Monarch Casino & Resort, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Until the proposed acquisition closes, the Atlantis Casino Resort Spa in Reno is the company’s sole operating property.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Gross revenue | $169.8 million | $170.5 million | Down 0.4% |
| Net revenue, after promotional allowances | $140.6 million | $142.0 million | Down 1.0% |
| Operating income | $9.8 million | $14.0 million | Down 30.4% |
| Operating margin | 6.9% | 9.9% | Down 3.0 percentage points |
| Net income | $5.7 million | $8.2 million | Down 30.5% |
| Diluted EPS | $0.35 | $0.51 | Down 31.4% |
| Cash from operations | $22.6 million | $26.0 million | Down 13.1% |
| Capital expenditures | $17.4 million | $6.8 million | Up $10.6 million |
Casino revenue declined 2.5%, primarily due to lower table-game hold. Food and beverage revenue grew 4.8%, while hotel revenue fell 1.5%. Hotel occupancy improved to 89.1% from 85.4%; average daily room rate rose to $74.22 from $69.06, and RevPAR increased to $66.11 from $58.98. The motor lodge demolition reduced available rooms but removed lower-priced inventory. Promotional allowances rose to $29.1 million, or 17.2% of gross revenue, from $28.4 million, or 16.7%.
Fourth-quarter 2011 net revenue was $34.0 million, operating income was $1.3 million, and net income was $0.6 million, or $0.03 diluted EPS. Fourth-quarter 2010 comparables were $33.8 million, $0.9 million, and $0.5 million, or $0.03 diluted EPS.
Liquidity, debt, and acquisition financing
At year-end, cash and cash equivalents were $13.6 million, current assets were $24.9 million, and current liabilities were $23.3 million. Long-term debt was $24.7 million, with no amount classified as current; total assets were $179.6 million and stockholders’ equity was $130.5 million. Operating cash flow exceeded capital spending by approximately $5.2 million, before acquisition-related land and deposit payments.
The amended credit facility has a $100 million maximum capacity, with $30 million available before the acquisition closes and an additional $70 million contingent on closing. It matures November 15, 2016, is secured by substantially all company property, and bears a variable rate. At year-end, pricing was one-month LIBOR plus 2.25%; the filing estimates a 1-percentage-point rate increase would add approximately $247,000 in annual interest at the then-outstanding balance. The company reported compliance with its debt covenants.
The company agreed to acquire Riviera Black Hawk, Inc. for $76 million, subject to working-capital adjustments and regulatory and other closing conditions. It had paid a $3.8 million deposit and acquired adjacent 1.5-acre land for $8.4 million. At closing, the remaining purchase price was expected to be $72.2 million, plus a $1.25 million financial-advisor success fee; the seller was to pay substantially all target debt and leave at least $2.1 million in cash/net working capital. The transaction had not closed as of the filing, and the filing states it was not subject to a financing condition.
Changes, outlook, and risks
FY 2011 operating results included a $3.5 million one-time, non-cash charge for demolition of the Adventure Inn building. FY 2010 included a $414,000 demolition charge for the 149-room motor lodge. The company also adopted new jackpot accounting in 2011, reversing $639,000 of previously accrued base jackpots to opening retained earnings; this was not an operating-period gain.
Management attributed the weaker annual results to the continued difficult northern Nevada economy, a smaller Reno gaming market, competitor discounting, lower table-game hold, and higher promotional spending. Management said facility improvements and service execution helped mitigate these pressures. No quantified earnings or revenue guidance is provided. Management expected operating cash flow, cash balances, and credit-facility borrowings to fund operations and planned spending, while noting that results depend on economic, competitive, regulatory, and other factors outside its control.
Key risks include economic weakness and discretionary-spending sensitivity; competition from Reno casinos, California tribal gaming, and potential new entrants near Reno; winter travel disruption; dependence on one operating property pending the acquisition; acquisition approval, integration, and benefit risks; variable-rate debt and refinancing/liquidity needs; gaming regulation and taxes; and dependence on key executives. The Atlantis trademark case was on appeal after a district-court judgment largely favorable to Monarch; appeal briefing was stayed while the parties explored settlement. Management said other ordinary-course claims were not expected to have a material adverse effect. The company reported effective internal controls, and the auditor issued unqualified opinions on the financial statements and internal control.
The company did not anticipate cash dividends in the foreseeable future. It reported that approximately 43% of its shares were beneficially owned by the Farahi brothers, who could significantly influence shareholder matters.
Most important facts for investors to verify
- Whether the Riviera Black Hawk acquisition closed, received required gaming approvals, and was funded on the expected terms; verify final purchase price, working-capital adjustment, and post-close debt.
- Whether Atlantis casino revenue, table-game results, occupancy, room rates, and promotional spending trends improved after year-end.
- Available borrowing capacity and covenant headroom after acquisition, along with the impact of variable interest rates and scheduled facility capacity reductions.
- The status and potential resolution of the Kerzner trademark appeal and pending Trademark Trial and Appeal Board proceeding.
- Cash conversion and recurring capital needs, distinguishing ongoing property investment from acquisition-related spending and the 2011 demolition charge.