Monarch Casino & Resort, Inc., through its direct and indirect wholly-owned
subsidiaries, Golden Road Motor Inn, Inc. ("Golden Road"), Monarch Growth Inc.
("Monarch Growth"), Monarch Black Hawk, Inc. ("Monarch Black Hawk"), High Desert
Sunshine, Inc. ("High Desert"), Golden North, Inc. ("Golden North") and Golden
East, Inc. ("Golden East") owns and operates the Atlantis Casino Resort Spa, a
hotel/casino facility in Reno, Nevada (the "Atlantis"), the Monarch Casino Black
Hawk in Black Hawk, Colorado ("Monarch Black Hawk"), and certain real estate
proximate to the Atlantis and Monarch Casino Black Hawk
Monarch's wholly owned subsidiary Monarch Interactive, Inc. ("Monarch
Interactive") received approval from the Nevada Gaming Commission on August 23,
2012, which approval was extended three times, each for an additional six-month
period, for a license as an operator of interactive gaming. The Company has
decided to allow the current approval to lapse pending a change in market
conditions that would support the Company's investment in this line of business.
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: Aggressive marketing programs by our competitors have posed
challenges to us. In response our complimentaries expense has increased.
Monarch Black Hawk: Since the acquisition of Monarch Black Hawk in April 2012,
our focus has been to maximize casino and food and beverage revenues. There is
currently no hotel on the property. In September 2013, we opened a new buffet.
In December 2013, we began a project to redesign and upgrade the casino. To
minimize disruption, we staged the work in three equal phases. The first phase
was completed and opened in August 2014. The second phase was completed and
opened in March 2015. We estimate that the third and final phase of the redesign
and upgrade work will be completed by the end of the third quarter 2015. The
excavation and foundation work for the facility's new parking structure has been
completed and the new parking structure is anticipated to be completed in late
2015 (see "Master Planned Expansion of the Monarch Casino Black Hawk" below).
Monarch expects to begin construction of its new hotel tower and casino
expansion in the second quarter of 2016. Once completed, the Monarch Black Hawk
expansion 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, a new parking structure and associated support facilities. The
planned nine story parking structure will increase total parking on site from
approximately 500 spaces to approximately 1,500 spaces. Upon completion of the
new parking structure, the existing parking structure will be demolished to make
space for the hotel tower.
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.
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Capital expenditures totaled approximately $7.8 million and $5.0 million for the
three month periods ended March 31, 2015 and 2014. During each of the three
month periods ended March 31, 2015 and 2014, our capital expenditures related
primarily to the redesign and upgrade of the Monarch Black Hawk facility as well
as acquisition of gaming equipment to upgrade and replace existing equipment in
the Atlantis and Monarch Casino Black Hawk. In December 2013, we started a
three-phase casino floor remodel and upgrade project. The first phase was
completed and opened in August 2014 and the second phase was completed and
opened in March 2015.
Master Planned Expansion of the Monarch Casino Black Hawk
In October 2012, we began an extensive renovation and upgrade of Monarch Casino
Black Hawk. To-date, we have upgraded the property's food and beverage
operations (including an all-new buffet) and completed the first two phases of a
three-phase renovation and upgrade of the existing casino floor (including a new
front entrance and cabaret lounge). We expect to complete phase three in the
third quarter of 2015. Our plans also call for the exterior of the existing
facilities to be refinished to match the master planned expansion. The remaining
cost of the upgrade and renovation is expected to be approximately $16-$18
million, all of which is expected to be funded from operating cash flow.
In addition, we have begun work on our master plan to expand and convert the
Monarch Casino Black Hawk into a full-scale casino resort. The excavation and
foundation work for the facility's new parking structure has been completed. The
9-story parking structure will increase on-site parking from approximately 500
spaces to approximately 1,500 spaces and is anticipated to be completed in late
2015. Upon completion of the new parking structure, the existing parking
structure will be razed to make room for the hotel tower. The remaining cost of
the parking structure-related work is expected to be approximately $29-$32
million, which we expect to fund primarily from operating cash flow and, to a
lesser extent, from our Credit Facility.
We expect to begin construction of the new hotel tower and casino expansion in
the second quarter of 2016. 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. Tower
floors will be opened as they are finished beginning with the casino expansion
and additional restaurants, with the expected opening of the entire tower in
late 2017 at a total cost of approximately $229-$234 million. The cost is
expected to be financed through a combination of operating cash flow and an
expansion or replacement of our Credit Facility. The Company's current credit
facility will mature in November 2016, and before that time, we expect to
negotiate a new or amended Credit Facility with sufficient borrowing capacity to
complete the expansion.
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,
construction timelines, 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, legalization of additional gaming operations
in our markets, 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. Any changes
in the law that would permit the establishment of gaming operations in or near
Denver could materially impact Black Hawk operations and could alter, delay or
cause us to reconsider our master development plan to expand our Black Hawk
property. 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
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RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2015
For the three months ended March 31, 2015, our net income totaled $4.0 million,
or $0.24 per diluted share, compared to net income of $3.3 million, or $0.19 per
diluted share, reflecting a 23.4% increase in net income and a 26.3% increase in
diluted earnings per share. Net revenues totaled $47.2 million in the current
quarter, an increase of $1.7 million compared to the 2014 first quarter. Income
from operations for the three months ended March 31, 2015 totaled $6.5 million
compared to $5.3 million for the same period in 2014.
Casino revenues increased 3.9%, in the first quarter of 2015 compared to the
first quarter of 2014. Casino operating expenses as a percentage of casino
revenue increased to 43.6% in the first quarter of 2015, compared to 41.7% in
the first quarter of 2014 primarily due to higher complimentaries expense
combined with higher payroll and related benefits.
Food and beverage revenues for the first quarter of 2015 increased 6.8% over the
first quarter of 2014, due to a 3.5% increase in average revenue per cover
combined with a 3.3% increase in total covers served. Food and beverage
operating expenses as a percentage of food and beverage revenues decreased
slightly in the first quarter of 2015 to 39.8% compared to 40.5% for the prior
year same period primarily as a result of the increase in revenue per cover
partially offset by higher repair and maintenance expenses.
Hotel revenue increased 2.0% due to a slightly higher average daily room rate
("ADR") of $68.43 in the first quarter of 2015 compared to $67.86 in first
quarter of 2014 and slightly higher hotel occupancy of 84.4% during first
quarter of 2015 compared to 83.5% during first quarter of 2014. Revenue per
Available Room ("REVPAR"), calculated by dividing total room revenue (less
service charges, if any) by total rooms available was $63.88 and $62.63 for the
three months ended March 31, 2015 and 2014, respectively. Hotel operating
expenses as a percentage of hotel revenues increased to 32.1% in first quarter
of 2015 as compared to 29.8% for the comparable prior year period due to higher
repair and maintenance expenses and higher payroll and related expenses.
Promotional allowances as a percentage of gross revenues increased to 18.5%
during the first quarter of 2015 compared to 17.9% in the comparable 2014
quarter. This increase was primarily due to the increase in complimentary
expenses driven by our competitive gaming markets.
Other revenues increased 4.9% in the first quarter of 2015 compared to the first
quarter of 2014 driven primarily by increased arcade, retail and spa revenues.
Selling, General and Administrative ("SG&A") expense decreased to $12.6 million
in the first quarter of 2015 from $13.2 million in the first quarter of 2014
primarily due to lower marketing expense and lower salaries, wages and benefits
expenses. As a percentage of net revenue, SG&A expense decreased to 26.7% in the
first quarter of 2015 from 29.1% in the first quarter of 2014.
Depreciation and amortization expense decreased to $4.1 million for the three
months ended March 31, 2015 as compared to $4.7 million for the three months
ended March 31, 2014 primarily as a result of a decrease in monthly depreciation
expense of the existing parking structure following the revision in the expected
date of early removal of the parking structure from service in relation to the
Monarch Black Hawk expansion project.
During the first quarter, the Company paid down the principal balance on its
credit facility by $4.3 million, which decreased the outstanding balance of the
credit facility to $42.0 million at March 31, 2015 from $46.3 million at
December 31, 2014. Interest expense, net of amounts capitalized decreased to
$0.2 million in the first quarter of 2015 from $0.3 million in the first quarter
of 2014 as a result of lower average outstanding borrowings in 2015 first
quarter compared to the 2014 first quarter.
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LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2015, net cash provided by operating
activities totaled $8.2 million, an increase of approximately $0.4 million or
5.0% compared to the same period in the prior year. This increase was primarily
the result of an increase in net income by $0.8 million and an increase in
income tax payable by $0.4 million partially offset by a decrease in
depreciation expense by $0.6 million and a decrease in the ordinary working
Net cash used in investing activities totaled $7.3 million and $3.8 million for
the three months ended March 31, 2015 and 2014, respectively. Net cash used in
investing activities during first quarters of 2015 and 2014 consisted primarily
of net cash used for redesigning and upgrading of the Monarch Casino Black Hawk
property and for acquisition of gaming equipment and general upgrades at the
Net cash used in financing activities during first quarter of 2015 was $4.0
million and represented $4.3 million of payments made on the Credit Facility
offset by $0.3 million in proceeds resulting from stock options exercises. Net
cash used in financing activities during first quarter of 2014 of $6.3 million
represented $4.9 million of payments made on the Credit Facility and $0.5
million in proceeds resulting from stock options exercises net of $2.0 million
in income taxes paid to satisfy minimum tax withholdings.
As of March 31, 2015, we had $88.0 million maximum principal available under the
Credit Facility, of which $42.0 million was drawn. The proceeds from the Credit
Facility were utilized to finance the acquisition of Monarch Black Hawk and may
also be used for working capital needs, general corporate purposes and for
ongoing capital expenditure requirements. We had $46.0 million remaining credit
available on the Credit Facility as of March 31, 2015.
The maximum principal available under the Credit Facility is reduced by 1.5% per
quarter beginning July 1, 2013. We may permanently reduce the maximum principal
available at any time so long as the amount of such reduction is at least $0.5
million and a multiple of $50,000. Maturities of the borrowings for each of the
next three years and thereafter as of March 31, 2015 are as follows (in
2015 $ -
The maturity date of the Credit Facility is November 15, 2016. Borrowings are
secured by liens on substantially all of our real and personal property.
The Credit Facility contains customary covenants for a facility of this nature,
including, but not limited to, covenants requiring the preservation and
maintenance of the Company's assets and covenants restricting our ability to
merge, transfer ownership of Monarch, incur additional indebtedness, encumber
assets and make certain investments. Management does not consider the covenants
to restrict normal functioning of day-to-day operations.
We may prepay borrowings under the Credit Facility without penalty (subject to
certain charges applicable to the prepayment of LIBOR borrowings prior to the
end of the applicable interest period). Amounts prepaid may be borrowed so long
as the total borrowings outstanding do not exceed the maximum principal
We believe that our existing cash balances, cash flow from operations and
borrowings available under the Credit Facility will provide us with sufficient
resources to fund our operations, meet our debt obligations, and fulfill our
capital expenditure plans over the next twelve months; however, our operations
are subject to financial, economic, competitive, regulatory, and other factors,
many of which are beyond our control. If we are unable to generate sufficient
cash flow, we could be required to adopt one or more alternatives, such as
reducing, delaying or eliminating planned capital expenditures, selling assets,
restructuring debt or obtaining additional equity capital.
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OFF BALANCE SHEET ARRANGEMENTS
A driveway was completed and opened on September 30, 2004, that is being shared
between the Atlantis and a shopping center (the "Shopping Center") directly
adjacent to the Atlantis. The Shopping Center is controlled by an entity whose
owners include our controlling stockholders. As part of this project, in
January 2004, we leased a 37,368 square-foot corner section of the Shopping
Center for a minimum lease term of 15 years at an annual rent of $300 thousand,
subject to increase every year beginning in the 61st month based on the Consumer
Price Index. We also use part of the common area of the Shopping Center and pay
our proportional share of the common area expense of the Shopping Center. We
have the option to renew the lease for three individual five-year terms, and at
the end of the extension periods, we have the option to purchase the leased
section of the Shopping Center at a price to be determined based on an MAI
Appraisal. The leased space is being used by us for pedestrian and vehicle
access to the Atlantis, and we may use a portion of the parking spaces at the
Shopping Center. The total cost of the project was $2.0 million; we were
responsible for two thirds of the total cost, or $1.35 million. The cost of the
new driveway is being depreciated over the initial 15-year lease term; some
components of the new driveway are being depreciated over a shorter period of
time. We paid approximately $94 thousand in lease payments for the leased
driveway space at the Shopping Center during the three-month period ended
March 31, 2015.
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, 2014
("2014 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 2014 Form 10-K filed on March 13, 2015.
OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS
Negative economic developments in Northern Nevada, the Denver metropolitan area,
and our feeder markets, could adversely impact discretionary incomes of our
target customers, which, in turn could adversely impact our business as our
target customers might 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 economic 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 should negative economic developments in our
The expansion of Native American casinos in California has had an impact on
casino revenues in Nevada, in general, and many analysts have continued to
predict the impact will be more significant on the Reno-Lake Tahoe market. If
other Reno-area casinos continue to suffer business losses due to increased
pressure from California Native American casinos, such casinos may intensify
their marketing efforts to northern Nevada residents as well, greatly increasing
competitive activities for our local customers.
Higher fuel costs may deter California, Denver area, and other drive-in
customers from coming to the Atlantis or the Monarch Black Hawk Casino.
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We also believe that unlimited land-based casino gaming in or near any major
metropolitan area in the Atlantis' key feeder market areas, such as San
Francisco or Sacramento, or in other areas near Denver, Colorado, the Black Hawk
key feeder markets, could have a material adverse effect on our business.
We rely on information technology and other systems to maintain and transmit
customer financial information, credit card settlements, credit card funds
transmissions, mailing lists and reservations information. The systems and
processes we have implemented to protect customers, employees and company
information are subject to the ever-changing risk of compromised security. These
risks include cyber and physical security breaches, system failure, computer
viruses, and negligent or intentional misuse by customers, company employees, or
employees of third party vendors. The steps we take to deter and mitigate these
risks may not be successful and our insurance coverage for protecting against
cybersecurity risks may not be sufficient. Any disruption, compromise or loss of
data or systems that results from a cybersecurity attack or breach could
materially adversely impact operations or regulatory compliance and could result
in remedial expenses, fines, litigation, and loss of reputation, potentially
impacting our financial results.
COMMITMENTS AND CONTINGENCIES
Our contractual cash obligations as of March 31, 2015 and the next five years
and thereafter are as follows (in millions):
Payment due by period (1)
than 1 1 to 3 3 to 5
Total year years years
Operating Leases (2) $ 1.9 $ 0.5 $ 0.8 $ 0.6
Purchase Obligations (3) 7.5 7.5 - -
Construction Contracts (4) 31.2 25.0 6.2 -
Borrowings Under Credit Facility (5) 42.0 - 42.0 -
Total Contractual Cash Obligations $ 82.6 $ 33.0 $ 49.0 $ 0.6
(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 Adjusted EBITDA and our
borrowing levels; and iii) the speed with which we deploy capital and other
spending which in turn impacts the level of future borrowings. The interest rate
under our credit facility is LIBOR, or a base rate (as defined in the credit
facility agreement), plus an interest rate margin ranging from 1.25% to 2.50%
depending on our leverage ratio. The interest rate is adjusted quarterly based
on our leverage ratio which is calculated using operating results over the
previous four quarters and borrowings at the end of the most recent quarter.
Based on our leverage ratio, at March 31, 2015 pricing was LIBOR plus 1.5% and
will be adjusted in subsequent quarters in accordance with our leverage ratio.
At March 31, 2015, the one-month LIBOR rate was 0.18%.
(2) Operating leases include leased driveway usage and executive housing in
(3) Purchase obligations represent approximately $2.5 million of commitments
related to capital projects and approximately $5.0 million of materials and
supplies used in the normal operation of our business. Of the total purchase
order and construction commitments, approximately $7.5 million are cancelable by
us upon providing a 30-day notice.
(4) Construction contracts obligations represent commitments related to remodel
and expansion projects in Monarch Casino Black Hawk. $28.6 million of the
commitment relates to construction of the new parking garage structure, $0.6
million relates to construction of the new parking garage foundation and $2.0
million relates to the remodel of the casino floor of the existing facility.
(5) The amount represents outstanding draws against the Credit Facility as of
March 31, 2015.
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 which started 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.
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