Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MCRI > SEC Filings for MCRI > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC

Form 10-Q for MONARCH CASINO & RESORT INC


8-Aug-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. The Company has decided to allow the current approval to lapse pending a change in market conditions that would support the Company's investment in this line of business. 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.


Table of Contents

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 compared to the prior year, for the five month period ended May 31, 2014, compared to the same period in 2013 the market declined. 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.

Construction disruption related to redesign and upgrade of the Monarch Black Hawk casino impacted the property's operation throughout the first six months of 2014. To minimize additional disruption, we have staged the work in three equal phases. The first phase is anticipated to be completed in the third quarter of 2014 with the final two stages each estimated to be completed in approximately six to seven months.

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 $9.5 million and $5.3 million for the six month periods ended June 30, 2014 and 2013. During each of the six month periods ended June 30, 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.


Table of Contents

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, 2014 and 2013

For the three months ended June 30, 2014, our net income totaled $3.0 million, or $0.18 per diluted share, compared to net income of $6.1 million, or $0.37 per diluted share, reflecting a 50.6% decline in net income and 51.4% decline in diluted earnings per share. Net revenues totaled $47.8 million in the current quarter, a decrease of $1.8 million compared to the 2013 second quarter. Income from operations for the three months ended June 30, 2014 totaled $5.5 million, a 46.2% decline compared to $10.2 million for the same period in 2013.

Casino revenues decreased 8.9% in the second quarter of 2014 compared to the second quarter of 2013 driven by lower gaming revenue at both Monarch Black Hawk and Atlantis. The decrease in Monarch Black Hawk gaming revenue is primarily due to disruption from the ongoing upgrade, remodeling and construction work combined with the effect of the substitution of cash voucher promotions for free play credits at Monarch Black Hawk. To accommodate construction, we have had to reduce the number of slot machines on the Monarch Black Hawk gaming floor by approximately 13%. In the prior year's second quarter, we offered certain patrons cash voucher promotions which were recognized as promotional allowance while free play credits are recognized as a reduction of casino revenue. In August 2013, the Company discontinued the issuance of cash vouchers in favor of free play credits which were legalized in Colorado at that time. The decrease in gaming revenue at Atlantis was driven primarily by lower business volume.

Casino operating expenses as a percentage of casino revenue increased to 41.7% in the second quarter of 2014, compared to 37.5% in the second quarter of 2013 primarily due to the lower gaming revenues combined with higher complimentaries expense, partially offset by lower gaming tax expense.

Food and beverage revenues for the second quarter of 2014 increased 5.7% over the second quarter of 2013, due to a 4.5% increase in average revenue per cover, combined with 1.1% increase in total covers served. Food and beverage operating expenses as a percent of food and beverage revenues increased in the second quarter of 2014 to 42.0% compared to 40.0% for the prior year same period primarily as a result of the increase in food and other commodity costs and higher payroll and related taxes and employee benefits expense.

Hotel revenue decreased 5.3% due to lower average daily room rate ("ADR") of $78.55 in the second quarter of 2014 compared to $83.91 in second quarter of 2013 and slightly lower hotel occupancy of 93.3% during second quarter of 2014 as compared to 93.7% during second quarter of 2013. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $80.43 and $84.91 for the three months ended June 30, 2014 and 2013, respectively. We believe that the reduced demand of convention and meeting groups in the Reno area in the 2014 three month period compared to the same period of 2013, contributed to the lower ADR and REVPAR. Hotel operating expenses as a percent of hotel revenues increased to 28.2% in second quarter of 2014 as compared to 27.1% for the comparable prior year period due to the lower hotel revenue combined with higher operating expense.


Table of Contents

Other revenues increased 6.0% in the second quarter of 2014 compared to the second quarter of 2013 driven primarily by increased revenue at the Atlantis spa and salon.

Promotional allowances as a percentage of gross revenues decreased to 17.5% during the second quarter of 2014 compared to 18.6% 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 as described above.

Selling, General and Administrative ("SG&A") expense increased to $13.2 million in the second quarter of 2014 from $12.6 million in the second quarter of 2013 primarily due to the reversal of $0.6 million accumulated sales tax expense accrual as a result of the Nevada Tax Commission ruling that complimentary and employee meals were no longer subject to sales taxation, higher salaries and wages, higher utilities expenses, all partially offset by lower bad debt expense and lower legal expenses. As a percentage of net revenue, SG&A expense increased to 27.6% in the second quarter of 2014 from 25.5% in the second quarter of 2013.

Depreciation and amortization expense increased slightly to $4.6 million for the three month period ended June 30, 2014 as compared to $4.4 million for the same period ended June 30, 2013 as a result of: i) accelerated depreciation on the garage structure at Monarch Black Hawk recognized in anticipation of its early removal from service as part of the expansion project, ii) new assets related to the remodel and upgrade project at Monarch Black Hawk, iii) all partially offset by lower depreciation expense at our Atlantis property due to assets from our 2008 expansion and remodel becoming fully depreciated in July 2013.

Interest expense decreased to $0.3 million in the second quarter of 2014 from $0.5 million in the second quarter of 2013 as a result of a lower interest rate driven by our lower leverage ratio combined with lower average outstanding borrowings in the 2014 second quarter compared to the 2013 second quarter.

The Company incurred an approximate $0.3 million loss on disposal of slot machines and $1.0 million of expense related to the campaign against proposed 2014 ballot initiatives to expand gaming in Colorado.

Comparison of Operating Results for the Six-Month Periods Ended June 30, 2014 and 2013

For the six months ended June 30, 2014, our net income totaled $6.3 million, or $0.37 per diluted share, compared to net income of $10.4 million, or $0.63 per diluted share, reflecting a 39.3% decline in net income and 41.3% decline in diluted earnings per share. Net revenues totaled $93.3 million in the current six months period, reflecting $1.9 million, or 2.0% decline in net revenue compared to the 2013 first six months. Income from operations for the six months ended June 30, 2014 totaled $10.8 million compared to $17.4 million for the same period in 2013, representing 37.8% decline in income from operations.

Casino revenues decreased 5.8% in the first six months of 2014 compared to the first six months of 2013 driven by lower gaming revenue at both Monarch Black Hawk and Atlantis. The decrease in Monarch Black Hawk gaming revenue is primarily due to disruption from the ongoing upgrade and remodel construction work combined with the effect of the substitution of cash voucher promotions for free play credits at Monarch Black Hawk. To accommodate construction, we have had to reduce the number of slot machines on the gaming floor by approximately 13%. In prior year's second quarter, we offered certain patrons cash voucher promotions which were recognized as promotional allowance while free play credits are recognized as a reduction of casino revenue. In August 2013, the Company discontinued the issuance of cash vouchers in favor of free play credits which were legalized in Colorado at that time. The decrease in gaming revenue at Atlantis was driven primarily by lower business volume.


Table of Contents

Casino operating expenses as a percentage of casino revenue increased to 41.7% in the first six months of 2014, compared to 38.3% in the first six months of 2013 due to lower revenues combined with higher complimentaries expense, partially offset by lower gaming tax expense.

Food and beverage revenues for the first six months of 2014 increased 4.4% over the first six months of 2013, due to a 4.8% increase in average revenue per cover, partially offset by a slight decrease in total covers served. Food and beverage operating expenses as a percent of food and beverage revenues increased in the first six months of 2014 to 41.3% compared to 40.3% for the prior year same period primarily as a result of higher food and other commodity costs, increased payroll and related taxes and employee benefits, higher repairs and maintenance and operating expenses.

Hotel revenue decreased 8.6% due to lower ADR of $73.89 in the first six months of 2014 compared to $81.14 in first six months of 2013 and slightly lower hotel occupancy of 88.0% during first six months of 2014 compared to 88.9% during first six months of 2013. REVPAR was $71.58 and $78.29 for the six months ended June 30, 2014 and 2013, respectively. We believe that the reduced demand in the 2014 six month period caused by less convention and meeting business in the Reno area contributed to both the lower ADR and REVPAR. Hotel operating expenses as a percent of hotel revenues increased to 28.9% in first six months of 2014 as compared to 26.8% for the comparable prior year period due to the lower hotel revenue combined with higher payroll and related expenses and higher repair and maintenance and uniform expenses.

Other revenues increased 6.2% in the first six months of 2014 compared to the first six months of 2013 driven primarily by increased revenue at the Atlantis spa and salon.

Promotional allowances as a percentage of gross revenues decreased to 17.7% during the first six months of 2014 compared to 18.9% in the comparable 2013 same period. This decrease was driven primarily by the substitution of cash voucher promotions for free play credits at Monarch Black Hawk as discussed above.

Selling, General and Administrative ("SG&A") expense increased to $26.4 million in the first six months of 2014 from $24.9 million in the first six months of 2013 primarily due to reversal of 0.6 million accumulated sales tax expense accrual as a result of the Nevada Tax Commission ruling that complimentary and employee meals were no longer subject to sales taxation, higher salaries, wages and related taxes expenses, higher utilities expenses, all partially offset by lower employee benefit expense and lower legal expenses. As a percentage of net revenue, SG&A expense increased to 28.3% in the first six months of 2014 from 26.2% in the first six months of 2013.

Depreciation and amortization expense increased to $9.3 million for the six months ended June 30, 2014 as compared to $9.0 million for the six months ended June 30, 2013 as a result of: i) accelerated depreciation on the garage structure at Monarch Black Hawk recognized in anticipation of its early removal from service as part of the expansion project, ii) new assets related to the remodel and upgrade project at Monarch Black Hawk, iii) all partially offset by lower depreciation expense at our Atlantis property due to assets from our 2008 expansion and remodel becoming fully depreciated in July 2013.

Interest expense decreased to $0.6 million in the first six months of 2014 from $1.1 million in the first six months 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.

The Company incurred an approximate $0.3 million loss on disposal of slot machines and $1.0 million of expense related to the campaign against proposed 2014 ballot initiatives to expand gaming in Colorado.


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 2014, net cash provided by operating activities totaled $14.1 million, a decrease of $4.9 million or 25.9% compared to the same period in prior year. This decrease was primarily the result of a decrease in net income of $4.1 million combined with changes in ordinary working capital accounts, which was partially offset by an increase in income tax payable of $1.0 million and an increase in depreciation expense by $0.3 million.

Net cash used in investing activities totaled $9.3 million and $5.3 million for the six months ended June 30, 2014 and June 30, 2013, respectively. Net cash used in investing activities during the first six months 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 six months 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 six months of 2014 of $7.0 million represented $4.9 million of payments made on our Credit Facility (as defined below) and $0.6 million in proceeds from exercise of stock options net of $3.1 million in income taxes paid to satisfy minimum tax withholdings. Net cash used in financing activities during the first six months of 2013 of $15.0 million represented $16.3 million of payments made on our Credit Facility, partially offset by $1.3 million in proceeds from the exercise of stock options.

As of June 30, 2014, we had a $92.5 million credit facility available ("Credit Facility") of which $48.9 million was outstanding. The proceeds from the Credit Facility were utilized to finance the acquisition of Monarch Black Hawk and availability under the Credit Facility may be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements. We had $43.6 million available on the Credit Facility as of June 30, 2014.

The maximum principal available under the Credit Facility is being 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 in multiples of $50,000. Maturities of the borrowings for each of the next three years and thereafter as of June 30, 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.


Table of Contents

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.

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 $170 thousand in lease payments for the leased driveway space at the Shopping Center during the six months ended June 30, 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 higher than historically average unemployment. 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 these economic 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.


Table of Contents

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.

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

. . .

  Add MCRI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MCRI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.