SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to
Commission file number 000-21430
Riviera Holdings Corporation
----------------------------
(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (702) 794-9527
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE LAST FIVE YEARS
Indicate by check mark whether the Registrant has filed all documentation
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __No__
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
As of October 31, 2002, there were 3,579,720 shares of Common Stock, $.001 par
value per share, outstanding.
RIVIERA HOLDINGS CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Independent Accountants' Report 2
Condensed Consolidated Balance Sheets (Unaudited) at September 30,
2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three and Nine Months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-k 27
Signature Page 28
Certifications 29
Exhibits 33
1
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Riviera Holdings Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Riviera Holdings Corporation (the "Company") and subsidiaries as of September
30, 2002, and the related condensed consolidated statements of operations and of
cash flows for the three and nine months ended September 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our reviews, in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Riviera Holdings Corporation as of December 31, 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 12,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2001, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
October 22, 2002
Las Vegas, Nevada
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands, except share amounts) September 30 December 31
--------------------------------------------------------------------------------------------
2002 2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,418 $ 46,606
Accounts receivable, net 3,526 3,528
Inventories 1,657 2,253
Prepaid expenses and other assets 4,009 3,083
------------ -------------
Total current assets 36,610 55,470
PROPERTY AND EQUIPMENT, Net 191,678 200,531
OTHER ASSETS, Net 14,954 6,728
DEFERRED INCOME TAXES 2,964 5,089
------------ -------------
TOTAL $ 246,206 $ 267,818
============ =============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,375 $ 3,151
Accounts payable 9,062 8,200
Accrued interest 6,257 8,084
Accrued expenses 14,031 14,740
------------ -------------
Total current liabilities 32,725 34,175
------------ -------------
OTHER LONG-TERM LIABILITIES 7,771 7,391
------------ -------------
LONG-TERM DEBT, Net of current portion 217,438 217,288
------------ -------------
SHAREHOLDERS' (DEFICIENCY) EQUITY:
Common stock ($.001 par value; 20,000,000 shares
authorized; 5,106,776 shares issued at December 31, 2001
and September 30, 2002, respectively) 5 5
Additional paid-in capital 13,485 13,485
Treasury stock (1,674,144 shares and 1,649,495 shares at
December 31, 2001 and September 30, 2002, respectively) (11,121) (11,246)
Retained earnings (accumulated deficit) (14,097) 6,720
------------ -------------
Total stockholders' (deficiency) equity (11,728) 8,964
------------ -------------
TOTAL $ 246,206 $ 267,818
============ =============
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001 Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
---------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES: 2002 2001 2002 2001
Casino $ 26,806 $ 29,880 $ 81,732 $ 88,194
Rooms 11,020 9,987 32,406 34,458
Food and beverage 8,455 7,814 24,834 24,224
Entertainment 4,698 5,483 13,278 17,246
Other 2,031 2,211 6,281 7,138
---------- ------------- ------------- -------------
Total revenues 53,010 55,375 158,531 171,260
Less promotional allowances 4,398 4,330 13,567 13,188
---------- ------------- ------------- -------------
Net revenues 48,612 51,045 144,964 158,072
---------- ------------- ------------- -------------
COSTS AND EXPENSES:
Direct costs and expenses of operating departments:
Casino 14,751 16,459 43,937 48,570
Rooms 6,036 5,920 17,762 18,148
Food and beverage 5,622 5,626 16,257 16,628
Entertainment 3,280 3,924 8,954 12,311
Other 709 812 2,130 2,420
Other operating expenses:
General and administrative 10,271 10,907 29,633 32,326
Depreciation and amortization 4,433 4,384 13,383 12,930
---------- ------------- ------------- -------------
Total costs and expenses 45,102 48,032 132,056 143,333
---------- ------------- ------------- -------------
INCOME FROM OPERATIONS 3,510 3,013 12,908 14,739
---------- ------------- ------------- -------------
OTHER (EXPENSE) INCOME :
Interest expense (6,863) (6,649) (19,975) (20,180)
Interest expense, net - Due to Defeasance (2,328) 0 (2,692) 0
Loss on extinguishment of debt (11,211) 0 (11,211) 0
Interest income 4 308 176 1,062
Other, net (7) 9 (23) (23)
---------- ------------- ------------- -------------
Total other expense (20,405) (6,332) (33,725) (19,141)
---------- ------------- ------------- -------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (16,895) (3,319) (20,817) (4,402)
BENEFIT FOR INCOME TAXES 0 (819) 0 (1,174)
---------- ------------- ------------- -------------
NET LOSS $ (16,895) $ (2,500) $ (20,817) $ (3,228)
========== ============= ============= =============
LOSS PER SHARE DATA:
Loss per share:
Basic & Diluted $ (4.89) $ (0.71) $ (6.04) $ (0.89)
---------- ------------- ------------- -------------
Weighted-average common and common equivalent shares 3,456 3,513 3,448 3,618
---------- ------------- ------------- -------------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
2002 2001 2002 2001
----------- ----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($16,895) ($2,500) ($20,817) ($3,228)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,433 4,384 13,383 12,930
Provision for bad debts 127 16 (218) 155
Provision for gaming discounts 0 (49) (48) (70)
Interest expense 6,863 6,649 19,975 20,180
Interest paid (216) (9,076) (12,339) (20,950)
Interest expense, net, Bonds held for retirement 2,328 2,692
Interest expense, net, Bonds held for retirement, paid (2,548) (2,548)
Loss on extinguishment of debt 11,211 11,211
Loss on extinguishment of debt paid (6,646) (6,646)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (733) 14 267 1,816
Decrease (increase) in inventories 151 319 596 1,114
Decrease (increase) in prepaid expenses
and other assets (515) 578 (926) 882
Increase (decrease) in accounts payable (538) (1,315) 862 (1,363)
Increase (decrease) in accrued liabilities 1,678 2,565 709 (2,255)
Increase (decrease) in deferred income taxes 2,125 (819) 2,125 (1,174)
Increase in deferred compensation plan liability 10 76 115 570
Increase (decrease) in non-qualified pension plan
obligation to CEO upon retirement (125) (125) (375) (375)
----------- ----------- ----------- ----------
Net cash provided by operating activities 710 717 8,018 8,232
----------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (666) (2,312) (2,934) (6,907)
Capital expenditures - Black Hawk, Colorado (387) (613) (1,595) (2,207)
Decrease (increase) in other assets (140) (27) (1,877) (42)
----------- ----------- ----------- ----------
Net cash used in investing activities (1,193) (2,952) (6,406) (9,156)
----------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 0 0 211,781 0
US Treasury Bills to provide for defeasance of debt 226,576 0 0 0
Decrease (increase) in deferred loan fees 0 (10,381)
Payments on long-term borrowings (220,674) (702) (222,325) (2,072)
Purchase of treasury stock 0 (921) 0 (970)
Increase in paid-in capital 0 0 0 41
Purchase of deferred comp treasury stock 0 (582) 0 (775)
Purchase of Black Hawk 13% 1st Mortgage Notes 0 (1,000) 0 (3,500)
Issuance of restricted stock 25 25 125 141
----------- ----------- ----------- ----------
Netcash (used in) provided by financing activities 5,927 (3,180) (20,800) (7,135)
----------- ----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,444 (5,415) (19,188) (8,059)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 21,974 $ 49,530 $ 46,606 $ 52,174
----------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,418 $ 44,115 $ 27,418 $ 44,115
=========== =========== =========== ==========
See notes to condensed consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Riviera Holdings Corporation and its wholly owned subsidiary, Riviera Operating
Corporation ("ROC") (together, the "Company"), were incorporated on January 27,
1993, in order to acquire all assets and liabilities of Riviera, Inc.
Casino-Hotel Division on June 30, 1993, pursuant to a plan of reorganization.
In August 1995, Riviera Gaming Management, Inc. ("RGM") incorporated in the
State of Nevada as a wholly owned subsidiary of ROC for the purpose of obtaining
management contracts in Nevada and other jurisdictions. In March 1997, Riviera
Gaming Management of Colorado was incorporated in the State of Colorado, and in
August 1997, Riviera Black Hawk, Inc. ("RBH") was incorporated in the State of
Colorado for the purpose of developing a casino in Black Hawk, Colorado which
opened February 4, 2000.
On March 15, 2002, Riviera Gaming Management of New Mexico, Inc. was
incorporated in the State of New Mexico. On June 5, 2002, Riviera Gaming
Management of Missouri, Inc. was incorporated in the State of Missouri.
Nature of Operations
The Company owns and operates the Riviera Hotel & Casino ("Riviera Las Vegas")
on the Strip in Las Vegas, Nevada and in February of 2000, opened its casino in
Black Hawk, Colorado ("Riviera Black Hawk"). Riviera Black Hawk is owned through
Riviera Black Hawk, Inc. ("RBH"), a wholly owned subsidiary of ROC. Riviera
Gaming Management of Colorado, Inc. is a wholly owned subsidiary of RGM, and
manages the casino.
Casino operations are subject to extensive regulation in the states of Nevada
and Colorado and various state and local regulatory agencies. Management
believes that the Company's procedures for supervising casino operations,
recording casino and other revenues, and granting credit comply, in all material
respects, with the applicable regulations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiary ROC and various indirect wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
The financial information at September 30, 2002 and for the three and nine
months ended September 30, 2002 and 2001 is unaudited. However, such information
reflects all adjustments (consisting solely of normal and recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation of the
6
financial position, results of operations, and cash flows for the interim
periods. The results of operations for the nine months ended September 30, 2002
and 2001 are not necessarily indicative of the results that will be achieved for
the entire year.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2001, included in the Company's Annual Report on Form 10-K.
Interest Expense, Net - Due to Defeasance
The Company reports interest expense, net of interest earned on defeasing funds,
separately for bonds to be retired when funds have been segregated for that
specific purpose. The amounts totaling $2.7 million for the nine months ended
September 30, 2002 include the interest on the 10% bonds from June 26, 2002
until retirement on August 15, 2002 and the 13% RBH bonds from June 26 until
retirement on July 26, 2002, less interest earned on the funds segregated for
the retirement.
Earnings Per Share
Basic per share amounts are computed by dividing net income by weighted average
shares outstanding during the period. Diluted net income (loss) per share
amounts are computed by dividing net income by weighted average shares
outstanding plus the dilutive effect of common share equivalents. The effect of
options outstanding was not included in diluted calculations for the three and
nine months ended September 30, 2002 and 2001 since the Company incurred a net
loss. The number of potentially dilutive options was 115,000 for the three and
nine months ended September 30, 2002 and 111,000 for the three and nine months
ended September 30, 2001.
Income Taxes
The cash flow projections used by the Company in the application of SFAS 109 for
the realization of deferred tax assets indicate that a valuation allowance
should be recorded on the tax benefit earned by the Company in 2002. The
estimates used are based upon recent operating results and budgets for future
operating results. These estimates are made using assumptions about the
economic, social and regulatory environments in which we operate. These
estimates could be impacted by numerous unforeseen events including changes to
regulations affecting how the Company operates the business, changes in the
labor market or economic downturns in the areas where the Company operates.
During 2002 the Company received refunds from 1996 totaling $2.1 million and
believe it will be able to file claims for refunds of approximately $500,000 to
$600,000 in January 2003 for taxes paid in 1997.
Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
7
revenues and expenses during the reporting period. Significant estimates used by
the Company include estimated useful lives for depreciable and amortizable
assets, cash flow projections for testing asset impairment, certain accrued
liabilities and the estimated allowance for receivables. Actual results may
differ from estimates.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company is currently assessing, but has not yet
determined the impact of SFAS No. 143 on its financial position and results of
operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently assessing but
has not yet determined the impact of SFAS No. 146 on its financial position and
results of operations.
Recently Adopted Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective January 1, 2002. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
SFAS No. 142 includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, and the identification of reporting units for purposes
of assessing potential future impairments of goodwill. SFAS No. 142 also
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. As of June 30, 2002 the Company has determined
that it has no intangible assets or goodwill recorded on its balance sheet, and
accordingly the adoption of SFAS No, 142 had no impact on its financial position
or results of operations.
8
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Bulletin Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 also amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company has determined that the implementation of SFAS No. 144 had no
effect on its financial position and results of operations upon implementation.
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No.
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meet criteria for
classification as an extraordinary item. SFAS No. 145 is effective for the
Company beginning January 1, 2003, but the Company adopted the provisions of
SFAS No. 145 during fiscal year 2002, as permitted. The effect on our
consolidated financial position and results of operations of the adoption of
SFAS No. 145 was that the Company recognized and reported bond retirement costs
as other expense.
2. OTHER ASSETS
Other assets at September 30, 2002 include deferred loan fees of approximately
$11.3 million associated with the refinancing of the Company's debt and
capitalized costs associated with the RGM Missouri proposed venture of
approximately $700,000 and the RGM New Mexico proposed venture of approximately
$1.3 million.
3. LONG TERM DEBT AND COMMITMENTS
On June 26, 2002, the Company issued 11% Senior Secured Notes ("the 11% Notes")
with a principal amount of $215 million. The Notes were issued at a discount in
the amount of $3.2 million. The discount is being amortized over the life of the
11% Notes. The Company incurred fees of approximately $9.3 million with the
issuance of the $215 million 11% Notes which are included in other assets at
September 30, 2002 and are being amortized to interest expense over the life of
the indebtedness.
On August 13, 1997, the Company issued 10% First Mortgage Notes ("the 10%
Notes") with a principal amount of $175 million. The Notes were issued at a
discount in the amount of $2.2 million. The discount was being amortized over
9
the life of the 10% Notes on a straight-line basis, which approximated the
effective interest method. The Notes were defeased on June 26, 2002 as part of
our new $215 million dollar Senior Secured Note offering and were redeemed on
August 15, 2002.
On June 3, 1999, Riviera Black Hawk, Inc. ("RBH"), a wholly owned subsidiary,
closed a $45 million private placement of 13% First Mortgage Notes, ("the 13%
Notes"). The net proceeds of the placement were used to fund the completion of
RBH's casino project in Black Hawk, Colorado. During 2000 and 2001 the Company
repurchased approximately $10 million of these bonds. The Notes were defeased on
June 26, 2002 as part of our new $215 million dollar Senior Secured Note
offering and were redeemed on July 26, 2002.
Effective July 26, 2002 the Company entered in to a $30 million, five year
revolving credit arrangement with a financial institution. Terms of the
arrangement include interest at prime plus .75 percent or a LIBOR derived rate.
No advances on this revolver have been requested. The Company incurred loan fees
of approximately $1.5 million which are being expensed over the life of the
agreement.
4. LEGAL PROCEEDINGS
The Company is a party to several routine lawsuits, both as plaintiff and as
defendant, arising from the normal operations of a hotel. The Company does not
believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on its financial position or results of its operations.
5. STOCK REPURCHASES
There were no treasury stock purchases for the nine months ended 2002 or 2001.
6. ISSUANCE OF RESTRICTED STOCK
There were 4,099 shares of Treasury Stock issued at an average cost of $4.75
under the Restricted Stock Plan for executive compensation for the nine months
ended 2002. Those shares had an average market value of $6.10 per share at the
time of issuance.
7. GUARANTOR INFORMATION
The Company's 11.0% Senior Secured Notes and the Foothill $30 million line of
credit are guaranteed by all of the Company's wholly owned existing significant
restricted subsidiaries. These guaranties are full, unconditional, and joint and
several. RGM Missouri and RGM New Mexico are unrestricted subsidiaries of RHC
and are not guarantors of the notes.
8. SUBSEQUENT EVENT
On October 25, 2002, the Company commenced an offer to exchange the 11% Senior
Secured Notes that were issued on June 26, 2002 for new notes, with
substantially the same terms as the old notes, that have been registered under
10
the Securities Act of 1933. The exchange offer will expire on November 25, 2002,
unless the Company extends the expiration date.
11
9. SEGMENT DISCLOSURES
The Company determines its segments based upon the review process of the chief
decision maker who reviews by geographic gaming market segments: Riviera Las
Vegas and Riviera Black Hawk. Beginning with the September 2002 period, the
Company began allocating Corporate overhead in its determination of income
(loss) from operations. All amounts for all periods presented have been revised
to reflect this change. All intersegment revenues have been eliminated.
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 2002 2001 2002 2001
Net revenues:
Riviera Las Vegas $35,574 $37,567 $107,510 $121,634
Riviera Black Hawk 13,038 13,478 37,454 36,438
---------- ----------- ----------- ----------
Total net revenues $48,612 $51,045 $144,964 $158,072
========== =========== =========== ==========
Income (loss) from operations:
Riviera Las Vegas $3,071 $1,709 $11,370 $13,380
Riviera Black Hawk 1,802 2,297 5,411 5,251
---------- ----------- ----------- ----------
Property Operating Income 4,873 4,006 16,781 18,631
Corporate Expenses (1,363) (993) (3,873) (3,892)
---------- ----------- ----------- ----------
Total income from operations $3,510 $3,013 $12,908 $14,739
========== =========== =========== ==========
EBITDA (1):
Riviera Las Vegas $5,778 $4,741 $19,943 $22,552
Riviera Black Hawk 3,310 3,649 10,005 9,009
---------- ----------- ----------- ----------
Property Operating Income 9,088 8,390 29,948 31,561
Corporate Expenses (1,145) (993) (3,657) (3,892)
---------- ----------- ----------- ----------
Total EBITDA $7,943 $7,397 $26,291 $27,669
========== =========== =========== ==========
EBITDA margin:
Riviera Las Vegas 16.2% 12.6% 18.5% 18.5%
Riviera Black Hawk 25.4% 27.1% 26.7% 24.7%
Total EBITDA 16.3% 14.5% 18.1% 17.5%
(1) EBITDA consists of earnings before interest, income taxes, depreciation,
amortization, loss on extinguishment of debt and other, net. WhileEBITDA should
not be construed as a substitute for operating income or a better indicator of
liquidity than cashflow from operating activities, which are determined in
accordance with generally accepted accounting principles("GAAP"), it is included
herein to provide additional information with respect to the ability of the
Company to meetits future debt service, capital expenditure and working capital
requirements. Although EBITDA is not necessarilya measure of the Company's
ability to fund its cash needs, management believes that certain investors find
EBITDAto be a useful tool for measuring the ability of the Company to service
its debt. EBITDA margin is EBITDA as a percent of net revenues. The Company's
definition of EBITDA may not be comparable to other companies' definitions.
12
September 30, December 31,
2002 2001
Assets (2): (in thousands)
Riviera Las Vegas $24,432 $ 29,503
Riviera Black Hawk 65,663 67,549
Riviera Corporate 101,583 103,479
------------ --------------
Total assets $191,678 $ 200,531
============ ==============
(2)Asset represent property and equipment and intangible assets, net of
accumulated depreciation and amortization. Riviera Holdings Corporation
(Corporate) own the Riviera Las Vegas land and building.
RIVIERA LAS VEGAS REVENUES
The primary marketing of the Riviera Las Vegas is not aimed toward residents of
Las Vegas, Nevada. Significantly all revenues derived from patrons visiting the
Riviera Las Vegas are from other parts of the United States and other countries.
Revenues for Riviera Las Vegas from a foreign country or region may exceed 10
percent of all reported segment revenues; however, the Riviera Las Vegas cannot
identify such information, based upon the nature of gaming operations.
RIVIERA BLACK HAWK REVENUES
The casino in Black Hawk, Colorado, primarily serves the residents of
metropolitan Denver, Colorado. As such, management believes that significantly
all revenues are derived from within 250 miles of that geographic area.
MANAGEMENT AGREEMENTS
RBH has a management agreement (the RBH Management Agreement) with Riviera
Gaming Management of Colorado, Inc. (the Manager), a wholly-owned subsidiary
of Riviera Holdings Corporation, which, in exchange for a fee, manages RBH.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
The following table sets forth, for the periods indicated, certain operating
data for the Riviera Las Vegas and Riviera Black Hawk. Beginning with the
September 2002 period, the Company began allocating Corporate overhead in its
determination of income (loss) from operations. All amounts for all periods
presented have been revised to reflect this change. Intercompany management fees
have been eliminated from EBITDA from properties for the purpose of this table.
Operating Income includes intercompany management fees.
Third Quarter Incr/ % Incr/
(In Thousands) 2002 2001 (Decr) (Decr)
Net revenues:
Riviera Las Vegas $35,574 $37,567 ($1,993) -5.3%
Riviera Black Hawk 13,038 13,478 (440) -3.3%
Total Net Revenues $48,612 $51,045 ($2,433) -4.8%
Operating Income (Loss)
Riviera Las Vegas $3,071 $1,709 $1,362 79.7%
Riviera Black Hawk 1,802 2,297 (495) -21.5%
Property Operating Income 4,873 4,006 867 21.6%
Corporate Expenses (1) (1,363) (993) (370) 37.2%
Total Operating Income $3,510 $3,013 $497 16.5%
EBITDA:(2)
Riviera Las Vegas $5,778 $4,741 $1,037 21.9%
Riviera Black Hawk 3,310 3,649 (339) -9.3%
Property EBITDA as Adjusted 9,088 8,390 698 8.3%
Corporate Expenses (1) (1,145) (993) (152) -15.3%
Total EBITDA $ 7,943 $7,397 $546 7.3%
EBITDA margin
Riviera Las Vegas 16.2% 12.6% 3.6%
Riviera Black Hawk 25.4% 27.1% -1.7%
Total EBITDA 16.3% 14.5% 1.8%
Reconciliation of Income from
Operations to EBITDA
Operating Income $3,510 $3,013
Depreciation 4,433 4,384
EBITDA $ 7,943 $ 7,397
14
(1) Deferred compensation plan expenses were $300,000 lower in the third quarter
of 2001 as the result of a one-time reduction associated with the price of the
Company's stock.
(2) EBITDA consists of earnings before interest, income taxes, depreciation,
amortization, loss on extinguishment of debt and other, net. While EBITDA should
not be construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles ("GAAP"), it is
included herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and working
capital requirements. Although EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs, management believes that certain
investors find EBITDA to be a useful tool for measuring the ability of the
Company to service its debt. EBITDA margin is EBITDA as a percent of net
revenues. The Company's definition of EBITDA may not be comparable to other
companies' definitions.
Riviera Las Vegas
Revenues
Net revenues decreased by approximately $2.0 million, or 5.3%,
from $37.6 million in 2001 to $35.6 million in 2002 due primarily to decreased
casino and entertainment revenues. Casino revenues decreased by approximately
$2.6 million, or 15.2%, from $17.2 million during 2001 to $14.6 million during
2002 due to a 11.2% decrease in slot machine revenue. Room revenue increased
$1.0 million, or 10.3%, from $10.0 million in 2001 to $11.0 million in 2002 due
to an increase in convention room nights. Hotel occupancy was comparable to last
year at 93 percent and average daily room rate increased $4.11 from $55.87 in
2001 to $59.98 in 2002. The Company has been able to bring occupancy back to
normal levels since September 11, 2001 and increased the average daily rate for
the quarter primarily due to increased convention room nights. Entertainment
revenues decreased by approximately $772,000, or 14.4%, from $5.3 million during
2001 to $4.6 million during 2002 due primarily to a decrease in Splash and Crazy
Girls revenues as result of competition from the openings of new shows on the
Las Vegas Strip and a slower economy. Other revenues decreased by approximately
$192,000, or 9.2%, from $2.1 million during 2001 to $1.9 million during 2002 due
primarily to decreased gift shop and telephone revenues. Promotional allowances
decreased by approximately $183,000, or 5.3%, from $3.4 million during 2001 to
$3.3 million during 2002 primarily due to decreases in comps related to lower
casino activity.
Income from Operations
Income from operations in Las Vegas increased $1.4 million, or 79.7%, from
$1.7 million in 2001 to $3.1 million in 2002 due to the 5.3% decrease in net
revenues which was more than offset by an 8.8% decrease in expenses. The
decreased expenses were mainly in the area of payroll and casino marketing
expenses.
EBITDA
Riviera Las Vegas EBITDA, as defined, increased by approximately
$1.0 million, or 21.9%, from $4.7 million in 2001 to $5.8 million in 2002 for
reasons described above. During the same periods, EBITDA margin increased from
12.6% to 16.2% of net revenues.
15
Riviera Black Hawk
Revenues
Net revenues decreased by approximately $440,000, or 3.3%, from
$13.5 million in 2001 to $13.0 million in 2002. Casino revenues decreased
$460,000, or 3.6%, from $12.7 million in 2001 and $12.2 million in 2002 . Food
and beverage revenues were approximately $1.7 million in 2002, of which $1.1
million was complimentary (promotional allowance). Although the Black Hawk
market grew at a rate of 7.8 percent, it was substantially below the first six
months' rate of 14.1 percent and below the 13.4 percent increase in the supply
of slot machines introduced to the market with the opening of the Hyatt Casino
in December of last year. Even with the decrease in revenues, our market share
remained consistent with last year and was over 100 percent of our fair share
(Riviera's share of revenue divided by its share of units) of the market. The
Denver area economy has been slowing down over the past year, which we feel has
had some impact on consumer confidence and spending. We continue to monitor
market conditions and have made several adjustments to our marketing programs to
insure that we stay competitive.
Income from Operations
Income from operations in Black Hawk, Colorado decreased
$495,000, or 21.5%, from $2.3 million in 2001 to $1.8 million in 2002 due to
decreased revenues resulting from a lower Colorado economic condition and
various road construction projects in and around Black Hawk, Colorado and
competition in the market place. As a result, we continue to monitor market
conditions and have made several adjustments to our marketing programs to insure
we stay competitive.
EBITDA
Riviera Black Hawk EBITDA, as defined, decreased $339,000, or
9.3%, from $3.6 million in 2001 to $3.3 million in 2002. EBITDA margin for the
third quarter decreased to 25.4% from 27.1% in the same quarter of the prior
year.
Consolidated Operations
Corporate Expenses
In the past, we have shown corporate expenses as a part of the Las Vegas
operation. Common practice in the industry is to break out corporate expenses
that are not directly attributable or allocable to a specific operating unit.
This quarter we started breaking out those expenses that were general expenses
associated with the public company, including directors fees, listing fees, D&O
insurance, executive office payroll and similar expenses. We believe this will
make our property EBITDA more comparable to our peers. Deferred compensation
plan expenses were $300,000 lower in the third quarter 2001 as a result of a
one-time reduction associated with the price of the Company's stock.
16
Other Income (Expense)
Interest expense on the $215 million 11% Senior Secured Notes
issued by Riviera Holdings Corporation of $5.9 million plus related amortization
of loan fees and other financing costs totaled approximately $6.3 million in
2002. Interest expense on equipment and other financing totaled approximately
$500,000 for the quarter.
Net Income (Loss)
The results of operations decreased $14.4 million from a net
loss of $2.5 million in 2001 to a net loss of $16.9 million in 2002 due
primarily to the loss on extinguishment of debt totaling $11.2 million or $3.24
per share. The costs included the call premium on the Company's refinanced 10
percent bonds and Riviera Black Hawk's refinanced 13 percent bonds, the write
off of unamortized deferred loan costs associated with the bond issues and the
balance of the original issue discount on the 10 percent bonds. Furthermore, the
quarterly net income was affected by approximately $2.3 million or $0.66 per
share of additional interest expense, net, incurred as a result of the
defeasance / retirement of the debt.
EBITDA
Consolidated EBITDA, as defined, increased by approximately
$546,000, or 7.3%, from $7.4 million in 2001 to $7.9 million in 2002. During the
same periods, EBITDA margin increased from 14.5% to 16.3% of net revenues for
the reasons described above.
17
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
The following table sets forth, for the periods indicated, certain operating
data for the Riviera Las Vegas and Riviera Black Hawk. The Company began
allocating Corporate overhead in its determination of income (loss) from
operations. All amounts for all periods presented have been revised to reflect
this change. Intercompany management fees have been eliminated from EBITDA from
properties for the purpose of this table. Operating Income includes intercompany
management fees.
Nine Months Ended Incr/ % Incr/
(In Thousands) 2002 2001 (Decr) (Decr)
Net revenues:
Riviera Las Vegas $107,510 $121,634 ($14,124) -11.6%
Riviera Black Hawk 37,454 36,438 1,016 2.8%
Total Net Revenues $144,964 $158,072 ($13,108) -8.3%
Operating Income (Loss)
Riviera Las Vegas $11,370 $13,380 ($2,010) -15.0%
Riviera Black Hawk 5,411 5,251 160 3.0%
Property Operating Income 16,781 18,631 (1,850) -9.9%
Corporate Expenses (3,873) (3,892) 19 -0.5%
Total Operating Income $12,908 $14,739 ($1,831) -12.4%
EBITDA:(1)
Riviera Las Vegas $19,943 $22,522 ($2,609) -11.6%
Riviera Black Hawk 10,005 9,009 996 11.1%
Property EBITDA, as Adjusted 29,948 31,561 (1,613) -5.1%
Corporate Expenses (3,657) (3,892) 235 -6.0%
Total EBITDA $ 26,291 $27,669 ($1,378) -5.0%
EBITDA margin
Riviera Las Vegas 18.5% 18.5% 0.0%
Riviera Black Hawk 26.7% 24.7% 2.0%
Total EBITDA 18.1% 17.5% 0.6%
Reconciliation of Income from
Operations to EBITDA
Operating Income $12,908 $14,739
Depreciation 13,383 12,930
EBITDA $ 26,291 $ 27,669
(1) EBITDA consists of earnings before interest, income taxes, depreciation,
amortization, loss on extinguishment of debt and other, net. While EBITDA should
not be construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles ("GAAP"), it is
18
included herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and working
capital requirements.
Although EBITDA is not necessarily a measure of the Company's ability to fund
its cash needs, management believes that certain investors find EBITDA to be a
useful tool for measuring the ability of the Company to service its debt. EBITDA
margin is EBITDA as a percent of net revenues. The Company's definition of
EBITDA may not be comparable to other companies' definitions.
Riviera Las Vegas
Revenues
Net revenues decreased by approximately $14.1 million, or
11.6%, from $121.6 million in 2001 to $107.5 million in 2002 due primarily to
decreased casino, rooms and entertainment revenues. Casino revenues decreased by
approximately $7.1 million, or 13.2%, from $53.6 million during 2001 to $46.5
million during 2002 due to a decrease in slot machine revenue. Room revenue
decreased $2.1 million, or 6.0%, from $34.5 million in 2001 to $32.4 million in
2002 due to the continued effects of a slower economy and the events of
September 11, 2001. Hotel occupancy fell 3.9% from 96.0% in 2001 to 92.1% in
2002 and the average daily room rate fell $2.45 from $62.03 in 2001 to $59.58 in
2002. Entertainment revenues decreased by approximately $4.0 million, or 23.7%,
from $17.0 million during 2001 to $13.0 million during 2002 due primarily to a
decrease in Splash and Crazy Girls revenues as result of competition from the
openings of new shows on the Las Vegas Strip and a slower economy. Other
revenues decreased by approximately $966,000, or 14.2%, from $6.8 million during
2001 to $5.8 million during 2002 due primarily to decreased gift shop and
telephone revenues. Promotional allowances decreased by approximately $412,000,
or 3.9%, from $10.5 million during 2001 to $10.1 million during 2002 primarily
due to decreases in comps related to lower casino activity.
Income from Operations
Income from operations in Las Vegas declined $2.0 million, or 15.0%, from
$13.4 million in 2001 to $11.4 million in 2002 due to the 11.6% decrease in net
revenues which was partially offset by a 11.1% decrease in expenses. Fixed costs
in the rooms department and general administrative costs were not reduced in
sufficient proportion to compensate for the decline in revenue. Room revenues
fell 6.0% while costs were down 2.1%.
EBITDA
Riviera Las Vegas EBITDA, as defined, decreased by approximately
$2.6 million, or 11.6%, from $22.6 million in 2001 to $20.0 million in 2002 for
reasons described above. During the same periods, EBITDA margin remained the
same at 18.5% of net revenues. Margins in Las Vegas continue to be pressured by
the economy and competition, but have improved each month. The Las Vegas
operation is spending more marketing dollars to increase demand and will
continue to focus and improve incentive programs through the rest of the year
and into 2003.
19
Riviera Black Hawk
Revenues
Net revenues increased by approximately $1.0 million, or 2.8%,
from $36.4 million in 2001 to $37.4 million in 2002. Casino revenues increased
$623,000, or 1.8%, from $34.6 million in 2001 to $35.3 million in 2002 .
Food and beverage revenues were approximately $5.0 million in
2002, of which $3.5 million was complimentary (promotional allowance). Riviera
Black Hawk continues to refine its marketing efforts by constantly measuring the
success rates of its programs, while monitoring the offerings of competitors.
The operation is attempting to strike a balance between player incentives,
gaming product, food offerings and entertainment as its primary marketing
programs.
Income from Operations
Income from operations in Black Hawk, Colorado increased $160,000, or 3.0%,
from $5.3 million in 2001 to $5.4 million in 2002 due to increased revenues as a
result of refining direct marketing and promotional programs for the casino in
the nine months of 2002.
EBITDA
Riviera Black Hawk EBITDA, as defined, increased $996,000, or
11.1%, from $9.0 million in 2001 to $10.0 million in 2002. EBITDA margin for the
nine months increased to 26.7% from 24.7% for the same period last year.
Consolidated Operations
Other Income (Expense)
Interest expense on the $215 million 11% Senior Secured
Notes issued by Riviera Holdings Corporation of $6.2 million plus related
amortization of loan fees and equipment and other financing costs totaled
approximately $7.6 million in 2002. Interest on the $175 million First Mortgage
Notes plus related costs totaled $9.2 million for the first nine months of 2002.
Interest expense on the remaining $35 million of the 13% First Mortgage Notes
issued by Riviera Black Hawk in June 1999 combined with its interest from
capital leases totaled $3.2 million in the first nine months of 2002 compared to
$5.1 million for the first nine months of 2001. Additionally interest expense
due to defeasance totaled $2.7 million for the first nine months.
Net Income (Loss)
The results of operations decreased $17.6 million from net
loss of $3.2 million in 2001 to a net loss of $20.8 million in 2002 due
primarily to the loss on extinguishment of debt totaling $11.2 million,
additional interest expense of $2.7 million as a result of the
defeasance/retirement of debt and the continuing effects of a slower economy and
the events of September 11, 2001.
20
EBITDA
Consolidated EBITDA, as defined, decreased by approximately $1.4
million, or 5.0%, from $27.7 million in 2001 to $26.3 million in 2002. During
the same periods, EBITDA margin increased from 17.5% to 18.1% of net revenues
for the reasons described above.
Liquidity and Capital Resources
In June 2002, the Company issued $215 million 11% Senior Secured Notes due 2010.
The proceeds along with cash on hand was used to retire our 10% First Mortgage
Notes due 2004 and Riviera Black Hawk's remaining 13% First Mortgage Notes due
2005 with contingent interest.
On July 26, 2002 the Company entered into a $30 million, five-year senior
secured revolving credit facility. The credit facility is secured by
substantially the same collateral that secures the 11% Notes. The lien on the
collateral securing the credit facility is senior to the lien on the collateral
securing the 11% Notes. The credit facility contains customary conditions to
borrowing and certain representations and warranties customary in gaming-related
financing. The credit facility also contains financial covenants and
restrictions regarding, among other things, indebtedness, capital expenditures,
minimum EBITDA levels throughout the five-year term, investments, distributions
and changes in control of the Company. The Company interest rate is prime rate
plus 0.75% or LIBOR plus 3.00%, with a minimum of 4.5%. The Company has received
no advances under the revolver except for fees which are paid monthly.
At September 30, 2002, the Company had cash and cash equivalents of $27.4
million. The cash and cash equivalents decreased $19.2 million during the first
nine months of 2002, including, $8.0 million of cash provided by operations,
$6.4 million of cash outflow for investing activities and $20.8 million outflow
for financing activities.
Cash balances include amounts that may be required to fund the Chairman's
pension obligation in a rabbi trust with 5 days notice. (See Note 7 to the
financial statements, Other Long-Term Liabilities included in Form 10K as filed
with the SEC.) Although there is no current intention to require this funding,
the Company could be required to disburse approximately $7.1 million for this
purpose in a short period.
Management believes that cash flow from operations, combined with the $27.4
million cash and cash equivalents and the new $30 million revolving credit
facility will be sufficient to cover the Company's debt service and enable
investment in budgeted capital expenditures for 2002 for both the Las Vegas and
Black Hawk properties and provide initial investments in the potential Missouri
and New Mexico projects.
Cash flow from operations may not to be sufficient to pay 100% of the principal
of the $215 million 11% Notes ("the 11% Notes") at maturity on June 15, 2010.
Accordingly, the ability of the Company to repay Notes at maturity may be
dependent upon our ability to refinance those notes. There can be no assurance
that the Company will be able to refinance the principal amount of the 11% Notes
at maturity.
The 11% Notes provide that, in certain circumstances, the Company and its
subsidiary must offer to repurchase the 11% Notes upon the occurrence of a
21
change of control or certain other events. In the event of such mandatory
redemption or repurchase prior to maturity, the Company and its subsidiary would
be unable to pay the principal amount of the 11% Notes without a refinancing.
The 11% Notes contain certain covenants, which limit the ability of the Company
and its restricted subsidiaries subject to certain exceptions, to: (i) incur
additional indebtedness; (ii) pay dividends or other distributions, repurchase
capital stock or other equity interests or subordinated indebtedness; (iii)
enter into certain transactions with affiliates; (iv) create certain liens; sell
certain assets; and (v) enter into certain mergers and consolidations. As a
result of these restrictions, the ability of the Company and its subsidiaries to
incur additional indebtedness to fund operations or to make capital expenditures
is limited. In the event that cash flow from operations is insufficient to cover
cash requirements, the Company and its subsidiaries would be required to curtail
or defer certain capital expenditure programs under these circumstances, which
could have an adverse effect on operations.
At September 30, 2002, the Company believes that it is in compliance with the
covenants of the 11% Notes.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company is currently assessing, but has not yet
determined the impact of SFAS No. 143 on its financial position and results of
operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently assessing but
has not yet determined the impact of SFAS No. 146 on its financial position and
results of operations.
22
Recently Adopted Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective January 1, 2002. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
SFAS No. 142 includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, and the identification of reporting units for purposes
of assessing potential future impairments of goodwill. SFAS No. 142 also
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. As of June 30, 2002 the Company has determined
that it has no intangible assets or goodwill recorded on its balance sheet, and
accordingly the adoption of SFAS No, 142 had no impact on its financial position
or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Bulletin Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 also amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company has determined that the implementation of SFAS No. 144 had no
effect on its financial position and results of operations upon implementation.
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No.
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meet criteria for
classification as an extraordinary item. SFAS No. 145 is effective for the
Company beginning January 1, 2003, but the Company adopted the provisions of
SFAS No. 145 during fiscal year 2002, as permitted. The effect on our
consolidated financial position and results of operations of the adoption of
SFAS No. 145 was that the Company recognized and reported bond retirement costs
as other expense.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our 2001 Form 10-K and for a more extensive discussion of our
accounting policies, see Note 2, Summary of Significant Accounting Policies, in
the Notes to the Consolidated Financial Statements in our 2001 Form 10-K filed
on March 27, 2002.
23
Forward Looking Statements
This report includes "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Statements in this
report regarding future events or conditions, including statements regarding
industry prospects and the Company's expected financial position, business and
financing plans, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed in this report as well
as the Company's most recent annual report on Form 10-K, and include the
Company's substantial leverage, the risks associated with the expansion of the
Company's business, as well as factors that affect the gaming industry
generally. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligations to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Specific factors that might cause actual results to differ from our expectations
or might cause us to modify our plans or objectives include, but are not limited
to:
o the availability and adequacy of our cash flow to meet our
requirements, including payment of amounts due under our
indebtness;
o economic, competitive, demographic, business and other
conditions in our local and regional markets;
o changes or developments in laws, regulations or taxes in the
gaming industry;
o actions taken or omitted to be taken by third parties,
including our customers, suppliers, competitors and members as
well as legislative, regulatory, judicial and other
governmental authorities;
o competition in the gaming industry, including the availability
and success of alternative gaming venues and other
entertainment attractions;
o a decline in the public acceptance of gaming;
o changes in personnel or compensation, including federal
minimum wage requirements;
o our failure to obtain, delays in obtaining or the loss of any
licenses, permits or approvals, including gaming and liquor
licenses, or the limitation, conditioning, suspension or
revocation of any such licenses, permits or approvals, or our
failure to obtain an unconditional renewal of any such
licenses, permits or approvals on a timely basis;
24
o the loss of any of our casino facilities due to terrorist
acts, casualty, weather, mechanical failure or any
extended or extraordinary maintenance or inspection that may
be required;
o other adverse conditions, such as adverse economic conditions,
changes in general customer confidence or spending, increased
transportation costs, travel concerns or weather-related
factors, that may adversely affect the economy in general
and/or the casino industry in particular;
o our substantial indebtedness, debt service requirements and
liquidity constraints;
o risks related to our notes and to high-yield securities and
gaming securities generally;
o changes in our business strategy, capital improvements or
development plans;
o the availability of additional capital to support capital
improvements and development; and
o factors relating to the current state of world affairs and any
further acts of terrorism or any other destabilizing events in
the United States or elsewhere.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of September 30, 2002, we had $220.8 million in borrowings. The borrowings
include $215 million in notes maturing in 2010 and capital leases maturing at
various dates through 2005. Interest under the $215 million notes is basedon a
fixed rate of 11%. The equipment loans and capital leases have interest rates
ranging from 5.2% to 13.5%.The borrowings also include $863,000 in a special
improvement district bond offering with the City of Black Hawk.The Company's
share of the debt on the SID bonds of $1.2 million when the project is complete,
is payable over tenyears beginning in 2000. The special improvement district
bonds bear interest at 5.5%.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Amounts in Fair Value
thousands) 2002 2003 2004 2005 2006 Thereafter Total at 9/30/02
Assets
Short term investments $ - $ -
Average interest rate
Long Term Debt Including
Current Portion
Equipment loans and
capital leases Las Vegas $ 298 $ 1,326 $ 988 $ 11 $ 2,623 $ 2,623
Average interest rate 8.0% 7.8% 7.8% 8.4%
11% Senior Secured Notes $211,882 $211,882 $199,169
Average interest rate 11.6%
Capital leases
Black Hawk, Colorado $ 479 $ 2,045 $ 2,263 $ 658 $ 5,445 $ 5,445
Average interest rate 10.8% 10.8% 10.8% 10.8%
Special Improvement District
Bonds
Black Hawk, Colorado $ - $ 103 $ 109 $ 116 $ 124 $ 411 $ 863 $ 863
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
26
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to several routine lawsuits, both as plaintiff and as
defendant, arising from the normal operations of a hotel. The Company does not
believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on its financial position or results of its operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) See list of exhibits on page 33.
(b) During the third quarter of 2002, the Company filed reports on Form
8-K on July 31, and September 19, 2002. Each Form 8-K reported Item Nos. 5 and 7
which, in the July 31, 2002 filing, included summary financial information for
the Company's second quarter.
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By: /s/ William L. Westerman
William L. Westerman
Chairman of the Board and
Chief Executive Officer
By: /s/ Duane Krohn
Duane Krohn
Treasurer and
Chief Financial Officer
Date: November 8, 2002
28
CERTIFICATIONS
I, William L. Westerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Riviera Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
29
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
William L. Westerman
Chairman of the Board and
Chief Executive Officer
30
CERTIFICATIONS
I, Duane Krohn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Riviera Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
31
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
Duane Krohn
Treasurer and
Chief Financial Officer
32
Riviera Holdings Corporation
Form 10Q
September 30, 2002
Exhibit No. Description
10.1* Loan and Security Agreement dated as of July 26, 2002 by and
among the Company and the other Borrower parties thereto, the
Guarantors parties thereto and Foothill Capital Corporation
(see Exhibit 10.30 to Registration Statement on Form S-4 filed
with the Commission on August 9, 2002)
10.2* Intercreditor Agreement dated as of July 26, 2002 by and
between The Bank of New York, as trustee, and Foothill Capital
Corporation (see Exhibit 10.31 to Registration Statement on
Form S-4 filed with the Commission on August 9, 2002)
10.3* Fee Letter, dated July 26, 2002, issued by the Company,
Riviera Black Hawk, Inc. and Riviera Operating Corporation to
Foothill Capital Corporation(see Exhibit 10.32 to Registration
Statement on Form S-4 filed with the Commission on August 9,
2002)
10.4* Intellectual Property Security Agreement dated as of July 26,
2002 by and between the Company and the other Debtors parties
thereto, and Foothill Capital Corporation (see Exhibit 10.33
to Registration Statement on Form S-4 filed with the
Commission on August 9, 2002)
10.5* Deed of Trust, Assignment of Rents, Leases, Fixture Filing and
Security Agreement dated July 26, 2002, executed by the
Company for the benefit of Foothill Capital Corporation (see
Exhibit 10.34 to Amendment No. 1 to Registration Statement on
Form S-4 filed with the Commission on August 26, 2002)
10.6* Environmental Indemnity dated July 26, 2002 from the Company
in favor of Foothill Capital Corporation (see Exhibit 10.35 to
Registration Statement on Form S-4 filed with the Commission
on August 9, 2002)
10.7* Continuing Guaranty dated July 26, 2002 by and among the
Company, the other Borrowers parties thereto and the
Guarantors parties thereto in favor of Foothill Capital
Corporation (see Exhibit 10.36 to Registration Statement on
Form S-4 filed with the Commission on August 9, 2002)
10.8* Subordination Agreement dated July 26, 2002 by and among the
Company and the other Creditors parties thereto in favor of
Foothill Capital Corporation (see Exhibit 10.37 to
Registration Statement on Form S-4 filed with the Commission
on August 9, 2002)
33
10.9* Stock Pledge and Security Agreement dated July 26, 2002,
executed by the Company (see Exhibit 10.38 to Registration
Statement on Form S-4 filed with the Commission on August 9,
2002)
10.10* Stock Pledge and Security Agreement dated July 26, 2002,
executed by Riviera Operating Corporation (see Exhibit 10.39
to Registration Statement on Form S-4 filed with the
Commission on August 9, 2002)
10.11* Stock Pledge and Security Agreement dated July 26, 2002,
executed by Riviera Gaming Management, Inc. (see Exhibit 10.40
to Registration Statement on Form S-4 filed with the
Commission on August 9, 2002)
10.12* Deed of Trust to Public Trustee, Security Agreement, Fixture
Filing and Assignment of Rents, Leases and Leasehold Interests
dated July 26, 2002, executed by Riviera Black Hawk, Inc. for
the benefit of Foothill Capital Corporation (see Exhibit 10.41
to Amendment No. 1 to Registration Statement on Form S-4 filed
with the Commission on August 26, 2002)
10.13* Environmental Indemnity dated July 26, 2002 from the Company
and Riviera Black Hawk, Inc. in favor of Foothill Capital
Corporation (see Exhibit 10.42 to Registration Statement on
Form S-4 filed with the Commission on August 9, 2002)
* The exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of each such exhibit is a reference to it as
it appeared in a specified document previously filed with the Commission to
which there have been no amendments or changes.
34