 increased 2.9% primarily due to increased slot revenue. Casino operating expenses as a percentage of


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casino revenue decreased to 40.8% as compared to 42.6% in the prior year's nine month period primarily due to higher casino revenue and lower Complimentaries.

Food and beverage revenues increased 2.9% due to a 2.2% increase in the number of covers served combined with slight increase in average revenue per cover of 0.7%. Food and beverage operating expenses amounted to 42.8% of food and beverage revenues during the first nine months of 2013, an increase when compared to 41.4% for the same period in 2012. This increase was primarily a result of increases in payroll and related taxes and benefits.

The increase in hotel revenues of 15.4% was due to higher average daily room rate ("ADR") and higher hotel occupancy. ADR increased from $73.66 during the first nine months of 2012 to $82.56 in the same period of 2013. Hotel occupancy increased to 91.1% during the first nine months of 2013 compared to 88.4% during the first nine months of 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $81.27 and $70.19 for the nine month periods ended September 30, 2013 and 2012, respectively. Hotel operating expenses as a percent of hotel revenues improved to 26.6% for the first nine months of 2013 from 27.0% for the same period of 2012, primarily due to higher hotel revenue.

Promotional allowances as a percentage of gross revenues decreased to 17.7% for the first nine months of 2013 compared to 18.9% for the same period in 2012. This increase was primarily the result of strategic changes resulting in more cost effective promotional and discount program utilization.

Monarch Black Hawk Operations:

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

Amounts in millions

                            Nine months ended September 30,
                               2013                 2012
Net revenue              $           35.8     $           19.1
Income from operations                9.6                  4.3
Net income                            6.5                  3.1

Corporate and Other:

SG&A expenses for the first nine months of 2013 increased by $3.4 million, representing nine months of expense for Monarch Black Hawk while the comparable period in 2012 reflects Monarch Black Hawk operations subsequent to the acquisition date (April 26, 2012).

Depreciation and amortization expense increased to $12.6 million in the nine month period ended September 30, 2013 compared to $12.3 million for the same period in 2012. The increase was primarily due to depreciation and amortization expense related to the inclusion of Monarch Black Hawk for the entire nine month period in 2013 compared to depreciation and amortization post-acquisition in the same 2012 period. The increase was offset by a decrease in depreciation and amortization expense in the third quarter of 2013 related to assets from the expansion at Atlantis in 2008 that have become fully


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depreciated and due to the Riviera trade name, formerly used by our Monarch Black Hawk property, becoming fully amortized in April 2013.

During the first nine months of 2012, we incurred $2.2 million of non-recurring acquisition expenses, comprised primarily of professional fees, directly related to the acquisition of Monarch Black Hawk. No such expenses were incurred in the current year.

Interest expense during the nine month period ended September 30, 2013 totaled $1.5 million compared to $1.4 million during the same period of 2012. This increase was due to having outstanding debt balances related to the acquisition for the full nine month period during the current year compared to five months in the prior year (after the acquisition of Monarch Black Hawk on April 26, 2012).

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 2013, net cash provided by operating activities totaled $28.4 million, an increase of $7.7 million or 37.2% compared to the same period last year. This increase was primarily the result of higher net income, depreciation and amortization, and a decrease in accounts receivable. These increases were partially offset by an increase in inventories and prepaid expenses compared to the nine months ended September 30, 2012.

Net cash used in investing activities totaled $8.2 million and $74.7 million in the nine months ended September 30, 2013 and 2012, respectively. The change was primarily due to net cash paid to acquire Monarch Black Hawk. Additionally investments in property and equipment were $0.3 million higher in the nine month ended September 30, 2013 compared to the same period in 2012.

For the nine months ended September 30, 2013, net cash used by financing activities totaled $21.7 million, resulting from principle payments on our Credit Facility offset by proceeds from stock option exercises. For the nine months ended September 30, 2012 net cash of $57.4 million was provided by financing activities due primarily to borrowings made to complete the acquisition of Monarch Black Hawk, Inc. and offset by principle payments on long-term debt. During the first nine months of 2013 and 2012, we paid $24.8 million and $17.0 million, respectively, on the outstanding balance under our credit facility described below.

$56.3 million was outstanding under our Credit Facility as of September 30, 2013. The proceeds from the Credit Facility were primarily utilized to finance the acquisition of Monarch Black Hawk and may also be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements. $40.7 million in borrowings remained available under the Credit Facility as of September 30, 2013.

The Credit Facility is structured to reduce the maximum principal available by $1.5 million each quarter beginning June 30, 2013. As of September 30, 2013, the maximum principal available was $97.0 million. 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 September 30, 2013 are as follows:

Amounts in millions

Year         Maturities
2013         $         -
2014                   -
2015                   -
Thereafter          56.3
             $      56.3


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The maturity date of the 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 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 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.

We are in the process of completely redesigning and upgrading the existing Monarch 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, once completed, would nearly double the existing casino space and would convert the facility into a full-scale, high-end, resort through the addition of a 22-story hotel tower with 507 guest rooms and suites, an upscale spa and pool facility, four restaurants, additional bars, associated support facilities and a new ten story parking structure that, together with existing parking, would provide 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. We anticipate announcing that cost estimate and construction timeline in late 2013 or in the first quarter of 2014. We will also identify financing sources for the expansion project, which we currently believe will most likely be a credit facility from financial institutions.

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 $255,600 in lease payments plus common area charges for the leased driveway space during the nine months ended September 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


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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 recovery appears underway, but it is not clear whether the recovery will be sustained 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.

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 Monarch Casino Black Hawk.

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 Monarch . . .

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