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(MARK ONE)
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
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
(State or Other Jurisdiction of
Incorporation or Organization)
3800 S. Virginia Street
Reno, Nevada
(Address of Principal Executive Offices)
88-0300760
(I.R.S. Employer
Identification No.)
89502
(ZIP Code)
Registrant’s telephone number, including area code: (775) 335-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
None
Name of each exchange
on which registered
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Non-Accelerated Filer o
Accelerated Filer x
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
The aggregate market value of voting and non-voting common equity held by nonaffiliates as of June 30, 2014, based on the closing price as reported on The Nasdaq
Stock Market (SM) of $15.14 per share, was approximately $254.5 million.
As of March 5, 2015, Registrant had 16,812,794 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant’s 2015 Annual Meeting of Stockholders, which Proxy Statement shall be filed with the Commission not later than 120
days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.
Table of Contents
Page
Number
Table of Contents
Item
Forward Looking Statements
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Monarch Casino & Resort, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
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Forward Looking Statements
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, relating to our financial condition, profitability, liquidity, resources, business outlook, market forces, corporate strategies, contractual commitments,
legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations
expressed in our forward-looking statements. When words and expressions such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,”
“objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or
expressions are used in this Form 10-K, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance
can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made.
Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to
change significantly from those set forth in our forward-looking statements, including the following factors:
· our growth strategies;
· our potential acquisitions and investments;
· successful integration of acquisitions;
· risks related to development and construction activities;
· anticipated trends in the gaming industries;
· patron demographics;
· general market and economic conditions, including but not limited to, the effects of local and national economic, housing and energy
conditions on the economy in general and on the gaming and lodging industries in particular;
· access to capital and credit, including our ability to finance future business requirements;
· our dependence on key personnel;
· the availability of adequate levels of insurance;
· changes in federal, state, and local laws and regulations, including environmental and gaming licenses or legislation and regulations;
· ability to obtain and maintain gaming and other governmental licenses;
· regulatory approvals;
· impact of weather;
· competitive environment, including increased competition in our target market areas;
· increases in the effective rate of taxation at any of our properties or at the corporate level; and
· risks, uncertainties and other factors described from time to time in this and our other SEC filings and reports.
For a more detailed description of certain Risk Factors affecting our business, see Item 1A, “Risk Factors.”
We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New
risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking
statements.
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ITEM 1. BUSINESS
3
PART I
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 East, Inc.
(“Golden East”) and Golden North, Inc. (“Golden North”), 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 (the “Monarch Casino Black Hawk”); and 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 decided to allow the 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.
Our operating assets are the Atlantis and the Monarch Casino Black Hawk. 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 yet have
a hotel. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost
efficiencies.
Unless otherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries. Monarch was
incorporated in Nevada in 1993. Our principal executive offices are located at 3800 S. Virginia Street, Reno, Nevada 89502; telephone (775) 335-4600.
Available Information
Our website address is www.monarchcasino.com. We make available on or through our internet website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and
Exchange Commission.
The Atlantis Casino Resort Spa
The Atlantis is located approximately three miles south of downtown in the generally more affluent area of Reno, Nevada. The Atlantis features
approximately 61,000 square feet of casino space; 824 guest rooms and suites; eight food outlets; two espresso and pastry bars; a 30,000 square foot health
spa and salon with an enclosed year-round pool; two retail outlets offering clothing and traditional gift shop merchandise; an 8,000 square-foot family
entertainment center; and approximately 52,000 square feet of banquet, convention and meeting room space. The casino features approximately 1,450 slot
and video poker machines; approximately 38 table games, including blackjack, craps, roulette, and others; a race and sports book; a 24-hour live keno lounge
and a poker room.
Through an enclosed skywalk, Atlantis is the only hotel facility to be physically connected to the Reno-Sparks Convention Center. The Reno-Sparks
Convention Center offers approximately 500,000 square feet of leasable exhibition, meeting room, ballroom and lobby space.
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Operations at the Atlantis are conducted 24 hours a day, every day of the year. Business is seasonal in nature, with higher revenues during the summer
months and lower revenues during the winter months.
Atlantis Casino. The Atlantis offers what we believe to be higher than average payout rates on slot machines relative to other northern Nevada casinos.
We seek to attract high-end players through high quality amenities and services and by extension of gaming credit after a careful credit history evaluation.
Hotel and Spa. The Atlantis includes three contiguous, high-rise hotel towers with a total of 824 rooms and suites. The rooms on the top seven floors in
the third tower are nearly 20% larger than the standard guest rooms and offer restricted elevator access, upscale accommodations and a private concierge
service.
The Atlantis hotel rooms feature design and furnishings consistent with the highest quality in the Northern Nevada market as well as nine-foot ceilings,
which create an open and spacious feel. The third hotel tower features a four-story waterfall with an adjacent year-round swimming pool in a climate
controlled, five-story glass enclosure, which shares an outdoor pool deck with a seasonal outdoor swimming pool and year round whirlpool. The Salon at
Atlantis is a full service salon overlooking the third floor sundeck and outdoor seasonal swimming pool and offers salon-grade products and treatments for
hair, nails, skincare and body services for both men and women. Our Spa Atlantis is a high-end health spa located adjacent to the swimming area that offers
treatments and amenities unique to our market. The hotel rooms on the spa floor feature décor that is themed consistent with the spa. Certain spa treatments
are also available in spa floor hotel rooms. The hotel features glass elevators that rise the full 19 and 28 stories of the respective towers providing panoramic
views of the Reno area and the Sierra Nevada mountain range. In 2012, our hotel was awarded with the prestigious AAA Four Diamond rating from the
American Automobile Association, a rating we currently maintain.
The average occupancy rate and average daily room rate (“ADR”) at the Atlantis for the following periods were:
Occupancy rate
ADR
2014
Years ended December 31,
2013
2012
89.1%
73.66
$
89.5%
77.78
$
87.2%
71.13
$
We continually monitor and adjust hotel room rates based upon demand and other competitive factors.
Restaurants and Dining. The Atlantis has eight restaurants, two gourmet coffee bars and one snack bar as described below:
· The 600-seat Toucan Charlie’s Buffet & Grill, which offers a wide variety of food selections, as well as specialty substations featuring made-to-order
items;
· The 160-seat Atlantis Steakhouse gourmet restaurant;
· The 200-seat upscale Bistro Napa featuring a centrally located wine cellar;
· The Oyster Bar restaurant offering fresh seafood, soups and bisques made to order;
· The Sushi Bar offering a variety of fresh raw and cooked sushi specialties, including all-you-can-eat lunch and dinner selections. Combined, the
Oyster Bar and Sushi Bar can accommodate up to 139 guests;
· The 178-seat 24-hour Purple Parrot coffee shop;
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· The 122-seat Café Alfresco restaurant serving a full menu, pizzas prepared in a wood-fired, brick oven and a variety of gelato desserts;
· The 170-seat Manhattan Deli restaurant specializing in piled-high sandwiches, soups, salads and desserts;
· Two gourmet coffee bars, offering specialty coffee drinks, pastries and desserts made fresh daily in the Atlantis bakery; and
· A snack bar and soda fountain serving ice cream and arcade-style refreshments.
The Sky Terrace. The Sky Terrace is a unique structure with a diamond-shaped, blue glass body suspended approximately 55 feet, and spanning 160 feet
across South Virginia Street, Reno’s main thoroughfare. The Sky Terrace connects the Atlantis with parking on our 16-acre site across South Virginia Street.
The structure rests at each end on two 100-foot tall Grecian columns with no intermediate support pillars. The interior of the Sky Terrace houses the Oyster
Bar, the Sushi Bar, a video poker bar, banks of slot machines and a lounge area.
The Monarch Casino Black Hawk
The Monarch Casino Black Hawk is located approximately 40 miles west of Denver, Colorado and is the first casino encountered by visitors arriving
from Denver, Colorado on Highway 119. The Monarch Casino Black Hawk features approximately 32,000 square feet of casino space, 710 slot machines, 11
table games, a 250 seat buffet-style restaurant, a snack bar and a parking structure with approximately 500 spaces. Currently the casino space is
approximately 27,500 square feet and the slot machine count has been temporarily reduced to approximately 620 to accommodate redesign and upgrade work
on the facility. Monarch owns a 1.5 acre land parcel contiguous to the Monarch Casino Black Hawk which is zoned for gaming that we plan to utilize for
future expansion.
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, which was an important step in our ongoing process of redesigning and upgrading the
existing Monarch Casino Black Hawk facility. In December 2013, we began casino remodel and upgrade work. To minimize disruption, we have staged the
work in three equal phases. The first phase of the remodel was completed and opened in August 2014. Work on the second phase is currently underway and is
expected to be complete in the first quarter of 2015. We estimate all phases of the redesign and upgrade work to be completed by the end of third quarter
2015.
Excavation and foundation work on the new parking structure is complete and we anticipate completing construction in late 2015. The 9-story parking
structure will increase on-site parking from approximately 500 spaces to approximately 1,500 spaces. Upon completion of the new parking structure, the
existing parking structure will be razed to make room for the hotel tower.
Monarch expects 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. The Company’s Master Planned Expansion of Monarch Black Hawk is more fully discussed in the CAPITAL SPENDING AND
DEVELOPMENT section.
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Acquisition, Improvements and Additional Expansion Potential
6
We identify and evaluate strategic expansion and acquisition opportunities through market and detailed financial analysis. We develop overall master
plans and then execute each phase of the master plan after re-evaluation of the current market conditions and comparison against other capital investment
opportunities.
We have continuously invested in upgrading our facilities. Capital expenditures were $21.7 million in 2014; $12.4 million in 2013; and $10.3 million in
2012. During 2014 and 2013, capital expenditures related primarily to the upgrade and master expansion plan of the Monarch Casino Black Hawk facility as
well as acquisition of gaming equipment to upgrade and replace existing equipment at both of our properties. Capital expenditures in 2012 related primarily to
purchases of gaming equipment and continued renovation and other general upgrades to both facilities.
Expansion potential at the Atlantis is twofold. First, we could further expand our existing hotel and casino, thereby providing more hotel rooms. Second,
we could develop the 16-acre parcel we own across Virginia Street from the Atlantis. This site is connected to the Atlantis by the Sky Terrace and is currently
used for surface parking and special events related to the Atlantis. Our 16-acre parcel meets all current Reno zoning requirements in the event we decide to
build another resort casino or entertainment facility. We also own additional land adjacent to our two large sites that would facilitate expansion opportunities
by allowing us to relocate certain of our administrative and other non-operational personnel and offices.
As discussed in the “Monarch Casino Black Hawk” section above, we own a 1.5 acre land parcel contiguous to the Monarch Casino Black Hawk which
is zoned for gaming that we plan to utilize for expansion of that facility.
Marketing Strategy
Reno/Sparks. Our marketing efforts are directed toward three broad consumer groups: leisure travelers, conventioneers and northern Nevada local
residents.
The Reno/Sparks region is a major gaming and leisure destination with aggregate gaming revenues of approximately $670 million (as reported by the
Nevada State Gaming Control Board for the twelve months ended December 31, 2014).
Our Atlantis revenues and operating income are principally dependent on the level of gaming activity at the Atlantis casino. Our predominant marketing
goal is to utilize all of the Atlantis amenities to generate additional casino play. Our secondary goal is to maximize revenues from our hotel, food and
beverage, spa, convention and meeting rooms, retail and other amenities.
We believe the Atlantis’ location south of downtown Reno (near the airport, near major freeway arteries and physically connected to the Reno-Sparks
Convention Center) makes the facility appealing to all three groups.
Leisure Travelers: The Reno/Tahoe region is a popular gaming and vacation destination. The principal segments of Reno’s leisure traveler market are
independent travelers, package tour and travel guests, guests we reach through the internet and high-end players. We attempt to maximize our gaming
revenues and hotel occupancy through a balanced marketing approach that addresses each market segment.
Independent travelers make reservations directly with hotels of their choice, through independent travel agents or through the internet. We strive to attract
the middle to upper-middle income strata of this consumer segment through advertising and direct marketing. This segment represents a large portion of the
Atlantis’ guests.
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The package tour and travel segment consists of visitors who utilize travel packages offered by wholesale operators. We market to this segment through
relationships with select wholesalers, primarily to generate guest visits and supplement mid-week occupancy.
We welcome domestic and international reservations on the Atlantis’ website www.atlantiscasino.com and are featured on major package tour and travel
websites.
We market to high-end players selectively through direct sales and hosts. We utilize complimentary rooms, food and beverage, special events and the
extension of gaming credit to attract, and maintain patronage from, high-end players.
Conventioneers: Convention business, like package tour and travel business, supplements occupancy during lower-demand periods. Conventioneers also
typically pay higher average room rates than non-conventioneers. We selectively seek convention and meeting groups that we believe will materially enhance
the Atlantis’ occupancy and daily room rates, as well as those we believe will be more likely to utilize our gaming products. As the only hotel-casino
physically connected to the Reno-Sparks Convention Center, the Atlantis is, in our view, uniquely positioned to capitalize on this segment. We believe the
Reno-Sparks Convention Center has created, and we expect will continue to create, additional guest traffic for the Atlantis within this market segment that is
presently underserved in the Reno area.
We market to all guest segments, including conventioneers, on the basis of the location, quality and ambiance of the Atlantis facility, gaming values,
friendly, efficient service, and the quality and relative value of Atlantis rooms, food and beverage offerings, entertainment and promotions.
Our players’ club, “Club Paradise,” allows our guests to be eligible to receive rewards and privileges based on the amount of their play, while allowing us
to track play patterns through a computerized system. We use this information to determine appropriate levels of complimentary awards and to guide our
direct marketing efforts. We believe that Club Paradise significantly enhances our ability to build guest loyalty and generate repeat guest visits.
Northern Nevada Residents: We market to northern Nevada residents (referred to as “Locals”) on the basis of the Atlantis’ location and accessibility;
convenient surface parking; gaming values; ambiance; friendly efficient service; quality and relative value of food and beverage offerings.
Black Hawk. Our marketing efforts are directed toward patrons from the Denver metropolitan area and to Colorado mountain areas. Black Hawk is
approximately 40 miles west of Denver.
Our Monarch Casino Black Hawk revenues and operating income are principally dependent on the level of gaming activity in the Black Hawk market.
Our predominant marketing goal is to provide a desired mix of high quality gaming products in an attractive setting while providing superior food and
beverage offerings. We have begun redesign and upgrade work on the existing facilities, and have begun work on our master expansion plan, to offer a full
complement of amenities to satisfy all of our guests’ requirements during their visit.
Competition
Reno/Sparks. Gaming competition in the Reno area is intense. Based on information obtained from the December 31, 2014 Gaming Revenue Report
published by the Nevada State Gaming Control Board, there are approximately 14 casinos in the Reno-Sparks area which each generated more than $12.0
million in annual gaming revenues.
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We believe that the Atlantis’ primary competition for leisure travelers comes from other large-scale casinos that offer amenities that appeal to middle to
upper-middle income guests. We compete for leisure travelers on the basis of the desirability of our location, the quality and ambiance of the Atlantis facility,
friendly, efficient service, the quality and relative value of our rooms and food and beverage offerings, entertainment offerings, promotions and gaming
values. We believe that our location away from downtown Reno is appealing to first-time and more affluent guests.
We believe that the Atlantis’ primary competition for conventioneers comes from other large-scale hotel casinos in the Reno area that actively target the
convention market segment, and from other cities in the western United States with large convention facilities and substantial hotel capacity, including Las
Vegas. We compete for conventioneers based on the desirability of our location, the quality and ambiance of the Atlantis facility, meeting and banquet rooms
designed to appeal to conventions and groups, friendly, efficient service, and the quality and relative value of our rooms and food and beverage offerings. We
believe that the Atlantis’ proximity to the Reno-Sparks Convention Center, and the enclosed pedestrian skybridge that connects the Atlantis directly with the
Reno-Sparks Convention Center facilities, affords us a distinct competitive advantage in attracting conventioneers.
We believe that the Atlantis’ competition for northern Nevada residents comes primarily from other large-scale casinos located outside of downtown
Reno that offer amenities that appeal to middle to upper-middle income guests, and secondarily with those casinos located in downtown Reno that offer
similar amenities. We compete for northern Nevada residents primarily on the basis of the desirability of our location, the quality and ambiance of the Atlantis
facility, friendly, efficient service, the quality and relative value of our food and beverage offerings, entertainment offerings, promotions and gaming values.
We believe the Atlantis’ proximity to residential areas in south Reno and its abundant surface parking provide us an advantage over the casinos located in
downtown Reno in attracting Locals.
The Atlantis also competes for gaming guests with hotel casino operations located in other parts of Nevada, especially Las Vegas and Lake Tahoe, and
with hotel casinos, located elsewhere throughout the United States and the world. Major Native American owned facilities in central and northern California
have been very successful, adversely impacting many hotel casinos in Reno. We believe that the Atlantis also competes to a lesser extent with state-sponsored
lotteries, off-track wagering, card parlors and other forms of legalized gaming, particularly in northern California and the Pacific Northwest. We believe our
numerous amenities, such as a wide array of restaurants, banquet facilities, spa and surface parking are key advantages in our ability to attract Locals that
competitor facilities cannot easily match without significant capital expenditures.
We also believe that the legalization of additional land-based casino gaming in or near any major metropolitan area in the Atlantis’ feeder markets, such
as San Francisco or Sacramento, could have a material adverse impact on our business.
The legalization of internet poker and other forms of internet gaming in additional jurisdictions throughout the United States could create further
competition for the Atlantis.
Black Hawk. There is strong competition in the concentrated Black Hawk/Central City area gaming market including approximately 24 casinos, which
generated more than $620 million in annual gaming revenues for the twelve months ended December 31, 2014 according to the Colorado Division of
Gaming.
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The Black Hawk and Central City gaming market is geographically isolated. The only other non-tribal gaming market is Cripple Creek, seventy-five
miles away. There are two federally recognized tribes in southwest Colorado, both with gaming facilities, more than 350 miles from Denver. There have been
proposals for the development of Native American, racetrack and video lottery terminal casinos throughout the state over the years. None of the proposals has
been adopted by the state’s electorate or by the legislature. Should any form of additional gaming be authorized in the Denver metropolitan area, the Black
Hawk and Central City market would be adversely affected.
We believe that the Monarch Casino Black Hawk’s primary competition for visitors comes from larger-scale casinos in the market which offer amenities
that appeal to the guest’s entire vacation experience including hotel, broader dining choices as well as other amenities. We compete for patrons on the basis of
the desirability of our location, which is the first casino encountered when entering the area on the main thoroughfare, as well as the attractive setting,
friendly, efficient service, quality and relative value of our food and beverage offerings, promotions and gaming values.
Regulation and Licensing
Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder, referred to as the Nevada Act, and various local regulations. Our gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Commission, the Nevada State Gaming Control Board, and the Reno City Council, referred to collectively as the Nevada
Gaming Authorities.
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned
with, among other things:
· the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;
· the establishment and maintenance of responsible accounting practices and procedures;
· the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal
affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada
Gaming Authorities;
· the prevention of cheating and fraudulent practices; and
· providing a source of state and local revenues through taxation and licensing fees.
Changes in such laws, regulations and procedures could have an adverse effect on our gaming operations.
Golden Road, our subsidiary which operates the Atlantis, is required to be licensed by the Nevada Gaming Authorities. This gaming license requires the
periodic payment of fees and taxes and is not transferable. We are registered by the Nevada Gaming Commission as a publicly traded corporation, or
Registered Corporation. As such, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and to
furnish any other information that the Nevada Gaming Commission may require. No person may become a stockholder of, or receive any percentage of
profits from Golden Road without first obtaining licenses and approvals from the Nevada Gaming Authorities. Golden Road and Monarch have obtained from
the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada.
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The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with Golden Road or
Monarch in order to determine whether that individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and
key employees of Golden Road must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Our officers, directors and key employees who are actively and directly involved in gaming activities of Golden Road may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensure on
suitability for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. Applicants for licensing or a finding of suitability must pay all costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities also have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a
relationship with Golden Road or us, the companies involved would have to sever all relationships with that person. In addition, the Nevada Gaming
Commission may require that we terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability and
questions pertaining to licensing are not subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada Gaming Authorities. Substantially all material loans, leases, sales of
securities and similar financing transactions by us must be reported to, or approved by, the Nevada Gaming Authorities.
If it were determined that we violated the Nevada Act, our gaming licenses and registrations with the Nevada Gaming Commission could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, we and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Gaming Commission. Further, the Nevada Gaming
Commission could appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s
appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada. The limitation, conditioning or
suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect our
gaming operations.
Any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have
his or her suitability as a beneficial holder of our voting securities determined if the Nevada Gaming Commission has reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada
Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of Monarch’s voting securities to report the acquisition to the Nevada Gaming
Commission. The Nevada Act requires that beneficial owners of more than 10% of our voting securities apply to the Nevada Gaming Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Gaming Control Board mails the written notice requiring such filing. Under certain
circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 25%, of our voting securities may
apply to the Nevada Gaming Commission for a waiver of such finding of suitability if the institutional investor holds the voting securities for investment
purposes only. If the acquisition is above 20% of the voting securities, the institutional investor may also apply for a waiver of the requirement for an
approval of a
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change of control. An institutional investor is not deemed to hold voting securities for investment purposes unless the securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members
of the board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action
that the Nevada Gaming Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities that are not deemed
to be inconsistent with holding voting securities for investment purposes only include:
· voting on all matters voted on by stockholders;
· making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a
change in its management, policies or operations; and
· such other activities as the Nevada Gaming Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming
Commission or the Chairman of the Nevada State Gaming Control Board may be found unsuitable. The same restrictions apply to a record owner if the
record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial
ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Gaming Commission may be
guilty of a criminal offense. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other
relationship with us, we:
· pay that person any dividend or interest upon voting securities;
· allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;
· pay remuneration in any form to that person for services rendered or otherwise; or
· fail to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value.
The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Gaming Commission determines that a person is
unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals if, without
the prior approval of the Nevada Gaming Commission, it:
· pays to the unsuitable person any dividend, interest, or any distribution;
· recognizes any voting right by such unsuitable person in connection with such securities;
· pays the unsuitable person remuneration in any form; or
· makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.
We are required to maintain a current stock ledger in Nevada, and the Nevada Gaming Authorities may examine the ledger at any time. If any securities
are held in trust by an agent or a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities.
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A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining
the identity of the beneficial owner. The Nevada Gaming Commission may require our stock certificates to bear a legend indicating that the securities are
subject to the Nevada Act.
We may not make a public offering of our securities without the prior approval of the Nevada Gaming Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for purposes of
constructing, acquiring or financing gaming facilities. Any approval, if granted, does not constitute a finding, recommendation or approval by the Nevada
Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is
unlawful.
Changes in our control through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a
person whereby that person obtains control (including foreclosure on the pledged shares), may not occur without the prior approval of the Nevada Gaming
Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Gaming Authorities in a variety of stringent standards
prior to assuming control of such Registered Corporation. The Nevada Gaming Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed or found suitable as
part of the approval process relating to the transaction.
The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business
practices upon Nevada’s gaming industry and to further Nevada’s policy to:
· assure the financial stability of corporate gaming operators and their affiliates;
· preserve the beneficial aspects of conducting business in the corporate form; and
· promote a neutral environment for the orderly governance of corporate affairs.
We are, in certain circumstances, required to receive approval from the Nevada Gaming Commission before we can make exceptional repurchases of
voting securities above their current market price and before we can consummate a corporate acquisition opposed by management. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the board of directors in response to a tender offer made directly to a Registered
Corporation’s stockholders for the purposes of acquiring control of the Registered Corporation.
Licensee fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee’s respective operations are conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable monthly, quarterly or annually and are based upon either:
· a percentage of the gross revenues received;
· the number of gaming devices operated; or
· the number of table games operated.
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A live entertainment tax is also paid where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold
a license as an operator of a slot route, a manufacturer or a distributor also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons, referred to as
“Licensees”, and who is or proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada State Gaming Control
Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada State Gaming Control Board of
their participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter,
Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the
Nevada Gaming Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
Colorado. As prescribed by the Colorado Limited Gaming Act of 1991 (the “Colorado Act”), the ownership and operation of limited stakes gaming
facilities in Colorado are subject to the Colorado Gaming Regulations (the “Colorado Regulations”) and final authority of the Colorado Limited Gaming
Control Commission (the “Colorado Commission”). The Colorado Act also created the Colorado Division of Gaming within the Colorado Department of
Revenue to license, supervise and enforce the conduct of limited stakes gaming in Colorado.
The Colorado Act declares public policy on limited stakes gaming to be that: (1) the success of limited stakes gaming is dependent upon public
confidence and trust that licensed limited stakes gaming is conducted honestly and competitively, the rights of the creditors of licensees are protected and
gaming is free from criminal and corruptive elements; (2) public confidence and trust can be maintained only by strict regulation of all persons, locations,
practices, associations and activities related to the operation of licensed gaming establishments and the manufacture or distribution of gaming devices and
equipment; (3) all establishments where limited gaming is conducted and where gambling devices are operated, and all manufacturers, sellers and distributors
of certain gambling devices and equipment, must therefore be licensed, controlled and assisted to protect the public health, safety, good order and the general
welfare of the inhabitants of the state to foster the stability and success of limited stakes gaming and to preserve the economy, policies and free competition in
Colorado; and (4) no applicant for a license or other affirmative Colorado Commission approval has any right to a license or to the granting of the approval
sought. Having the authority to impose fines, the Colorado Commission has broad discretion to issue, condition, suspend for up to six months, revoke, limit or
restrict at any time the following licenses: slot machine manufacturer or distributor, operator, retail gaming, support and key employee gaming licenses. With
limited exceptions applicable to licensees that are publicly traded entities, no person may sell, lease, purchase, convey or acquire any interest in a retail
gaming or operator license or business without the prior approval of the Colorado Commission. Any license issued or other Colorado Commission approval
granted pursuant to the Colorado Act is a revocable privilege, and no holder acquires any vested rights therein.
Pursuant to an amendment to the Colorado Constitution (the “Colorado Amendment”), limited stakes gaming became lawful in the cities of Central City,
Black Hawk and Cripple Creek on October 1, 1991. Currently, limited stakes gaming means a maximum single bet of $100 on slot machines and in the games
of blackjack, poker, craps and roulette. Gaming is permitted to be conducted 24 hours each day.
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Limited stakes gaming is confined to the commercial districts of these cities as defined by Central City on October 7, 1981, by Black Hawk on May 4,
1978, and by Cripple Creek on December 3, 1973. In addition, the Colorado Amendment restricts limited stakes gaming to structures that conform to the
architectural styles and designs that were common to the areas prior to World War I and that conform to the requirements of applicable city ordinances
regardless of the age of the structures. Under the Colorado Amendment, no more than 35% of the square footage of any building and no more than 50% of
any one floor of any building may be used for limited stakes gaming. Persons under the age of 21 cannot participate in limited stakes gaming. The Colorado
Constitution provides for a tax on the total amount wagered less all payouts to players at graduated annual rates. The gaming tax rates in effect as of July 1,
2008 can only be increased by amendment to the Colorado Constitution by voters in a statewide election. With respect to games of poker, the tax is calculated
based on the sums wagered that are retained by the licensee as compensation, which must be consistent with the minimum and maximum amounts established
by the Colorado Commission. The graduated rates effective as of July 1, 2012 are:
· 0.25% up to and including $2 million of the subject amounts;
· 2.0% on amounts from $2 million to $5 million;
· 9.0% on amounts from $5 million to $8 million;
· 11.0% on amounts from $8 million to $10 million;
· 16.0% on amounts from $10 million to $13 million; and
· 20.0% on amounts over $13 million.
The City of Black Hawk also assesses two monthly device fees that are based on the number of gaming devices operated. Those consist of a $62.50 fee
per device and a transportation device fee of $6.42 per device.
The Colorado Commission has enacted Rule 4.5, which imposes requirements on publicly traded corporations holding gaming licenses in Colorado and
on gaming licenses owned directly or indirectly by a publicly traded corporation, whether through a subsidiary or intermediary company. The term “publicly
traded corporation” includes corporations, firms, limited liability companies, trusts, partnerships and other forms of business organizations. Such
requirements automatically apply to any ownership interest held by a publicly traded corporation, holding company or intermediary company thereof, where
the ownership interest directly or indirectly is, or will be upon approval of the Colorado Commission, 5% or more of the entire licensee. In any event, if the
Colorado Commission determines that a publicly traded corporation or a subsidiary, intermediary company or holding company has the actual ability to
exercise influence over a licensee, regardless of the percentage of ownership possessed by such entity, the Colorado Commission may require the entity to
comply with the disclosure regulations contained in Rule 4.5.
Under Rule 4.5, gaming licensees, affiliated companies and controlling persons commencing a public offering of voting securities must notify the
Colorado Commission no later than 10 business days after the initial filing of a registration statement with the Securities and Exchange Commission.
Licensed publicly traded corporations are also required to send proxy statements to the Division of Gaming within five days after their distribution. Licensees
to whom Rule 4.5 applies must include in their charter documents provisions that restrict the rights of the licensees to issue voting interests or securities
except in accordance with the Colorado Act and the Colorado Regulations; limit the rights of persons to transfer voting interests or securities of licensees
except in accordance with the Colorado Act and the Colorado Regulations; and provide that holders of voting interests or securities of licensees found
unsuitable by the Colorado Commission may, within 60 days of such finding of unsuitability, be required to sell their
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interests or securities back to the issuer at the lesser of the cash equivalent of the holders’ investment or the market price as of the date of the finding of
unsuitability. Alternatively, the holders may, within 60 days after the finding of unsuitability, transfer the voting interests or securities to a suitable person, as
determined by the Colorado Commission. Until the voting interests or securities are held by suitable persons, the issuer may not pay dividends or interest, the
securities may not be voted and may not be included in the voting or securities of the issuer, and the issuer may not pay any remuneration in any form to the
holders of the securities.
Pursuant to Rule 4.5, persons who acquire direct or indirect beneficial ownership of (a) 5% or more of any class of voting securities of a publicly traded
corporation that is required to include in its articles of incorporation the Rule 4.5 charter language provisions; or (b) 5% or more of the beneficial interest in a
gaming licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a licensee, referred to as
“qualifying persons,” shall notify the Division of Gaming within 10 days of such acquisition and submit all requested information. Such persons are subject to
a finding of suitability as required by the Division of Gaming or the Colorado Commission. Licensees also must notify any qualifying persons of these
requirements. A qualifying person other than an institutional investor whose interest equals 10% or more must apply to the Colorado Commission for a
finding of suitability within 45 days after acquiring such securities. Licensees must also notify any qualifying persons of these requirements. Whether or not
notified, qualifying persons are responsible for complying with these requirements.
A qualifying person who is an institutional investor under Rule 4.5 and who, individually or in association with others, acquires, directly or indirectly, the
beneficial ownership of 15% or more of any class of voting securities must apply to the Colorado Commission for a finding of suitability within 45 days after
acquiring such interests.
The Colorado Regulations provide for exemption from the requirements for a finding of suitability when the Colorado Commission finds such action to
be consistent with the purposes of the Colorado Act.
Pursuant to Rule 4.5, persons found unsuitable by the Colorado Commission must be removed from any position as an officer, director or employee of a
licensee, or from a holding or intermediary company. Such unsuitable persons also are prohibited from any beneficial ownership of the voting securities of
any such entities. Licensees, or affiliated entities of licensees, are subject to sanctions for paying dividends or distributions to persons found unsuitable by the
Colorado Commission, or for recognizing voting rights of, or paying a salary or any remuneration for services to, unsuitable persons. Licensees or their
affiliated entities also may be sanctioned for failing to pursue efforts to require unsuitable persons to relinquish their interest. The Colorado Commission may
determine that anyone with a material relationship to, or material involvement with, a licensee or an affiliated company must apply for a finding of suitability
or must apply for a key employee license.
The Colorado Regulations require that every officer, director and stockholder of private corporations or equivalent office or ownership holders for non-
corporate applicants, and every officer, director or stockholder holding either a 5% or greater interest or controlling interest of a publicly traded corporation or
owners of an applicant or licensee, shall be a person of good moral character and submit to a full background investigation conducted by the Division of
Gaming and the Colorado Commission. The Colorado Commission may require any person having an interest in a license to undergo a full background
investigation and pay the cost of investigation in the same manner as an applicant.
The sale of alcoholic beverages in gaming establishments is subject to strict licensing, control and regulation by State and local authorities. Alcoholic
beverage licenses are revocable and nontransferable. State and local licensing authorities have full power to limit, condition, suspend for as long as six
months or revoke any such licenses.
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There are various classes of retail liquor licenses which may be issued under the Colorado Liquor Code. A gaming licensee may sell malt, vinous or
spirituous liquors only by the individual drink for consumption on the premises. An application for an alcoholic beverage license in Colorado requires notice,
posting and a public hearing before the local liquor licensing authority prior to approval. The Colorado Department of Revenue’s Liquor Enforcement
Division must also approve the application. Monarch Casino Black Hawk has been approved for a restaurant liquor license by both the local Black Hawk
licensing authority and the State Division of Liquor Enforcement.
2014 Equity Incentive Plan
On May 21, 2014, the Company’s stockholders adopted its 2014 Equity Incentive Plan (the “2014 Plan”). The purposes of the 2014 Plan are to attract and
retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of the Company’s
business. For additional information regarding the 2014 Plan, see Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Notes to
Consolidated Financial Statements, Note 9.
Employees
As of February 9, 2015, we had approximately 2,100 employees. None of our employees are covered by collective bargaining agreements. We believe
that our relationship with our employees is good.
ITEM 1A. RISK FACTORS
Our business prospects are subject to various risks and uncertainties that impact our business. You should carefully consider the following discussion of
risks, and the other information provided in this annual report on Form 10-K. The risks described below are not the only ones facing us; however, they do
represent all material risks currently known to us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our
business.
THE RECENT RECESSION MAY CONTINUE TO IMPACT OUR BUSINESS
The recent global and U.S. recession has had and may continue to have an adverse impact on our business. The U.S. economy continues to experience
some weakness following a severe recession, which resulted in increased unemployment, decreased consumer spending and a decline in housing values.
While the U.S. economy has slowly emerged from the recession, high levels of unemployment have continued to persist. In addition, while the Federal
Reserve took policy actions to promote market liquidity and encourage economic growth following the recession, such actions are now being curtailed as
signs of improvement in the economy have emerged, and the impact of these monetary policy actions on the recovery is uncertain. If the economic recovery
slows or stalls, or if the economy experiences another recession, we may experience a material adverse effect on our business, results of operations and
financial condition. Declines in real estate values in Reno, Denver and the U.S. or elsewhere and continuing credit and liquidity concerns could have an
adverse effect on our results of operations.
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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 the Reno and Denver metropolitan areas. Adverse changes in the business and employment conditions in Reno
and Denver may adversely impact our business. There can be no guarantee that economic conditions will continue to improve or will not stagnate or worsen
in our feeder markets, including Reno and Denver. Erosion in business and employment conditions in the Reno or Denver metropolitan areas could adversely
impact our business.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WEAKENED ECONOMIC CONDITIONS IN CALIFORNIA AND THE PACIFIC
NORTHWEST
Because California and the Pacific Northwest are also significant markets for our leisure traveler and conventioneer guests, our business may be
adversely impacted in the event of weakened economic conditions in those geographical markets.
OUR BUSINESS IS PARTICULARLY SENSITIVE TO WEAK DISCRETIONARY CONSUMER SPENDING
Consumer demand for entertainment and other amenities at hotel-casino properties and casino properties, such as ours, are particularly sensitive to a
weak economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer
preferences brought about by factors such as perceived or actual general economic conditions, effects of the recession and economic slowdown, including the
housing crisis and credit crisis, the impact of high energy and food costs, the increased cost of travel, the potential for continued bank failures, perceived or
actual disposable consumer income and wealth, or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we
offer, thus imposing practical limits on pricing and negatively impacting our results of operations and financial condition.
CERTAIN OF OUR STOCKHOLDERS OWN LARGE INTERESTS IN OUR CAPITAL STOCK AND MAY SIGNIFICANTLY INFLUENCE
OUR AFFAIRS
John Farahi and Bob Farahi, officers and directors of the Company, together with their brother Ben Farahi, beneficially own approximately 41% of the
Company’s outstanding shares of common stock. As such, members of the Farahi family, if voting together, have the ability to significantly influence our
affairs, including the election of members of the board of directors and, except as otherwise provided by law, approving or disapproving other matters
submitted to a vote of our stockholders, including a merger, consolidation, or sale of assets.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH
DEPENDS ON MANY FACTORS BEYOND OUR CONTROL
Our ability to make payments on and to refinance our indebtedness and to fund future capital expenditures and expansion efforts will depend upon our
ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control. It is possible that our business will generate insufficient cash flows from operations, or that future borrowings will not be
available to us under our Credit Facility (defined below), in amounts sufficient to enable us to pay our indebtedness as it matures and to fund our other
liquidity needs. We believe that we will need to refinance all or a portion of our indebtedness at maturity, and cannot provide assurances that we will be able
to refinance any of our indebtedness on commercially reasonable terms, or at all. We may have to adopt one or more alternatives, such as reducing or delaying
planned expenses and capital expenditures, selling assets or obtaining additional equity or debt financing or joint venture partners. These financing strategies
may not be affected on satisfactory terms, if at all.
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LIMITATIONS OR RESTRICTIONS ON OUR CREDIT FACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY
Any renegotiation or refinancing of our Credit Facility would likely result in the amendment of material provisions of the Credit Facility, such as the
interest rate charged and other material covenants. Our Credit Facility is an important component of our liquidity. Any material restriction on our ability to
use our Credit Facility or the failure to obtain a new credit facility upon either the maturity of the Credit Facility or the depletion of funds remaining under the
Credit Facility could adversely impact our operations and future growth options.
INTENSE COMPETITION EXISTS IN THE GAMING INDUSTRY, AND WE EXPECT COMPETITION TO CONTINUE TO INTENSIFY
The gaming industry is highly competitive for both customers and employees, including those at the management level. We compete with numerous
casinos and hotel-casinos of varying quality and size in our markets. We also compete with other non-gaming resorts and vacation destinations, and with
various other casino and other entertainment businesses, and could compete with any new forms of gaming, including internet gaming, that has been or may
be legalized in the future. The casino entertainment business is characterized by competitors that vary considerably in their size, quality of facilities, number
of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic
diversity. We compete directly with other casino facilities operating in the immediate and surrounding market areas in which we operate. In some markets, we
face competition from nearby markets in addition to direct competition within our market areas.
As competitive pressures increase, other casinos in our markets may intensify their marketing efforts. Increased competitive pressures in the local
markets could adversely impact our ability to continue to attract local residents to the Atlantis and the Monarch Casino Black Hawk or require us to use more
expensive, and therefore, less profitable promotions to compete more efficiently. Competitive pressures from internet gaming could also affect our future
operations.
In recent years, with fewer new markets opening for development, competition in existing markets has intensified. We have invested in expanding the
Atlantis, and are in the process of renovating and expanding the Monarch Casino Black Hawk. Our competitors have also invested in expanding their existing
facilities and developing new facilities. This expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive
marketing strategies of many of our competitors have increased competition in our markets, and this intense competition can be expected to continue. In
addition, competition may intensify if our competitors commit additional resources to aggressive pricing and promotional activities in order to attract
customers.
If our competitors operate more successfully than we do, if they attract customers away from us as a result of aggressive pricing and promotion, if they
are more successful than us in attracting and retaining employees, if their properties are enhanced or expanded, if they operate in jurisdictions that give them
operating advantages due to differences or changes in gaming regulations or taxes, or if additional hotels and casinos are established in and around our
markets, we may lose market share or the ability to attract or retain employees. In particular, the expansion of casino gaming in or near any geographic area
from which we attract or expect to attract a significant number of our customers could have a significant adverse effect on our business, financial condition
and results of operations.
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We also believe that the legalization of additional casino gaming in or near any major metropolitan area in the Atlantis’ or Monarch Casino Black Hawk’s
key marketing areas could have a material adverse impact on our business.
In addition, Native American gaming facilities in some instances operate under regulatory requirements less stringent than those imposed on our
properties, which could provide them a competitive advantage in our markets. Moreover, there is a possibility of competition from internet and other account
wagering gaming services, which would allow their guests to wager on a wide variety of sporting events and play Las Vegas-style casino games from home,
and this could have a material adverse effect on our business, financial condition, operating results and prospects. The legalization of internet poker and other
forms of internet gaming could create further competition for our operations.
OUR BUSINESS MAY BE ADVERSELY IMPACTED IF WE ARE UNABLE TO ADEQUATELY STAFF OUR OPERATIONS
From time to time, the competition for employees increases. During such times, new and growing business in the area may create job opportunities that at
times have exceeded the area’s supply of qualified employees. If we are unable to attract and retain qualified employees, or if competition for employees
results in materially increased wages, our ability to maintain and grow our business could be adversely impacted.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY DOMESTIC AND INTERNATIONAL EVENTS
The terrorist attacks that took place in the United States on September 11, 2001, were unprecedented events that created economic and business
uncertainties, especially for the travel and tourism industry. The potential for future terrorist attacks, the national and international responses, and other acts of
war or hostility have created economic and political uncertainties that could materially adversely affect our business, results of operations and financial
condition in ways we cannot predict.
AN OUTBREAK OF HIGHLY INFECTIOUS DISEASE COULD ADVERSELY AFFECT THE NUMBER OF VISITORS TO OUR FACILITIES
AND DISRUPT OUR OPERATIONS, RESULTING IN A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOWS
There have been recent fears concerning the spread of certain influenza or other diseases, as well as outbreaks on cruise ships. Potential future outbreaks
of highly infectious diseases may adversely affect the number of visitors to our property and our business and prospects. Furthermore, a major outbreak might
disrupt our ability to adequately staff our business and could generally disrupt our operations. If any of our guests or employees is suspected of having
contracted certain highly contagious diseases, we may be required to quarantine these customers or employees or the affected areas of our facilities and
temporarily suspend part or all of our operations at affected facilities. Any new outbreak of such a highly infectious disease could have a material adverse
effect on our financial condition, results of operations and cash flows.
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FAILURE OF THE RENO-SPARKS CONVENTION CENTER TO BOOK AND ATTRACT CONVENTION BUSINESS COULD ADVERSELY
IMPACT OUR BUSINESS AT THE ATLANTIS
The Atlantis is the closest hotel-casino to the Reno-Sparks Convention Center. If the Reno-Sparks Convention Center does not succeed in booking the
anticipated level of conventions, our future results of operations could be adversely impacted.
OUR BUSINESS IS SUBJECT TO RESTRICTIONS AND LIMITATIONS IMPOSED BY GAMING REGULATORY AUTHORITIES THAT
COULD ADVERSELY AFFECT US
The ownership and operation of casino gaming facilities are subject to extensive state and local regulation. The State of Nevada, the State of Colorado
and the applicable local authorities require various licenses, registrations, permits and approvals to be held by us and our subsidiaries. The Nevada Gaming
Commission and the Colorado Commission may, among other things, limit, condition, suspend, revoke or decline to renew a license or approval to own the
stock of our subsidiaries for any cause deemed reasonable by such licensing authority. If we violate gaming laws or regulations, substantial fines could be
levied against us, our subsidiaries and the persons involved, and we could be forced to forfeit a portion of our assets. The suspension, revocation or non-
renewal of any of our licenses or the levy on us of substantial fines or forfeiture of assets would have a material adverse effect on our business, financial
condition and results of operations.
To date, we have obtained all governmental licenses, findings of suitability, registrations, permits and approvals necessary for the operation of our current
gaming activities. However, gaming licenses and related approvals are deemed to be privileges under Nevada and Colorado law. We cannot assure you that
our existing licenses, permits and approvals will be maintained or extended.
OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COVER ALL POSSIBLE LOSSES THAT OUR PROPERTIES COULD
SUFFER. IN ADDITION, OUR INSURANCE COSTS MAY INCREASE AND WE MAY NOT BE ABLE TO OBTAIN THE SAME INSURANCE
COVERAGE IN THE FUTURE
Although we have general property insurance covering damage caused by a casualty loss (such as fire and natural disasters), each such policy has certain
exclusions. In addition, our property insurance is in an amount that may be less than the expected replacement cost of rebuilding the applicable complex if
there was a total loss. Our level of insurance coverage may not be adequate to cover all losses in the event of a major casualty. In addition, certain casualty
events, such as labor strikes, nuclear events, acts of war, loss of income due to cancellation of room reservations or conventions due to fear of terrorism,
deterioration or corrosion, insect or animal damage and pollution, might not be covered at all under our policies. Therefore, certain acts could expose us to
heavy, uninsured losses.
In addition, although we currently have insurance coverage for occurrences of terrorist acts and for certain losses that could result from these acts, our
terrorism coverage is subject to the same risks and deficiencies as those described above for our general property coverage. The lack of sufficient insurance
for these types of acts could expose us to heavy losses in the event that any damages occur, directly or indirectly, as a result of terrorist attacks or otherwise,
which could have a significant negative impact on our operations.
In addition to the damage caused to our property by a casualty loss (such as fire, natural disasters, acts of war or terrorism), we may suffer business
disruption as a result of these events or be subject to claims by third parties injured or harmed. While we carry business interruption insurance and general
liability insurance, this insurance may not be adequate to cover all losses in such event.
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We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to reduce our policy limits or agree to
certain exclusions from our coverage. Among other factors, it is possible that homeland security concerns, other catastrophic events or any change in
government legislation governing insurance coverage for acts of terrorism could materially adversely affect available insurance coverage and result in
increased premiums on available coverage (which may cause us to elect to reduce our policy limits) and additional exclusions from coverage. Among other
potential future adverse changes, in the future we may elect not to, or may not be able to, obtain any coverage for losses due to acts of terrorism.
Our debt instruments and other material agreements require us to maintain a certain minimum level of insurance. Failure to satisfy these requirements
could result in an event of default under these debt instruments or material agreements, which would have a material adverse effect on our financial condition,
results of operations or cash flows.
IF GAMING TAXES AND FEES ARE INCREASED, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
The federal government has, from time to time, considered a federal tax on casino revenues and may consider such a tax in the future. State and local
authorities raise a significant amount of revenue through taxes and fees on gaming activities. From time to time, legislators and officials have proposed
changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, worsening economic conditions could intensify the
efforts of state and local governments to raise revenues through increases in gaming taxes or other fees. If the state and/or local governments where our
properties are located were to increase gaming taxes and fees, our results of operations could be adversely affected.
IF WE LOSE OUR KEY PERSONNEL, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED
We depend on the continued performances of John Farahi and Bob Farahi, our Chief Executive Officer and our President, respectively, and their
management team. If we lose the services of the Farahi brothers, or other senior Atlantis management personnel, and cannot replace such persons in a timely
manner, our business could be materially adversely affected.
CLAIMS HAVE BEEN BROUGHT AGAINST US AND OUR SUBSIDIARIES IN VARIOUS LEGAL PROCEEDINGS, AND ADDITIONAL
LEGAL AND TAX CLAIMS ARISE FROM TIME TO TIME
It is possible that our cash flows and results of operations could be affected by the resolution of legal and other claims. We believe that the ultimate
disposition of current matters will not have a material impact on our financial condition or results of operations. Please see the further discussion under “Legal
Proceedings” in Item 3 of this Form 10-K.
WE OWN FACILITIES THAT ARE LOCATED IN AREAS THAT EXPERIENCE EXTREME WEATHER CONDITIONS
Extreme weather conditions may interrupt our operations, damage our properties and reduce the number of customers who visit our facilities in the
affected areas. Snowstorms, other adverse weather conditions or forest or range fires may interrupt our operations, damage our properties and reduce the
number of customers who visit our facilities in the affected areas. If there is a prolonged disruption at either our Atlantis or Monarch Casino Black Hawk
properties due to extreme weather conditions, natural disasters, catastrophic events or other acts of God, our results of operations and financial condition
could be materially adversely affected.
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While we maintain insurance coverage that may cover certain of the costs and loss of revenue that we incur as a result of some extreme weather
conditions, our coverage is subject to deductibles and limits on maximum benefits. There can be no assurance that we will be able to fully collect, if at all, on
any claims resulting from extreme weather conditions. If any of our properties are damaged or if their operations are disrupted as a result of extreme weather
in the future, or if extreme weather adversely impacts general economic or other conditions in the areas in which our properties are located or from which
they draw their patrons, our business, financial condition and results of operations could be materially adversely affected.
WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
We are subject to various federal, state and local environmental laws and regulations that govern our operations, including emissions and discharges into
the environment, and the handling and disposal of hazardous and nonhazardous substances and wastes. Failure to comply with such laws and regulations
could result in costs for corrective action, penalties or the imposition of other liabilities or restrictions. As we acquire properties, we may not know the full
level of exposure that we may have undertaken despite appropriate due diligence.
We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment.
Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating contaminated soil
or groundwater on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to
third parties impacted by such contamination. The presence of contamination, or failure to remediate it properly, may adversely affect our ability to use, sell
or rent property. The Monarch Casino Black Hawk is located within an area of historic mining activity and near superfund sites that have been the subject of
state and federal clean-up actions. Although the Monarch Casino Black Hawk is not part of a superfund site, the fact that such sites are in the vicinity and that
mining activities occurred throughout the area, it is possible that as a result of our ownership and operation of Monarch Casino Black Hawk (on which mining
may have occurred in the past), we may incur costs related to this matter in the future. Furthermore, there may have been soil or groundwater contamination at
certain of our properties resulting from current or former operations. None of these matters or other matters arising under environmental laws has had a
material adverse effect on our business, financial condition, or results of operations; however, there can be no assurance that such matters will not have such
an effect in the future.
ENERGY PRICE INCREASES MAY ADVERSELY AFFECT OUR COST OF OPERATIONS AND OUR REVENUES
Our facilities use significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy or fuel have been experienced to
date, increases in energy and fuel prices in the United States may negatively affect our operating results. The extent of the impact is subject to the magnitude
and duration of the energy and fuel price increases, but this impact could be material. In addition, energy and gasoline price increases in cities that constitute a
significant source of customers for our properties could result in a decline in disposable income of potential customers and a corresponding decrease in
visitation and spending at our properties, which would negatively impact revenues.
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CHANGES IN REGULATIONS ON LAND USE REQUIREMENTS COULD ADVERSELY IMPACT OUR BUSINESS
A change in regulations on land use requirements with regard to development of new hotel casinos in the proximity of the Atlantis and the Monarch
Casino Black Hawk could have an adverse impact on our business, results of operations, and financial condition. A relaxation in such regulations could make
it easier for competitors to enter our immediate market. A tightening of such regulations could adversely impact our future expansion opportunities.
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY HIGH-END PLAYERS’ WINNINGS
Although not the major focus of our marketing efforts, we have selectively targeted high-end players. Should one or more of these high-end players win
large sums in our casino, or should a material amount of credit extended to such players not be repaid, our results of operations could be adversely impacted.
OUR COMMON STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY, AND A STOCKHOLDER’S INVESTMENT COULD DECLINE IN
VALUE
The market price of our common stock may fluctuate substantially due to many factors, including:
· actual or anticipated fluctuations in our results of operations;
· announcements of significant acquisitions or other agreements by us or by our competitors;
· our sale of common stock or other securities in the future;
· trading volume of our common stock;
· conditions and trends in the gaming and destination entertainment industries;
· changes in the estimation of the future size and growth of our markets; and
· general economic conditions, including, without limitation, changes in the cost of fuel and air travel.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to
companies’ operating performance. Broad market and industry factors may materially harm the market price of our common stock, regardless of our
operating performance. In the past, following periods of volatility in the market price of a company’s securities, stockholder derivative lawsuits and/or
securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a
diversion of management’s attention and resources.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO DILUTION OF OUR ISSUED AND
OUTSTANDING COMMON STOCK
The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing stockholders’ equity
interests in us. Our board of directors has the authority to issue, without vote or action of stockholders, preferred stock in one or more series, and has the
ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. If
we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders’ interest.
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WE DO NOT INTEND TO PAY CASH DIVIDENDS. AS A RESULT, STOCKHOLDERS WILL BENEFIT FROM AN INVESTMENT IN OUR
COMMON STOCK ONLY IF IT APPRECIATES IN VALUE
We have never paid a cash dividend on our common stock, and we do not plan to pay any cash dividends on our common stock in the foreseeable future.
We currently intend to retain any future earnings to finance our operations and further expansion and growth of our business, including acquisitions. As a
result, the success of an investment in our common stock will depend upon any future appreciation in its value. We cannot guarantee that our common stock
will appreciate in value or even maintain the price at which stockholders have purchased their shares.
WE FACE RISKS ASSOCIATED WITH GROWTH
In April 2012, we acquired Monarch Black Hawk. The expansion of our operations, whether through acquisitions, development or internal growth, could
divert management’s attention and could also cause us to incur substantial costs, including legal, professional and consulting fees. There can be no assurance
that we will be able to develop or profitably manage our additional operations or successfully integrate such operations into our existing operations without
substantial costs, delays or other problems. Additionally, there can be no assurance that we will receive necessary licenses or approvals for expansion and
development projects currently being contemplated.
Management of new properties, especially in new geographic areas, may require that we increase our management resources. Our ability to achieve our
objectives in connection with our acquisition may be highly dependent on, among other things, our ability to retain or train capable executives. We cannot
assure you that we will be able to manage the combined operations effectively or realize any of the anticipated benefits of our acquisitions. We also cannot
assure you that the acquired business will generate returns consistent with our expectations.
The occurrence of some or all of the above described events could have a material adverse effect on our business, financial condition and results of
operations.
OUR EXPANSION AND RENOVATION PROJECTS MAY FACE SIGNIFICANT RISKS INHERENT IN CONSTRUCTION PROJECTS
We expect to commence additional expansion and renovation projects at the Monarch Casino Black Hawk in the future.
Such projects and any other development projects we may undertake will be subject to the many risks inherent in the expansion or renovation of an
existing enterprise or construction of a new enterprise, including unanticipated design, construction, regulatory, environmental and operating problems and
lack of demand for our projects. Our current and future projects could also experience:
· delays and significant cost increases;
· shortages of materials;
· shortages of skilled labor or work stoppages;
· poor performance or nonperformance by any third parties on whom we place reliance;
· unforeseen construction scheduling, engineering, environmental, permitting, construction or geological problems; and
· weather interference, floods, fires or other casualty losses.
The completion dates of any of our projects could differ significantly from expectations for construction-related or other reasons.
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In addition, actual costs and construction periods for any of our projects can differ significantly from initial expectations. Our initial project costs and
construction periods will be based upon budgets, conceptual design documents and construction schedule estimates prepared at inception of the project in
consultation with architects and contractors. Many of these costs can increase over time as the project is built to completion.
The cost of any project may vary significantly from initial budget expectations and we may have a limited amount of capital resources to fund cost
overruns. If we cannot finance cost overruns on a timely basis, the completion of one or more projects may be delayed until adequate funding is available. We
can provide no assurance that any project will be completed on time, if at all, or within established budgets, or that any project will result in increased
earnings to us. Significant delays, cost overruns, or failures of our projects to achieve market acceptance could have a material adverse effect on our business,
financial condition and results of operations.
OUR EXPANSION AND RENOVATION PROJECTS MAY FACE SIGNIFICANT RISKS INHERENT IN CONSTRUCTION PROJECTS OR
IMPLEMENTING A NEW MARKETING STRATEGY, INCLUDING RECEIPT OF NECESSARY GOVERNMENT APPROVALS
Certain permits, licenses and approvals necessary for some of our anticipated projects have not yet been obtained. The scope of the approvals required for
expansion or renovation projects can be extensive and may include gaming approvals, state and local land-use permits and building and zoning permits.
Unexpected changes or concessions required by local, state or federal regulatory authorities could involve significant additional costs and delay the scheduled
openings of the facilities. We may not obtain the necessary permits, licenses and approvals within the anticipated time frames, or at all.
In addition, although we will design our projects to minimize disruption of our existing business operations, expansion and renovation projects require,
from time to time, all or portions of affected existing operations to be closed or disrupted. Any significant disruption in operations of a property could have a
significant adverse effect on our business, financial conditions and results of operations.
IF WE ARE UNABLE TO FINANCE OUR EXPANSION AND RENOVATION PROJECTS, AS WELL AS OTHER CAPITAL EXPENDITURES,
THROUGH CASH FLOW FROM OPERATIONS, BORROWINGS UNDER OUR CREDIT FACILITY AND ADDITIONAL FINANCINGS, OUR
EXPANSION AND RENOVATION EFFORTS WILL BE JEOPARDIZED
We intend to finance our future expansion and renovation projects, as well as our other capital expenditures, primarily with cash flow from operations,
borrowings under our Credit Facility, and additional debt financings. If we are unable to finance our future expansion and renovation projects, or our other
capital expenditures, we will have to adopt one or more alternatives, such as reducing, delaying or abandoning planned expansion and renovation projects as
well as other capital expenditures, selling assets, restructuring debt, considering obtaining equity financing or joint venture partners, or modifying our Credit
Facility. These sources of funds may not be sufficient to finance our expansion, development, investment and renovation projects, and other financing may
not be available on acceptable terms, in a timely manner, or at all. In addition, our existing indebtedness contains certain restrictions on our ability to incur
additional indebtedness.
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In the past few years there have been significant disruptions in the global capital markets that have adversely impacted the ability of borrowers to access
capital. We anticipate that these disruptions may continue for the foreseeable future. We anticipate that funding for any of our expansion projects would come
from cash flows from operations and availability under our Credit Facility (to the extent that availability exists under our Credit Facility, as applicable, after
we meet our working capital needs).
If availability under our Credit Facility does not exist or we are otherwise unable to make sufficient borrowings thereunder, any additional financing that
is needed may not be available to us or, if available, may not be on terms favorable to us. As a result, if we are unable to obtain adequate project financing in a
timely manner, or at all, we may be forced to sell assets in order to raise capital for projects, limit the scope of, or defer such projects, or cancel the projects
altogether. In the event that capital markets do not improve and we are unable to access capital with more favorable terms, additional equity and/or credit
support may be necessary to obtain construction financing for the remaining cost of the project.
OUR ABILITY TO OPERATE INTRASTATE INTERACTIVE POKER IN NEVADA IS SUBJECT TO A NUMBER OF FACTORS
Monarch’s wholly owned subsidiary 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 decided to allow the
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.
Even with the approval that was allowed to lapse, our ability to offer interactive poker in the State of Nevada is subject to a number of preconditions,
including payment of a $500,000 license fee.
WE FACE INFORMATION TECHNOLOGY RISKS, INCLUDING CYBER AND PHYSICAL SECURITY BREACHES
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There were no unresolved comments from the SEC staff at the time of filing this Form 10-K.
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ITEM 2. PROPERTIES
Our properties consist of:
Reno, Nevada Properties:
(a) An approximately 13-acre site on which the Atlantis is situated, including the hotel towers, casino, restaurant facilities and surrounding parking.
(b) An approximately 16-acre site, adjacent to the Atlantis and connected to the Atlantis by the Sky Terrace, which includes approximately 11 acres of
paved parking used for customer, employee and valet parking. The remainder of the site is undeveloped. This site is compliant with all casino zoning
requirements and is suitable and available for future expansion of the Atlantis facilities, parking, or complementary resort casino and/or entertainment
amenities. We have not determined the ultimate use of this site.
(c) An approximately 2.6-acre site across Virginia Street from the Atlantis which is utilized as administrative offices (“the Administrative Site”) for
Atlantis staff.
(d) Leased land consisting of approximately 37,400 square-feet adjacent to the Atlantis serving as a driveway entrance to the Atlantis. The lease term
ends in 2019. For a further description of the lease terms, see Item 8, “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Notes to
Consolidated Financial Statements, Note 5”.
(e) An approximate 2.3-acre site adjacent to the Administrative Site which is currently unused.
(f) An approximate 5.3-acre site with a 14,376 square foot building across Coliseum Way from the Atlantis which is currently unused.
Black Hawk, Colorado Properties:
(a) An approximate 1.6 acre site on which the Monarch Casino Black Hawk is situated including the casino and parking structure.
(b) An approximate 1.8-acre site in Black Hawk, Colorado contiguous to the Monarch Casino Black Hawk. A new parking structure is currently under
construction on this land site.
Our Credit Facility is secured by liens on substantially all of our real and personal property.
ITEM 3. LEGAL PROCEEDINGS
We are party to 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 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information. Our common stock trades on The NASDAQ Stock Market under the symbol MCRI. The following table sets forth the high and low
sales prices of our common stock, as reported by the NASDAQ Stock Market, during the periods indicated.
First quarter
Second quarter
Third quarter
Fourth quarter
2014
2013
High
Low
High
Low
20.39
19.72
16.23
17.73
$
$
$
$
17.20
14.38
11.90
11.22
$
$
$
$
11.97
17.22
21.00
22.12
$
$
$
$
8.64
9.29
16.35
16.33
$
$
$
$
Stockholders. As of March 5, 2015, there were approximately 70 holders of record of our common stock, and approximately 2,000 beneficial
stockholders.
Dividends. We have never paid dividends. We presently intend to retain earnings and use free cash flow to finance our operating activities, for capital
expenditures and to pay down our debt. We do not anticipate declaring cash dividends in the foreseeable future. Our bank loan agreement also contains
provisions that require the achievement of certain financial ratios before we can pay or declare dividends to our stockholders. See Item 8, “FINANCIAL
STATEMENTS AND SUPPLIMENTAL DATA, Notes to Consolidated Financial Statements, Note 6.”
Securities Authorized for Issuance under Equity Compensation Plans. For information relating to securities authorized for issuance under equity
compensation plans, see Part III, Item 12, “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”
There have been no unregistered sales of equity securities in 2014.
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STOCK PERFORMANCE GRAPH
The following chart reflects the cumulative total return (change in stock price plus reinvested dividends) of a $100 investment in the Company’s
Common Stock from the five-year period from December 31, 2009 through December 31, 2014, in comparison to the Standard & Poor’s 500 Composite
Stock Index and an industry peer group index. The comparisons are not intended to forecast or be indicative of possible future performance of the Company’s
Common Stock.
Index
Monarch Casino & Resort, Inc.
S&P 500
MCRI Peer Group 2014 Index*
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
100.00
100.00
100.00
154.32
115.06
224.58
125.80
117.49
211.76
134.69
136.30
243.88
247.90
180.44
427.83
204.81
205.14
339.15
Period Ending
*MCRI Peer Group 2014 comprised of: Boyd Gaming Corp (BYD); Isle of Capri Casinos, Inc. (ISLE); Las Vegas Sands Corp. (LVS);
MGM Resorts International (MGM); Nevada Gold & Casinos, Inc. (UWN); Penn National Gaming, Inc. (PENN);
Pinnacle Entertainment, Inc. (PNK); and Wynn Resorts, Ltd (WYNN)
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Repurchases
On October 22, 2014, the board of directors authorized a stock repurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, the board of
directors authorized a program to repurchase up to 3,000,000 shares of our common stock in the open market or in privately negotiated transactions from time
to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal requirements and other
factors. The Repurchase Plan does not obligate us to acquire any particular amount of common stock and the plan may be suspended at any time at our
discretion, and it will continue until exhausted. The actual timing, number and value of shares repurchased under the Repurchase Program will be determined
by management at its discretion and will depend on a number of factors, including the market price of our stock, general market economic conditions and
applicable legal requirements. We have made no purchases under the Repurchase Plan.
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ITEM 6. SELECTED FINANCIAL DATA
OPERATING RESULTS
Casino revenues
Other revenues
Gross revenues
Promotional allowances
Net revenues
Income from operations
Income before income tax
Net income
INCOME PER SHARE OF COMMON
STOCK
Net income per common share
Basic
Diluted
Weighted average number of common
shares and potential common shares
outstanding
Basic
Diluted
OTHER DATA
Depreciation and amortization
Other expense
Capital expenditures (F6)
BALANCE SHEET DATA
Total assets
Long-term debt, less current maturities
Stockholders’ equity (F7)
2014
145,134
84,441
229,575
(41,808)
187,767
22,219(F1)
21,115
14,185
0.85
0.83
16,734
17,107
17,824
(1,104)
21,719
252,301
46,300
176,951
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Years ended December 31,
(Amounts in thousands, except per share amounts)
2011
2012
2013
149,916
82,001
231,917
(43,168)
188,749
30,455(F2)
28,595
17,961
1.10
1.06
16,302
16,944
16,638
(1,860)
12,400
244,523
53,800
163,880
$
$
$
$
$
$
$
$
$
$
128,831
75,160
203,991
(40,689)
163,302
15,983(F3)
13,959
8,911
0.55
0.55
16,140
16,250
16,651
(2,024)
10,329
248,120
81,100
140,848
$
$
$
$
$
$
$
$
$
$
92,420
71,242
163,662
(29,133)
134,529
9,770(F4)
8,856
5,676
0.35
0.35
16,138
16,231
13,380
(914)
17,392
179,600
24,680
130,516
$
$
$
$
$
$
$
$
$
$
2010
95,319
69,490
164,809
(28,438)
136,371
14,033(F5)
12,575
8,236
0.51
0.51
16,131
16,206
13,281
(1,458)
6,815
179,734
28,600
22,582
Footnotes to Selected Financial Data:
(F1) 2014 includes $1.9 million of expense related to the campaign against the proposed 2014 ballot initiative to expand gaming in Colorado.
(F2) 2013 includes $0.6 million benefit from the reversal of sales tax expense accrual as a result of the State of Nevada Department of Taxation ruling on
complimentary and employee meals.
(F3) 2012 includes $2.2 million of non-recurring acquisition expense directly related to our acquisition of the Monarch Casino Black Hawk in April 2012.
(F4) 2011 includes a $3.5 million one-time, non-cash charge related to the demolition of a free standing building on a parcel near the Atlantis and $1.0 million
of non-recurring acquisition expense related to our acquisition of the Monarch Casino Black Hawk in April 2012.
(F5) 2010 includes a $414 thousand one-time charge related to the demolition of the Company’s 149 room motor lodge.
(F6) Includes amounts financed with debt or capitalized lease obligations.
(F7) We paid no dividends during the five year period ended December 31, 2014.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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” section preceding Item 1, Business.
OVERVIEW OF OUR BUSINESS
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 (the “Monarch Casino Black Hawk”), and 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 decided to allow the 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.
Our operating assets are the Atlantis and the Monarch Casino Black Hawk. 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 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.
Unless otherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries.
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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, 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: Aggressive marketing programs by our competitors have posed challenges to us. For the year ended December 31, 2013, statistics released by the
Nevada Gaming Control Board showed growth in northern Nevada and in the Reno/Sparks gaming market. For the year ended December 31, 2014, compared
to the same period ended December 31, 2013, the market was flat. We anticipate that the unstable macroeconomic climate nationally and in the northern
Nevada, combined with the aggressive marketing programs of our competitors, will continue to apply pressure on Atlantis revenue.
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, which was an important step in our ongoing process of redesigning
and upgrading the existing Monarch Casino Black Hawk facility. In December 2013, we began a project to remodel and upgrade the casino. To minimize
disruption, we staged the work in three equal phases. The first phase of the remodel was completed and opened in August 2014. Work on the second phase is
currently underway and is expected to be complete in the first quarter of 2015. We estimate all phases of the redesign and upgrade work to 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 is
anticipated to open in late 2015. 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, 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.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Twelve-Month Periods Ended December 31, 2014 and 2013
For the year ended December 31, 2014, our net income totaled $14.2 million, or $0.83 per diluted share, compared to net income of $18.0 million, or
$1.06 per diluted share for the same period of 2013, reflecting a 21.1% decline in net income and a 21.7% decline in diluted earnings per share. Net revenues
totaled $187.8 million in the current year, reflecting a $1.0 million, or 0.5% decline in net revenues compared to the same period in 2013. Income from
operations for the year ended December 31, 2014 totaled $22.2 million compared to $30.5 million for the same period in 2013, representing a 27.2% decline
in income from operations.
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Casino revenues decreased 3.2% in the year ended December 31, 2014 compared to the same period of 2013 driven by lower casino revenues at both the
Monarch Casino Black Hawk and the Atlantis. The decrease in Monarch Casino Black Hawk revenues is primarily due to disruption from the ongoing
upgrade and remodel construction work combined with the effect of the substitution of cash voucher promotions for free play credits at the Monarch Casino
Black Hawk. To accommodate construction at Black Hawk, we have had to reduce the number of slot machines on the gaming floor by approximately 13%.
During a portion of the prior year we offered certain patrons cash voucher promotions which were recognized as promotional allowance while free play
credits are recognized as a reduction of casino revenues. In August 2013, the Company discontinued the issuance of cash vouchers in favor of free play
credits which were legalized in Colorado at that time. The decrease in casino revenues at the Atlantis was driven primarily by lower business volume. Casino
operating expenses as a percentage of casino revenue increased to 42.4% in the twelve months of 2014, compared to 39.8% in the twelve months of 2013 due
to lower casino revenues combined with higher Complimentaries (defined in the CRITICAL ACCOUNTING POLICIES AND ESTIMATES section below)
and payroll and related employee benefits expenses.
Food and beverage revenues for the twelve months of 2014 increased 5.4% over the same period in 2013, due to a 2.7% increase in average revenue per
cover, combined with a 2.6% increase in total covers served. Food and beverage operating expenses as a percentage of food and beverage revenues in the
twelve months of 2014 were 40.9% compared to 40.4% in the twelve months of 2013 due to an increase in cost of sales as a result of commodity price
increases and an increase in payroll expense.
Hotel revenues decreased 4.2% due to lower ADR of $73.66 for the year ended December 31, 2014 compared to $77.78 for the same period in 2013 and
slightly lower hotel occupancy of 89.1% in 2014 compared to 89.5% in 2013. Revenue per Available Room (“REVPAR”), calculated by dividing total room
revenue (less service charges, if any) by total rooms available, was $72.26 and $75.41 for years ended December 31, 2014 and 2013, respectively. We believe
fewer conventions and meetings in the city of Reno during 2014 compared to 2013 contributed to both the lower ADR and REVPAR. Hotel operating
expenses as a percent of hotel revenues in the twelve months of 2014 were 27.6% and are in line with the prior year same period.
Other revenues increased 7.4% in 2014 compared to 2013 driven primarily by increased Atlantis spa and salon revenue and commission revenue.
Promotional allowances as a percentage of gross revenues decreased to 18.2% during 2014 compared to 18.6% in 2013. This decrease was driven
primarily by the substitution of cash voucher promotions for free play credits at the Monarch Casino Black Hawk as discussed above, partially offset by an
increase in complimentary expense.
Selling, general and administrative (“SG&A Expense”) expense increased to $53.0 million in the twelve months of 2014 from $52.3 in the same period
of 2013 primarily due to: i) higher salaries, wages and related taxes expenses by $1.1 million, ii) higher sales tax expense by $0.4 million due to the reversal
of accumulated sales tax expense accrual in 2013 as a result of the Nevada Tax Commission ruling that complimentary and employee meals were no longer
subject to sales taxation, and iii) higher bad debt expense due to a credit of $0.3 million in 2013 resulted from an adjustment to reserve for accounts
receivable, all partially offset by lower legal, accounting and other professional fees expense by $0.6 million and lower employee benefit expense by $0.5
million. As a percentage of net revenue, SG&A Expense increased to 28.2% in the year 2014 from 27.7% in the year 2013.
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Depreciation and amortization expense increased to $17.8 million for the year ended December 31, 2014 as compared to $16.6 million for the same
period in 2013 as a result of: i) accelerated depreciation on the parking structure at the Monarch Casino Black Hawk recognized in anticipation of its early
removal from service as part of the expansion project, and ii) new assets related to the remodel and upgrade project at the Monarch Casino Black Hawk, all
partially offset by lower depreciation expense at Atlantis due to assets from the 2008 Atlantis expansion and remodel becoming fully depreciated in
July 2013.
The Company incurred an approximately $0.3 million and $0.2 million net loss on disposal of slot machines and other equipment in the years ended
December 31, 2014 and 2013, respectively. In 2014 the Company incurred $1.9 million of expense related to the campaign against the proposed 2014 ballot
initiatives to expand gaming in Colorado. The Company had no such expense in 2013.
During the year ended December 31, 2014 the Company paid down the principal balance on its Credit Facility by $7.5 million, which decreased the
outstanding balance of the Credit Facility to $46.3 million at December 31, 2014 from $53.8 million at December 31, 2013. Interest expense, net of amounts
capitalized, decreased to $1.1 million for the year 2014 from $1.9 million for the year 2013 primarily as a result of a lower interest rate driven by our lower
leverage ratio combined with lower average outstanding borrowings in 2014 compared to 2013. See further discussion of our Credit Facility in the
LIQUIDITY AND CAPITAL RESOURCES section below.
Comparison of Operating Results for the Twelve-Month Periods Ended December 31, 2013 and 2012
For the year ended December 31, 2013, our net income totaled $18.0 million, or $1.06 per diluted share, reflecting an increase of $9.0 million, or 102%
in net income, and $0.51, or 93% per diluted share, compared to the year ended 2012. Net revenues totaled $188.7 million for the twelve months ended
December 31, 2013, an increase of $25.4 million or 15.6% over the same period in 2012. Income from operations for the twelve months ended December 31,
2013 totaled $30.5 million compared to $16.0 million for the same period in 2012 representing an increase of $14.5 million or 91%.
We acquired Monarch Black Hawk on April 26, 2012, and therefore, Black Hawk’s results for the year ended December 31, 2012 reflect its operations
only for the period subsequent to its acquisition. Because of this, the results for the year ended December 31, 2013 are not comparable to 2012 which reflects
only partial year results. The amounts of net revenue and operating income of Monarch Black Hawk included in the Company’s consolidated statement of
income, after elimination of intercompany transactions, for the year ended December 31, 2013 and 2012 (reflecting only operations since April 26, 2012) are
as follows (in millions):
Net revenue
Income from operations
Twelve months ended December 31,
2013
2012
$
$
47.5
11.6
$
$
29.7
6.3
Casino revenues increased 16.4% primarily due to higher casino revenue in Monarch Black Hawk as a result of 2012 casino revenue representing partial
year results. Casino revenue in Atlantis increased 3.1%. Casino operating expenses as a percentage of casino revenues decreased to 39.8% as compared to
41.4% in the prior year primarily due to the revenues increase.
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Food and beverage revenues increased 8.0% during the year driven by a 2.6% increase in covers served combined with a 1.0% increase in the average
revenue per cover at Atlantis and the increase in Black Hawk food and beverage revenue as a result of 2012 representing partial year results. Food and
beverage operating expenses as a percentage of food and beverage revenues increased from 40.2% in the year ended December 31, 2012 to 40.4% in the same
period in 2013 due primarily to higher food commodity prices.
Hotel revenues increased 12.3% due to higher ADR of $77.78 in 2013 compared to $71.13 in 2012 and higher hotel occupancy of 89.5% during 2013
compared to 87.2% during 2012. REVPAR was $75.41 and $66.98 for the years ended December 31, 2013 and 2012, respectively. Hotel operating expenses
as a percent of hotel revenues in 2013 were 27.5% and are in line with the 2012.
Promotional allowances as a percentage of gross revenues decreased to 18.6% during 2013 from 19.9% during 2012. This decrease was primarily the
result of increased revenue and modified utilization of the promotional programs.
SG&A Expense for 2013 increased by $4.2 million, or 8.7%, compared to prior year. A $3.2 million of this increase represents SG&A Expense from the
Monarch Casino Black Hawk operation for the period beginning January 1, 2013 through April 26, 2013 for which the prior year reflects no expense
(Monarch Black Hawk was acquired on April 26, 2012). The primary drivers of the remaining $1.0 million increase in SG&A Expense are: i) higher payroll
and related taxes and benefits expense of $1.6 million; and ii) higher professional fees by $0.5 million, partially, offset by a $1.1 million decrease in use tax
expense on complimentary meals as a result of the State of Nevada Department of Taxation ruling, which affected the entire Nevada hotel-casino industry,
that complimentary and employee meals were no longer subject to taxation.
Depreciation and amortization expense slightly decreased to $16.6 million for the year ended December 31, 2013 as compared to $16.7 million for the
year ended December 31, 2012 as a result of the decrease in depreciation expense for Atlantis property due to assets from 2008 Atlantis expansion being fully
depreciated by July 2013 and partially offset by the increase in depreciation expense for the Monarch Casino Black Hawk property due to the fact that 2013
represents a full year of Monarch Casino Black Hawk depreciation and amortization expense while 2012 represents depreciation and amortization expense for
the period only after the acquisition (we acquired Monarch Casino Black Hawk on April 26, 2012).
During 2012, the Company incurred $2.2 million of non-recurring acquisition expenses, comprised primarily of professional fees, directly related to the
acquisition of Monarch Black Hawk. No such expenses were incurred in 2013.
During 2013, the Company paid down the principal balance on its Credit Facility by $27.3 million, which decreased the outstanding balance of the Credit
Facility to $53.8 million at December 31, 2013 from $81.1 million at December 31, 2012. Interest expense decreased to $1.9 million in the year 2013 from
$2.0 million in the year 2012 as a result of a lower loan balance combined with lower interest rates on our Credit Facility driven by our lower leverage ratio.
See further discussion of our Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.
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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, 2014 and 2013 were as follows (in thousands):
Capital Expenditures:
Atlantis
Monarch Black Hawk
$
$
2014
2013
4,223
17,496
21,719
$
$
3,813
8,587
12,400
During the twelve months ended December 31, 2014 and 2013, capital expenditures related primarily to the redesign and upgrade of the Monarch Casino
Black Hawk property as well as acquisition of gaming equipment to upgrade and replace existing equipment in the Monarch Casino Black Hawk and the
Atlantis. In 2013 at Monarch Casino Black Hawk capital expenditures were made for the new buffet, remodeling of restrooms and temporary casino area. In
December 2013, we started a three-phase casino floor remodel and upgrade project. The first phase of the remodel was completed and opened in
August 2014.
Master Planned Expansion of the Monarch Casino Black Hawk
The Company has completed a master plan to expand and convert the Monarch Casino Black Hawk into a full-scale casino resort. The project will
feature an approximately 500-room hotel tower and will nearly double the size of the existing casino while adding three new restaurants and a new parking
structure that will increase on-site parking from approximately 500 spaces to 1,500 spaces.
In October 2012, the Company began an extensive renovation and upgrade of Monarch Casino Black Hawk. To-date, the Company has upgraded the
property’s food and beverage operations (including an all-new buffet) and completed the first phase of a three-phase renovation and upgrade of the existing
casino floor (including a new front entrance and cabaret lounge). Monarch expects to complete phase two of the renovation next month and phase three in the
third quarter of 2015. The Company’s 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 $17-$19 million, all of which is expected to be funded from operating cash
flow.
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 open 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 $33-$36 million, which the Company expects to fund primarily from operating cash flow and, to a lesser extent, from its credit facility.
Monarch expects 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 the Company’s Credit Facility. The Company’s current credit facility will mature in November 2016, and before that time, the
Company expects to negotiate a new or amended Credit Facility with sufficient borrowing capacity to complete the expansion.
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LIQUIDITY AND CAPITAL RESOURCES
38
For the year ended December 31, 2014, net cash provided by operating activities totaled $31.2 million, a decrease of approximately $4.9 million, or
13.6%, compared to the same period of the prior year. This decrease was primarily the result of a decrease in net income of $3.8 million combined with
changes in ordinary working capital accounts, partially offset by an increase in depreciation expense.
Net cash used in investing activities totaled $19.8 million and $12.4 million in the years ended December 31, 2014 and December 31, 2013, respectively.
Net cash used in investing activities during 2014 and 2013 consisted primarily of net cash used for redesigning and upgrading the Monarch Casino Black
Hawk property and for acquisition of gaming equipment and general upgrades at the Atlantis property.
Net cash used in financing activities during the year ended December 31, 2014 of $9.1 million represented $7.5 million of payments made on our Credit
Facility (see below) and $0.8 million in proceeds from the exercise of stock options net of $3.5 million in income taxes paid to satisfy minimum tax
withholdings. Net cash used in financing activities during the year 2013 of $23.4 million represented $27.3 million of payments made on our Credit Facility,
partially offset by $3.4 million in proceeds from the exercise of stock options.
As of December 31, 2014, our credit facility (“Credit Facility”) had total availability of $89.5 million of which $46.3 million was outstanding. The
proceeds from the Credit Facility were utilized to finance the acquisition of Monarch Black Hawk and availability under the Credit Facility may be used for
working capital needs, general corporate purposes and for ongoing capital expenditure requirements.
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 our assets and covenants restricting our ability to merge, transfer ownership of Monarch, incur additional indebtedness, encumber assets and
make certain investments. The Credit Facility contains covenants requiring that we maintain certain financial ratios and achieves a minimum level of
Earnings-Before-Interest-Taxes-Depreciation and Amortization and other non-cash charges (“Adjusted EBITDA”) on a trailing four-quarter basis. It also
contains provisions that restrict cash transfers between Monarch and its affiliates and contains provisions requiring the achievement of certain financial ratios
before the Company can repurchase common stock or pay dividends. Management does not consider the covenants to restrict normal functioning of day-to-
day operations.
As of December 31, 2014, we were required to maintain a leverage ratio, defined as consolidated debt divided by Adjusted EBITDA, of no more than
2.5:1 and a fixed charge coverage ratio (Adjusted EBITDA divided by fixed charges, as defined) of at least 1.15:1. As of December 31, 2014, the Company’s
leverage ratio was 1.1:1, and the fixed charge coverage ratio was 30.0:1.
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The maximum principal available under the Credit Facility is reduced by $1.5 million per quarter beginning June 30, 2013. We may permanently reduce
the maximum principal available at any time so long as the amount of such reduction is at least $0.5 million and in multiples of $50,000. Maturities of the
borrowings for each of the next three years and thereafter as of December 31, 2014 are as follows (in millions):
Year
2015
2016
Maturities
—
46.3
46.3
$
$
We may prepay borrowings under the Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior
to the end of the applicable interest period). Amounts prepaid may be reborrowed so long as the total borrowings outstanding do not exceed the maximum
principal available.
We paid various one-time fees and other loan costs which totaled $1.5 million upon the closing of the Credit Facility that are being amortized over the
term of the Credit Facility using the straight-line method which approximates the effective interest method.
At December 31, 2014, our leverage ratio was such that pricing for borrowings under the Credit Facility was LIBOR plus 1.5%. At December 31, 2014,
the one-month LIBOR interest rate was 0.17%. The carrying value of the debt outstanding under the Credit Facility approximates fair value because the
interest fluctuates with the lender’s prime rate or other market rates of interest.
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.
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 $350 thousand in lease payments for the leased driveway space at the Shopping Center during the fiscal year ended December 31,
2014.
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COMMITMENTS AND CONTINGENCIES
Our contractual cash obligations as of December 31, 2014 and the next five years and thereafter are as follows (in millions):
Operating Leases (2)
Purchase Obligations (3)
Construction Contracts (4)
Borrowings Under Credit Facility (5)
Total Contractual Cash Obligations
Payment due by period (1)
Total
Less
than 1
year
1 to 3
years
3 to 5
years
$
$
1.9
8.0
36.0
46.3
92.2
$
$
0.4
8.0
29.8
—
38.2
$
$
0.8
—
6.2
46.3
53.3
$
$
0.7
—
—
—
0.7
(1) Because interest payments under our Credit Facility are subject to factors that in our judgment vary materially, the amount of future interest payments is
not presently determinable. These factors include: i) future short-term interest rates; ii) our future leverage ratio which varies with EBITDA and our
borrowing levels; and iii) the speed with which we deploy capital and other spending which in turn impacts the level of future borrowings. The interest rate
under our Credit Facility is LIBOR, or a base rate (as defined in the Credit Facility agreement), plus an interest rate margin ranging from 1.25% to 2.50%
depending on our leverage ratio. The interest rate is adjusted quarterly based on our leverage ratio which is calculated using operating results over the
previous four quarters and borrowings at the end of the most recent quarter. Based on our leverage ratio, at December 31, 2014 pricing was LIBOR plus 1.5%
and will be adjusted in subsequent quarters in accordance with our leverage ratio. At December 31, 2014, the one-month LIBOR rate was 0.17%.
(2) Operating leases include leased driveway usage and executive housing in Colorado.
(3) Purchase obligations represent approximately $3.2 million of commitments related to capital projects and approximately $4.8 million of materials and
supplies used in the normal operation of our business. Of the total purchase order and construction commitments, approximately $8.0 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. $31.1 million of the
commitment relates to construction of the new garage building, $2.3 million relates to construction of the new garage foundation and $2.6 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 December 31, 2014.
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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
41
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, 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
The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, the Company also
has receivables due from hotel guests which are primarily secured with a credit card at the time a customer checks in. An allowance for doubtful accounts is
established for all Company receivables based upon the Company’s historical collection and write-off experience, unless situations warrant a specific
identification of a necessary reserve related to certain receivables. The Company charges off its 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. The Company reviews
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. 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.
Capitalized Interest
The Company capitalizes 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, the Company capitalizes interest on amounts expended on the project at the Company’s
average borrowing cost. Interest capitalization is ceased when the project is substantially complete. The Company capitalized $152 thousand of interest
during the year ended December 31, 2014. There was no capitalized interest recorded in years 2013 and 2012.
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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 the Company.
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. The liability for unrecognized tax benefits is included in current and noncurrent tax liabilities, based on when expected to be
recognized, within the consolidated balance sheets at December 31, 2014 and 2013.
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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 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. Additionally, the carrying value of our long-term debt approximates fair value due to the variable nature of applicable interest rates and relative
short-term maturity.
Goodwill
The Company accounts 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. The Company tests its 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 the Company’s 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, the Company utilizes 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, the Company estimates 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, 2014, we had goodwill totaling $25.1 million related to the purchase of Monarch Black Hawk.
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Business Combinations
The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates,
as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year,
in which we may adjust the provisional amounts recognized for a business combination) in a manner that is generally similar to the previous purchase method
of accounting.
Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in an acquiree, generally at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of
consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities
assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of
consideration and we charge them to acquisition expense as they are incurred.
Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we
report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date
to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement
of the amounts recognized as of that date and we record those adjustments to our financial statements. We apply those measurement period adjustments that
we determine to be significant retrospectively to comparative information in our financial statements, including adjustments to depreciation and amortization
expense.
Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or
liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that
existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other
changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
Finite-Lived Intangible Assets
Our finite-lived intangible assets include assets related to customer relationships acquired in our acquisition of Monarch 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.
The customer relationship intangible asset represents the value associated with Monarch 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.
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Fair Value Measurement
ASC 820 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for various valuation techniques e.g. market
value, income approach and cost approach. The levels of the hierarchy are described below:
· Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
· Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
· Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The fair value measurements relating to the acquired assets of Monarch Casino Black Hawk was determined using inputs within Level 2 and Level 3 of
ASC 820’s hierarchy.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2013, the Financial Accounting Standard Board (“FASB”) issued an accounting standards update that amends the presentation requirements of an
unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update requires an unrecognized
tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward in most cases. The standard update is effective for our 2014 financial statements. In complying
with FASB, the Company has focused on three areas: 1) developing a process for identifying, recognizing, and measuring tax positions; 2) applying a
consistent process and set of assumptions for evaluating tax positions; and 3) developing controls surrounding the ASC 740-10 process. These processes and
related controls are designed to reduce to a low level the risk that significant tax uncertainties with a potential material effect on the Company’s financial
statements have not been identified or appropriately analyzed. The Company believes it has no uncertain tax positions at this time and adopting this statement
had no effect upon the Company’s Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standards update that amends the FASB Accounting Standards Codification 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 for this
update is for the annual and interim periods beginning after December 15, 2016. Early application is not permitted. The Company will adopt this standard
effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on its Consolidated Financial Statements.
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In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.” The amendments in the ASU require that a performance target that affects vesting and that
could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718,
Compensation — Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance
target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes
probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service
has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining
unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost
recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those
awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the
performance target is achieved. The amendments in this ASU are effective for interim or annual reporting periods beginning after December 15, 2015; early
adoption is permitted. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or
(2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial
statements and to all new or modified awards thereafter. As of December 31, 2014, the Company did not have any share-based payment awards that include
performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 is not expected to have a material
impact on the Company’s Consolidated Financial Statements.
In August 2014, the FASB issued an accounting standard update that requires management to assess an entity’s ability to continue as a going concern and
to provide related footnote disclosures in certain circumstances. Substantial doubt about an entity’s ability to continue as a going concern exist when relevant
conditions and events, consolidated and aggregated, indicate that it is probable that an entity will be unable to meet its obligations as they become due within
one year after the date that the financial statement are issue. Currently, there is no guidance in U.S. GAAP for management’s responsibility to perform an
evaluation. Under the update, management’s evaluation is to be performed when preparing financial statement for each annual and interim reporting period
and based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The Company will
adopt this standard effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on the Company’s
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, the
implementation of any such proposed or revised standards would have on the Company’s consolidated financial statements.
ITEM 7A. 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 December 31, 2014 subject to market risk. As of December 31, 2014, we had $46.3
million of outstanding debt under our Credit Facility that was subject to credit risk. A 1% increase in the interest rate on the balance outstanding under the
Credit Facility at December 31, 2014 would result in a change in our annual interest cost of approximately $0.5 million.
The Credit Facility is structured to reduce the maximum principal available by $1.5 million each quarter beginning June 30, 2013. As of December 31,
2014, the maximum principal available was $89.5 million. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Monarch Casino & Resort, Inc.:
We have audited Monarch Casino & Resort, Inc. and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Monarch Casino & Resort, Inc. and subsidiaries’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Monarch Casino & Resort, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Monarch Casino & Resort, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2014 of Monarch Casino & Resort, Inc. and subsidiaries and our report
dated March 13, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 13, 2015
Table of Contents
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Monarch Casino & Resort, Inc.:
We have audited the accompanying consolidated balance sheets of Monarch Casino & Resort, Inc. and subsidiaries (the “Company”) as of December 31,
2014 and 2013, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2014. Our audits also included the financial statement schedule listed in the index at Item 15(2). These financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Monarch Casino &
Resort, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years
in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statements schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Monarch Casino & Resort, Inc.
and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2015, expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 13, 2015
Table of Contents
49
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Revenues
Casino
Food and beverage
Hotel
Other
Gross revenues
Less promotional allowances
Net revenues
Operating expenses
Casino
Food and beverage
Hotel
Other
Selling, general and administrative
Depreciation and amortization
Loss (gain) on disposition of assets
Colorado ballot initiative costs
Acquisition expenses
Total operating expenses
Income from operations
Other expenses
Interest expense, net of amounts capitalized
Total other expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share of common stock
Net income
Basic
Diluted
$
$
$
$
Weighted average number of common shares and potential common shares outstanding
Basic
Diluted
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
50
2014
Year Ended December 31,
2013
2012
$
$
$
$
145,134
52,314
21,733
10,394
229,575
(41,808)
187,767
61,583
21,410
5,992
3,545
52,987
17,824
343
1,864
—
165,548
22,219
(1,104)
(1,104)
21,115
(6,930)
14,185
0.85
0.83
16,734
17,107
$
$
$
$
149,916
49,642
22,679
9,680
231,917
(43,168)
188,749
59,646
20,077
6,241
3,260
52,256
16,638
176
—
—
158,294
30,455
(1,860)
(1,860)
28,595
(10,634)
17,961
1.10
1.06
16,302
16,944
128,831
45,966
20,200
8,994
203,991
(40,689)
163,302
53,331
18,487
5,578
3,001
48,120
16,651
(5)
—
2,156
147,319
15,983
(2,024)
(2,024)
13,959
(5,048)
8,911
0.55
0.55
16,140
16,250
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
December 31,
2014
2013
Table of Contents
ASSETS
Current assets
Cash and cash equivalents
Receivables, net
Income taxes receivable
Inventories
Prepaid expenses
Deferred income taxes
Total current assets
Property and equipment
Land
Land improvements
Buildings
Buildings improvements
Furniture and equipment
Construction in progress
Leasehold improvements
Less accumulated depreciation and amortization
Net property and equipment
Other assets
Goodwill
Intangible assets, net
Deferred income taxes
Other assets, net
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Construction accounts payable
Accrued expenses
Total current liabilities
Long - term debt
Total liabilities
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; 16,812,794
outstanding at December 31, 2014; 16,482,768 outstanding at December 31, 2013
Additional paid-in capital
Treasury stock, 2,283,506 shares at December 31, 2014; 2,613,532 shares at December 31, 2013
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
51
$
$
$
$
21,583
3,047
1,139
2,846
4,021
1,626
34,262
29,415
6,701
150,821
18,142
125,671
15,672
1,347
347,769
(167,498)
180,271
25,111
7,366
4,682
609
37,768
252,301
7,933
1,790
19,327
29,050
46,300
75,350
—
191
22,985
(32,970)
186,745
176,951
252,301
$
$
$
$
19,330
2,628
608
2,675
2,830
5,909
33,980
28,680
6,562
150,828
15,897
134,425
4,891
1,347
342,630
(166,993)
175,637
25,111
8,531
350
914
34,906
244,523
8,666
—
18,177
26,843
53,800
80,643
—
191
30,926
(39,797)
172,560
163,880
244,523
Table of Contents
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except shares)
Balance, December 31, 2011
16,138,158
$
191
$
33,179
$
145,688
$
(48,542) $
130,516
Common Stock
Shares
Outstanding
Amount
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Exercise of stock options, including
related tax benefit
Stock-based compensation expense
Net income
Balance, December 31, 2012
Exercise of stock options
Excess tax benefit from stock-based
9,166
—
—
16,147,324
335,444
—
$
—
—
—
191
—
—
$
(183)
1,368
—
34,364
(5,071)
413
$
—
—
8,911
154,599
—
—
$
236
—
—
(48,306) $
8,509
—
53
1,368
8,911
140,848
3,438
413
compensation
Stock-based compensation expense
Net income
Balance, December 31, 2013
Net exercise of stock options
Excess tax benefit from stock-based
compensation
Stock-based compensation expense
Net income
Balance, December 31, 2014
—
—
16,482,768
330,026
—
—
—
16,812,794
$
$
—
—
191
—
—
—
—
191
$
$
1,220
—
30,926
(9,553)
386
1,226
—
22,985
$
$
—
17,961
172,560
—
—
—
14,185
186,745
$
$
—
—
(39,797) $
6,827
—
—
—
(32,970) $
1,220
17,961
163,880
(2,726)
386
1,226
14,185
176,951
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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Table of Contents
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred loan costs
Stock-based compensation
Excess tax benefit from stock-based compensation
Provision (recoveries) for bad debts
Loss (gain) on disposition of assets
Deferred income taxes
Changes in operating assets and liabilities, excluding the effect of Monarch Black
Hawk acquisition:
Receivables
Inventories
Prepaid expenses
Accounts payable
Accrued expenses
Income taxes
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of assets
Change in construction payable
Acquisition of property and equipment
Net cash paid for the Monarch Black Hawk acquisition
Net cash used in investing activities
Cash flows from financing activities:
Net exercise of stock options
Excess tax benefit from stock-based compensation
Principal payments on long-term debt
Borrowings under credit facility
Net cash (used in) provided by financing activities
Net increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes
Cash paid for federal tax settlement
2014
Year Ended December 31,
2013
2012
$
14,185
$
17,961
$
8,911
17,824
305
1,226
(1,079)
51
343
336
(470)
(171)
(1,191)
(733)
1,150
(531)
31,245
84
1,790
(21,719)
—
(19,845)
(2,726)
1,079
(7,500)
—
(9,147)
2,253
19,330
21,583
853
7,300
—
$
$
$
$
16,638
305
1,220
(413)
(230)
176
795
59
(293)
(194)
604
342
(882)
36,088
48
—
(12,400)
—
(12,352)
3,438
413
(27,300)
—
(23,449)
287
19,043
19,330
1,472
10,690
—
$
$
$
$
16,651
304
1,368
—
(8)
(5)
(240)
(31)
(125)
453
(899)
164
(494)
26,049
14
—
(10,329)
(66,747)
(77,062)
53
—
(21,340)
77,760
56,473
5,460
13,583
19,043
1,658
6,500
1,120
$
$
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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”), Golden East, Inc. (“Golden East”) 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 on April 26, 2012. Riviera Black Hawk Casino was renamed Monarch Casino Black Hawk in
October 2013. Monarch Growth also owns a parcel of land in Black Hawk, Colorado contiguous to the Monarch Casino Black Hawk. The Company has
included the results of Monarch Casino Black Hawk in its consolidated financial statements since the date of acquisition.
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.
On October 22, 2014, the board of directors authorized a stock repurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, the board of
directors authorized a program to repurchase up to 3,000,000 shares of the Company’s common stock in the open market or in privately negotiated
transactions from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal
requirements and other factors. The Repurchase Plan does not obligate the Company to acquire any particular amount of common stock and the plan may be
suspended at any time at our discretion, and it will continue until exhausted. The actual timing, number and value of shares repurchased under the Repurchase
Program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s stock,
general market economic conditions and applicable legal requirements. The Company has made no purchases under the Repurchase Plan.
The consolidated financial statements include the accounts of Monarch and its subsidiaries. Intercompany balances and transactions are eliminated.
Certain amounts in the consolidated financial statements for the previous periods have been reclassified to be consistent with the current period presentation.
These reclassifications had no effect on the previously reported net income. Reference to the number of square feet or acreage are unaudited and considered
outside the scope of our independent registered public accounting firm’s audit of our consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board.
Unless otherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries.
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Use of Estimates
In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the year. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, as well as investments purchased with an original maturity of 90 days or less.
Allowance for Doubtful Accounts
The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, the Company
also has receivables due from hotel guests which are primarily secured with a credit card at the time a customer checks in. An allowance for doubtful
accounts is set up for all Company receivables based upon the Company’s historical collection and write-off experience, unless situations warrant a specific
identification of a necessary reserve related to certain receivables. The Company charges off its 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. In December 2013, the
Company recorded an adjustment to its reserve for casino accounts receivable based on the results of historical collection patterns and current collection
trends. For the year ended December 31, 2013, this adjustment benefitted income from operations by $0.3 million and net income by $0.2 million (or $0.01
per share on a fully diluted basis). No such adjustment was made during the year ended December 31, 2014.
Casino Jackpots
The Company does not accrue a liability for base jackpots because it has the ability to avoid such payment as gaming devices can legally be removed
from the gaming floor without payment of the base amount. When the Company is unable to avoid payment of a jackpot such as the incremental jackpot
amounts of progressive-type slot machines, due to legal requirements, the jackpot is accrued as the obligation becomes unavoidable. This liability is accrued
over the time period in which the incremental progressive jackpot amount is generated commensurate with a corresponding reduction in casino revenue.
Inventories
Inventories, consisting primarily of food, beverages, and retail merchandise, are stated at the lower of cost or market. Cost is determined based on the
weighted average, which approximates a first-in, first out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment is depreciated principally on a
straight line basis over the estimated useful lives as follows:
Land improvements
Buildings
Building improvements
Furniture
Equipment
15-40 years
30-40 years
5-40 years
5-10 years
3-20 years
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The Company evaluates property and equipment and other long-lived assets for impairment in accordance with the guidance for accounting for the
impairment or disposal of long-lived assets. For assets to be disposed of, the Company recognizes the asset to be sold at the lower of carrying value or fair
value less costs of disposal. Fair value for assets to be disposed of is generally estimated based on comparable asset sales, solicited offers or a discounted cash
flow model. For assets to be held and used, the Company reviews fixed assets for impairment annually during the fourth quarter of each year or whenever
indicators of impairment exist. If an indicator of impairment exists, we compare the estimated future cash flows of the asset, on an undiscounted basis, to the
carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not
exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted
cash flow model or market comparables, when available. For the years ended December 31, 2014, 2013 and 2012, there were no impairment charges.
Change in Accounting Estimate of Depreciable Life of Monarch Casino Black Hawk Parking Structure
In December 2013, the Company began construction of a new parking facility at the Monarch Casino Black Hawk. Upon completion of that new
structure, the Company plans to demolish the existing parking structure. At December 31, 2013, the existing parking structure had a net book value of
approximately $4.8 million and a remaining depreciable life of approximately 37 years. The new parking facility was estimated to be completed on March 31,
2015. In accordance with ASC 250-10-45-17, effective January 1, 2014, the Company modified the estimated depreciable life of the existing parking structure
to 15 months; the period from January 1, 2014 through the estimated demolition commencement date of March 31, 2015. As a result of this modification to
the estimated depreciable life, depreciation expense of the existing parking structure increased by approximately $0.3 million per month (approximately $0.2
million net of tax). In July 2014, because of a delayed construction schedule, the Company revised the new parking facility completion date to December 31,
2015. At this time, the existing parking structure had a net book value of approximately $2.9 million. The Company modified the estimated depreciable life of
the existing parking structure to 18 months; the period from July 1, 2014 through the revised estimated demolition commencement date of December 31,
2015. As a result of this modification, the increase in depreciation expense was adjusted to $0.2 million per month (approximately $0.1 million net of tax) for
the period from July 1, 2014 through December 31, 2015. For the twelve months ended December 31, 2014, the effect of this change in estimate was an
increase of depreciation expense by $2.9 million, a decrease of net income by $1.9 million and a decrease of basic and diluted earnings per share by $0.11.
Goodwill
The Company accounts 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. The Company tests its 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 the Company’s 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, the Company utilizes 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
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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, the Company estimates 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, 2014,
we had goodwill totaling $25.1 million related to the purchase of Black Hawk, Inc. (see NOTES 3 and 11).
Business Combinations
The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates,
as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year,
in which we may adjust the provisional amounts recognized for a business combination) in a manner that is generally similar to the previous purchase method
of accounting.
Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in an acquiree, generally at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of
consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities
assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of
consideration and we charge them to acquisition expense as they are incurred.
Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we
report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date
to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement
of the amounts recognized as of that date and we record those adjustments to our financial statements. We apply those measurement period adjustments that
we determine to be significant retrospectively to comparative information in our financial statements, including adjustments to depreciation and amortization
expense.
Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or
liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that
existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other
changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
Finite-Lived Intangible Assets
The Company’s finite-lived intangible assets include assets related to its customer relationships which are amortized over its estimated useful life using
the straight-line method. The Company periodically evaluates the remaining useful lives of its finite-lived intangible assets to determine whether events and
circumstances warrant a revision to the remaining period of amortization.
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The customer relationship intangible asset represents the value associated with Monarch Casino Black Hawk’s 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 the
Company’s 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. As of December 31, 2014 and December 31, 2013, the customer relationships net
intangible asset balance was $7.4 million and $8.5 million, respectively.
The trade name, related to the Riviera Black Hawk name was fully amortized by October 2013 when Riviera Black Hawk was renamed Monarch Casino
Black Hawk.
Fair Value Measurement
ASC 820 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for various valuation techniques e.g. market
value, income approach and cost approach. The levels of the hierarchy are described below:
· Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
· Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
· Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The fair value measurements relating to the acquired assets of Monarch Casino Black Hawk was determined using inputs within Level 2 and Level 3 of
ASC 820’s hierarchy.
Segment Reporting
The accounting guidance for disclosures about segments of an enterprise and related information requires separate financial information to be disclosed
for all operating segments of a business. The Company determined that two of the Company’s operating segments, Atlantis and Monarch Casino Black
Hawk, meet all of the aggregation criteria stipulated by ASC 280-10-50-11. The Company views each property as an operating segment and the two
operating segments have been aggregated into one reporting segment. The December 31, 2013 financial information has been reclassified to be consistent
with the current year presentation.
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. The Company reviews
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. The reserve is an amount estimated to pay both reported and unreported
claims as of the balance sheet date, which management believes is adequate.
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Capitalized Interest
The Company capitalizes 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, the Company capitalizes interest on amounts expended on the project at the Company’s
average borrowing cost. Interest capitalization is ceased when the project is substantially complete. The Company capitalized $152 thousand of interest
during the years ended December 31, 2014. There was no capitalized interest recorded in years ended December 31, 2013 and 2012.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the difference between wins and losses. Additionally, net win is reduced by a
provision for anticipated payouts on slot participation fees, progressive jackpots and any pre-arranged marker discounts.
Promotional Allowances
The Company’s player program allows members, through the frequency of their play at the Company’s casino, to earn and accumulate points which may
be redeemed for a variety of goods and services. Points may be applied toward room stays at the hotel, 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 at our Monarch Casino Black Hawk property. Points earned may also be
applied toward off-property events such as concerts, shows and sporting events.
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 estimated departmental costs of providing such promotional allowances are primarily included in casino operating expenses and are as
follows (in thousands):
Food and beverage
Hotel
Other
2014
Years ended December 31,
2013
2012
$
$
22,855
2,893
1,732
27,480
$
$
21,713
2,622
1,777
26,112
$
$
20,464
2,850
1,857
25,171
Advertising Costs
All advertising costs are expensed as incurred. Advertising expense, which is included in selling, general and administrative expense, was $5.2 million,
$5.2 million and $4.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.
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.
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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. The liability for
unrecognized tax benefits is included in current and noncurrent tax liabilities, based on when expected to be recognized, within the consolidated balance
sheets at December 31, 2014 and 2013.
Gaming Taxes
The Company is subject to taxes based on gross gaming revenue in the jurisdictions in which it operates, subject to applicable jurisdictional adjustments.
These gaming taxes are an assessment on the Company’s gaming revenue and are recorded as casino expense in the accompanying Consolidated Statements
of Income. These taxes totaled $16.0 million, $16.1 million and $12.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with the authoritative guidance requiring that compensation cost relating to stock-
based payment transactions be recognized in the Company’s consolidated statements of income. The cost is measured at the grant date, based on the
calculated fair value of the award using the Black-Scholes option pricing model for stock options, and based on the closing share price of the Company’s
stock on the grant date for restricted stock awards. The cost is recognized as an expense over the employee’s requisite service period (the vesting period of the
equity award). The Company’s stock-based employee compensation plan is more fully discussed in NOTE 9.
Earnings Per Share
Basic earnings per share are 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 (in thousands,
except per share data):
2014
Years ended December 31,
2013
2012
Shares
Per Share
Amount
Shares
Per Share
Amount
Shares
Per Share
Amount
Basic
Effect of dilutive stock options
Diluted
16,734
373
17,107
$
$
0.85
(0.02)
0.83
60
16,302
642
16,944
$
$
1.10
(0.04)
1.06
16,140
110
16,250
$
$
0.55
—
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The following options were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the
average market price of the common shares and their inclusion would be antidilutive:
Options to purchase shares of common stock
Exercise prices
Expiration dates (month/year)
Fair Value of Financial Instruments
2014
563,633
$16.66-$29.00
05/15-11/24
Years ended December 31,
2013
418,071
$21.65-$29.00
05/16-10/23
2012
1,518
$11.00-$29.00
10/14-2/22
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, account 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
relative short-term maturity.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of bank deposits and trade receivables.
The Company maintains its surplus cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s
customer base. The Company believes it is not exposed to any significant credit risk on cash and accounts receivable. Accounts are written off when
management determines that an account is uncollectible. Recoveries of accounts previously written off are recorded when received. An allowance for
doubtful accounts is determined to reduce the Company’s receivables to their carrying value, which approximates fair value. The allowance is estimated based
on historical collection experience, specific review of individual customer accounts, and current economic and business conditions. Historically, the Company
has not incurred any significant credit-related losses.
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Certain Risks and Uncertainties
The Company’s operations are dependent on its continued licensing by the Nevada and Colorado gaming regulatory bodies. The loss of a license could
have a material adverse effect on future results of operations.
The Company is dependent on the northern Nevada and Denver, Colorado markets for a significant number of its patrons and revenues. If economic
conditions in these areas deteriorate or additional gaming licenses are awarded, the Company’s results of operations could be adversely affected.
The Company is dependent on the U.S. economy in general, and any deterioration in the national economic, energy, credit and capital markets could
have a material adverse effect on future results of operations.
The Company is dependent upon a stable gaming and admission tax structure in the locations in which it operates. Any change in the tax structure could
have a material adverse effect on future results of operations.
Impact of Recently Issued Accounting Standards
In July 2013, the Financial Accounting Standard Board (“FASB”) issued an accounting standards update that amends the presentation requirements of an
unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update requires an unrecognized
tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward in most cases. The standard update is effective for our 2014 financial statements. In complying
with FASB, the Company has focused on three areas: 1) developing a process for identifying, recognizing, and measuring tax positions; 2) applying a
consistent process and set of assumptions for evaluating tax positions and; 3) developing controls surrounding the ASC 740-10 process. These processes and
related controls are designed to reduce to a low level the risk that significant tax uncertainties with a potential material effect on the Company’s financial
statements have not been identified or appropriately analyzed. The Company believes it has no uncertain tax positions at this time and adopting this statement
had no effect upon the Company’s Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standards update that amends the FASB Accounting Standards Codification 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 for this
update is for the annual and interim periods beginning after December 15, 2016. Early application is not permitted. The Company will adopt this standard
effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on its Consolidated Financial Statements.
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In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.” The amendments in the ASU require that a performance target that affects vesting and that
could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718,
Compensation — Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance
target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes
probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service
has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining
unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost
recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those
awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the
performance target is achieved. The amendments in this ASU are effective for interim or annual reporting periods beginning after December 15, 2015; early
adoption is permitted. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or
(2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial
statements and to all new or modified awards thereafter. As of December 31, 2014, the Company did not have any share-based payment awards that include
performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 is not expected to have a material
impact on the Company’s Consolidated Financial Statements.
In August 2014, the FASB issued an accounting standard update that requires management to assess an entity’s ability to continue as a going concern and
to provide related footnote disclosures in certain circumstances. Substantial doubt about an entity’s ability to continue as a going concern exist when relevant
conditions and events, consolidated and aggregated, indicate that it is probable that an entity will be unable to meet its obligations as they become due within
one year after the date that the financial statement are issue. Currently, there is no guidance in U.S. GAAP for management’s responsibility to perform an
evaluation. Under the update, management’s evaluation is to be performed when preparing financial statement for each annual and interim reporting period
and based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The Company will
adopt this standard effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on the Company’s
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, the
implementation of any such proposed or revised standards would have on the Company’s consolidated financial statements.
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NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
Casino
Hotel
Other
Less allowance for doubtful accounts
December 31,
2014
2013
2,034
476
854
3,364
(317)
3,047
$
$
2,205
435
359
2,999
(371)
2,628
$
$
The Company recorded bad debt expense of $51 thousand in 2014 and did not record bad debt expense in the years 2013 and 2012. The Company
calculates an allowance for doubtful accounts by applying a percentage, estimated by management based on historical aging experience, to the accounts
receivable balance.
NOTE 3. GOODWILL AND INTANGIBLE ASSETS
Goodwill of $25.1 million at December 31, 2014 represents the excess of total acquisition costs over the fair market value of net assets acquired and
liabilities assumed in a business combination. To assist in the Company’s determination of the purchase price allocation for the Monarch Casino Black Hawk,
the Company engaged a third-party valuation firm regarding the assets acquired and liabilities assumed in its acquisition (see NOTE 11).
Intangible assets consist of the following at December 31, (in thousands except years):
Customer list
Trade name
Total intangible assets
$
2014
2013
$
10,490
1,590
12,080
10,490
1,590
12,080
Less accumulated amortization:
Customer list
Trade name
Total accumulated amortization
Intangible assets, net
Weighted-average life in years
(3,124)
(1,590)
(4,714)
7,366
6.3
$
(1,959)
(1,590)
(3,549)
8,531
7.3
$
Amortization expense of $1.2 million and $1.7 million was recognized for the years ended December 31, 2014 and 2013, respectively. Estimated
amortization expense for the years ending December 31, 2015 through 2019 and thereafter is as follows (in thousands):
Year
Expense
2015
2016
2017
2018
2019
Thereafter
Total
1,165
1,165
1,165
1,165
1,165
1,541
7,366
$
$
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In connection with business combination accounting, the Company recognized $1.6 million in a trade name related to the Riviera name. The trade name
intangible asset was fully amortized by October 2013 at which time the Company renamed Riviera Black Hawk Casino to Monarch Casino Black Hawk.
Customer lists were valued at $10.5 million, representing the value associated with the future potential customer revenue production and are being amortized
on a straight-line basis over nine years.
Intangible assets were valued using the income approach. The Multi-Period Excess Earning Method was used to value the customer list by capitalizing
the future cash flows attributable to the customers based upon their expected future mortality dispersion function. The expected revenue from the existing
client was estimated by applying a 24.0% attrition rate. To calculate excess earnings attributable to the customer list, the required return on other contributory
assets such as tangible assets and identified intangible assets were deducted to estimate income associated with the customer list. The future excess earnings
were discounted to the present value by a risk-adjusted discount rate of 12.0%, in order to determine the fair value of the customer list.
The Relief-from-Royalty Method was used to determine the fair value of the trade name. Considering comparable companies and the Company’s
operation, a 1.0% royalty rate was applied in order to calculate the expected revenue attributable to the trade name. The future cash flows were discounted to
the present value by a risk-adjusted discount rate of 11.0% in order to determine the fair value of the trade name.
All goodwill and intangible assets relate to our Black Hawk property. Upon completion of the preliminary purchase price allocation for the Company’s
acquisition of Monarch Casino Black Hawk, the Company decreased goodwill by $1.4 million related primarily to modification to the value of certain
deferred tax assets in 2012. No changes were made to the carrying amount of goodwill during 2013 and 2014. The allocation of the purchase price of
Monarch Black Hawk is described in NOTE 11.
NOTE 4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
Accrued salaries, wages and related benefits
Progressive slot machine and other gaming accruals
Accrued gaming taxes
Accrued interest
Other accrued liabilities
December 31,
2014
2013
5,813
8,457
2,198
2
2,857
19,327
$
$
6,096
6,413
2,046
56
3,566
18,177
$
$
NOTE 5. LEASE COMMITMENTS
The Atlantis shares a driveway access with the Shopping Center adjacent to the Atlantis which is controlled by an entity whose owners include our
controlling stockholders. We also leased an approximately 37,000 square-foot section of the Shopping Center for a minimum lease term of 15 years at an
annual rent of $300 thousand, subject to increase upon renewal after each five year period based on the Consumer Price Index. The annual rent for the years
2014, 2013 and 2012 was $350 thousand, $340 thousand and $340 thousand, respectively. 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
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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 improvements was $2.0 million of which $1.35 million was paid by the Company. The cost of the driveway
improvements is being depreciated over the initial 15-year lease term; some components of the driveway are being depreciated over a shorter period of time.
The Company accounts for its rental expense using the straight-line method over the original lease term. Rental increases based on the change in the CPI
are contingent and accounted for prospectively.
Following is a summary of future minimum payments under operating leases that have initial or remaining non-cancelable lease terms for the next five
years (in thousands):
Year ending December 31,
2015
2016
2017
2018
2019
Total minimum lease payments
Operating
Leases
406
406
406
406
304
1,928
$
$
Rental expense for operating leases amounted to $889 thousand, $907 thousand and $857 thousand in 2014, 2013 and 2012, respectively, as reported in
selling, general and administrative expenses in the Consolidated Statements of Income.
NOTE 6. LONG-TERM DEBT
On November 15, 2011, we amended and restated our $60.0 million Credit Facility with a new facility (as amended, the “Credit Facility”). We utilized
the Credit Facility to finance the acquisition of the Monarch Casino Black Hawk and the Credit Facility is available to be used for working capital needs,
general corporate purposes and for ongoing capital expenditure requirements.
The maturity date of the Credit Facility is November 15, 2016. Borrowings are secured by liens on substantially all of the Company’s 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. The Credit Facility contains covenants requiring that the Company maintain certain financial ratios and achieves a
minimum level of Earnings-Before-Interest-Taxes-Depreciation and Amortization and other non-cash charges (“Adjusted EBITDA”) on a trailing four-quarter
basis. It also contains provisions that restrict cash transfers between Monarch and its affiliates and contains provisions requiring the achievement of certain
financial ratios before the Company can repurchase common stock or pay dividends. Management does not consider the covenants to restrict normal
functioning of day-to-day operations.
In addition to other customary covenants for a facility of this nature, as of December 31, 2014, we are required to maintain a leverage ratio, defined as
consolidated debt divided by Adjusted EBITDA, of no more than 2.5:1 and a fixed charge coverage ratio (Adjusted EBITDA divided by fixed charges, as
defined) of at least 1.15:1. As of December 31, 2014, the Company’s leverage ratio and fixed charge coverage ratios were 1.1:1 and 30.0:1, respectively.
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The Credit Facility is structured to reduce the maximum principal available by $1.5 million each quarter beginning June 30, 2013. As of December 31,
2014, the maximum principal available was $89.5 million. 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 our borrowings for each of the next three years as of December 31, 2014 are as
follows (in millions):
Year
2015
2016
Maturities
—
46.3
46.3
$
$
At December 31, 2014, our leverage ratio was such that pricing for borrowings under the Credit Facility was LIBOR plus 1.5%. At December 31, 2014,
the one-month LIBOR interest rate was 0.17%. The carrying value of the debt outstanding under the Credit Facility approximates fair value because the
interest fluctuates with the lender’s prime rate or other market rates of interest.
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.
NOTE 7. TAXES
Income Taxes
The Company’s income tax provision (benefit) consists of the following (in thousands):
Federal
State
Current tax provision
Federal
2014
$
Years ended December 31,
2013
$
6,935
46
6,981
637
9,856
396
10,252
(108)
2012
$
5,029
259
5,288
(209)
State
Deferred tax (benefit) provision
Total tax provision
(688)
(51)
6,930
$
490
382
10,634
$
(31)
(240)
5,048
$
Table of Contents
The income tax provision differs from that computed at the federal statutory rate as follows:
67
Federal tax at the statutory rate
State tax (net of federal benefit)
Permanent items
Tax credits
Other
2014
Years ended December 31,
2013
2012
35.00%
(1.84)%
3.49%
(1.03)%
(2.80)%
32.82%
35.00%
1.33%
0.45%
(0.77)%
1.18%
37.19%
35.00%
0.98%
3.03%
(1.44)%
(1.41)%
36.16%
Tax planning strategies implemented during 2014 resulted in a decrease of the effective tax rate when compared to 2013.
The Company recorded $386 thousand, $413 thousand and $0 thousand as increases to contributed capital from certain tax benefits for employee stock-
based compensation for the years ended December 31, 2014, 2013 and 2012, respectively.
The components of the deferred income tax assets and liabilities at December 31, 2014 and 2013, as presented in the consolidated balance sheets, are as
follows (in thousands):
DEFERRED TAX ASSETS
Stock-based compensation
Compensation and benefits
Bad debt reserves
Accrued expenses
Fixed assets and depreciation
Base stock
NOLs & credit carry-forwards
Deferred income tax asset
DEFERRED TAX LIABILITIES
Fixed assets and depreciation
Intangibles and amortization
Prepaid expenses
Real estate taxes
Other Reserves
Federal deduction on deferred state taxes
Deferred income tax liability
NET DEFERRED INCOME TAX ASSET
2014
2013
2,156
744
114
1,663
1,615
1
4,322
10,615
—
(2,649)
(984)
(290)
(24)
(360)
(4,307)
6,308
$
$
$
$
$
4,621
760
134
1,127
—
—
4,103
10,745
(105)
(3,070)
(907)
(285)
—
(119)
(4,486)
6,259
$
$
$
$
$
As of December 31, 2014 the Company had $8.6 million of federal net operating loss (“NOL”) carryforwards, general business credit (“GBC”)
carryforwards of $0.3 million and $20.7 million of state NOL carryforwards, acquired as part of the Monarch Casino Black Hawk (formerly Rivera Black
Hawk) acquisition. The federal NOL carryforwards expire in 2020 through 2031. The federal GBC carryforwards expire in 2022 through 2031. The state
NOL carryforwards expire in 2022 through 2032.
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The acquired federal and state NOL and federal GBC carryforwards are subject to Internal Revenue Code change of ownership limitations. Accordingly,
future utilization of the carryforwards is subject to an annual base limitation of $1.25 million that can be applied against future taxable income.
The Company acquired NOLs of Monarch Black Hawk generated in tax years 2000 through 2012. The statute of limitation for assessment for these
NOL years is determined by reference to the year the NOL is used to reduce taxable income. Consequently, the separate returns that included Monarch Black
Hawk remain subject to examination by the Internal Revenue Service (the “IRS”). The Company’s income tax returns from 2011 forward are subject to
examination by the IRS. During the third quarter of 2012, the Company settled an IRS examination of its 2006 through 2008 income tax returns, paying $1.1
million.
Accounting standards require that tax positions be assessed for recognition using a two-step process. A tax position is recognized if it meets a “more
likely than not” threshold, and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized. Uncertain tax positions
must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or
deferred income tax accounts. The Company’s policy regarding interest and penalties associated with uncertain tax positions is to classify such amounts as
income tax expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
2014
2013
2012
Balance — Beginning of year
Additions based on tax positions of the current year
Additions based on tax positions of prior years
Reductions for settlements
Decreases due to lapses in statutes of limitations
Balance — End of year
$
$
—
—
—
—
—
—
$
$
—
—
—
—
—
—
$
$
1,501
—
—
(1,501)
—
—
As of December 31, 2011, the Company recorded a liability related to uncertain tax positions of $1,501 thousand. With the conclusion of the IRS
examination of the Company’s 2006 through 2008 income tax returns, this liability was eliminated as of December 31, 2012. No uncertain tax positions were
recorded as of December 31, 2014 and 2013. No change in uncertain tax positions is anticipated over the next twelve months.
The Company accrued interest related to unrecognized tax benefits of $336 thousand as of December 31, 2011 of which $166 thousand related to 2011.
When the IRS examination was completed, over-accrued interest of $133 thousand was reversed, resulting in tax benefit of $87 thousand in 2012. No interest
or expense for uncertain tax positions was recorded for years ended December 31, 2014 and 2013.
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Sales and Use Tax on Complimentary Meals
On March 27, 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 requested refunds totaling
approximately $1.6 million, excluding interest (“the Refunds”). We have not recognized any of these 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. Subject to these regulations we accrued $0.6 million through June 2013 related to this directive.
The Department policy directive was challenged by several affected parties and in June 2013, the Nevada Tax Commission issued a ruling that
complimentary and employee meals were no longer subject to sales taxation. Associated with the ruling, the Nevada hotel-casino industry, including the
Company, agreed to forego and cause to be withdrawn certain pending use tax refund requests. Pursuant to that agreement, we withdrew our request for the
Refunds. As a result of the ruling, we reversed the accumulated sales tax expense accrual totaling $0.6 million in the second quarter of 2013.
NOTE 8. BENEFIT PLANS
Savings Plan - Effective November 1, 1995, the Company adopted a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code.
Under the plan, participating employees may defer up to 100% of their pre-tax compensation, but not more than statutory limits. The Company’s matching
contributions were approximately $283 thousand, $283 thousand, and $242 thousand for years ended December 31, 2014, 2013 and 2012, respectively.
NOTE 9. STOCK-BASED COMPENSATION
On May 21, 2014, we adopted the 2014 Equity Incentive Plan (the “2014 Plan”). The purposes of the 2014 Plan are to attract and retain the best available
personnel, to provide additional incentives to employees, directors and consultants and to promote the success of the Company’s business. The 2014 Plan is
an “omnibus plan” under which stock options, stock appreciation rights, performance awards, dividend equivalents, restricted stock, and restricted stock units
can be awarded to employees, directors and consultants of the Company. The 2014 Plan serves as the successor to our 1993 Employee Stock Option Plan,
1993 Executive Long-Term Incentive Plan and 1993 Directors’ Stock Option Plan (which plan terminated on June 13, 2013) (the “Predecessor Plans”). The
2014 Plan became effective as of May 21, 2014 and the remaining two Predecessor Plans terminated on that date (except with respect to awards previously
granted under the Predecessor Plans that remain outstanding).
The share reserve under the 2014 Plan includes 1,000,000 new shares and the shares available for grant or subject to outstanding awards under the
Predecessor Plans, for an aggregate amount of up to 2,843,411 common shares as of December 31, 2014. By its terms, the 2014 Plan will expire in May 2024
after which no options may be granted unless the 2014 Plan is amended or replaced.
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Pursuant to the terms of the 2014 Plan, either the Board or a committee designated by the Board is authorized to administer the plan. The administrator
has the authority, in its discretion, to select employees, consultants and directors to whom awards under the 2014 Plan may be granted from time to time, to
determine whether and to what extent awards are granted, to determine the number of shares or the amount of other consideration to be covered by each
award (subject to certain limitations), to approve award agreements for use under the 2014 Plan, to determine the terms and conditions of any award
(including the vesting schedule applicable to the award), to amend the terms of any outstanding award granted under the 2014 Plan (subject to certain
limitations), to construe and interpret the terms of the 2014 Plan and awards granted, and to take such other action not inconsistent with the terms of the 2014
Plan as the administrator deems appropriate.
A summary of the stock option activity as of and for the year ended December 31, 2014 is presented below:
Options
Shares
Exercise
Price
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Weighted Average
Outstanding at beginning of period
Granted
Exercised
Forfeited
Expired
Outstanding at end of period
Exercisable at end of period
2,886,574
377,000
(1,136,371)
(125,000)
—
2,002,203
829,060
$
$
$
12.51
14.44
11.08
11.09
—
13.73
14.22
—
—
—
—
—
7.0 yrs.
5.0 yrs.
$
$
—
—
—
—
—
8,468,661
3,887,865
A summary of the status of the Company’s nonvested shares as of, and for the year ended, December 31, 2014 is presented below:
Nonvested Shares
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2014
Expense Measurement and Recognition:
Shares
1,203,070
377,000
(281,927)
(125,000)
1,173,143
$
$
Weighted-Average
Grant Date Fair
Value
12.51
4.02
3.24
11.09
13.73
The Company recognizes stock-based compensation for all current award grants and for the unvested portion of previous award grants based on grant
date fair values. Unrecognized costs related to all stock-based awards outstanding at December 31, 2014 totaled approximately $1.3 million and is expected to
be recognized over a weighted average period of 2.4 years.
The Company uses historical data and projections to estimate expected employee, executive and director behaviors related to option exercises and
forfeitures.
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71
The Company estimates the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the
assumptions noted in the following table. Option valuation models require the input of highly subjective assumptions, and changes in assumptions used can
materially affect the fair value estimate. Option valuation assumptions for options granted during each year were as follows (in thousands, except per share
amounts and percentages):
2014
Years ended December 31,
2013
2012
Expected volatility
Expected dividends
Expected life (in years)
Directors’ plan
Executives plan
Employees plan
Weighted average risk free rate
34.95%
—
3.59
4.31
3.59
1.06%
Weighted average grant date fair value per share of
options granted
Total fair value of shares vested
Total intrinsic value of options exercised
Cash received for all stock option exercises
Tax benefit realized from stock awards exercised
$
$
$
$
$
4.02
913
8,921
12,595
3,122
$
$
$
$
$
37.03%
—
3.32
4.48
3.32
0.85%
5.38
1,123
2,737
3,438
958
$
$
$
$
$
56.1%
—
9.5
3.1
3.1
0.40%
3.43
1,918
41
53
14
The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant. The expected lives of options are based on historical
data of the Company. The Company has determined that an implied volatility is more reflective of market conditions and a better indicator of expected
volatility as compared to the Company’s experience.
Reported stock-based compensation expense was classified as follows (in thousands):
Casino
Food and beverage
Hotel
Selling, general and administrative
Total stock-based compensation,
before taxes
Tax benefit
Total stock-based compensation,
net of tax
$
$
2014
For the years ended December 31,
2013
2012
$
45
68
11
1,102
1,226
(429)
$
20
33
3
1,164
1,220
(427)
797
$
793
$
72
65
81
20
1,202
1,368
(479)
889
Table of Contents
NOTE 10. COMMITMENTS AND CONTINGENCIES
Self-Insurance: The Company is self-insured for health care claims for eligible active employees. Benefit plan administrators assist the Company in
determining its liability for self-insured claims, and such claims are not discounted. Black Hawk’s health plan has stop-loss insurance whereby the Company
retains the first $250,000 of liability for individual health care claims. The Company’s liability on the Atlantis health plan is limited to the first $250,000 of
claims plus 10% of claims above $250,000.
The Company is also self-insured for Atlantis workers’ compensation. The maximum liability for workers’ compensation under the Atlantis stop-loss
agreement is $500,000 per claim. The Company is fully-insured for Monarch Casino Black Hawk workers compensation claims.
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.
NOTE 11. RIVIERA BLACK HAWK ACQUISITION
On September 29, 2011, Monarch entered into a definitive Stock Purchase Agreement (the “Stock Purchase Agreement”) with Riviera Operating
Corporation, a Nevada corporation, Riviera Holdings Corporation, a Nevada corporation (the “Seller”) and Riviera Black Hawk, Inc., a Colorado corporation
(“Riviera Black Hawk”). Pursuant to the Stock Purchase Agreement, the Seller agreed to sell all of the issued and outstanding shares of common stock of
Riviera Black Hawk to Monarch. As required by the Stock Purchase Agreement, the Company paid a $3.8 million deposit (the “Deposit”) against the $76
million purchase price (the “Purchase Price”).
On April 26, 2012 (the “Closing”) Monarch completed the acquisition of Riviera Black Hawk. Monarch paid $72.2 million, the difference between the
Purchase Price and the Deposit, subject to certain post-Closing working capital adjustments. At Closing, Seller paid substantially all of Riviera Black Hawk’s
indebtedness and left Monarch $2.1 million of net working capital. In order to fund the Purchase Price and related transaction costs, Monarch borrowed $72.3
million under the Credit Facility (see NOTE 6). $2.28 million of the Purchase Price was escrowed for one year to secure the Seller’s indemnification
obligations under the Stock Purchase Agreement.
The acquisition was treated as a purchase transaction. Accordingly, the purchase price was allocated to the underlying assets acquired and liabilities
assumed based upon their estimated fair values at the date of acquisition. In establishing its purchase price allocation, the Company obtained a third-party
valuation of the assets acquired and liabilities assumed, and assigned the following values based upon the Company’s consideration of the third-party
valuation (in thousands):
Cash consideration
Liabilities assumed by the Company
Working capital adjustment
Total consideration
Table of Contents
The allocation of the purchase price was as follows (in thousands):
73
Tangible Assets:
Current assets
Land
Site improvements
Building improvements
Furniture and equipment
Total tangible assets
Intangible Assets:
Customer list
Trade name
Goodwill
Total intangible assets
Deferred tax asset
Total assets
$
$
$
$
75,885
3,505
604
79,994
6,241
8,700
30
15,200
5,737
35,908
10,490
1,590
25,110
37,190
6,896
79,994
The Company recognized $2.2 million of acquisition related expenses for the year ended December 31, 2012. The Company had no acquisition related
expenses in 2013 and 2014.
The amounts of net revenue and operating income of Monarch Casino Black Hawk included in the Company’s consolidated statement of income,
subsequent to the Closing, after elimination of intercompany transactions, for the year ended December 31, 2012 are as follows (in thousands):
Net revenues
Income from operations
$
$
29,678
6,350
The unaudited pro forma consolidated results of operations, as if the acquisition of Riviera Black Hawk had occurred on January 1, 2012, are as
follows (in thousands, except per share):
Pro forma (unaudited):
Net revenues
Twelve Months Ended
December 31, 2012
$
183,043
Income from operations
Net income
Basic earnings per share
Diluted earnings per share
$
$
$
$
17,516
9,542
0.59
0.59
NOTE 12. RELATED PARTY TRANSACTIONS
The shopping center adjacent to the Atlantis (the “Shopping Center”) 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 of Directors, Chief Executive Officer, Secretary and a Director of Monarch. Bob Farahi is Co-Chairman of the Board of Directors,
President and a Director of Monarch.
In addition, we share a driveway with and lease approximately 37,000 square-feet from the Shopping Center for a minimum lease term of 15 years at an
annual rent of $340 thousand plus common area expenses, subject to increase every year beginning in the 61st month based on the Consumer Price Index. 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
driveway section of the Shopping Center. For each of the years ended December 31, 2014, 2013 and 2012, the Company paid $350 thousand, $340 thousand
and $340 thousand respectively in rent, plus $119 thousand, $159 thousand and $123 thousand respectively for operating expenses related to this lease.
We occasionally lease billboard advertising, storage space and parking lot from affiliates of our controlling stockholders and paid $125 thousand, $123
thousand and $114 thousand for the years ended December 31, 2014, 2013 and 2012, respectively.
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NOTE 13 SUBSEQUENT EVENTS
The Company evaluated all subsequent events through the date that the consolidated financial statements were issued. No material subsequent events
have occurred since December 31, 2014 that required recognition or disclosure in the consolidated financial statements.
NOTE 14 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial information for 2014 and 2013 (in thousands, except per share amounts):
Net revenues
Operating expenses
Income from operations
Net income
Income per share of common stock
Basic
Diluted
Net revenues
Operating expenses
Income from operations
Net income
Income per share of common stock
Basic
Diluted
Table of Contents
1st Quarter
2nd Quarter
2014
3rd Quarter
4th Quarter
Total
$
$
$
$
$
$
45,508
40,177
5,331
3,276
0.20
0.19
1st Quarter
45,605
38,420
7,185
4,262
0.26
0.26
$
$
$
$
$
$
47,803
42,335
5,468
3,024
0.18
0.18
2nd Quarter
49,651
39,483
10,168
6,120
0.38
0.37
75
$
$
$
$
$
$
48,597
41,931
6,666
4,074
0.24
0.24
2013
3rd Quarter
48,989
40,050
8,939
5,520
0.34
0.32
$
$
$
$
$
$
45,859
41,105
4,754
3,811
0.23
0.22
4th Quarter
44,504
40,341
4,163
2,059
0.12
0.12
$
$
$
$
$
$
187,767
165,548
22,219
14,185
0.85
0.83
Total
188,749
158,294
30,455
17,961
1.10
1.06
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”), an evaluation was carried out by our management,
with the participation of our Chief Executive Officer and our Chief Financial Officer, 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 evaluation date. No changes were made to our internal control over financial
reporting (as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal controls may vary over time.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO) in Internal Control-Integrated
Framework. Based on our assessment we believe that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on
those criteria.
The Company’s independent registered public accounting firm has issued an audit report on our assessment of the Company’s internal control over
financial reporting. This report appears in Item 8 of this Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
This information is incorporated by reference from the Company’s Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 2015. We expect to file the Company’s Proxy Statement with the Commission not later than April 30, 2015.
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ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company’s Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 2015. We expect to file the Company’s Proxy Statement with the Commission not later than April 30, 2015.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Following is information related to the Company’s equity compensation plan.
Plan Category
Equity compensation plans approved by security holders (F1)
Equity compensation plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
2,002,203
—
2,002,203
$
$
13.73
—
13.73
841,208
—
841,208
(F1) Includes the 1993 Directors’ Stock Option Plan, 1993 Employee Stock Option Plan and 1993 Executive Long-Term Incentive Plan, as amended, and the
2014 Equity Incentive Plan.
Additional information is incorporated by reference from the Company’s Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 2015. We expect to file the Company’s Proxy Statement with the Commission not later than April 30, 2015.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information is incorporated by reference from the Company’s Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 2015. We expect to file the Company’s Proxy Statement with the Commission not later than April 30, 2015.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is incorporated by reference from the Company’s Proxy Statement to be filed with the Commission in connection with the Annual
Meeting of Stockholders to be held on June 9, 2015. We expect to file the Company’s Proxy Statement with the Commission not later than April 30, 2015.
77
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1). Financial Statements
Included in Part II, Item 8 of this report:
a)
b)
c)
d)
e)
f)
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012.
Consolidated Balance Sheets at December 31, 2014 and 2013.
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012.
Notes to Consolidated Financial Statements.
(a)(2). Financial Statements Schedules (in thousands)
Schedule II. - VALUATION AND QUALIFYING ACCOUNTS
Year ended
December 31,
2012
Allowance for doubtful accounts
2013
Allowance for doubtful accounts
2014
Allowance for doubtful accounts
Balance at
beginning
of year
Charged to
costs and
expenses
(F1)
Deductions
(F1)
Other
Balance at end
of year
$
$
$
1,313
729
371
$
$
$
(8)
(230)
51
$
$
$
(576)
(128)
(105)
$
$
$
—
—
—
$
$
$
729
371
317
(F1) The Company reviews receivables monthly and, accordingly, adjusts the allowance for doubtful accounts monthly. The Company records write-offs
annually. The amount charged to costs and expenses reflects the bad debt expense recorded in the consolidated statements of income, while the amount
recorded for deductions reflects the adjustment to actual allowance for doubtful accounts reserve at the end of the period.
78
Table of Contents
(a)(3) Exhibits
Number
2.01
3.01
3.02
3.03
3.04
4.01
4.02+
Exhibit Description
Stock Purchase Agreement dated as of September 29, 2011 by and between Monarch Casino & Resort, Inc., Monarch Growth
Inc. (a wholly owned subsidiary of Monarch Casino and Resort, Inc.), Riviera Operating Corporation, Riviera Holdings
Corporation and Riviera Black Hawk, Inc. is incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K/A
(SEC File 0-22088) filed on October 4, 2011.
Articles of Incorporation of Monarch Casino & Resort, Inc., filed June 11, 1993 are incorporated herein by reference to
Exhibit 3.01 to the Company’s Form S-1 registration statement (SEC File 33-64556).
Bylaws of Monarch Casino & Resort, Inc., adopted June 14, 1993 and amended January 24, 1995, and March 27, 2009 and
June 1, 2012 are incorporated herein by reference to Exhibit 3.02 to the Company’s Form 10-K (SEC 0-22088) for the year
ended December 31, 2012.
Articles of Incorporation of Golden Road Motor Inn, Inc. filed March 6, 1973; Certificate Amending Articles of Incorporation
of Golden Road Motor Inn, Inc. filed August 29, 1973; and Certificate of Amendment of Articles of Incorporation filed April 5,
1984 are incorporated herein by reference to Exhibit 3.03 to the Company’s Form S-1 registration statement (SEC File 33-
64556).
Bylaws of Golden Road Motor Inn, Inc., adopted March 9, 1973 are incorporated herein by reference to Exhibit 3.04 to the
Company’s Form S-1 registration statement (SEC File 33-64556).
Specimen Common Stock Certificate for the Common Stock of Monarch Casino & Resort, Inc. is incorporated herein by
reference to Exhibit 4.01 to the Company’s Form S-1 registration statement (SEC File 33-64556).
Amended and Restated Monarch Casino & Resort, Inc. 1993 Directors’ Stock Option Plan is incorporated herein by reference
to Exhibit 4.02 to the Company’s Form 10-K report (SEC File 0-022088) for the fiscal year ended December 31, 1998.
4.03+
4.04+
4.05+
First Amendment to the Amended and Restated 1993 Director’s Stock Option Plan is incorporated herein by reference to
Exhibit 10.5 to the Company’s Form 10-Q (SEC File 0-22088) for the quarterly period ended September 30, 2013.
Monarch Casino & Resort, Inc. 1993 Executive Long-Term Incentive Plan, as amended, is incorporated herein by reference to
Appendix B to the Company’s Proxy Statement (SEC File 0-22088) filed on March 25, 2011.
Seventh Amendment to the 1993 Executive Long Term Incentive Plan is incorporated herein by reference to Exhibit 10.4 to the
Company’s Form 10-Q (SEC File 0-22088) for the quarterly period ended September 30, 2013.
79
Table of Contents
4.06+
4.07+
4.08+
10.1+
10.02
10.03
10.04
10.05
10.06+
21.01
23.1
Table of Contents
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
Monarch Casino & Resort, Inc. 1993 Employee Stock Option Plan, as amended, is incorporated herein by reference to
Appendix A to the Company’s Proxy Statement (SEC File 0-22088) filed on March 25, 2011.
Eighth Amendment to the 1993 Employee Stock Option Plan is incorporated herein by reference to Exhibit 10.2 to the
Company’s Form 10-Q (SEC File 0-22088) for the quarterly period ended September 30, 2013.
2014 Equity Incentive Plan is incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File 0-22088)
filed on May 23, 2014.
Non-standardized 401(k) Plan Adoption Agreement between Monarch Casino & Resort, Inc. and Smith Barney Shearson dated
November 7, 1995 is incorporated herein by reference to Exhibit 10.21 to the Company’s Form 10-K report (SEC File 0-22088)
for the fiscal year ended December 31, 1995.
Trademark Agreement between Golden Road Motor Inn, Inc. and Atlantis Lodge, Inc., dated February 3, 1996 is incorporated
herein by reference to Exhibit 10.23 to the Company’s Form 10-K report (SEC File 0-22088) for the fiscal year ended
December 31, 1995.
Lease Agreement and Option to Purchase dated as of January 29, 2004, between Golden Road Motor Inn, Inc. as Lessee and
Biggest Little Investments, L.P. as Lessor is incorporated herein by reference to Exhibit 10.18 to the Company’s Form 10-K
(SEC File 0-22088) dated March 11, 2004.
Second Amended and Restated Credit Agreement, dated as of November 15, 2011, among Monarch Casino & Resort, Inc.,
Golden Road Motor Inn, Inc. and Monarch Growth Inc., as Borrowers, the Lenders named therein, and Wells Fargo Bank,
National Association, as Administrative Agent, L/C Issuer, Swing Line Lender and Lead Arranger and Wells Fargo Securities,
LLC, as Lead Arranger and Sole Book runner, Bank of America N.A., as Syndication Agent as incorporated herein by reference
to Exhibit 10.04 to the Company’s Form 10-K (SEC File 0-22088) dated March 13, 2012.
Trademark and Domain Name License Agreement, dated as of April 26, 2012, by and between Riviera Operating Corporation
and Riviera Black Hawk, Inc. is incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K (SEC File 0-
22088) filed on April 27, 2012.
Agreement to pay severance to Ronald Rowan as described under the heading “Executive Compensation — Other Employment
Related Agreements” in the Company’s Proxy Statement (SEC File 0-22088) filed on March 28, 2013.
List of Subsidiaries of Monarch Casino & Resort, Inc. is incorporated herein by reference to Exhibit 21.01 to the Company’s
Form 10-K (SEC File 0-22088) for the year ended December 31, 2012.
Consent of Independent Registered Public Accounting Firm*
80
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed
as an exhibit to this Form 10-K.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed
as an exhibit to this Form 10-K.*
XBRL Instance*
XBRL Taxonomy Extension Schema*
XBRL Taxonomy Extension Calculation*
XBRL Taxonomy Extension Definition*
101.LAB
101.PRE
XBRL Taxonomy Extension Labels*
XBRL Taxonomy Extension Presentation*
* filed herewith.
+ denote management contracts or compensatory plans or arrangements.
Table of Contents
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 2015
/s/ RONALD ROWAN
By:
Ronald Rowan, Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ JOHN FARAHI
John Farahi
/S/ BOB FARAHI
Bob Farahi
/S/ RONALD ROWAN
Ronald Rowan
/S/ PAUL ANDREWS
Paul Andrews
/S/ YVETTE E. LANDAU
Yvette E. Landau
/S/ CRAIG F. SULLIVAN
Craig F. Sullivan
Co-Chairman of the Board of Directors
Chief Executive Officer (Principal
Executive Officer) and Director
Co-Chairman of the Board of Directors,
President, Secretary and Director
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Director
Director
Director
82
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-200102, 333-179158, 333-179159, 333-144254, 333-
144253, 333-144252, 333-85412, 333-85418, and 333-85420) pertaining to the 2014 Equity Incentive Plan, Directors’ Stock Option Plan, Executive Long-
Term Stock Incentive Plan, and Employee Stock Option Plan of Monarch Casino & Resort, Inc. of our reports dated March 13, 2015, with respect to the
consolidated financial statements and schedule of Monarch Casino & Resort, Inc. and subsidiaries, and the effectiveness of internal control over financial
reporting of Monarch Casino & Resort, Inc. and subsidiaries, included in this Annual Report (Form 10-K) for the year ended December 31, 2014.
EXHIBIT 23.1
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 13, 2015
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald Rowan, Chief Financial Officer of Monarch Casino & Resort, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Monarch Casino & Resort, Inc. a Nevada Corporation;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
controls over financial reporting.
Date: March 13, 2015
/s/ Ronald Rowan
By:
Ronald Rowan
Chief Financial Officer and Treasurer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Farahi, Chief Executive Officer of Monarch Casino & Resort, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Monarch Casino & Resort, Inc. a Nevada Corporation;
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
controls over financial reporting.
Date: March 13, 2015
/s/ John Farahi
By:
John Farahi
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
I, Ronald Rowan, Chief Financial Officer and Treasurer of Monarch Casino & Resort, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2014 (the “Report”) fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
EXHIBIT 32.1
/S/ RONALD ROWAN
Ronald Rowan
Chief Financial Officer
March 13, 2015
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
I, John Farahi, Chief Executive Officer of Monarch Casino & Resort, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
1. The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2014 (the “Report”) fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
EXHIBIT 32.2
/S/ JOHN FARAHI
John Farahi
Chief Executive Officer
March 13, 2015