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MCRI > SEC Filings for MCRI > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC

Form 10-Q for MONARCH CASINO & RESORT INC


12-May-2014

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"), 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 Black Hawk Casino in Black Hawk, Colorado ("Black Hawk") and real estate proximate to the Atlantis and Monarch 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 three times, each for an additional six month period, with the most recent approval received on February 20, 2014, 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 continues to be 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. While recent statistics released by the Nevada Gaming Control Board have shown growth in northern Nevada and in the Reno/Sparks gaming market for the year ended December 31, 2013, and for the two month period ended February 28, 2014, compared to the same periods in 2012 and 2013, respectively, we anticipate that the unstable macroeconomic climate nationally and in the northern Nevada, combined with aggressive marketing programs of our competitors, will continue to apply pressure on Atlantis revenue.

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. In September 2013, we opened our new buffet, 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 master expansion plan, 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 approximately 1,550 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. Our decision to proceed on this project will be subject to many of the factors set forth under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.


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Severe winter weather adversely impacted our Monarch Black Hawk operations throughout the first quarter of 2014. Black Hawk had 50% more snow days than the first quarter of 2013 and all but one weekend during the 2014 first quarter was impacted by adverse weather.

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 $5.0 million and $2.4 million for the three month periods ended March 31, 2014 and 2013. During each of the three month periods ended March 31, 2014 and 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.

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 March 31, 2014 and 2013

For the three months ended March 31, 2014, our net income totaled $3.3 million, or $0.19 per diluted share, compared to net income of $4.3 million, or $0.26 per diluted share, reflecting a 23.3% decline in net income and 26.9% decline in diluted earnings per share. Net revenues totaled $45.5 million in the current quarter, a decrease of $0.1 million compared to the 2013 first quarter. Income from operations for the three months ended March 31, 2014 totaled $5.3 million compared to $7.2 million for the same period in 2013.

Casino revenues decreased 2.6% in the first quarter of 2014 compared to the first quarter of 2013. Casino operating expenses as a percentage of casino revenue increased to 41.7% in the first quarter of 2014, compared to 39.2% in the first quarter of 2013 primarily due to lower revenues combined with higher complimentaries expense.

Food and beverage revenues for the first quarter of 2014 increased 3.1% over the first quarter of 2013, due to a 5% increase in average revenue per cover, partially offset by a 2% decrease in total covers served. Food and beverage operating expenses as a percent of total revenue decreased slightly in the first quarter of 2014 to 40.5% compared to 40.7% for the prior year same period primarily as a result of the increase in revenue per cover partially offset by higher food and other commodity costs.


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Hotel revenue decreased 12.6% due to lower average daily room rate ("ADR") of $67.86 in the first quarter of 2014 compared to $77.27 in first quarter of 2013 and slightly lower hotel occupancy of 83.5% during first quarter of 2014 compared to 84.9% during first quarter of 2013. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $62.63 and $71.62 for the three months ended March 31, 2014 and 2013, respectively. We believe that the reduced demand in the 2014 three month period caused by the absence of a major convention that took place in 2013 contributed to both the lower ADR and REVPAR. Hotel operating expenses as a percent of hotel revenues increased to 29.8% in first quarter of 2014 as compared to 26.4% for the comparable prior year period due to the lower hotel revenue combined with higher payroll and related expenses and higher repair and maintenance expense.

Promotional allowances as a percentage of gross revenues decreased to 17.9% during the first quarter of 2014 compared to 19.3% in the comparable 2013 quarter. This decrease was driven primarily by the substitution of cash voucher promotions for free play credits at Monarch Black Hawk. In prior year's first quarter, we offered certain Black Hawk patrons cash voucher promotions which were recognized as promotional allowance while in the first quarter of 2014 we did not offer cash voucher promotions. Instead, upon a modification in the gaming regulations allowing free play credits, we offered our patrons free play credits which are recognized as a reduction of casino revenues.

Other revenues increased 6.4% in the first quarter of 2014 compared to the first quarter of 2013 driven primarily by increased revenue at the Atlantis spa and salon.

Selling, General and Administrative ("SG&A") expense increased to $13.2 million in the first quarter of 2014 from $12.3 million in the first quarter of 2013 primarily due to higher salaries, wages and benefits, higher marketing and higher utilities expenses. As a percentage of net revenue, SG&A expense increased to 29.1% in the first quarter of 2014 from 26.9% in the first quarter of 2013.

Depreciation and amortization expense increased slightly to $4.7 million for the three months ended March 31, 2014 as compared to $4.6 million for the three months ended March 31, 2013 as a result of accelerated depreciation on the garage building at Monarch Black Hawk in anticipation of its early removal from service related to the Black Hawk expansion project and new assets put in operation in relations to the remodeling at Monarch Black Hawk, all partially offset by lower depreciation expense at our Atlantis property due to certain assets from our 2008 expansion and remodel becoming fully depreciated in July 2013.

During the first quarter, the Company paid down the principal balance on its credit facility by $4.9 million, which decreased the outstanding balance of the credit facility to $48.9 million at March 31, 2014 from $53.8 million at December 31, 2013. Interest expense decreased to $0.3 million in the first quarter of 2014 from $0.6 million in the first quarter of 2013 as a result of a lower interest rate driven by our lower leverage ratio combined with lower average outstanding borrowings in 2014 first quarter compared to the 2013 first quarter.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2014, net cash provided by operating activities totaled $7.8 million, a decrease of approximately $4.0 million or 33.8% compared to the same period last year. This decrease was primarily the result of a decrease in accounts payable in first quarter of 2014 compared to an increase in accounts payable in first quarter of 2013 representing a net change of $1.6 million, a decrease in accrued expenses in first quarter of 2014 compared to an increase in accrued expenses in first quarter of 2013 representing a net change of $1.2 million, a decrease in net income of $1.0 million and a decrease in income tax payable by $0.4 million.


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Net cash used in investing activities totaled $3.8 million and $2.4 million for the three months ended March 31, 2014 and March 31, 2013, respectively. Net cash used in investing activities during first quarter of 2014 consisted primarily of net cash used for redesigning and upgrading the Black Hawk property and for acquisition of gaming equipment and general upgrades at the Atlantis property. In the first quarter of 2013 net cash used in investing activities consisted primarily of cash spent to acquire property and equipment for both properties.

Net cash used in financing activities during first quarter of 2014 of $6.3 million represented $4.9 million of payments made on our Credit facility and $0.5 million proceeds from exercise of stock options net of $2.0 million in income taxes paid to satisfy minimum tax withholdings. Net cash used in financing activities during first quarter of 2013 of $9.3 million related to payments made on our Credit facility.

As of March 31, 2014, we had a $94.0 million credit facility available ("Credit Facility") of which $48.9 million was drawn. The proceeds from the Credit Facility were utilized to finance the acquisition of Black Hawk, Inc. and may be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements. We had $45.1 million available on the New Credit Facility as of March 31, 2014.

The maximum principal available under the New Credit Facility is reduced by 1.5% per quarter beginning July 1, 2013. We 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 borrowings for each of the next three years and thereafter as of March 31, 2014 are as follows:

Amounts in millions

Year         Maturities
2014         $         -
2015                   -
2016                48.9
Thereafter             -
             $      48.9

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

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 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.

We believe that our existing cash balances, cash flow from operations and borrowings available under the 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. In addition, once the detailed design and construction plans are completed for the redesign and upgrade of our Monarch Black Hawk casino facility, we intend to finalize the cost estimate and develop a financing plan which will require us to seek sources of debt financing from financial institutions. No assurance can be given that such debt financing will be available to us on commercially reasonable terms or at all. If we are unable to obtain additional debt financing when we need it, our ability to meet our plans for expansion would be materially adversely affected.


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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 thousand, 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 of the new driveway are being depreciated over a shorter period of time. We paid approximately $85 thousand in lease payments for the leased driveway space at the Shopping Center during the three months ended March 31, 2014.

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, 2013 ("2013 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 2013 Form 10-K filed on March 14, 2014.

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 Monarch Black Hawk Casino.


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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 March 31, 2014 and the next five years and thereafter are as follows:

Amounts in millions

                                                  Payments due by period (1)
                                                 Less                           Greater
                                                than 1    1 to 3     3 to 5     than 5
                                       Total     year      years     years       years
Operating Leases (2)                   $  2.1   $   0.3   $   0.8   $    0.7   $     0.3
Purchase Obligations (3)                  7.6       7.6         -          -           -
Construction Contracts (4)               13.5      11.3       2.2          -           -
Borrowings Under Credit Facility (5)     48.9         -      48.9          -           -
Total Contractual Cash Obligations     $ 72.1   $  19.2   $  51.9   $    0.7   $     0.3



(1) Because interest payments under our 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: i) future short-term interest rates; ii) our future leverage ratio which varies with EBITDA and our borrowing levels; and iii) 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 March 31, 2014 pricing was LIBOR plus 1.5% and will be adjusted in subsequent quarters in accordance with our leverage ratio. At March 31, 2014, the one-month LIBOR rate was 0.15%.

(2) Operating leases include leased driveway usage and executive housing in Colorado.

(3) Purchase obligations represent approximately $2.6 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 $7.6 million are cancelable by us upon providing a 30-day notice.

(4) Construction contracts obligations represent commitments related to remodel and expansion projects in Monarch Casino Black Hawk.

(5) The amount represents outstanding draws against the Credit Facility as of March31, 2014.

We anticipate commencement of a substantial expansion of our Monarch Black Hawk facility. The total estimated costs of such expansion have not yet been finalized. For this reason, we have included above only amounts for which we have contractual commitments.


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