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MONARCH CASINO & RESORT INC - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to            .

 

Commission File No. 0-22088

 

 

MONARCH CASINO & RESORT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

88-0300760

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

3800 S. Virginia St.

 

 

Reno, Nevada

 

89502

(Address of Principal Executive Offices)

 

(ZIP Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

(775)  335-4600

Registrant’s telephone number, including area code:

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $0.01 par value

 

16,155,661 shares

Class

 

Outstanding at May 1, 2013

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page
Number

Item

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 (unaudited)

3

Condensed Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012

4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)

5

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

17

 

 

Item 4. Controls and Procedures

17

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

17

 

 

Item 1A. Risk Factors

18

 

 

Item 6. Exhibits

19

 

 

Signatures

20

 

2


 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONARCH CASINO & RESORT, INC.

Condensed Consolidated Statements of Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

 

 

 

 

Casino

 

$

38,703,346

 

$

25,409,520

 

Food and beverage

 

12,221,987

 

10,585,794

 

Hotel

 

5,311,228

 

4,368,442

 

Other

 

2,329,980

 

2,137,356

 

Gross revenues

 

58,566,541

 

42,501,112

 

Less promotional allowances

 

(10,922,514

)

(7,633,056

)

Net revenues

 

47,644,027

 

34,868,056

 

Operating expenses

 

 

 

 

 

Casino

 

14,505,785

 

10,133,551

 

Food and beverage

 

5,175,661

 

4,725,753

 

Hotel

 

1,403,878

 

1,295,194

 

Other

 

751,643

 

726,224

 

Selling, general and administrative

 

13,978,711

 

11,685,381

 

Depreciation and amortization

 

4,643,435

 

3,375,084

 

Acquisition expense

 

 

74,591

 

Total operating expenses

 

40,459,113

 

32,015,778

 

Income from operations

 

7,184,914

 

2,852,278

 

Other expenses

 

 

 

 

 

Interest expense

 

(566,096

)

(328,661

)

Total other expense

 

(566,096

)

(328,661

)

Income before income taxes

 

6,618,818

 

2,523,617

 

Provision for income taxes

 

(2,356,816

)

(882,250

)

Net income

 

$

4,262,002

 

$

1,641,367

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

Net income

 

 

 

 

 

Basic

 

$

0.26

 

$

0.10

 

Diluted

 

$

0.26

 

$

0.10

 

 

 

 

 

 

 

Weighted average number of common shares and potential common shares outstanding

 

 

 

 

 

Basic

 

16,147,324

 

16,138,158

 

Diluted

 

16,275,208

 

16,274,355

 

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

 

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MONARCH CASINO & RESORT, INC.

Condensed Consolidated Balance Sheets

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

19,222,894

 

$

19,043,213

 

Receivables, net

 

2,240,069

 

2,456,883

 

Inventories

 

2,364,866

 

2,382,802

 

Prepaid expenses

 

3,365,919

 

2,636,422

 

Deferred income taxes

 

5,425,848

 

5,425,848

 

Total current assets

 

32,619,596

 

31,945,168

 

Property and equipment

 

 

 

 

 

Land

 

27,914,847

 

27,914,847

 

Land improvements

 

6,561,729

 

6,561,729

 

Buildings

 

150,843,298

 

150,843,298

 

Building improvements

 

11,681,100

 

11,681,100

 

Furniture and equipment

 

135,341,915

 

132,946,374

 

Leasehold improvements

 

1,346,965

 

1,346,965

 

 

 

333,689,854

 

331,294,313

 

Less accumulated depreciation and amortization

 

(156,823,265

)

(152,868,719

)

Net property and equipment

 

176,866,589

 

178,425,594

 

Other assets

 

 

 

 

 

Goodwill

 

25,110,810

 

25,110,810

 

Intangible assets, net

 

9,515,803

 

10,204,691

 

Deferred income taxes

 

1,214,113

 

1,214,113

 

Other assets, net

 

1,143,300

 

1,219,579

 

Total other assets

 

36,984,026

 

37,749,193

 

Total assets

 

$

246,470,211

 

$

248,119,955

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

8,351,876

 

$

8,061,570

 

Accrued expenses

 

18,541,466

 

17,836,194

 

Income taxes payable

 

2,431,217

 

274,401

 

Total current liabilities

 

29,324,559

 

26,172,165

 

Long-term debt

 

71,800,000

 

81,100,000

 

Total liabilities

 

101,124,559

 

107,272,165

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued

 

 

 

Common stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares issued; 16,147,324 outstanding at March 31, 2013 and at December 31, 2012

 

190,963

 

190,963

 

Additional paid-in capital

 

34,599,550

 

34,363,690

 

Treasury stock, 2,948,976 shares at March 31, 2013 and at December 31, 2012, at cost

 

(48,306,046

)

(48,306,046

)

Retained earnings

 

158,861,185

 

154,599,183

 

Total stockholders’ equity

 

145,345,652

 

140,847,790

 

Total liabilities and stockholder’s equity

 

$

246,470,211

 

$

248,119,955

 

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

 

MONARCH CASINO & RESORT, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

4,262,002

 

$

1,641,367

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,643,435

 

3,375,084

 

Amortization of deferred loan costs

 

76,279

 

107,679

 

Share based compensation

 

235,860

 

268,485

 

(Recoveries) provision for bad debts

 

(33,783

)

93,171

 

Gain on disposal of assets

 

(20,608

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

250,597

 

(356,373

)

Inventories

 

17,936

 

197,061

 

Prepaid expenses

 

(729,497

)

(425,391

)

Accounts payable

 

290,306

 

(1,602,224

)

Accrued expenses

 

705,272

 

552,789

 

Income taxes

 

2,156,816

 

882,250

 

Net cash provided by operating activities

 

11,854,615

 

4,733,898

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of assets

 

20,608

 

 

Acquisition of property and equipment

 

(2,395,542

)

(1,443,703

)

Net cash used in investing activities

 

(2,374,934

)

(1,443,703

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on long-term debt

 

(9,300,000

)

(5,700,000

)

Net cash used in financing activities

 

(9,300,000

)

(5,700,000

)

Net increase (decrease) in cash

 

179,681

 

(2,409,805

)

Cash and cash equivalents at beginning of period

 

19,043,213

 

13,582,659

 

Cash and cash equivalents at end of period

 

$

19,222,894

 

$

11,172,854

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

479,180

 

$

139,738

 

Cash paid for income taxes

 

$

200,000

 

$

 

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

 

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Table of Contents

 

MONARCH CASINO & RESORT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation:

 

Monarch Casino & Resort, Inc., was incorporated in 1993 and through its wholly-owned subsidiary, Golden Road Motor Inn, Inc. (“Golden Road”), owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the “Atlantis”).  Monarch’s wholly owned subsidiaries, High Desert Sunshine, Inc. (“High Desert”) and Golden North, Inc. (“Golden North”), each own separate parcels of land located proximate to the Atlantis.  Monarch’s wholly owned subsidiary Monarch Growth Inc. (“Monarch Growth”), formed in 2011, acquired Riviera Black Hawk, Inc., owner of the Riviera Black Hawk Casino (collectively “Black Hawk”) on April 26, 2012.  Monarch Growth also owns a parcel of land in Black Hawk, Colorado contiguous to the Riviera Black Hawk Casino.  The Company has included the results of Black Hawk in its unaudited condensed consolidated financial statements since the date of acquisition.

 

Monarch’s wholly owned subsidiary Monarch Interactive, Inc. (“Monarch Interactive”) was formed on January 4, 2012 and received approval from the Nevada Gaming Commission on August 23, 2012, which approval was extended on February 26, 2013 for six months pending commencement of operations, for a license as an operator of interactive gaming.  Before the license can be issued, a number of conditions must be met, within six months of the 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.

 

The unaudited condensed consolidated financial statements include the accounts of Monarch and its subsidiaries.  Intercompany balances and transactions are eliminated.

 

Unless otherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries.

 

Interim Financial Statements:

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management of the Company, all adjustments considered necessary for a fair presentation are included.  Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

 

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Reclassification:

 

Certain gaming related expenses in the 2012 unaudited condensed consolidated financial statements have been reclassified to conform to the 2013 presentation. These reclassifications had no effect on the previously reported, income from operations, net income or statements of cash flows.

 

Fair Value of Financial Instruments:

 

The estimated fair value of the Company’s financial instruments has been determined by the Company, using available market information and valuation methodologies.  However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

 

The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.

 

NOTE 2. STOCK-BASED COMPENSATION

 

The Company accounts for its stock-based compensation in accordance with the authoritative guidance requiring the compensation cost relating to share-based payment transactions be recognized in the Company’s consolidated statements of income.

 

Reported stock-based compensation expense was classified as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Casino

 

$

12,987

 

$

13,323

 

Food and beverage

 

19,548

 

16,931

 

Hotel

 

4,056

 

4,056

 

Selling, general and administrative

 

199,269

 

234,175

 

Total stock-based compensation, before taxes

 

235,860

 

268,485

 

Tax benefit

 

(82,551

)

(93,970

)

Total stock-based compensation, net of tax

 

$

153,309

 

$

174,515

 

 

NOTE 3. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing reported net earnings by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect the additional dilution for all potentially dilutive securities such as stock options.  The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

Shares

 

Per Share
Amount

 

Shares

 

Per Share
Amount

 

Basic

 

16,147

 

$

0.26

 

16,138

 

$

0.10

 

Effect of dilutive stock options

 

128

 

 

136

 

 

Diluted

 

16,275

 

$

0.26

 

16,274

 

$

0.10

 

 

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Table of Contents

 

Excluded from the computation of diluted earnings per share are options where the exercise prices are greater than the market price as their effects would be anti-dilutive in the computation of diluted earnings per share.  For the three months ended March 31, 2013 and 2012, 1,912,060 and 1,754,864, respectively, anti-dilutive options were excluded from the computation.

 

NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2011, the FASB issued amendments to enhance disclosures about offsetting and related arrangements. This information will enable the users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial and derivative instruments. These amendments are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The disclosures required by these amendments should be provided retrospectively for all comparative periods presented. Management does not believe that these amendments will have a material impact on the consolidated financial statements.

 

A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of any such proposed or revised standards would have on the Company’s consolidated financial statements.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

The 19 acre shopping center (the “Shopping Center”) adjacent to the Atlantis is owned by Biggest Little Investments, L.P. (“BLI”) whose general partner is Maxum, L.L.C. (“Maxum”).  John Farahi, Bob Farahi and Ben Farahi each individually own non-controlling interests in BLI and Maxum.  John Farahi is Co-Chairman of the Board, Chief Executive Officer, Secretary, and a Director of Monarch.  Bob Farahi is Co-Chairman of the Board, President, and a Director of Monarch.

 

In addition, the Company shares a driveway with and leases approximately 37,000 square-feet from the Shopping Center for a minimum lease term of 15 years at an annual rent of $370,000 including common area expenses, subject to increase every year beginning in the 61st month based on the Consumer Price Index. The Company has the option to renew the lease for three individual five-year terms, and at the end of the extension periods, the Company has the option to purchase the leased driveway section of the Shopping Center at a price to be determined based on an appraisal. The Company paid approximately $85,200 plus common area maintenance charges for its leased driveway space at the Shopping Center during both three month periods ended March 31, 2013 and March 31, 2012.

 

The Company occasionally leases billboard advertising space from affiliates of its controlling stockholders and paid $12,500 for the three months ended March 31, 2013, and paid $53,800 for the three months ended March 31, 2012.

 

NOTE 6.  LONG-TERM DEBT

 

On November 15, 2011, we amended and restated our $60.0 million credit facility with a new facility (the “New Credit Facility”).  We utilized the New Credit Facility to finance the acquisition of Riviera Black Hawk, Inc. and the New Credit Facility is available to be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements.  The maximum available borrowings under the New Credit Facility are $100.0 million.

 

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In addition to other customary covenants for a facility of this nature, as of March 31, 2013, the Company was required to maintain a leverage ratio, defined as consolidated debt divided by EBITDA, of no more than 3.0:1 and a fixed charge coverage ratio (EBITDA divided by fixed charges, as defined) of at least 1.15:1.  As of March 31, 2013, the Company’s leverage ratio and fixed charge coverage ratios were 1.7:1 and 10.1:1, respectively.

 

The maximum principal available under the New Credit Facility is reduced by 1.5% 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 March 31, 2013 are as follows:

 

Amounts in thousands

 

Year

 

Maturities

 

2013

 

$

 

2014

 

 

2015

 

 

Thereafter

 

71,800

 

 

 

$

 71,800

 

 

At March 31, 2013, the Company had $71.8 million outstanding under the New Credit Facility.  At that time its leverage ratio was such that pricing for borrowings under the New Facility was LIBOR plus 2.25%.  At March 31, 2013 the one-month LIBOR interest rate was 0.20%.   The carrying value of the debt outstanding under the New Facility approximates fair value because the interest fluctuates with the lender’s prime rate or other market rates of interest.

 

NOTE 7.  TAXES

 

For the three months ended March 31, 2013 the Company’s effective tax rate was 35.6% compared to 35.0% in the quarter ended March 31, 2012 with the increase in the effective rate attributable to Colorado taxable income due to the acquisition of Black Hawk.

 

NOTE 8.  SEGMENT INFORMATION

 

We have two reportable operating segments, the Atlantis and Black Hawk.  The following table highlights our Adjusted EBITDA and reconciles Adjusted EBITDA to net income for the three months ended March 31, 2013 and 2012.

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

Net revenue

 

 

 

 

 

Atlantis

 

$

36,048,764

 

$

34,868,056

 

Black Hawk(a)

 

11,595,263

 

 

Total net revenue

 

$

47,644,027

 

$

34,868,056

 

 

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Three months ended March 31,

 

 

 

2013

 

2012

 

Adjusted EBITDA (b)

 

 

 

 

 

Atlantis

 

$

9,327,000

 

$

7,818,152

 

Black Hawk(a)

 

4,016,696

 

 

 

 

13,343,696

 

7,818,152

 

Corporate and other expense(c)

 

(1,279,487

)

(1,247,714

)

Total Adjusted EBITDA

 

$

12,064,209

 

$

6,570,438

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Stock based compensation

 

(235,860

)

(268,485

)

Depreciation and amortization

 

(4,643,435

)

(3,375,084

)

Acquisition expense

 

 

(74,591

)

Interest expense

 

(566,096

)

(328,661

)

Provision for income taxes

 

(2,356,816

)

(882,250

)

Net income

 

$

4,262,002

 

$

1,641,367

 

 


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

 

(b)         We define Adjusted EBITDA for each segment as net income plus provision for income taxes, interest expense, acquisition expense, management fee income or expense, gain or loss on disposal of assets, depreciation and amortization and stock based compensation.  Adjusted EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) or as a measure of liquidity. This item enables comparison of the Company’s performance with the performance of other companies that report Adjusted EBITDA, although some companies do not calculate this measure in the same manner and therefore, the measure as presented may not be comparable to similarly titled measures presented by other companies.

 

(c)          Corporate and other expenses represent unallocated payroll, professional fees, travel expenses and other general and administrative expenses not directly related to our casino and hotel operations.

 

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.

 

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Monarch’s wholly owned subsidiary Monarch Interactive, Inc. (“Monarch Interactive”) received approval from the Nevada Gaming Commission on August 23, 2012, which approval was extended on February 26, 2013 for six months pending commencement of operations, for a license as an operator of interactive gaming.  Before the license can be issued, a number of conditions must be met, within six months of the February 26, 2013 approval, and before operations can commence, the Company must enter into contracts with a licensed interactive gaming service provider with an approved system.  None of these conditions have occurred, and Monarch Interactive is not currently engaged in any operating activities.  In Nevada, legal interactive gaming is currently limited to intrastate poker.

 

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 impacts of the economic decline in Reno that began in the fourth quarter of 2007 continue to be felt in the first quarter of 2013.  Aggressive marketing programs by our competitors have also posed challenges to us during that time.  Furthermore, based on statistics released by the Nevada Gaming Control Board, the Reno gaming revenue market has shrunk in the aggregate.  Despite those negative factors, revenue in our food and beverage, hotel and other operating departments increased compared to the same quarter of 2012, however casino revenue decreased slightly from the prior year quarter.  We anticipate that the ongoing macroeconomic decline nationally and in the Reno market, combined with aggressive marketing programs of our competitors, will continue to apply downward pressure on Atlantis revenue.

 

Riviera Black Hawk:  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 and have reduced 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.

 

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 $2.4 million and $1.4 million for the three month periods ended March 31, 2013 and 2012.  During the three month periods ended March 31, 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 the Atlantis facility.

 

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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 March 31, 2013 and 2012

 

For the three months ended March 31, 2013, our net income totaled $4.3 million, or $0.26 per diluted share, an increase in net income of $2.6 million, or $0.16 per diluted share, reflecting a 160.0% increase in both net income and diluted earnings per share.  Revenues totaled $47.6 million in the current quarter, an increase of $12.8 million over the 2012 first quarter.  Income from operations for the three months ended March 31, 2013 totaled $7.2 million compared to $2.9 million for the same period in 2012.

 

Atlantis Operations:

 

Casino revenues decreased 1.2% in the first quarter of 2013 compared to the first quarter of 2012 Casino operating expenses amounted to 38.6% of casino revenues in the first quarter of 2013, compared to 39.9% in the first quarter of 2012.  The improvement in casino operating expenses as a percentage of casino revenues was primarily due to a 5.8% decrease in casino complimentary expense.

 

Food and beverage revenues for the first quarter of 2013 increased 3.0%  over the first quarter of 2012, due to a 3% increase in total covers served with stable average revenue per cover.  Food and beverage operating expenses as a percent of total revenue of 44.9% were consistent with the prior year period where costs totaled 44.6% of food and beverage revenues.

 

Hotel revenues grew 21.6% in the first quarter of 2013, compared to the 2012 first quarter due to improvements in both occupancy and average daily room rate (“ADR”).  Our hotel occupancy improved to 84.9% during the first quarter of 2013 compared to 81.4% during the same period in 2012 while ADR increased 16.9% to $77.27 during the current quarter versus $66.09 in the prior year quarter.  Revenue per Available Room (“REVPAR”), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $71.60 and $58.24 for the three month periods ended March 31, 2013 and 2012, respectively.  Hotel operating expenses as a percent of hotel revenues improved to 26.4% for the first quarter of 2013 from 29.6% for the first quarter of 2012 due primarily to growth in hotel revenue.

 

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Promotional allowances as a percentage of gross revenues decreased to 18.6% during the first quarter of 2013 compared to 18.0% in the comparable 2012 quarter.

 

Other revenues increased 9.0% in the first quarter of 2013 compared to the first quarter of 2012.

 

Riviera Black Hawk Operations:

 

We acquired the Riviera Black Hawk on April 26, 2012, and therefore, no information is given for the quarter ended March 31, 2012.  The amounts of net revenue and operating income of Riviera Black Hawk included in the Company’s consolidated statement of income, after elimination of intercompany transactions, for the quarter ended March 31, 2013 are as follows:

 

Amounts in millions

 

Net revenues

 

$

11.6

 

Income from operations

 

2.8

 

Net income

 

1.4

 

 

Corporate and Other Expenses:

 

Selling, General and Administrative (“SG&A”) expense increased to $14.0 million in the first quarter of 2013 from $11.7 million in the first quarter of 2012 attributable primarily due to the inclusion of Black Hawk SG&A of $2.5 million offset by lower marketing and utilities expenses.  As a percentage of net revenue, SG&A expenses declined to 29.3% in the first quarter of 2013 from 33.5% in the same period in 2012 as a result of growth in revenues.

 

Depreciation and amortization expense increased to $4.6 million in the first quarter of 2013 from $3.4 million in the 2012 first quarter due to the inclusion of $1.2 million of depreciation and amortization related to the Black Hawk acquired assets.

 

During the quarter, the Company paid down the principal balance on its credit facility by $9.3 million, which decreased the outstanding balance of the credit facility to $71.8 million at March 31, 2013 from $81.1 million at December 31, 2012. Interest expense increased to $0.6 million in the quarter ended March 31, 2012 from $0.3 million in the prior year’s first quarter due to higher average loan balances in the current year quarter compared to the prior year quarter.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the three months ended March 31, 2013, net cash provided by operating activities totaled $11.9 million, an increase of approximately $7.1 million or 150.4% compared to the same period last year due primarily to increased net income from the addition of the Black Hawk property.  Also contributing to the improvement in operating cash flow were increases in income taxes and accounts payable as well a decrease in account receivable.

 

Net cash used in investing activities totaled $2.4 million for the current quarter compared to $1.4 million for the prior year period.  The current period investing activities reflects our continued investment in gaming equipment and facilities upgrades for both the Atlantis and Black Hawk properties while the prior period cash used for investing activities related to gaming equipment and upgrades of the Atlantis property.

 

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We used $9.3 million and $5.7 million of cash in financing activities during the three months ended March 31, 2013 and March 31, 2012, respectively, to repay borrowings under our New Credit Facility.

 

The Company has a $100.0 million credit facility available (“New Credit Facility”) of which $71.8 million was drawn at March 31, 2013.  The proceeds from the New Credit Facility were utilized by the Company to finance the acquisition of Black Hawk, Inc. and may also be used for working capital needs, general corporate purposes and for ongoing capital expenditure requirements.  The company had $28.2 million available on the New Credit Facility as of March 31, 2013.

 

The maximum principal available under the New Credit Facility is reduced by 1.5% 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 March 31, 2013 are as follows:

 

Amounts in thousands

 

Year

 

Maturities

 

2013

 

$

 

2014

 

 

2015

 

 

Thereafter

 

71,800

 

 

 

$

 71,800

 

 

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.

 

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 $300,000, 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.

 

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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 $85,200 in lease payments for the leased driveway space at the Shopping Center during the three months ended March 31, 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, 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 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 March 31, 2013 and the next five years and thereafter are as follows:

 

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Amounts in thousands

 

 

 

Payments Due by Period (4)

 

 

 

 

 

less than

 

1 to 3

 

4 to 5

 

more than

 

 

 

Total

 

1 year

 

years

 

years

 

5 years

 

Operating Leases (1)

 

$

2,462

 

$

416

 

$

751

 

$

740

 

$

555

 

Borrowings Under Credit Facility (2)

 

71,800

 

 

 

71,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Obligations (3)

 

6,613

 

6,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Cash Obligations

 

$

80,875

 

$

7,029

 

$

751

 

$

72,540

 

$

555

 

 


(1) Operating leases include leased storage, driveway usage and common area expense payments for the shopping center adjacent to the Atlantis.

 

(2) The amount represents outstanding draws against the New Credit Facility as of March 31, 2013.

 

(3) Purchase obligations represent approximately $1.9 million of commitments related to capital projects and approximately $4.7 million of materials and supplies used in the normal operation of our business.  Of the total purchase order and construction commitments, approximately $4.7 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.  At March 31, 2013 pricing was set at the opening pricing point of LIBOR plus 2.25% and will be adjusted in subsequent quarters in accordance with our leverage ratio.  At March 31, 2013, the one-month LIBOR rate was 0.20%.

 

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 were 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 estimate the requested refund to be approximately $1.6 million, excluding interest.  We have not recognized any of these refund amounts.

 

In February 2012, the Department issued a policy directive, requesting that affected taxpayers begin collecting and remitting sales tax on complimentary meals and employee meals effective February 2012 and on June 25, 2012, the Nevada Tax Commission adopted regulations providing for a similar requirement, which regulations have not yet been made effective.   As such we have accrued the resultant tax of $0.5 million as of March 31, 2013.

 

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We believe this policy directive, and possibly, the new regulations, contradict the March 27, 2008 Nevada Supreme Court decision, and we believe each are being challenged by several affected parties.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from adverse changes in market risks and prices, such as interest rates, foreign currency exchange rates and commodity prices.  We do not have any cash or cash equivalents as of March 31, 2013 that are subject to market risk.  As of March 31, 2013 we had $71.8 million of outstanding debt under our New Credit Facility that was subject to credit risk.  A 1% increase in the interest rate on the balance outstanding under the New Credit Facility at March 31, 2013 would result in a change in our annual interest cost of approximately $0.7 million.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, (the “Evaluation Date”), an evaluation was carried out by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As previously disclosed, litigation was filed against Monarch on January 27, 2006, by Kerzner International Limited (“Kerzner”) owner of the Atlantis, Paradise Island, Bahamas in the United States District Court, District of Nevada, case number 3:06-cv-00232-ECR (RAM).  The complaint sought declaratory judgment prohibiting Monarch from using the name “Atlantis” in connection with offering casino services other than at Monarch’s Atlantis Casino Resort Spa located in Reno, Nevada, and particularly prohibiting Monarch from using the “Atlantis” name in connection with offering casino services in Las Vegas, Nevada; injunctive relief enforcing the same; and other relief.  Monarch filed a counterclaim against Kerzner seeking to cancel Kerzner’s federal registration of the ATLANTIS mark for casino services and to obtain declaratory relief in its favor on issues related to Monarch’s use of the mark, as raised by Kerzner’s complaint.  Upon conclusion of discovery various motions were filed by the parties.  On December 14, 2009, the court ruled on the pending motions, and identified a single remaining factual question concerning Kerzner’s alleged fame that potentially was dispositive of Kerzner’s claims.  After addressing additional procedural matters, on June 3, 2010, the court directed the parties to file the proposed joint pretrial order.  In the proposed joint pretrial order, Kerzner conceded that it could not prove the sole dispositive issue of fame and requested the court to make entry of judgment against Kerzner.  The court treated Kerzner’s request as a motion to dismiss and for entry of judgment, and on October 8, 2010 issued an order granting dismissal and entry of judgment against Kerzner.  On February 10, 2011, the court issued its final judgment against Kerzner and in favor of

 

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Monarch with respect to all claims asserted by Kerzner in the Complaint.  As to Monarch’s Counterclaims, the court granted all remaining counterclaims in favor of Monarch, including declaratory relief that: Monarch’s use of the ATLANTIS mark does not infringe on Kerzner’s rights; Monarch has developed valid common law rights in the ATLANTIS mark for casino services; Monarch owns a valid Nevada state trademark for the ATLANTIS mark in casino services; Monarch has the exclusive ability to use the ATLANTIS mark for casino services within the State of Nevada by virtue of its Nevada state registration; and  Monarch has the right and ability to use and convey rights in the Atlantis name and mark in connection with casino services in Las Vegas, Nevada, and to do so does not constitute deceptive trade practices under Nevada law.  The court declined Monarch’s request for cancellation of Kerzner’s federal registration and for attorneys’ fees, but awarded costs of suit to Monarch as the prevailing party.   On March 11, 2011, Kerzner filed its Notice of Appeal, appealing the above referenced final judgment.  Monarch filed a cross-appeal on the bases that the district court erred by failing to cancel Kerzner’s federal registration of the ATLANTIS mark for gaming, and by not awarding attorneys’ fees to Monarch.  The case number assigned in the Ninth Circuit Court of Appeal was 11-15675. The Ninth Circuit briefing schedule was stayed while the parties explored settlement.  Having reached a settlement, on February 13, 2013, the parties submitted a Stipulated Motion to Voluntarily Dismiss Appeal and Cross-Appeal and  the Ninth Circuit’s Order of Dismissal pursuant to that Motion was entered February 14, 2013.  In conjunction with the settlement,  Monarch was acknowledged by Kerzner to own the rights in the United States for use of the name ATLANTIS in connection with casino, restaurant, bar and cocktail lounge services, and Monarch further obtained registration for the marks “Atlantis Casino” and “Atlantis Casino Spa” in the US Patent and Trademark Office in International Class 41 (U.S. Classes 100, 101 and 107) for casinos, and in International Class 43 (U.S. Classes 100 and 101) for restaurant and bar services, and cocktail lounges.   Also, as an element of the settlement, under a license from Monarch, Kerzner is entitled to exclusive use of the Atlantis name for gaming in resort-type settings in the United States east of the Mississippi River.  However, Monarch retains all rights for online or internet-based casino gaming services under the Atlantis name directed toward United States consumers.   Kerzner retains ownership of the mark ATLANTIS for lodging services (this class of services  was not a subject of the litigation) and Monarch continues to hold the exclusive license from Kerzner for lodging services under the Atlantis name in the state of Nevada.  Accordingly, Monarch holds the intellectual property rights enabling it to own and/or operate an Atlantis-branded casino resort in Las Vegas, and any other Nevada location.   The above-described trademark litigation with Kerzner is now concluded.

 

We are party to other claims that arise in the normal course of business.  Management believes that the outcomes of such claims will not have a material adverse impact on our financial condition, cash flows or results of operations.

 

ITEM 1A. RISK FACTORS

 

A description of our risk factors can be found in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.  The material changes to those risk factors during the three months ended March 31, 2013 are found below.

 

OUR BUSINESS MAY BE ADVERSELY IMPACTED IF THE RENO OR DENVER METROPOLITAN ECONOMIES FURTHER DECLINE OR STAGNATE

 

We market to and rely upon business from Reno and Denver metropolitan area residents.  Adverse changes in the business and employment conditions in Reno (prior to our acquisition of Riviera Black Hawk) brought on by the economic recession have adversely impacted our business.  There can be no guarantee that such conditions will improve or will not worsen.  Additional erosion in business and employment conditions in Reno or the Denver metropolitan area could adversely impact our business.

 

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ITEM 6. EXHIBITS

 

Exhibit No

 

Description

31.1

 

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of John Farahi, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Ronald Rowan, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

 

XBRL Instance

101.SCH**

 

XBRL Taxonomy Extension Schema

101.CAL**

 

XBRL Taxonomy Extension Calculation

101.DEF**

 

XBRL Taxonomy Extension Definition

101.LAB**

 

XBRL Taxonomy Extension Labels

101.PRE**

 

XBRL Taxonomy Extension Presentation

 


** XBRL information is furnished and not filed as a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

MONARCH CASINO & RESORT, INC.

 

(Registrant)

 

 

 

 

 

Date: May 8, 2013

By:

/s/ RONALD ROWAN

 

Ronald Rowan, Chief Financial Officer

 

and Treasurer (Principal Financial

 

Officer and Duly Authorized Officer)

 

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