The following discussion is intended to assist in the understanding of our
results of operations and our present financial condition. The consolidated
financial statements and the accompanying notes contain additional detailed
information that should be referred to when reviewing this material. Statements
in this discussion may be forward-looking. Such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
significantly from those expressed. See "Forward-Looking Statements" preceding
Item 1. "BUSINESS".
OVERVIEW OF OUR BUSINESS
Monarch Casino & Resort, Inc. was incorporated in Nevada in1993 and, along with
its consolidated subsidiaries, is referred to collectively in this Annual Report
on Form 10-K as "Monarch", "we", "our" and "us". Monarch owns and operates the
Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the "Atlantis")
and Monarch Casino Black Hawk, a casino in Black Hawk, Colorado. In addition, we
own separate parcels of land located next to the Atlantis, a parcel of land
located next to the Monarch Casino Black Hawk and a parcel of land with an
industrial warehouse located between Denver, Colorado and Monarch Casino Black
Hawk. We also own Chicago Dogs Eatery, Inc. and Monarch Promotional Association,
both of which were formed in relation to extended licensure requirements for
extended hours of liquor operation in Black Hawk, Colorado.
Our business strategy is to maximize revenues, operating income and cash flow
primarily through our casino, food and beverage operations and, at the Atlantis,
our hotel operations. The Monarch Casino Black Hawk does not have a hotel;
however, we are in the process of renovations and construction that will include
a hotel. See Item 1, "BUSINESS - THE MONARCH CASINO BLACK HAWK." We focus on
delivering exceptional service and value to our guests. Our hands-on management
style focuses on customer service and cost efficiencies.
FACTORS IMPACTING OUR RESULTS OF OPERATION
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, as well
as those matters discussed in Item 1A. "RISK FACTORS" above.
The following significant factors and trends should be considered in analyzing
our operating performance:
Atlantis: Our business strategy is to maximize revenues, operating income and
cash flow primarily through our casino, food and beverage operations and hotel
operations. We continuously upgrade our property. With quality gaming, hotel and
dining products, we believe the Atlantis is well positioned to benefit from
future macro and local economic growth. Businesses continue to relocate to
Northern Nevada and local business volume has steadily increased. While such
economic activity could ultimately drive additional revenue and profit at
Atlantis, we are experiencing the more immediate effect of increased labor
costs, which, combined with continued aggressive marketing programs by our
competitors, have applied upward pressure on Atlantis operating costs.
34
--------------------------------------------------------------------------------
Table of Contents
Monarch Casino Black Hawk: Since the acquisition of Monarch Casino Black Hawk in
April 2012, our focus has been to maximize casino and food and beverage revenues
while upgrading the existing facility and laying the groundwork for the major
expansion. There is currently no hotel on the property. In October 2012, we
began a project to redesign and upgrade the existing Monarch Casino Black Hawk
facility. In September 2013, we opened a new buffet. In August 2015, we
completed the redesign and upgrade of the existing Monarch Casino Black Hawk,
bringing to the facility's interior the same quality, ambiance and finishes of
the ongoing master planned expansion that will transform Monarch Casino Black
Hawk into a full-scale casino resort. In the fourth quarter of 2013, we began
work on the Monarch Black Hawk Expansion Plan and have since completed the first
phase. In November 2016, we opened for guest use our elegant nine-story parking
facility with about 1,350 spaces. Construction of a new hotel tower and casino
expansion on the site where the old parking structure was sitting is under way.
(see CAPITAL SPENDING AND DEVELOPMENT - Monarch Black Hawk Expansion Plan). Once
completed, the Monarch Black Hawk Expansion Plan will nearly double the casino
space and will add a 23-story hotel tower with approximately 500 guest rooms and
suites, an upscale spa and pool facility, three additional restaurants
(increasing the total to four), additional bars and associated support
facilities. We currently expect completion of the entire expansion in the second
quarter of 2019.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016
For the year ended December 31, 2017, our net income totaled $25.5 million, or
$1.39 per diluted share, compared to net income of $24.6 million, or $1.39 per
diluted share for the same period of 2016, reflecting a 3.9% increase in net
income and no change in diluted earnings per share. Net revenue for the years
ended December 31, 2017 and 2016 was $230.7 million and $217.0 million,
respectively, reflecting an increase of $13.7 million, or 6.3%. Income from
operations for the year ended December 31, 2017 totaled $40.7 million compared
to $38.5 million for the same period in 2016, representing an increase of $2.1
million, or 5.5%.
Casino revenue increased 5.8% in the year ended December 31, 2017 compared to
the same period of 2016. Casino revenues increased at both the Monarch Casino
Black Hawk and at the Atlantis. The Atlantis benefited from the region's market
strength. Our renovated Monarch Black Hawk casino increased market share despite
the disruptions related to the property's expansion. Casino operating expense as
a percentage of casino revenue decreased to 40.9% for the year ended
December 31, 2017, compared to 41.2% in 2016 due to the effect of higher casino
revenue combined with operating cost efficiencies.
Food and beverage revenue increased 5.2% in the year ended December 31, 2017
over the same period in 2016, due to a 2.7% increase in average revenue per
cover and a 2.4% increase in covers served. Food and beverage operating expense
as a percentage of food and beverage revenue in the year ended December 31, 2017
was 40.6% compared to 40.9% over the same period in 2016. The decrease in
expense margin is due primarily to the costs, related to the redesign and
upgrade of Toucan Charlie's Buffet at Atlantis, which costs were expensed during
the first quarter of 2016 and the improved cost of sales percentage in 2017,
offset by increase in labor expenses.
Hotel revenue increased 6.0% due to a higher ADR of $81.46 for the year ended
December 31, 2017 compared to $79.52 for the same period in 2016, combined with
higher hotel occupancy of 89.4% in 2017 compared to 88.2% in 2016. REVPAR was
$82.40 and $77.50 for the years ended December 31, 2017 and 2016, respectively.
Hotel operating expense as a percent of hotel revenue for the year ended
December 31, 2017 was 37.6% compared to 30.9% for the same period in 2016. The
increase is due primarily to higher payroll and related benefits expense,
expenses related to the implementation of advanced analytical tools, hotel
repair and maintenance expense, as well as expenses related to the shuttle
service and expanded valet services implemented at Monarch Casino Black Hawk.
Other revenue increased 7.1% in 2017 compared to 2016 driven primarily by
increased Atlantis arcade revenue, spa and salon revenue and retail revenue.
Promotional allowances as a percentage of gross revenues declined to 17.4% for
the year ended December 31, 2017 compared to 17.8% for the year ended
December 31, 2016. This decrease was primarily due to higher revenues and more
efficient utilization of complimentaries.
35
--------------------------------------------------------------------------------
Table of Contents
Selling, general and administrative expense ("SG&A Expense") increased to $62.7
million in the year ended December 31, 2017 from $57.7 million in the same
period of 2016 primarily due to: i) a $3.2 million increase in salaries, wages
and related employee benefits expense; ii) a $0.5 million increase in
professional fees; iii) a $0.4 million increase in repair and maintenance
expense; iv) a $0.3 million increase in information technology expense; v) a
$0.3 million increase in marketing expense; vi) a $0.2 million increase in
property tax expense resulting from the new parking structure at Monarch Casino
Black Hawk; and vii) a $0.1 million increase in contribution expense.
Depreciation and amortization expense increased to $15.1 million for the year
ended December 31, 2017 as compared to $14.8 million for the same period in 2016
as a result of: i) a $0.4 million increase in depreciation expense from new
assets at Atlantis and ii) a $0.1 million decrease in depreciation expense at
Monarch Casino Black Hawk as a result of the accelerated depreciation of the old
garage building in 2016, partially offset by the increase in depreciation
expense from the new parking garage at Monarch Casino Black Hawk.
In 2016, we incurred a $0.6 million loss from disposal of assets, primarily as
a result of the write off of the remaining net book value of the hotel towers
doors at the Atlantis, that were replaced with new doors in the second quarter
of 2016.
During the year ended December 31, 2017, we did not draw on or make principal
payments on the Credit Facility and the outstanding balance of the Credit
Facility remained at $26.2 million as of December 31, 2017. Interest expense,
net of amounts capitalized were $1.0 million and $0.6 million in 2017 and 2016,
respectively. The increase in interest expense is a result of increase in the
interest rate and the commitment fees paid. See further discussion of our
Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
For the year ended December 31, 2016, our net income totaled $24.6 million, or
$1.39 per diluted share, compared to net income of $20.7 million, or $1.19 per
diluted share for the same period of 2015, reflecting a 19.0% increase in net
income and a 16.8% increase in diluted earnings per share. Net revenue for the
year ended December 31, 2016 and 2015, was $217.0 million and $202.2 million,
respectively, reflecting an increase of $14.8 million, or 7.3%. Income from
operations for the year ended December 31, 2016 totaled $38.5 million compared
to $32.6 million for the same period in 2015, representing an increase of $6.0
million, or 18.4%.
Casino revenue increased 7.7% in the year ended December 31, 2016 compared to
the same period of 2015. Casino revenues increased at both the Monarch Casino
Black Hawk and at the Atlantis. The Atlantis benefited from the region's market
strength and the increase in local patrons' visits. Monarch Black Hawk casino
revenue increased despite the disruptions related to the property's expansion.
Casino operating expense as a percentage of casino revenue decreased to 41.2%
for the twelve months ended December 31, 2016, compared to 42.1% in 2015 due to
the effect of higher casino revenue partially offset by higher complimentary
expense.
Food and beverage revenue for the twelve months ended December 31, 2016
increased 6.7% over the same period in 2015, due to a 6.4% increase in average
revenue per cover. Covers served were flat. Food and beverage operating expense
as a percentage of food and beverage revenue in the twelve months ended
December 31, 2016 were 40.9% compared to 39.4% over the same period in 2015. The
increase in expense margin is due primarily to costs, related to the redesign
and upgrade of Toucan Charlie's Buffet at Atlantis, which costs were expensed
during the first quarter of 2016.
Hotel revenue increased 3.3% due to a higher ADR of $79.52 for the year ended
December 31, 2016 compared to $76.92 for the same period in 2015, partially
offset by slightly lower hotel occupancy of 88.2% in 2016 compared to 89.7% in
2015. REVPAR was $77.50 and $75.24 for the years ended December 31, 2016 and
2015, respectively. Hotel operating expense as a percent of hotel revenue for
the twelve months ended December 31, 2016 was 30.9% compared to 30.0% for the
same period in 2015. The increase is due primarily to higher payroll and related
benefits expense and expense related to the implementation of advanced
analytical tools.
Other revenue increased 3.9% in 2016 compared to 2015, driven primarily by
increased Atlantis arcade revenue, Atlantis spa and salon revenue and retail
revenue.
36
--------------------------------------------------------------------------------
Table of Contents
Promotional allowances as a percentage of gross revenues declined to 17.8% for
the year ended December 31, 2016 compared to 18.2% for the year ended
December 31, 2015. This decrease was primarily due to higher revenues and more
efficient utilization of complimentaries.
SG&A Expense increased to $57.7 million in the twelve months ended December 31,
2016 from $54.8 million in the same period of 2015 primarily due to: i) a $1.8
million increase in salaries, wages and related benefits expense; ii) a $0.7
million increase in marketing expense; iii) a $0.5 million increase in rental
expense from the parking lot lease at Atlantis (see Note 12. Related Party
Transactions); iv) a $0.2 million increase in property tax expense, resulting
from the new parking structure at Monarch Casino Black Hawk and the addition of
the leased parking lot at Atlantis; and v) a $0.2 million increase in legal
fees expense, all offset by a decrease in utility expense of $0.5 million.
Depreciation and amortization expense decreased to $14.8 million for the year
ended December 31, 2016 as compared to $15.9 million for the same period in 2015
as a result of: i) a $1.1 million decrease in depreciation expense on the
parking structure at Monarch Casino Black Hawk; and ii) a $0.3 million decrease
in depreciation expense at Atlantis due to assets having become fully
depreciated, all partially offset by the increase in depreciation expense from
new assets related to the remodel and upgrade project at Monarch Casino Black
Hawk.
In 2016, we incurred a $0.6 million loss from disposal of assets, primarily as a
result of the write off of the remaining net book value of the hotel towers
doors at the Atlantis, that were replaced with new doors in the second quarter
of 2016.
During the year ended December 31, 2016, we paid down the principal balance on
our Credit Facility by $14.7 million, which decreased the outstanding balance of
the Credit Facility to $26.2 million at December 31, 2016 from $40.9 million at
December 31, 2015. Interest expense, net of amounts capitalized, decreased to
$0.6 million in 2016 from $0.7 million in 2015 primarily as a result of lower
borrowings in 2016 compared to 2015, offset by an increase in commitment fees in
relation to the Amended Credit Facility we entered into in July 2016. See
"LIQUIDITY AND CAPITAL RESOURCES".
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 during the
years ended December 31, 2017 and 2016 were as follows (in thousands):
Capital Expenditures:
2017 2016
Atlantis $ 6,464 $ 7,894
Monarch Casino Black Hawk 40,308 17,029
$ 46,772 $ 24,923
During the twelve months ended December 31, 2017 and 2016, capital expenditures
related primarily to the work on the Monarch Black Hawk Expansion Plan, as well
as acquisition of gaming equipment to upgrade and replace existing equipment at
the Monarch Casino Black Hawk and the Atlantis.
Since the acquisition of the Monarch Casino Black Hawk, we have upgraded the
property's food and beverage operations (including an all-new buffet) and
completed the redesign and upgrade of the existing casino floor. Our plans also
call for the exterior of the existing facility to be refinished to match the
master planned expansion. The exterior refinishing is expected to cost
approximately $11 to $13 million and is anticipated to be funded primarily from
operating cash flow or the credit facility.
Monarch Black Hawk Expansion Plan
In the fourth quarter of 2013, we began work to convert the Monarch Casino Black
Hawk into a full-scale casino resort.
37
--------------------------------------------------------------------------------
Table of Contents
The multi-phased expansion of the Monarch Casino Black Hawk involves
construction of a new parking structure, demolition of the existing parking
structure and construction of a new hotel tower and casino expansion. In
November 2016, the new nine-story parking structure, offering approximately
1,350 parking spaces, was completed and became available for use by Monarch
Casino Black Hawk guests. The demolition and removal of the old parking
structure, which included a controlled implosion of the old garage, was
completed in the first quarter of 2017.
On February 8, 2017, we broke ground on the hotel tower and casino expansion.
The new 23-story tower will nearly double the existing casino space and will
include approximately 500 hotel rooms, an upscale spa and pool facility, three
additional restaurants and additional bars. We currently expect completion of
the entire tower in the second quarter of 2019 at a total cost of approximately
$229 to $234 million. We expect to finance the cost through a combination of
operating cash flow and the credit facility. We can provide no assurance that
any project will be completed on schedule, if at all, or within established
budgets, or that any project will result in increased earnings to us.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash provided by operations and,
for capital expansion projects, borrowings available under our credit
facilities.
For the year ended December 31, 2017, net cash provided by operating activities
totaled $49.5 million, an increase of approximately $5.7 million, or 13.1%,
compared to the same period of the prior year. This increase was primarily due
to: i) a $6.1 million increase in share based compensation as a result of the
adoption of the ASU No. 2016-09, which changes the classification and
presentation of the stock-based compensation in the Statement of Cash Flows; ii)
a $3.0 million decrease in the deferred tax asset as a result of a decrease in
temporary tax-to-book differences and a revaluation of the deferred tax asset to
a 21% tax rate, established with the Tax Cuts and Jobs Act Bill of 2017; iii) a
$1.0 million increase in net income; and iv) a $0.4 million increase in
depreciation and amortization; offset by a combined increase in ordinary working
capital of $4.1 million and a decrease in loss on disposal of assets of $0.7
million.
Net cash used in investing activities totaled $46.7 million and $24.9 million in
the years ended December 31, 2017 and 2016, respectively. Net cash used in
investing activities during the year ended December 31, 2017 consisted primarily
of cash used for the new hotel tower and casino expansion at Monarch Casino
Black Hawk, the purchase of a parcel of land with an industrial warehouse in
proximity to the Monarch Casino Black Hawk, the re-carpeting of the casino floor
and hotel rooms and upgrading the fountains at Atlantis, and for acquisition of
gaming and other equipment at both properties. Net cash used in investing
activities during the year ended December 31, 2016 consisted primarily of cash
used for the new parking garage at Monarch Casino Black Hawk, the redesign and
upgrade of Toucan Charlie's Buffet at Atlantis, improvements to new additional
parking spaces at Atlantis, and for acquisition of gaming and other equipment at
both properties.
There were no financing activities during the year ended December 31, 2017. Net
cash used in financing activities during the year ended December 31, 2016 was
$13.6 million and represented $14.7 million in payments under our credit
facility, offset by $1.1 million in proceeds from stock option exercises,
including excess tax benefit from options exercised.
On July 20, 2016, we entered into an amended and restated credit facility
agreement (the "Amended Credit Facility"), under which our former $100 million
credit facility (which, as of June 30, 2016, had borrowing capacity reduced to
$45.5 million as a result of $19.5 million in mandatory reductions pursuant to
the agreement and $35 million in voluntary reductions, as allowed by the
agreement) was increased to $250.0 million, and the maturity date was extended
from November 15, 2016 to July 20, 2021.
As of December 31, 2017, we had $26.2 million borrowed and a $0.6 million
Standby Letter of Credit and $223.2 million remaining in available borrowings of
the $250.0 million maximum principal available under the Amended Credit
Facility. As of December 31, 2017, there have been no withdrawals from the
Standby Letter of Credit.
38
--------------------------------------------------------------------------------
Table of Contents
The total revolving loan commitment under the Amended Credit Facility will be
automatically and permanently reduced to $50 million in the first full quarter
after completion of the expansion project at the Monarch Casino Black Hawk and
all then outstanding revolving loans up to $200 million under the Amended Credit
Facility will be converted to a term loan at such time. We may be required to
prepay borrowings under the Amended Credit Facility using excess cash flows
depending on our leverage ratio no later than December 31, 2019. We have an
option to permanently reduce the maximum revolving available credit at any time
so long as the amount of such reduction is at least $0.5 million and in
multiples of $50,000.
Borrowings are secured by liens on substantially all of our real and personal
property.
In addition to other customary covenants for a facility of this nature, as of
December 31, 2017, we are required to maintain a leverage ratio, defined as
consolidated debt divided by Adjusted EBITDA, of no more than 3.5:1 and a fixed
charge coverage ratio (Adjusted EBITDA divided by fixed charges, as defined) of
at least 1.15:1. As of December 31, 2017, our leverage ratio and fixed charge
coverage ratios were 0.5:1 and 40.9:1, respectively.
The interest rate under the Amended Credit Facility is LIBOR plus a margin
ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit
Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The
applicable margins will vary depending on our leverage ratio. Commitment fees
are equal to the daily average unused revolving commitment multiplied by the
commitment fee percentage, ranging from 0.175% to 0.45%, based on our leverage
ratio.
At December 31, 2017, our interest rate was based on LIBOR and our leverage
ratio was such that pricing for borrowings under the Amended Credit Facility was
LIBOR plus 1.00%. At December 31, 2017, the one-month LIBOR interest rate was
1.57%. The carrying value of the debt outstanding under the Amended Credit
Facility approximates fair value because the interest fluctuates with the
lender's prime rate or other market rates of interest.
We may prepay borrowings under the Amended 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
re-borrowed 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 Amended 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 or if our cash needs exceed our borrowing capacity
under the Amended Credit Facility, 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.
OFF-BALANCE SHEET ARRANGEMENTS
The shopping center adjacent to the Atlantis (the "Shopping Center") is owned by
Biggest Little Investments, L.P. ("BLI"). John Farahi and Bob Farahi,
Co-Chairmen of the Board and our executive officers, and Ben Farahi are the
three largest stockholders (the "Farahi Family Stockholders") of Monarch and
each also beneficially owns limited partnership interests in BLI. Maxum LLC is
the sole general partner of BLI, and Ben Farahi is the sole managing member of
Maxum LLC. Neither John Farahi nor Bob Farahi has any management or operational
control over BLI or the Shopping Center. Until May 2006, Ben Farahi held the
positions of Co-Chairman of the Board, Secretary, Treasurer and Chief Financial
Officer of the Company.
39
--------------------------------------------------------------------------------
Table of Contents
In response to customer demand for more convenient surface parking at the
Atlantis, and after detailed analysis, on August 28, 2015, we, through our
subsidiary Golden Road, entered into a 20-year lease (the "Parking Lot Lease")
with BLI with respect to a portion of the Shopping Center. This lease gives the
Atlantis the right to use a parcel, approximately 4.15 acres, comprised of a
commercial building and surrounding land adjacent to the Atlantis (the "Leased
Property"). The primary purpose of the Parking Lot Lease is to provide
additional, convenient, Atlantis surface parking. We demolished the commercial
building on the Leased Property and converted the land into approximately 300
additional surface parking spaces for the Atlantis. The minimum annual rent
under the Parking Lot Lease is $695 thousand commencing November 17, 2015. The
minimum annual rent is subject to a cost of living adjustment increase on each
five year anniversary. In addition, we are responsible for payment of property
taxes, utilities and maintenance expenses related to the Leased Property. We
have an option to renew the Parking Lot Lease for an additional 10-year term. If
we elect not to exercise our renewal option, we will be obligated to pay BLI
$1.6 million. For each of the years ended December 31, 2017 and 2016, we paid
approximately $695 thousand in parking lot rent, respectively.
A driveway (the "Driveway Project") that is being shared between the Atlantis
and the Shopping Center was completed and opened on September 30, 2004. The
Shopping Center is controlled by BLI. As part of the Driveway Project, in
January 2004, we leased (the "Driveway Lease") an approximate 37,400 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 a cost of living increase on each five
year anniversary of the Driveway Lease. As of December 31, 2017, the annual rent
is $377 thousand. In August 2015, we exercised our option to extend the lease
for three individual five-year terms in addition to the 15 year initial term. 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 15-year expected economic useful life
of the asset; some components of the new driveway were being depreciated over a
shorter period of time. We paid approximately $377 thousand in lease payments
for the leased driveway space during each of the years ended December 31, 2017
and 2016.
COMMITMENTS AND CONTINGENCIES
Our contractual cash obligations as of December 31, 2017 and the next five years
and thereafter are as follows (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) $ 26.4 $ 1.1 $ 2.2 $ 2.2 $ 20.9
Purchase Obligations (3) 15.9 12.9 1.9 0.1 1.0
Borrowings Under Amended Credit
Facility (4) 26.2 - - 26.2 -
Total Contractual Cash Obligations $ 68.5 $ 14.0 $ 4.1 $ 28.5 $ 21.9
--------------------------------------------------------------------------------
(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 rate at which we deploy capital
and other spending which, in turn, impacts the level of future borrowings.
The interest rate under the Amended Credit Facility is LIBOR plus a margin
ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit
Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The
interest rate is adjusted quarterly based on our leverage ratio which is
calculated using operating results over the previous four quarters and
borrowings as of the end of the most recent quarter. Based on our leverage
ratio, at December 31, 2017, pricing was LIBOR plus 1.00% and will be
adjusted in subsequent quarters in accordance with our leverage ratio. At
December 31, 2017, the one-month LIBOR rate was 1.57%.
(2) Operating leases include the Driveway Lease and the Parking Lot Lease.
40
--------------------------------------------------------------------------------
Table of Contents
(3) Purchase obligations represent approximately $9.1 million of commitments
related to capital projects and approximately $6.8 million of materials and
supplies used in the normal operation of our business. Of the total purchase
order and construction commitments, approximately $15.9 million are
cancelable by us upon providing a 30-day notice.
(4) The amount represents outstanding draws against the Amended Credit Facility
as of December 31, 2017.
As described in the "CAPITAL SPENDING AND DEVELOPMENT" section above, we have
begun commencement of a substantial expansion of our Monarch Casino Black Hawk
facility starting in 2014. While we have disclosed the estimated cost of that
expansion, we have not entered into contracts for substantial portions of the
work. For this reason, we have included in the table above only the amounts for
which we have contractual commitments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP"). Certain of our
policies, including the estimated useful lives assigned to our assets, the
determination of the allowance for doubtful accounts and allowance for
unredeemed gift certificates, self-insurance reserves, the calculation of income
tax liabilities and the calculation of stock-based compensation, require that we
apply significant judgment in defining the appropriate assumptions for
calculating financial estimates. By their nature, these judgments are subject to
an inherent degree of uncertainty. Our judgments are based on historical
experience, terms of existing contracts, observation of trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. There can be no assurance that actual results will not
differ from our estimates. To provide an understanding of the methodologies
applied, our significant accounting policies are discussed where appropriate in
this discussion and analysis and in the Notes to Consolidated Financial
Statements.
The consolidated financial statements include the accounts of Monarch and its
subsidiaries. Intercompany balances and transactions are eliminated.
Allowance for Doubtful Accounts
We extend short-term credit to its gaming customers. Such credit is non-interest
bearing and is due on demand. In addition, we also have receivables due from
hotel guests which are primarily secured with a credit card at the time a
customer makes reservation or checks in. An allowance for doubtful accounts is
established for all Company receivables based upon our historical collection and
write-off experience, unless situations warrant a specific identification of a
necessary reserve related to certain receivables. We write off our uncollectible
receivables once all efforts have been made to collect such receivables. The
book value of receivables approximates fair value due to the short-term nature
of the receivables.
Self-insurance Reserves
We are currently self-insured up to certain stop loss amounts for Atlantis
workers' compensation and certain medical benefit costs provided to all of our
employees. As required by the state of Colorado, we are fully insured for
Monarch Casino Black Hawk workers' compensation costs. We review self-insurance
reserves at least quarterly. The reserve is determined by reviewing the actual
expenditures for the previous twelve-month period and reports prepared by the
third party plan administrator for any significant unpaid claims. We engage
third party actuaries at least once per year for a more precise reserves review
and calculation. The reserve is an amount estimated to pay both reported and
unreported claims as of the balance sheet date. We believe changes in medical
costs, trends in claims of our employee base, accident frequency and severity
and other factors could materially affect the estimate for this reserve.
Unforeseen developments in existing claims, or the possibility that our estimate
of unreported claims differs materially from the actual amount of unreported
claims, could result in the over or under estimation of our self-insurance
reserve.
41
--------------------------------------------------------------------------------
Table of Contents
Capitalized Interest
We capitalize interest costs associated with debt incurred in connection with
major construction projects. When no debt is specifically identified as being
incurred in connection with a construction project, we capitalize interest on
amounts expended on the project at our average borrowing cost. Interest
capitalization is ceased when the project is substantially complete. We
capitalized $544 thousand, $548 thousand and $533 thousand of interest during
the years ended December 31, 2017, 2016 and 2015, respectively.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the
difference between the amounts won and lost. Additionally, net win is reduced by
a provision for anticipated payouts on slot participation fees, progressive
jackpots and any pre-arranged marker discounts. Progressive jackpot provisions
are recognized in two components: 1) as wagers are made for the share of
player's wagers that are contributed to the progressive jackpot award, and 2) as
jackpots are won for the portion of the progressive jackpot award contributed by
us.
Promotional Allowances
Our player program allows members, through the frequency of their play at the
casino, to earn and accumulate points which may be redeemed for a variety of
goods and services ("Complimentaries"). Points may be applied toward hotel room
stays, food and beverage consumption at the food outlets, gift shop items, as
well as goods and services at the spa and beauty salon and for cash in our
Monarch Casino Black Hawk property. Points earned may also be applied toward
off-property events such as concerts, shows and sporting events.
We recognize Complimentaries expense at the time points are earned, which occurs
commensurate with casino patron play. The amount of expense recognized is based
on the estimated cost of the Complimentaries expected to be redeemed.
The retail value of hotel, food and beverage services provided to customers
without charge is included in gross revenue and deducted as promotional
allowances. The cost of the products and services earned is reported as casino
operating expense.
Income Taxes
Income taxes are recorded in accordance with the liability method pursuant to
authoritative guidance. Under the asset and liability approach for financial
accounting and reporting for income taxes, the following basic principles are
applied in accounting for income taxes at the date of the financial statements:
(a) a current liability or asset is recognized for the estimated taxes payable
or refundable on taxes for the current year; (b) a deferred income tax liability
or asset is recognized for the estimated future tax effects attributable to
temporary differences and carryforwards; (c) the measurement of current and
deferred tax liabilities and assets is based on the provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not anticipated;
and (d) the measurement of deferred income taxes is reduced, if necessary, by
the amount of any tax benefits that, based upon available evidence, are not
expected to be realized.
Our income tax returns are subject to examination by tax authorities. We assess
potentially unfavorable outcomes of such examinations based on accounting
standards for uncertain income taxes. Under the accounting guidance, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than 50.0% likelihood
of being realized upon ultimate settlement. It also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods and disclosure.
42
--------------------------------------------------------------------------------
Table of Contents
Stock-based Compensation
We account for stock-based compensation in accordance with authoritative
guidance which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods and services or
incurs a liability in exchange for goods and services that are based on the fair
value of the entity's equity instruments or that may be settled by the issuance
of those equity instruments. It requires an entity to measure the costs of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and recognize that cost over the
service period. We calculate the grant-date fair value using the Black-Scholes
valuation model.
The Black-Scholes valuation model requires the input of highly subjective
assumptions which include the expected term of options granted, risk-free
interest rates, expected volatility, and expected rates of dividends. We
estimate an expected term for each stock option grant based on the
weighted-average time between grant date and exercise date and the risk-free
interest rate assumption was based on U.S. Treasury rates appropriate for the
expected term. We use historical data and projections to estimate expected
volatility and expected employee behaviors related to option exercises and
forfeitures.
Fair Value of Financial Instruments
The estimated fair value of our financial instruments has been determined by us
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
we 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.
Additionally, the carrying value of our long-term debt approximates fair value
due to the variable nature of applicable interest rates and short-term maturity.
Goodwill
We account for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill
and Other ("ASC Topic 350"). ASU No. 2011-08, Intangibles- Goodwill and Other
(Topic 350): Testing Goodwill for Impairment (ASU 2011-08) gives companies the
option to perform a qualitative assessment that may allow them to skip the
annual two-step test as appropriate. We test goodwill for impairment annually
during the fourth quarter of each year, or whenever events or circumstances make
it more likely than not that impairment may have occurred. Impairment testing
for goodwill is performed at the reporting unit level, and each of our casino
properties is considered to be a reporting unit. We perform qualitative analysis
to determine whether it is more likely than not that the fair value of the
reporting unit is less than its carrying amount by assessing the relevant events
and circumstances. If that is the case, we utilize a two-step testing process.
In the first step, the estimated fair value of each reporting unit is compared
with its carrying amount, including goodwill. If the carrying value of the
reporting unit exceeds its estimated fair value, then the goodwill of the
reporting unit is considered to be impaired, and impairment is measured in the
second step of the process. In the second step, we estimate the implied fair
value of the reporting unit's goodwill by allocating the estimated fair value of
the reporting unit to the assets and liabilities of the reporting unit, as if
the reporting unit had been acquired in a business combination. If the carrying
value of the reporting unit's goodwill exceeds its implied fair value, an
impairment loss is recognized in an amount equal to that excess. Goodwill
consists of the excess of the acquisition cost over the fair value of the net
assets acquired in business combinations. As of December 31, 2017, we had
goodwill totaling $25.1 million related to the purchase of Monarch Casino Black
Hawk.
Finite-Lived Intangible Assets
Our finite-lived intangible assets include assets related to customer
relationships acquired in our acquisition of Monarch Casino Black Hawk. That
asset is amortized over its estimated useful life using the straight-line
method. We periodically evaluate the remaining useful lives of our finite-lived
intangible assets to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
43
--------------------------------------------------------------------------------
Table of Contents
The customer relationship intangible asset represents the value associated with
Monarch Casino Black Hawk rated casino guests. The initial fair value of the
customer relationship intangible asset was estimated based on the projected net
cash flows associated with these casino guests. The recoverability of our
customer relationship intangible asset could be affected by, among other things,
increased competition within the gaming industry, a downturn in the economy,
declines in customer spending which would impact the expected future cash flows
associated with the rated casino guests, declines in the number of visitations
which could impact the expected attrition rate of the rated casino guests, and
erosion of operating margins associated with rated casino guests. Should events
or changes in circumstances cause the carrying value of the customer
relationship intangible asset to exceed its estimated fair value, an impairment
charge in the amount of the excess would be recognized.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board ("FASB") issued an
accounting standard update ("ASU") that amends the FASB ASC and creates a new
topic for Revenue from Contracts with Customers. The new guidance is expected to
clarify the principles for revenue recognition and to develop a common revenue
standard for U.S. GAAP applicable to revenue transactions. This guidance
provides that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those
goods and services. This guidance also provides substantial revision of interim
and annual disclosures. The update allows for either full retrospective
adoption, meaning the guidance is applied for all periods presented, or modified
retrospective adoption, meaning the guidance is applied only to the most current
period presented in the financial statements with the cumulative effect of
initially applying the guidance recognized at the date of initial application.
The effective date is for the annual and interim periods beginning after
December 15, 2017.
We have completed our evaluation of the impact of adopting this new accounting
standard on our financial statements and internal revenue recognition policies.
The majority of our revenue recognition policies will not be impacted or will
have a minimal impact by the new standard. The accounting treatment for the
customer loyalty programs will be impacted the most by the adoption of this ASU.
Specifically, the recognition of revenue associated with the customer loyalty
programs will be impacted by eliminating the current accrual for the cost of the
points awarded at the time of play and instead deferring the portion of the
revenue received from the customer at the time of play and attributed to the
awarded points until a later period when the points are redeemed or forfeited.
The revenue deferral will be calculated from the portion of the transaction
price allocated to the points based upon their retail value. Under the former
guidance, the cost of the points was recorded as an operating expense through
the casino line item of our consolidated statements of income. In addition, upon
the adoption of this ASU, the complementary pricing for products and services
will be presented at retail pricing within the appropriate revenue line item.
Further, promotional allowances representing the retail value of food, beverages
and other services furnished to guests without charge will no longer be
presented as a separate line item on the consolidated statements of income,
rather they will be presented on a net basis within casino, food and beverage,
hotel and other revenue. These changes have no impact to net revenues and are
for presentation purposes only. We adopted this ASU on January 1, 2018 using the
modified retrospective approach and recorded a cumulative adjustment to retained
earnings, resulting from recalculating the customer loyalty program liability
balance at the time of the adoption from estimated cost to retail value, of
approximately $4.9 million.
In February 2016, the FASB issued an ASU which addresses the recognition and
measurement of leases. Under the new guidance, for all leases (with the
exception of short-term leases), at the commencement date, lessees will be
required to recognize a lease liability, which is a lessee's obligation to make
lease payments arising from a lease, measured on a discounted basis, and a
right-of-use asset, which is an asset that represents the lessee's right to use,
or control the use of, a specified asset for the lease term. Under the new
guidance, lessor accounting is largely unchanged. Further, the new lease
guidance simplifies the accounting for sale and leaseback transactions primarily
because lessees must recognize lease assets and liabilities, which no longer
provides a source for off- balance sheet financing. The effective date for this
update is for the annual and interim periods beginning after December 15, 2018
with early adoption permitted. Lessees and lessors must apply a modified
retrospective transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial
statements. We are currently assessing the impact the adoption of this standard
will have on our Consolidated Financial Statements.
44
--------------------------------------------------------------------------------
Table of Contents
In August 2016, the FASB issued an ASU that provides clarifying guidance on the
presentation of certain cash receipts and cash payments in the statement of cash
flows. The ASU is effective for annual reporting periods beginning after
December 15, 2017. We adopted this ASU on January 1, 2018, with no impact to our
presentation of cash receipts and payments on our Consolidated Statements of
Cash Flows.
In January 2017, the FASB issued an ASU that simplifies the accounting for
goodwill impairment for all entities by eliminating the requirement to calculate
the implied fair value of goodwill (i.e., Step 2 of today's goodwill impairment
test) to measure a goodwill impairment charge. Instead, entities will record an
impairment charge based on the excess of a reporting unit's carrying amount over
its fair value (i.e., measure the charge based on today's Step 1). The standard
does not change the guidance on completing Step 1 of the goodwill impairment
test. An entity will still be able to perform today's optional qualitative
goodwill impairment assessment before determining whether to proceed to Step 1.
The standard will be applied prospectively and is effective for annual and
interim impairment tests performed in periods beginning after December 15, 2019.
In January 2017, the FASB issued an ASU which provides clarifying guidance on
what constitutes a business acquisition versus an asset acquisition.
Specifically, the new guidance lays out a screen to more easily determine if a
set of integrated assets and activities does in fact represent a business. Under
this ASU, when substantially all of the fair value of the gross assets acquired
is concentrated in a single identifiable asset or group of similar identifiable
assets, the assets do not represent a business. The ASU is effective for annual
reporting periods beginning after December 15, 2017. We adopted this ASU on
January 1, 2018, with no impact to our accounting policies.
In May 2017, the FASB issued an ASU that clarifies when changes to the terms or
conditions of a share-based payment award must be accounted for as
modifications. Under the new guidance, entities will apply the modification
accounting guidance if the value, vesting conditions or classification of the
award changes. The guidance also clarifies that a modification to an award could
be significant and therefore requires disclosure, even if modification
accounting is not required. Therefore, an entity will have to make all of the
disclosures about modifications that are required today, in addition to
disclosing that compensation expense hasn't changed, if that's the case. The
effective date is for annual and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted, including in any
interim period for which financial statements have not yet been issued or made
available for issuance. The guidance will be applied prospectively to awards
modified on or after the adoption date. We adopted this ASU on January 1, 2018,
with no impact to the Company's accounting policies.
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, the implementation of
any such proposed or revised standards would have on our Consolidated Financial
Statements.
© Edgar Online, source Glimpses
United Kingdom
France
Deutschland
Schweiz (DE)
Report 
