ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Monarch Casino & Resort, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Monarch Casino & Resort, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 14, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for its revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Update (“ASU”) No. 2014-09 “
Revenue from Contracts with Customers (Topic 606).
”
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Las Vegas, Nevada
March 14, 2019
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
125,844
|
|
$
|
178,585
|
|
$
|
168,861
|
|
Food and beverage
|
|
|
71,212
|
|
|
63,416
|
|
|
60,269
|
|
Hotel
|
|
|
30,497
|
|
|
24,784
|
|
|
23,374
|
|
Other
|
|
|
12,762
|
|
|
12,467
|
|
|
11,640
|
|
Gross revenues
|
|
|
240,315
|
|
|
279,252
|
|
|
264,144
|
|
Less promotional allowances
|
|
|
—
|
|
|
(48,526)
|
|
|
(47,112)
|
|
Net revenues
|
|
|
240,315
|
|
|
230,726
|
|
|
217,032
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
43,791
|
|
|
73,017
|
|
|
69,529
|
|
Food and beverage
|
|
|
54,002
|
|
|
25,727
|
|
|
24,627
|
|
Hotel
|
|
|
13,059
|
|
|
9,320
|
|
|
7,231
|
|
Other
|
|
|
6,206
|
|
|
4,141
|
|
|
3,855
|
|
Selling, general and administrative
|
|
|
65,802
|
|
|
62,719
|
|
|
57,730
|
|
Depreciation and amortization
|
|
|
14,617
|
|
|
15,132
|
|
|
14,835
|
|
Loss on disposition of assets
|
|
|
12
|
|
|
4
|
|
|
677
|
|
Total operating expenses
|
|
|
197,489
|
|
|
190,060
|
|
|
178,484
|
|
Income from operations
|
|
|
42,826
|
|
|
40,666
|
|
|
38,548
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of amounts capitalized
|
|
|
(177)
|
|
|
(967)
|
|
|
(616)
|
|
Total other expense
|
|
|
(177)
|
|
|
(967)
|
|
|
(616)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
42,649
|
|
|
39,699
|
|
|
37,932
|
|
Provision for income taxes
|
|
|
(8,551)
|
|
|
(14,161)
|
|
|
(13,358)
|
|
Net income
|
|
$
|
34,098
|
|
$
|
25,538
|
|
$
|
24,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.91
|
|
$
|
1.45
|
|
$
|
1.42
|
|
Diluted
|
|
$
|
1.83
|
|
$
|
1.39
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and potential common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,846
|
|
|
17,585
|
|
|
17,305
|
|
Diluted
|
|
|
18,574
|
|
|
18,367
|
|
|
17,664
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,462
|
|
$
|
29,151
|
|
Receivables, net
|
|
|
6,740
|
|
|
6,925
|
|
Income taxes receivable
|
|
|
279
|
|
|
2,008
|
|
Inventories
|
|
|
3,692
|
|
|
3,335
|
|
Prepaid expenses
|
|
|
5,508
|
|
|
4,612
|
|
Total current assets
|
|
|
46,681
|
|
|
46,031
|
|
Property and equipment
|
|
|
|
|
|
|
|
Land
|
|
|
30,034
|
|
|
30,034
|
|
Land improvements
|
|
|
7,645
|
|
|
7,249
|
|
Buildings
|
|
|
193,235
|
|
|
193,286
|
|
Buildings improvements
|
|
|
25,995
|
|
|
24,745
|
|
Furniture and equipment
|
|
|
139,772
|
|
|
140,404
|
|
Construction in progress
|
|
|
180,518
|
|
|
48,834
|
|
Leasehold improvements
|
|
|
3,782
|
|
|
3,800
|
|
|
|
|
580,981
|
|
|
448,352
|
|
Less accumulated depreciation and amortization
|
|
|
(206,657)
|
|
|
(197,638)
|
|
Net property and equipment
|
|
|
374,324
|
|
|
250,714
|
|
Other assets
|
|
|
|
|
|
|
|
Goodwill
|
|
|
25,111
|
|
|
25,111
|
|
Intangible assets, net
|
|
|
2,704
|
|
|
3,869
|
|
Deferred income taxes
|
|
|
4,027
|
|
|
3,544
|
|
Other assets, net
|
|
|
2,280
|
|
|
2,818
|
|
Total other assets
|
|
|
34,122
|
|
|
35,342
|
|
Total assets
|
|
$
|
455,127
|
|
$
|
332,087
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,182
|
|
$
|
8,184
|
|
Construction accounts payable
|
|
|
17,152
|
|
|
5,823
|
|
Accrued expenses
|
|
|
31,111
|
|
|
25,406
|
|
Total current liabilities
|
|
|
59,445
|
|
|
39,413
|
|
Long-term debt
|
|
|
94,500
|
|
|
26,200
|
|
Total liabilities
|
|
|
153,945
|
|
|
65,613
|
|
|
|
|
|
|
|
|
|
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; 17,919,021 outstanding at December 31, 2018; 17,759,446 outstanding at December 31, 2017
|
|
|
191
|
|
|
191
|
|
Additional paid-in capital
|
|
|
30,111
|
|
|
26,890
|
|
Treasury stock, 1,177,279 shares at December 31, 2018; 1,336,854 shares at December 31, 2017
|
|
|
(15,876)
|
|
|
(18,123)
|
|
Retained earnings
|
|
|
286,756
|
|
|
257,516
|
|
Total stockholders’ equity
|
|
|
301,182
|
|
|
266,474
|
|
Total liabilities and stockholders’ equity
|
|
$
|
455,127
|
|
$
|
332,087
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUIT
Y
(In thousands, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
|
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Total
|
|
Balance, December 31, 2015
|
|
17,202,699
|
|
$
|
191
|
|
$
|
22,728
|
|
$
|
207,404
|
|
$
|
(26,404)
|
|
$
|
203,919
|
|
Net exercise of stock options
|
|
265,570
|
|
|
—
|
|
|
(1,312)
|
|
|
—
|
|
|
4,246
|
|
|
2,934
|
|
Excess tax benefit from stock-based compensation
|
|
—
|
|
|
—
|
|
|
737
|
|
|
—
|
|
|
—
|
|
|
737
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
1,681
|
|
|
—
|
|
|
—
|
|
|
1,681
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,574
|
|
|
—
|
|
|
24,574
|
|
Balance, December 31, 2016
|
|
17,468,269
|
|
$
|
191
|
|
$
|
23,834
|
|
$
|
231,978
|
|
$
|
(22,158)
|
|
$
|
233,845
|
|
Net exercise of stock options
|
|
291,177
|
|
|
—
|
|
|
812
|
|
|
—
|
|
|
4,035
|
|
|
4,847
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
2,244
|
|
|
—
|
|
|
—
|
|
|
2,244
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,538
|
|
|
—
|
|
|
25,538
|
|
Balance, December 31, 2017
|
|
17,759,446
|
|
$
|
191
|
|
$
|
26,890
|
|
$
|
257,516
|
|
$
|
(18,123)
|
|
$
|
266,474
|
|
Net exercise of stock options
|
|
159,575
|
|
|
—
|
|
|
90
|
|
|
—
|
|
|
2,247
|
|
|
2,337
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
3,131
|
|
|
—
|
|
|
—
|
|
|
3,131
|
|
Adjustment to beginning retained earnings for accounting changes in accordance with the new revenue recognition standard
|
|
|
|
|
|
|
|
|
|
|
(4,858)
|
|
|
|
|
|
(4,858)
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,098
|
|
|
—
|
|
|
34,098
|
|
Balance, December 31, 2018
|
|
17,919,021
|
|
$
|
191
|
|
$
|
30,111
|
|
$
|
286,756
|
|
$
|
(15,876)
|
|
$
|
301,182
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
S
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
34,098
|
|
$
|
25,538
|
|
$
|
24,574
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,617
|
|
|
15,132
|
|
|
14,835
|
|
Amortization of deferred loan costs
|
|
|
538
|
|
|
538
|
|
|
410
|
|
Stock-based compensation
|
|
|
5,468
|
|
|
7,091
|
|
|
1,681
|
|
Excess tax benefit from stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
(737)
|
|
Provision for bad debts
|
|
|
93
|
|
|
103
|
|
|
74
|
|
Loss on disposition of assets
|
|
|
12
|
|
|
4
|
|
|
677
|
|
Deferred income taxes
|
|
|
(483)
|
|
|
3,810
|
|
|
798
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
92
|
|
|
(1,992)
|
|
|
(1,381)
|
|
Income taxes
|
|
|
1,729
|
|
|
(1,600)
|
|
|
203
|
|
Inventories
|
|
|
(357)
|
|
|
(238)
|
|
|
(216)
|
|
Prepaid expenses
|
|
|
(896)
|
|
|
(125)
|
|
|
(1,085)
|
|
Accounts payable
|
|
|
2,998
|
|
|
(431)
|
|
|
1,973
|
|
Accrued expenses
|
|
|
847
|
|
|
1,624
|
|
|
1,922
|
|
Net cash provided by operating activities
|
|
|
58,756
|
|
|
49,454
|
|
|
43,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
—
|
|
|
86
|
|
|
29
|
|
Change in construction payable
|
|
|
11,329
|
|
|
3,218
|
|
|
1,198
|
|
Acquisition of property and equipment
|
|
|
(137,074)
|
|
|
(49,990)
|
|
|
(26,121)
|
|
Net cash used in investing activities
|
|
|
(125,745)
|
|
|
(46,686)
|
|
|
(24,894)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net exercise of stock options
|
|
|
—
|
|
|
—
|
|
|
2,934
|
|
Excess tax benefit from stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
737
|
|
Loan issuance cost
|
|
|
—
|
|
|
—
|
|
|
(2,586)
|
|
Long-term debt borrowings (principal payment)
|
|
|
68,300
|
|
|
—
|
|
|
(14,700)
|
|
Net cash provided by (used in) financing activities
|
|
|
68,300
|
|
|
—
|
|
|
(13,615)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
1,311
|
|
|
2,768
|
|
|
5,219
|
|
Cash and cash equivalents at beginning of period
|
|
|
29,151
|
|
|
26,383
|
|
|
21,164
|
|
Cash and cash equivalents at end of period
|
|
$
|
30,462
|
|
$
|
29,151
|
|
$
|
26,383
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
186
|
|
$
|
426
|
|
$
|
206
|
|
Cash paid for income taxes
|
|
$
|
7,305
|
|
$
|
11,950
|
|
$
|
12,375
|
|
Adjustment to beginning retained earnings for accounting changes in accordance with the new revenue recognition standard
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
4,858
|
|
|
—
|
|
|
—
|
|
Return of assets under capital lease:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
$
|
(105)
|
|
|
—
|
|
Accrued expenses
|
|
$
|
—
|
|
$
|
(13)
|
|
$
|
—
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
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 owns separate parcels of land located proximate to the Atlantis.
Monarch’s wholly owned subsidiary Monarch Growth Inc. (“Monarch Growth”), formed in 2011, owns Monarch Black Hawk, Inc. which owns and operates Monarch Casino Black Hawk. In addition to owning the Monarch Casino Black Hawk, Monarch Black Hawk, Inc. also wholly owns Chicago Dogs Eatery, Inc. and Monarch Promotional Association, both of which were formed related to licensure requirements for extended hours of liquor operation in Black Hawk. Monarch Growth’s wholly owned subsidiary, Inter-Mountain Construction, LLC, owns a parcel of land with an industrial warehouse located between Denver and Monarch Casino Black Hawk.
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.
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 writes 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.
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 to the lower of cost and net realizable value. Net realizable value is defined by the Financial Accounting Standards Board (“FASB”) as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The adoption of this standard did not have a material impact on our Consolidated Financial Statements due to the nature of its inventory, consisting primarily of food, beverages, and retail merchandise.
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
|
|
15
|
-
|
40
|
years
|
Buildings
|
|
30
|
-
|
40
|
years
|
Building improvements
|
|
5
|
-
|
40
|
years
|
Furniture
|
|
5
|
-
|
10
|
years
|
Equipment
|
|
3
|
-
|
20
|
years
|
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, the 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, 2018, 2017 and 2016, there were no impairment charges.
Goodwill
The Company accounts for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC Topic 350”). ASC Topic 350 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 a 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 a two-step testing process. In the first step, the estimated fair value of each reporting unit is compared with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its estimated fair value, then the goodwill of the reporting unit is considered to be impaired, and impairment is measured in the second step of the process. In the second step, 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 in April 2012. As of December 31, 2018 and 2017, we had goodwill totaling $25.1 million related to the purchase of Black Hawk, Inc. (see NOTE 4). For the years ended December 31, 2018, 2017 and 2016, there were no impairment charges.
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.
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, 2018 and 2017, the customer relationships net intangible asset balance was $2.7 million and $3.9 million, respectively.
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 the Company’s two 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.
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 company engages a third party actuarial at least once per year for a more precise reserves review and calculation. The reserve is an amount estimated to pay both reported and unreported claims as of the balance sheet date, which management believes is adequate.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the term of the related debt agreement. Loan issuance costs are included in “Other assets, net” on the Company’s condensed consolidated balance sheets. As of December 31, 2018, loan issuance costs, net of amortization, were $1.4 million.
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 $2.3 million during the year ended December 31, 2018 and $0.5 million during each of the years ended December 31, 2017 and 2016 of interest.
Advertising Costs
All advertising costs are expensed as incurred. Advertising expense, which is included in selling, general and administrative expense, was $4.9 million, $5.2 million and $5.4 million for the years ended December 31, 2018, 2017 and 2016, 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.
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.
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 $22.3 million, $21.6 million and $20.3 million for the years ended December 31, 2018, 2017 and 2016, 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 10.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
Per Share
|
|
|
|
Per Share
|
|
|
|
Per Share
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
17,846
|
|
$
|
1.91
|
|
17,585
|
|
$
|
1.45
|
|
17,305
|
|
$
|
1.42
|
|
Effect of dilutive stock options
|
|
728
|
|
|
(0.08)
|
|
782
|
|
|
(0.06)
|
|
359
|
|
|
(0.03)
|
|
Diluted
|
|
18,574
|
|
$
|
1.83
|
|
18,367
|
|
$
|
1.39
|
|
17,664
|
|
$
|
1.39
|
|
The following options were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the December 31 closing market price of the common shares and their inclusion would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Options to purchase shares of common stock
|
|
|
|
697,968
|
|
|
203,667
|
|
|
106,102
|
|
Exercise prices
|
|
|
$
|
39.82
|
-
|
$
|
47.81
|
|
$
|
45.32
|
-
|
$
|
46.73
|
|
$
|
28.02
|
-
|
$
|
29.00
|
|
Expiration dates (month/year)
|
|
|
|
11/27-12/28
|
|
|
11/27-12/27
|
|
11/17-10/20
|
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, 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.
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 August 2018, the FASB issued an ASU to align the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. The guidance in this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. The Company is currently assessing the impact the adoption of this standard will have on its Consolidated Financial Statements.
In January 2017, the FASB issued an ASU that simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019.
In November 2016, the FASB issued amended accounting guidance on the presentation of restricted cash in the statement of cash flows. Entities are required to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The amended guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this ASU on January 1, 2018, with no impact to our presentation on the Consolidated Statements of Cash Flows.
In August 2016, the FASB issued an ASU that provides clarifying guidance on the presentation of certain cash receipts and cash payments in the statement of cash flows. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017. We adopted this ASU on January 1, 2018, with no impact to our presentation of cash receipts and payments on our Consolidated Statements of Cash Flows.
In February 2016, the FASB issued an ASU, amended January 2017, which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off- balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. The standard permits two approaches, one requiring retrospective application of the new guidance with restatement of prior years, and one requiring prospective application of the new guidance. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods.
We will adopt this standard as of the first quarter of 2019 using this modified retrospective transition approach and have elected not to adjust comparative periods presented. We have elected to use the package of practical expedients in our transition and accordingly, will not reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition exemption, under which we will not recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less, and have elected not to apply the use-of-hindsight practical expedient. We are in the final stages of implementing changes to our systems and processes for lease accounting and reporting, and are currently finalizing our evaluation of the financial statement impact of adopting the amended guidance, which will include recognizing lease liabilities and related right-of-use assets for operating leases on the opening balance sheet in the period of adoption. We do not expect the adoption to have a material impact on the pattern of lease expense recognition in our consolidated statements of income or cash flows.
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.
NOTE 2. REVENUE RECOGNITION
On January 1, 2018, the Company adopted accounting standard update No. 2014-09 (“ASC 606”) and all the related amendments to all contracts (“new revenue standard”). The Company applied the modified retrospective method and recognized a $4.86 million cumulative effect adjustment to the opening balance of retained earnings with the adoption of the new revenue standard. This adjustment exclusively related to the change in the accounting for the slot club liability from the immediate revenue/cost method to the deferred revenue method. Financial results for the twelve months ended December 31, 2017 and 2016 have not been revised and are reported under the accounting standards in effect during that period.
Players’ Club Program:
The Company operates a players’ club program under which as players perform gaming activities they earn and accumulate points, which may be redeemed for a variety of goods and services. Points may be applied toward hotel room stays, food and beverage consumption at the food and beverage 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. The point balance under the players’ club program is forfeited if the member does not earn or use any points over a twelve-month period.
A large portion of our revenues are generated by customers who are members of our players’ club. Given the significance of the players’ club program and the ability for members to bank such points based on their past play, we have determined that players’ club program points granted in conjunction with gaming activity constitute a material right and, as such, represent a performance obligation associated with the gaming contracts.
We have determined the points estimated standalone selling prices (“SSP”) by computing the cash redemption value of the points expected to be redeemed by type of good or service. This cash redemption value is determined through an analysis of all redemption activity over the preceding twelve-month period, leveraging the fair market value of the goods and services provided through redemption of points as the means for determining the fair market value of such points as points are not otherwise independently sold. Because of the similarity of gaming and other transactions,
we have applied the practical expedient under the portfolio approach as prescribed in ASC paragraph 606-10-10-4 to apply to our loyalty credit transactions.
Prior to the adoption of the ASC 606, at the time points are earned, which occurs commensurate with casino patron play, we recognized a liability for points outstanding based on the average cost of the goods and services expected to be redeemed, with a corresponding increase in casino expenses. After the adoption of the ASC 606, at the time points are earned, we recognize deferred revenue at the standalone selling prices of the goods and services that the points are expected to be redeemed for, with a corresponding decrease in gaming revenue. As of December 31, 2018, we had estimated the obligations related to the players’ club program at $9.4 million, which is included in Accrued Expenses in the Liabilities and Stockholders’ Equity section in the Consolidated Balance Sheet. Estimates and assumptions made regarding breakage rates and the combination of goods and services members will choose impacts the estimated SSP of the points. We use historical data to assist in the determination of estimated accruals. Changes in estimates or member redemption patterns could produce different results.
The majority of the Company’s revenue continues to be recognized when products are delivered or services are performed. For certain revenue transactions (when a patron uses a club loyalty card), a portion of the revenue is deferred until the points earned by the patron are redeemed or expire.
The new revenue standard also resulted in reclassifications to or from revenues, promotional allowances and operating expenses.
Prior to the adoption of the new revenue standard, the retail value of hotel, food and beverage services provided to customers without charge was included in gross revenue and deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances were primarily included in casino operating expenses and were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
|
Food and beverage
|
|
$
|
26,025
|
|
$
|
25,743
|
|
Hotel
|
|
|
3,375
|
|
|
3,039
|
|
Other
|
|
|
2,128
|
|
|
1,943
|
|
|
|
$
|
31,528
|
|
$
|
30,725
|
|
Pursuant to the new FASB guidelines, food and beverage, hotel and other complimentaries are now valued at their retail price and included as revenues within their respective categories, with a corresponding decrease in gaming revenues, as the offsetting amount historically included in promotional allowances has been eliminated. In addition, the cost of providing these complimentary goods and services are now included as expenses within their respective categories, resulting in a corresponding decrease in casino expenses.
While those changes have resulted in $936 thousand increase in net revenue for the year ended December 31, 2018, the adoption of the new revenue standard had no impact on net income.
In accordance with the new revenue standard requirements, below is a disclosure of the impact of the adoption of ASC 606 on our consolidated income statement for the period ended December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Post ASC 606 Adoption
|
|
ASC 606 Changes
|
|
Pre ASC 606 Adoption
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
125,844
|
$
|
59,522
|
$
|
185,366
|
|
(a) (b) (c) (d)
|
|
Food and beverage
|
|
|
71,212
|
|
(5,600)
|
|
65,612
|
|
(a) (d) (e)
|
|
Hotel
|
|
|
30,497
|
|
(4,158)
|
|
26,339
|
|
(a) (f)
|
|
Other
|
|
|
12,762
|
|
143
|
|
12,905
|
|
(a) (d)
|
|
Gross revenues
|
|
|
240,315
|
|
49,907
|
|
290,222
|
|
|
|
Less promotional allowances
|
|
|
—
|
|
(50,843)
|
|
(50,843)
|
|
(a) (d)
|
|
Net revenues
|
|
|
240,315
|
|
(936)
|
|
239,379
|
|
(b) (c) (e) (f)
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
43,791
|
|
33,174
|
|
76,965
|
|
(b) (c) (g)
|
|
Food and beverage
|
|
|
54,002
|
|
(28,550)
|
|
25,452
|
|
(e) (g)
|
|
Hotel
|
|
|
13,059
|
|
(3,428)
|
|
9,631
|
|
(f) (g)
|
|
Other
|
|
|
6,206
|
|
(2,132)
|
|
4,074
|
|
(g)
|
|
Selling, general and administrative
|
|
|
65,802
|
|
—
|
|
65,802
|
|
|
|
Depreciation and amortization
|
|
|
14,617
|
|
—
|
|
14,617
|
|
|
|
Loss on disposition of assets
|
|
|
12
|
|
—
|
|
12
|
|
|
|
Total operating expenses
|
|
|
197,489
|
|
(936)
|
|
196,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
34,098
|
|
—
|
|
34,098
|
|
|
|
Basic
|
|
$
|
1.91
|
$
|
—
|
$
|
1.91
|
|
|
|
Diluted
|
|
$
|
1.83
|
$
|
—
|
$
|
1.83
|
|
|
|
|
(a)
|
|
Change as a result of reclassification of current period complimentaries at estimated retail price from promotional allowances to casino, food and beverage, hotel, spa and retail revenues.
|
|
(b)
|
|
Change as a result of reclassification of the earned and unused points during the period from casino expense to casino revenue.
|
|
(c)
|
|
Change as a result of reclassification of the wide area progressive system expense from casino revenue to casino expense.
|
|
(d)
|
|
Change as a result of the change of the casino floor bars menu prices and some retail outlets prices from discounted to retail price.
|
|
(e)
|
|
Change as a result of reclassification of the banquets service fees from food and beverage expense to food and beverage revenue.
|
|
(f)
|
|
Change as a result of reclassification of the group rebates and commissions from hotel expense to hotel revenue.
|
|
(g)
|
|
Change as a result of the elimination of the reclassification journal entry that reclassified the costs of complimentaries from hotel, food and beverage and other expense categories to casino expense. Under ASC 606, the costs of complimentaries stay in the complimentaries revenue producing department.
|
Casino revenue:
Casino revenues represent the net win from gaming activity, which is the difference between the amounts won and lost, which represents the transaction price. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. Funds deposited by customers in advance and outstanding chips and slot tickets in the customers’ possession are recognized as a liability until such amounts are redeemed or used in gaming play by the customer. Additionally, net win is reduced by the performance obligations for the players’ club program as discussed above, 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 players’ wagers that are contributed to the progressive jackpot award, and 2) as jackpots are won for the portion of the progressive jackpot award contributed by us. Cash discounts and other cash incentives to guests related to gaming play are recorded as a reduction to gaming revenue.
Food and Beverage, Hotel and Other (retail) Revenues:
Food and Beverage, Hotel and Other Revenues in general are recognized when products are delivered or services are performed. We recognize revenue related to the products and services associated to the players points’ redemptions at the time products are delivered or services are performed, with corresponding reduction in the deferred revenue, at SSP. Other complimentaries in conjunction with the gaming and other business are also valued at SSP. Hotel revenue is presented net of non-third party rebate and commission.
Other Revenues
: Other revenues (excluding retail) primarily consist of commissions received on ATM transactions and cash advances, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers, and commissions and fees received in connection with pari-mutuel wagering, which are also recorded on a net basis.
Sales and other taxes
: Sales taxes and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses. In addition, tips and other gratuities, excluding service charges, collected from customers on behalf of our employees are also accounted for on a net basis and are not included in revenues or operating expenses.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Casino
|
|
$
|
4,908
|
|
$
|
5,025
|
|
Hotel
|
|
|
1,773
|
|
|
1,719
|
|
Other
|
|
|
304
|
|
|
444
|
|
|
|
|
6,985
|
|
|
7,188
|
|
Less allowance for doubtful accounts
|
|
|
(245)
|
|
|
(263)
|
|
|
|
$
|
6,740
|
|
$
|
6,925
|
|
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. The Company recorded bad debt expense of $93 thousand, $103 thousand and $74 thousand in 2018, 2017 and 2016, respectively.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
Goodwill of $25.1 million at December 31, 2018 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.
Intangible assets consist of the following at December 31 (in thousands except years):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Customer list
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
10,490
|
|
$
|
10,490
|
|
Less accumulated amortization:
|
|
|
(7,786)
|
|
|
(6,621)
|
|
Intangible assets, net
|
|
$
|
2,704
|
|
$
|
3,869
|
|
Weighted-average life in years
|
|
|
2.3
|
|
|
3.3
|
|
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.
Amortization expense of $1.2 million was recognized for each of the years ended December 31, 2018, 2017 and 2016. Estimated amortization expenses for the years ending December 31, 2019 through 2021 are as follows (in thousands):
|
|
|
|
|
Year
|
|
Expense
|
|
2019
|
|
$
|
1,165
|
|
2020
|
|
|
1,165
|
|
2021
|
|
|
374
|
|
Total
|
|
$
|
2,704
|
|
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.
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Accrued salaries, wages and related benefits
|
|
$
|
8,639
|
|
$
|
9,838
|
|
Progressive slot machine and other gaming accruals
|
|
|
16,045
|
|
|
9,935
|
|
Accrued gaming taxes
|
|
|
2,788
|
|
|
2,607
|
|
Accrued interest
|
|
|
126
|
|
|
6
|
|
Other accrued liabilities
|
|
|
3,513
|
|
|
3,020
|
|
|
|
$
|
31,111
|
|
$
|
25,406
|
|
The increase in accrued expenses as of December 31, 2018 compared to 2017 was primarily due to the increase in incremental jackpot amounts of progressive-type games as of December 31, 2018 compared to December 31, 2017.
NOTE 6. LEASE COMMITMENTS
The shopping center adjacent to the Atlantis is owned by BLI. John Farahi and Bob Farahi, Co-Chairmen of the Board and executive officers of the Company, and Ben Farahi are the three largest stockholders of Monarch and each also beneficially owns limited partnership interests in BLI. Maxum LLC is the sole general partner of BLI, and Ben Farahi is the sole managing member of Maxum LLC. Neither John Farahi nor Bob Farahi has any management or operational control over BLI or the Shopping Center. Until May 2006, Ben Farahi held the positions of Co-Chairman of the Board, Secretary, Treasurer and Chief Financial Officer of the Company.
On August 28, 2015, Monarch, through its subsidiary Golden Road, entered into a 20-year lease agreement with BLI for a portion of the Shopping Center, consisting of an approximate 46,000 square-foot commercial building on approximately 4.2 acres of land adjacent to the Atlantis. The Parking Lot Lease gives the Atlantis the right to use a parcel, approximately 4.2 acres, comprised of a commercial building and surrounding land adjacent to the Atlantis. The primary purpose of the Parking Lot Lease is to provide additional, convenient, Atlantis surface parking. The Company demolished the commercial building and converted the land into approximately 300 additional surface parking spaces for the Atlantis. The minimum annual rent under the Parking Lot Lease is $695 thousand, commencing on November 17, 2015. The minimum annual rent is subject to a cost of living adjustment increase on each five-year anniversary. In addition, the Company is responsible for payment of property taxes, utilities and maintenance expenses related to the Leased Property. The Company has an option to renew the Parking Lot Lease for an additional 10-year term. If the Company elects not to exercise its renewal option, the Company will be obligated to pay BLI $1.6 million. In 2018, the Company paid $695 thousand for rent and $21 thousand for operating expenses relating to this lease. In 2017, the Company paid $695 thousand for rent and $31 thousand for operating expenses relating to this lease. In 2016, the Company paid $695 thousand for rent and $60 thousand for operating expenses relating to this lease.
In addition, the Atlantis shares a driveway with the Shopping Center and leases approximately 37,400 square feet from BLI for an initial lease term of 15 years, which commenced on September 30, 2004, at an original annual rent of $300 thousand plus common area expenses. The annual rent of the Driveway Lease is subject to a cost of living adjustment increase on each five year anniversary of the Driveway Lease. 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 15-year expected economic life of the asset; some components of the driveway were depreciated over a shorter period of time. Effective August 28, 2015, in connection with the Company entering into the Parking Lot Lease, the Driveway Lease was amended to: (i) make the Company solely responsible for the operation and maintenance costs of the shared driveway (including the fountains thereon); (ii) eliminate the Company’s obligation to reimburse the Shopping Center for its proportionate share of common area expenses; and (iii) exercise the three successive five-year renewal terms beyond the initial 15 year term in the existing Driveway Lease Agreement. At the end of the renewal terms, the Company has the option to purchase the leased driveway section of the Shopping Center. The annual rent for each of the years ended December 31, 2018, 2017 and 2016 was $377 thousand. In addition, the Company paid $22 thousand, $24 thousand and $37 thousand for the years ended December 31, 2018, 2017 and 2016, respectively, for operating expenses related to this lease.
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):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
Year ending December 31,
|
|
|
|
|
2019
|
|
$
|
1,072
|
|
2020
|
|
|
1,072
|
|
2021
|
|
|
1,072
|
|
2022
|
|
|
1,072
|
|
2023
|
|
|
1,072
|
|
Total minimum lease payments
|
|
$
|
5,360
|
|
Rental expense for operating leases amounted to $1.7 million, $1.6 million and $1.5 million in 2018, 2017 and 2016, respectively, as reported in Operating expenses in the Consolidated Statements of Income.
NOTE 7. LONG-TERM DEBT
On July 20, 2016, the Company entered into an amended and restated credit facility agreement (the “Amended Credit Facility”), under which our former $100 million credit facility (under which, as of June 30, 2016, the borrowing capacity had been reduced to $45.5 million as a result of $19.5 million in mandatory reductions pursuant to the agreement and $35 million in voluntary reductions, as allowed by the agreement) was increased to $250 million, and the maturity date was extended from November 15, 2016 to July 20, 2021.
As of December 31, 2018, the Company had an outstanding principal balance of $94.5 million under the Amended Credit Facility, a $0.6 million Standby Letter of Credit and $154.9 million remaining in available borrowings of the $250.0 million maximum principal available under the Amended Credit Facility. As of December 31, 2018, there have been no withdrawals from the Standby Letter of Credit.
The total revolving loan commitment under the Amended Credit Facility will be automatically and permanently reduced to $50 million in the earlier of the first full quarter after completion of the expansion project at the Monarch Casino Black Hawk and December 31, 2019, and all then outstanding revolving loans up to $200 million under the Amended Credit Facility will be converted to a term loan at such time. We may be required to prepay borrowings under the Amended Credit Facility no later than December 31, 2019 using excess cash flows depending on our leverage ratio. We have an option to permanently reduce the maximum revolving available credit at any time so long as the amount of such reduction is at least $0.5 million and in multiples of $50,000.
Borrowings are secured by liens on substantially all of the Company’s real and personal property.
In addition to other customary covenants for a facility of this nature, as of December 31, 2018, we are required to maintain a Total Leverage Ratio (Total Funded Debt divided by EBITDA, as defined in the Amended Credit Facility) of no more than 4.75:1 and a Fixed Charge Coverage Ratio (EBITDA divided by Fixed Charges, as defined in the Amended Credit Facility) of at least 1.15:1. As of December 31, 2018, the Company is in compliance with the financial covenants in the Amended Credit Facility, as our Total Leverage Ratio and fixed Charge Coverage Ratios were 1.6:1 and 24.4:1, respectively.
The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The applicable margins will vary depending on our leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.45%, based on our leverage ratio.
At December 31, 2018, our interest rate was based on LIBOR and our leverage ratio was such that pricing for borrowings under the Amended Credit Facility was LIBOR plus 1.25%. At December 31, 2018, the one-month LIBOR interest rate was 2.53%. The carrying value of the debt outstanding under the Amended Credit Facility approximates fair value because the interest fluctuates with the lender’s prime rate or other market rates of interest.
We may prepay borrowings under the Amended Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid may be re-borrowed so long as the total borrowings outstanding do not exceed the maximum principal available.
We believe that our existing cash balances, cash flow from operations and borrowings available under the Amended Credit Facility will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure plans over the next twelve months; however, our operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or obtaining additional equity capital.
NOTE 8. TAXES
Income Taxes
The Company’s income tax provision (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Federal
|
|
$
|
8,680
|
|
$
|
9,933
|
|
$
|
12,834
|
|
State
|
|
|
518
|
|
|
417
|
|
|
477
|
|
Current tax provision
|
|
|
9,198
|
|
|
10,350
|
|
|
13,311
|
|
Federal
|
|
|
(659)
|
|
|
3,738
|
|
|
99
|
|
State
|
|
|
12
|
|
|
73
|
|
|
(52)
|
|
Deferred tax provision (benefit)
|
|
|
(647)
|
|
|
3,811
|
|
|
47
|
|
Total tax provision
|
|
$
|
8,551
|
|
$
|
14,161
|
|
$
|
13,358
|
|
In conformity with the adopted in 2017 amendment to Topic 718, Compensation-Stock Compensation: Improvements to Employee Share-based Payment Accounting (ASU 2016-09), all excess tax benefits and deficiencies are recognized as income tax expense in the Company’s Consolidated Statement of Operations. This will result in increased volatility in the Company’s effective tax rate.
The income tax provision differs from that computed at the federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Federal tax at the statutory rate
|
|
21.00
|
%
|
35.00
|
%
|
35.00
|
%
|
|
State tax (net of federal benefit)
|
|
0.99
|
%
|
1.00
|
%
|
0.70
|
%
|
|
Permanent items
|
|
0.90
|
%
|
0.34
|
%
|
0.27
|
%
|
|
Tax credits
|
|
(1.08)
|
%
|
(0.82)
|
%
|
(0.96)
|
%
|
|
Excess tax benefits on stock-based compensation
|
|
(1.94)
|
%
|
(3.42)
|
%
|
—
|
%
|
|
Tax Cuts and Jobs Act of 2017
|
|
—
|
%
|
3.57
|
%
|
—
|
%
|
|
Other
|
|
0.19
|
%
|
—
|
%
|
0.23
|
%
|
|
|
|
20.06
|
%
|
35.67
|
%
|
35.24
|
%
|
|
The effective tax rate decreased in 2018 compared to 2017 due to the change in the statutory rate with the Tax Cuts and Jobs Act Bill (the “Tax Act”), partially offset by the re-measurement of our deferred tax inventories in 2017 in relation with the reduction in the U.S. federal tax rate and the reduction in excess tax benefits on stock-based compensation. At December 31, 2017, the Company was able to reasonably estimate the effects of the Act and recorded provisional adjustments associated with the effects on existing deferred tax balances. At December 31, 2018, the Company has completed its analysis and determined that there is no change to the provisional amount related to the re-measurement of its deferred tax balance.
The Company recorded $737 thousand as increases to contributed capital from certain tax benefits for employee stock-based compensation for the year ended December 31, 2016. In 2018 and 2017, subsequent to the adoption of the ASU 2016-09, the Company recorded $0.8 and $1.4 million tax benefit for employee stock-based compensation was recorded to the tax expense, respectively.
The components of the deferred income tax assets and liabilities at December 31, 2018 and 2017, as presented in the consolidated balance sheets, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
DEFERRED TAX ASSETS
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
2,018
|
|
$
|
1,434
|
|
Compensation and benefits
|
|
|
466
|
|
|
555
|
|
Bad debt reserves
|
|
|
1
|
|
|
58
|
|
Accrued expenses
|
|
|
679
|
|
|
512
|
|
Fixed assets and depreciation
|
|
|
1,048
|
|
|
896
|
|
Base stock
|
|
|
4
|
|
|
11
|
|
State taxes
|
|
|
—
|
|
|
(31)
|
|
NOLs & credit carry-forwards
|
|
|
1,761
|
|
|
2,219
|
|
Deferred income tax asset
|
|
$
|
5,977
|
|
$
|
5,654
|
|
DEFERRED TAX LIABILITIES
|
|
|
|
|
|
|
|
Intangibles and amortization
|
|
$
|
(600)
|
|
$
|
(855)
|
|
Prepaid expenses
|
|
|
(1,067)
|
|
|
(890)
|
|
Real estate taxes
|
|
|
(180)
|
|
|
(191)
|
|
Other reserves
|
|
|
(5)
|
|
|
(14)
|
|
Federal deduction on deferred state taxes
|
|
|
(98)
|
|
|
(160)
|
|
Deferred income tax liability
|
|
$
|
(1,950)
|
|
$
|
(2,110)
|
|
NET DEFERRED INCOME TAX ASSET
|
|
$
|
4,027
|
|
$
|
3,544
|
|
As of December 31, 2018, the Company had $3.6 million of federal net operating loss (“NOL”) carryforwards, general business credit (“GBC”) carryforwards of $0.3 million and $17.2 million of state NOL carryforwards, acquired as part of the Monarch Casino Black Hawk acquisition. The federal NOL carryforwards expire in 2022 through 2032. The federal GBC carryforwards expire in 2023 through 2032. The state NOL carryforwards expire in 2022 through 2032.
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 2014 forward are subject to examination by the IRS.
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.
No uncertain tax positions were recorded as of December 31, 2018, 2017 and 2016. No change in uncertain tax positions is anticipated over the next twelve months.
No interest expense or penalties for uncertain tax positions were recorded for years ended December 31, 2018, 2017 and 2016.
NOTE 9. 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 $436 thousand, $379 thousand, and $332 thousand for years ended December 31, 2018, 2017 and 2016, respectively.
NOTE 10. 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 and the Amendment No. 1 to the 2014 Plan includes 2,200,000 new shares and the shares available for grant or subject to outstanding awards under the Predecessor Plans, for an aggregate amount of up to 3,293,331 common shares as of December 31, 2018. 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.
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, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
Stock Options
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
Stock Option Shares outstanding at beginning of period
|
|
1,990,471
|
|
$
|
21.09
|
|
—
|
|
|
—
|
|
Stock Option Shares granted
|
|
499,301
|
|
|
42.41
|
|
—
|
|
|
—
|
|
Stock Option Shares exercised
|
|
(159,575)
|
|
|
14.75
|
|
—
|
|
|
—
|
|
Stock Option Shares forfeited
|
|
(93,333)
|
|
|
23.46
|
|
—
|
|
|
—
|
|
Stock Option Shares expired
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Stock Option Shares outstanding at end of period
|
|
2,236,864
|
|
$
|
26.21
|
|
7.3
|
yrs.
|
$
|
30,294,694
|
|
Stock Option Shares exercisable at end of period
|
|
970,552
|
|
$
|
15.72
|
|
5.1
|
yrs.
|
$
|
21,881,342
|
|
A summary of the status of the Company’s nonvested stock option shares as of, and for the year ended, December 31, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Grant Date Fair
|
|
Nonvested Stock Option Shares
|
|
Shares
|
|
Value
|
|
Nonvested at January 1, 2018
|
|
1,202,967
|
|
$
|
8.07
|
|
Granted
|
|
499,301
|
|
|
13.52
|
|
Vested
|
|
(342,623)
|
|
|
6.07
|
|
Forfeited
|
|
(93,333)
|
|
|
7.14
|
|
Nonvested at December 31, 2018
|
|
1,266,312
|
|
$
|
10.83
|
|
Expense Measurement and Recognition:
The Company recognizes stock-based compensation for all current stock option award grants and for the unvested portion of previous stock option award grants based on grant date fair values. Unrecognized costs related to all stock option awards outstanding at December 31, 2018 totaled approximately $9.9 million and is expected to be recognized over a weighted average period of 2.7 years.
The Company uses historical data and projections to estimate expected employee, executive and director behaviors related to stock option exercises and forfeitures.
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 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Weighted average expected volatility for options granted
|
|
|
32.98
|
%
|
|
35.54
|
%
|
|
35.81
|
%
|
|
Expected dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected life (in years)
|
|
|
|
|
|
|
|
|
|
|
|
Directors’ plan
|
|
|
3.04
|
|
|
2.99
|
|
|
2.73
|
|
|
Executives plan
|
|
|
5.07
|
|
|
5.05
|
|
|
4.71
|
|
|
Employees plan
|
|
|
4.12
|
|
|
4.14
|
|
|
4.10
|
|
|
Weighted average risk free rate
|
|
|
2.76
|
%
|
|
1.83
|
%
|
|
1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value per share of options granted
|
|
$
|
13.52
|
|
$
|
11.92
|
|
$
|
6.67
|
|
|
Total fair value of shares vested
|
|
$
|
2,080
|
|
$
|
1,324
|
|
$
|
1,758
|
|
|
Total intrinsic value of options exercised
|
|
$
|
4,659
|
|
$
|
5,819
|
|
$
|
3,276
|
|
|
Cash received for all stock option exercises
|
|
$
|
2,354
|
|
$
|
5,813
|
|
$
|
2,934
|
|
|
Tax benefit realized from stock awards exercised
|
|
$
|
978
|
|
$
|
2,037
|
|
$
|
1,146
|
|
|
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.
On January 1, 2017, the Company adopted ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Subsequent to the adoption, the Company records any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Income in the reporting periods in which vesting occurs. As a result, the Company’s income tax expense and associated effective tax rate are impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards. This guidance of requiring recognition of excess tax benefits and deficits in the income statement was applied prospectively with the adoption of ASU 2016-09.
For year ended December 31, 2018, the effect of the adoption of ASU 2016-09 was a decrease of tax expense by $0.7 million, resulting in an increase of basic and diluted earnings per share of $0.05. For year ended December 31, 2017, the effect of the adoption of ASU 2016-09 was a decrease of tax expense by $1.4 million resulting in an increase of basic and diluted earnings per share of $0.08.
The Company has elected to keep the accounting policy of estimated forfeitures, rather than account for forfeitures as they occur. The amendments in the guidance that require application using a modified retrospective transition method did not impact the Company. Therefore, there was no cumulative-effect adjustment to retained earnings recognized as of January 1, 2017.
ASU 2016-09 also changes the classification and presentation of the excess tax benefit from stock-based compensation in the statement of cash flows. The Company applied the amendments in this guidance relating to classification on its consolidated statement of cash flows prospectively.
Reported stock-based compensation expense was classified as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Casino
|
|
$
|
129
|
|
$
|
114
|
|
$
|
95
|
|
Food and beverage
|
|
|
137
|
|
|
92
|
|
|
101
|
|
Hotel
|
|
|
66
|
|
|
33
|
|
|
37
|
|
Selling, general and administrative
|
|
|
2,799
|
|
|
2,005
|
|
|
1,448
|
|
Total stock-based compensation, before taxes
|
|
|
3,131
|
|
|
2,244
|
|
|
1,681
|
|
Tax benefit
|
|
|
(657)
|
|
|
(785)
|
|
|
(588)
|
|
Total stock-based compensation, net of tax
|
|
$
|
2,474
|
|
$
|
1,459
|
|
$
|
1,093
|
|
NOTE 11: STOCK REPURCHASE PLAN
On October 22, 2014, the board of directors of Monarch 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 the Company’s 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.
NOTE 12. 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. Monarch Casino 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 13. RELATED PARTY TRANSACTIONS
The shopping center adjacent to the Atlantis is owned by BLI. John Farahi and Bob Farahi, Co-Chairmen of the Board and executive officers of the Company, and Ben Farahi are the three largest stockholders of Monarch and each also beneficially own limited partnership interests in BLI. Maxum LLC is the sole general partner of BLI, and Ben Farahi is the sole managing member of Maxum LLC. Neither John Farahi nor Bob Farahi has any management or operational control over BLI or the Shopping Center. Until May 2006, Ben Farahi formerly held positions of Co-Chairman of the Board, Secretary, Treasurer and Chief Financial Officer of the Company.
On August 28, 2015, Monarch, through its subsidiary Golden Road, entered into a 20-year lease agreement with BLI for a portion of the Shopping Center. The Parking Lot Lease gives the Atlantis the right to use a parcel, approximately 4.2 acres, comprised of a commercial building and surrounding land adjacent to the Atlantis. The primary purpose of the Parking Lot Lease is to provide additional, convenient, Atlantis surface parking. The Company demolished the building and converted the land into approximately 300 additional surface parking spaces for the Atlantis. The minimum annual rent under the Parking Lot Lease is $695 thousand commencing on November 17, 2015. The minimum annual rent is subject to a cost of living adjustment increase on each five-year anniversary. In addition, the Company is responsible for the payment of property taxes, utilities and maintenance expenses related to the Leased Property. The Company has an option to renew the Parking Lot Lease for an additional 10-year term. If the Company elects not to exercise its renewal option, the Company will be obligated to pay BLI $1.6 million. In 2018, the Company paid $695 thousand for rent and $21 thousand for operating expenses relating to this lease. In 2017, the Company paid $695 thousand for rent and $31 thousand for operating expenses relating to this lease. In 2016, the Company paid $695 thousand for rent and $60 thousand for operating expenses relating to this lease.
In addition, the Atlantis shares a driveway with the Shopping Center and leases approximately 37,400 square feet from BLI for an initial lease term of 15 years, which commenced on September 30, 2004, at an original annual rent of $300 thousand plus common area expenses. The annual rent is subject to a cost of living adjustment increase on each five year anniversary of the Driveway Lease. Effective August 28, 2015, in connection with the Parking Lot Lease, the Driveway Lease was amended to: (i) make the Company solely responsible for the operation and maintenance costs of the shared driveway (including the fountains thereon); (ii) eliminate the Company’s obligation to reimburse the Shopping Center for its proportionate share of common area expenses; and (iii) exercise the three successive five-year renewal terms beyond the initial 15-year term in the existing Driveway Lease Agreement. At the end of the renewal terms, the Company has the option to purchase the leased driveway section of the Shopping Center. The annual rent for each of the years 2018, 2017 and 2016 was $377 thousand. In addition, the Company paid $22 thousand, $24 thousand and $37 thousand, respectively, for operating expenses related to this lease.
The Company occasionally leases billboard advertising, storage space and parking lot space from affiliates controlled by Farahi Family Stockholders and paid $145 thousand, $131 thousand and $127 thousand for the years ended December 31, 2018, 2017 and 2016, respectively, for such leases.
NOTE 14. 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, 2018 that required recognition or disclosure in the consolidated financial statements.
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial information for 2018 and 2017 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Total
|
|
Net revenues
|
|
$
|
56,268
|
|
$
|
59,909
|
|
$
|
64,359
|
|
$
|
59,779
|
|
$
|
240,315
|
|
Operating expenses
|
|
|
47,711
|
|
|
48,567
|
|
|
50,493
|
|
|
50,718
|
|
|
197,489
|
|
Income from operations
|
|
|
8,557
|
|
|
11,342
|
|
|
13,866
|
|
|
9,061
|
|
|
42,826
|
|
Net income
|
|
|
6,741
|
|
|
9,239
|
|
|
10,859
|
|
|
7,259
|
|
|
34,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
0.52
|
|
$
|
0.61
|
|
$
|
0.40
|
|
$
|
1.91
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.50
|
|
$
|
0.58
|
|
$
|
0.39
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Total
|
|
Net revenues
|
|
$
|
53,414
|
|
$
|
58,229
|
|
$
|
63,027
|
|
$
|
56,056
|
|
$
|
230,726
|
|
Operating expenses
|
|
|
45,688
|
|
|
46,676
|
|
|
49,777
|
|
|
47,919
|
|
|
190,060
|
|
Income from operations
|
|
|
7,726
|
|
|
11,553
|
|
|
13,250
|
|
|
8,137
|
|
|
40,666
|
|
Net income
|
|
|
4,872
|
|
|
7,239
|
|
|
9,030
|
|
|
4,397
|
(F1)
|
|
25,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
$
|
0.41
|
|
$
|
0.51
|
|
$
|
0.25
|
(F1)
|
$
|
1.45
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.40
|
|
$
|
0.49
|
|
$
|
0.23
|
(F1)
|
$
|
1.39
|
|
(F1) The enactment of the Tax Cuts and Jobs Act in 2017 resulted in a non-cash Deferred tax asset revaluation, which had a $1.5 million negative effect on Net income and $0.08 negative effect on the Basic and Diluted EPS.
|
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUR
E
None.
ITEM 9A. CONTROLS AND PROCEDURE
S
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 Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) under the Exchange Act). Based upon the evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
We have established controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2018, we implemented certain controls related to the adoption of FASB ASC Topic 606, effective January 1, 2018. These controls were designed and implemented to ensure the completeness and accuracy of our financial reporting. With the exception of the controls implemented for FASB ASC Topic 606, there were no changes made to our internal control over financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) during the last fiscal year 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 reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) 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 are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of assets that could have a material effect on the 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, 2018. 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 such assessment, management concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s independent registered public accounting firm has issued an report on the effectiveness of the Company’s internal control over financial reporting. This report appears below.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Monarch Casino & Resort, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Monarch Casino & Resort, Inc.’s and subsidiaries (the Company) internal control over financial reporting as of December 31, 2018, 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). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (2) of the Company and our report dated March 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 14, 2019
ITEM 9B. OTHER INFORMATIO
N
None.