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 June 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 000-21430
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Riviera Holdings Corporation
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(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (702) 794-9527
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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___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes____ No X
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
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of July 31, 2003, there were 3,606,155 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 June 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three and Six Months ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature Page 28
Certifications 29
Exhibits 31
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 June 30,
2003, and the related condensed consolidated statements of operations and of
cash flows for the three and six months ended June 30, 2003 and 2002. These
financial statements are the responsibility of the Company's management.
We conducted our review, 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, 2002, 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 14,
2003, 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, 2002, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
July 22, 2003
Las Vegas, Nevada
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share amounts) June 30 December 31
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2003 2002
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 20,688 $ 20,220
Accounts receivable, net 2,946 4,010
Inventories 1,541 1,824
Prepaid expenses and other assets 3,855 3,968
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Total current assets 29,030 30,022
PROPERTY AND EQUIPMENT, Net 181,098 188,233
OTHER ASSETS, Net 14,285 14,677
DEFERRED INCOME TAXES 2,964 2,964
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TOTAL $ 227,377 $ 235,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,523 $ 3,430
Accounts payable 7,794 8,338
Accrued interest 1,064 1,065
Accrued expenses 13,674 15,576
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Total current liabilities 26,055 28,409
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OTHER LONG-TERM LIABILITIES 6,404 6,465
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LONG-TERM DEBT, Net of current portion 215,115 216,694
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SHAREHOLDERS' DEFICIENCY:
Common stock ($.001 par value; 20,000,000 shares
authorized; 5,162,208 and 5,135,773 shares issued at
June 30, 2003 and December 31, 2002, respectively) 5 5
Additional paid-in capital 13,715 13,638
Treasury stock (1,687,957 shares and 1,686,244 shares
at June 30, 2003 and December 31, 2002, respectively) (11,320) (11,313)
Accumulated Deficit (22,597) (18,002)
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Total stockholders' deficiency (20,197) (15,672)
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TOTAL $ 227,377 $ 235,896
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See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2003 AND 2002 Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
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REVENUES: 2003 2002 2003 2002
Casino $ 27,091 $ 28,863 $ 53,468 $ 54,926
Rooms 11,229 10,667 22,454 21,386
Food and beverage 8,529 8,519 16,542 16,378
Entertainment 4,471 4,372 8,870 8,580
Other 2,059 2,200 4,010 4,251
---------- ---------- ---------- ----------
Total revenues 53,379 54,621 105,344 105,521
Less promotional allowances 5,051 4,955 9,525 9,357
---------- ---------- ---------- ----------
Net revenues 48,328 49,666 95,819 96,164
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COSTS AND EXPENSES:
Direct costs and expenses of
operating departments:
Casino 13,897 14,813 27,967 29,185
Rooms 6,491 6,114 12,344 11,568
Food and beverage 5,749 5,518 11,053 10,608
Entertainment 2,919 2,887 5,875 5,674
Other 709 741 1,358 1,421
Other operating expenses:
General and administrative 9,980 9,427 19,700 19,363
Depreciation and amortization 4,151 4,459 8,381 8,963
---------- ---------- ---------- ----------
Total costs and expenses 43,896 43,959 86,678 86,782
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INCOME FROM OPERATIONS 4,432 5,707 9,141 9,382
---------- ---------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense (6,879) (6,932) (13,760) (13,533)
Interest income 11 137 24 229
---------- ---------- ---------- ----------
Total other expense (6,868) (6,795) (13,736) (13,304)
---------- ---------- ---------- ----------
(LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (2,436) (1,088) (4,595) (3,922)
(BENEFIT) FOR INCOME TAXES 0 0 0 0
---------- ---------- ---------- ----------
NET (LOSS) $ (2,436) $ (1,088) $ (4,595) $ (3,922)
========== ========== ========== ==========
(LOSS) PER SHARE DATA:
(Loss) per share:
Basic & Diluted $ (0.70) $ (0.32) $ (1.32) $ (1.14)
---------- ---------- ---------- ----------
Weighted-average common and common
equivalent shares 3,474 3,452 3,471 3,444
---------- ---------- ---------- ----------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended Six Months Ended
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 June 30, June 30,
AND 2002 2003 2002 2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($2,436) ($1,088) ($4,595) ($3,922)
Adjustments to reconcile net (loss) to net
cash (used in) provided by operating
activities:
Depreciation and amortization 4,151 4,459 8,381 8,963
Provision for bad debts 75 22 155 (345)
Provision for gaming discounts 7 (48) 7 (48)
Interest expense 6,879 6,932 13,760 13,533
Interest paid (12,077) (3,172) (12,388) (12,123)
Changes in operating assets and liabilities:
Increase in interest receivable on US
T-Bills purchased to retire bonds (57) (57)
Decrease (increase) in accounts receivable 1,126 966 901 1,000
Decrease (increase) in inventories 99 (11) 283 445
Decrease (increase) in prepaid expenses
and other assets 86 (208) 115 (424)
Increase (decrease) in accounts payable 161 1,545 (544) 1,400
Increase (decrease) in accrued liabilities (696) (177) (1,902) (969)
Increase in deferred compensation plan
liability 4 105 12 105
Increase (decrease) in non-qualified pension
plan obligation to CEO upon retirement (365) (125) (490) (250)
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Net cash (used in) provided by operating
activities (2,986) 9,143 3,695 7,308
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (344) (1,337) (783) (2,268)
Capital expenditures - Black Hawk, Colorado (174) (749) (450) (1,208)
Decrease (increase) in other assets (172) (622) (375) (1,737)
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Net cash (used in) investing activities (690) (2,708) (1,608) (5,213)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 0 211,781 0 211,781
US Treasury Bills purchased to retire bonds 0 (226,576) 0 (226,576)
Decrease (increase) in deferred loan fees 0 (10,381) 0 (10,381)
Payments on long-term borrowings (828) (854) (1,689) (1,651)
Increase in paid-in capital 0 0 52 0
Purchase of deferred comp treasury stock 0 0 (7) 0
Issuance of restricted stock 0 25 25 100
-------- --------- --------- ---------
Net cash (used in) financing activities (828) (26,005) (1,619) (26,727)
-------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,504) (19,570) 468 (24,632)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 25,192 $ 41,544 $ 20,220 $ 46,606
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,688 $ 21,974 $ 20,688 $ 21,974
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $101 $65 $101 $65
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 the assets and liabilities of Riviera, Inc.
Casino-Hotel Division on June 30, 1993, pursuant to a plan of reorganization.
Riviera Gaming Management, Inc. ("RGM") was incorporated in the State of Nevada
in August 1995 for the purpose of obtaining management contracts in Nevada and
other jurisdictions and is a wholly owned subsidiary of ROC. 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
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 through 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 June 30, 2003 and for the three and six months
ended June 30, 2003 and 2002 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
financial position, results of operations, and cash flows for the interim
periods. The results of operations for the six months ended June 30, 2003 and
2002 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, 2002, included in the Company's Annual Report on Form 10-K.
6
Earnings Per Share
Basic per share amounts are computed by dividing net income by weighted average
shares outstanding during the period. Diluted net income 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 six months ended June
30, 2003 and 2002 since the Company incurred a net loss. The number of
potentially dilutive options was 82,000 and 82,000 for the three and six months
ended June 30, 2003 and 285,500 and 113,000 for the three and six months ended
June 30, 2002.
Income Taxes
The cash flow projections used by the Company in the application of Statement of
Financial Accounting Standards ("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 2003 and 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.
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
revenues and expenses during the reporting period. Significant estimates used by
the Company include estimated useful lives for depreciable and amortizable
assets, certain accrued liabilities and the estimated allowance for receivables.
Actual results may differ from estimates.
Reclassifications
Certain prior-period amounts in the condensed financial statements have been
reclassified to conform to the June 30, 2003 presentation. These
reclassification had no effect on the Company's net income.
Stock-Based Compensation
As of June 30, 2003, the Company has two stock-based employee compensation
plans. The effect of stock options in the income statement is reported in
accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. The Company has
adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been recognized
for unissued stock options in the stock option plan, as all options granted had
an exercise price equal to the market value of the underlying common stock on
the date of grant.
7
No compensation cost has been recognized for unexercised options remaining in
the stock option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the date of grant for awards
consistent with the provisions of SFAS No. 123 (using an intrinsic value
method), the Company's net loss and pro forma net loss per common share and
common share equivalent would have been increased to the pro forma amounts
indicated below for three and six months ended June 30 (in thousands, except per
share amounts):
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
Net loss as reported $ (2,436) $(1,088) $(4,595) $ (3,922)
Deduct: Total stock-based employee
compensation expense determined under
fair value-based methods for awards
net of related tax effects (57) (74) (117) (148)
----- ------ ------- -------
Net loss pro forma $ (2,493) $(1,162) $(4,712) $ (4,070)
======= ======= ======= =======
Basic loss per common share as reported $ (0.70) $ (0.32) $ (1.32) $ (1.14)
Basic loss per common share pro forma $ (0.72) $ (0.34) $ (1.36) $ (1.18)
Diluted loss per common and common
share equivalent as reported $ (0.70) $ (0.32) $ (1.32) $ (1.14)
Diluted loss per common and common
share equivalent pro forma $ (0.72) $ (0.34) $ (1.36) $ (1.18)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002 respectively: dividend yield of 0%
for both years; expected volatility of 34% and 52%; risk-free interest rates of
2.27% and 4.49%; and expected lives of 10 years for all years. The weighted fair
value of options granted in 2003 and 2002 was $2.69 and $4.96, respectively.
Due to the fact that the Company's stock option programs vest over several years
and additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of SFAS No. 123
been applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995.
Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. ("SFAS No. 143"). 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 adopted SFAS
No. 143 and it had no effect on its financial position or results of operations.
In June 2002, the FASB issued SFAS 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
8
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 adopted SFAS No. 146 and it
had no effect on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation.
Although it does not require use of fair value method of accounting for
stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148's amendment of the transition and annual disclosure requirements
are effective for fiscal years ending after December 15, 2002. The amendment of
disclosure requirements of APB No. 28 is effective for interim periods beginning
after December 15, 2002. The Company adopted SFAS No. 148 and it had no effect
on its financial position or results of operations.
Recently Issued Accounting Standards
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. Additionally, a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial liability recognition and measurement provisions of FIN No. 45 apply
prospectively to guarantees issued or modified after December 31, 2002. The
disclosure requirements in FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has
determined that FIN No. 45 did not have a material impact on its financial
position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which addresses consolidation by business enterprises where equity
investors do not bear the residual economic risks and rewards. These entities
have been commonly referred to as "special purpose entities." Companies are
required to apply the provisions of FIN No. 46 prospectively for all variable
interest entities created after January 31, 2003. The Company has determined
that FIN No. 46 did not have a material impact on its financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is applied prospectively and is effective for contracts
9
entered into or modified after June 30, 2003, except for SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 and certain provisions relating to forward purchases and
sales on securities that do not yet exist. The Company has not determined the
effect, if any, that SFAS No. 149 will have on its consolidated financial
statements.
In May 2003, the FASB issued FIN No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company will adopt the standard during the third
quarter beginning on July 1, 2003. The Company is currently evaluating the
effects, if any, that this Statement will have on its financial position and
results of operations.
2. OTHER ASSETS
Other assets at June 30, 2003 include deferred loan fees of approximately $10.1
million associated with the refinancing of the Company's debt and capitalized
costs associated with the RGM Missouri proposed venture of approximately $1.4
million and the RGM New Mexico proposed venture of approximately $1.2 million.
3. LONG TERM DEBT AND COMMITMENTS
On June 26, 2002, the Company issued 11% Senior Secured Notes due 2010 with a
principal amount of $215 million, substantially all of which were later
exchanged for Securities Act of 1933-registered Notes of the Company with
substantially the same terms (collectively, the "11% Notes"). The 11% 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 June 30, 2002 and 2003 and are being amortized
to interest expense over the life of the indebtedness.
Effective July 26, 2002 the Company entered into 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.
There were no advances outstanding on this revolver at June 30, 2003. The
Company incurred loan fees of approximately $1.5 million which are being
expensed over the life of the agreement.
4. LEGAL PROCEEDINGS
On April 15, 2003, a class action complaint was filed in the Clark County,
Nevada District Court (Case No. A466204) in the name of Brian Placzek, on behalf
of himself and all others similarly situated, against the Company and Company
directors William L. Westerman, Robert R. Barengo, Jeffrey A. Silver and Paul A.
Harvey (the "Placzek Action"). The complaint was served on the Company on April
28, 2003. The named plaintiff in this action is a shareholder of the Company. In
the complaint, the plaintiff seeks an order which would require the individual
defendants to take the following actions, among others: cooperate with any
individual who makes a bona fide offer to acquire the Company, take steps that
are calculated to result in a buy-out or takeover of the Company at the highest
price, comply with their fiduciary duties, and reimburse the plaintiff's class
for damages, costs and disbursements related to the lawsuit. The complaint
10
states that the named plaintiff also seeks to have all of the Company's public
shareholders, excluding the defendants, certified as a class for purposes of the
class action suit and seeks to be the representative of the class. On July 10,
2003, the defendants filed a Motion to Dismiss the Placzek Action against all
defendants on the grounds that the Placzek Action was filed without the
authorization of the plaintiff. This Motion to Dismiss has not yet been heard or
ruled upon. An amended complaint was filed in the Placzek Action on July 11,
2003, alleging, among other things, that the Director defendants are attempting
to entrench themselves in their position of control.
On May 2, 2003, a class action complaint was filed in the Clark County, Nevada
District Court (Case No. A467159) in the name of Paul Rosa against the Company
and Company directors William L. Westerman, Robert R. Barengo, Jeffrey A.
Silver, Paul A. Harvey and Vincent L. DiVito (the "Rosa Action"). The named
plaintiff in this action is a shareholder of the Company and also seeks to have
all of the Company's public shareholders, excluding defendants and related
shareholders, certified as a class for purposes of the class action law suit. On
July 21, 2003, the defendants filed a Motion to Dismiss the Rosa Action on the
grounds that the complaint fails to state a claim upon which relief may be
granted. This Motion to Dismiss has not yet been heard or ruled upon.
The plaintiffs in both of these lawsuits are represented by the same law firm.
Both complaints assert, among other things, that the defendants violated their
fiduciary duties because they did not take affirmative steps in furtherance of
an offer by a third party to purchase all of the outstanding Common Stock at a
premium price. That offer was contingent upon, among other things, a waiver by
the holders of the 11% Notes of the right to an accelerated repayment of the 11%
Notes at a premium, which would be triggered by that third party's purchase of
the Common Stock.
We believe the claims in these lawsuits are without merit and we intend to
defend against them vigorously.
The Company is a party to several routine lawsuits, both as plaintiff and as
defendant, arising from the normal operations of a hotel or casino. 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 1,703 shares of treasury stock purchased by the Deferred Compensation
Plan Trustee at $4.27 for the six months ended June 30, 2003 and no shares were
purchased for the six months ended June 30, 2002.
6. ISSUANCE OF RESTRICTED STOCK
There were 5,435 shares of restricted stock issued at an average price of $4.60
under the Restricted Stock Plan in the first six months ended June 30, 2003 for
executive compensation earned in the last quarter of 2002.
7. GUARANTOR INFORMATION
The 11% Notes and the $30 million line of credit are guaranteed by all of the
Company's 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 11% Notes. Each of these entities is in the
11
development stage, and has no operating results. Their assets totaled $2.6
million (RGM Missouri $1.4 million and RGM New Mexico $1.2 million in 2002 and
2003), which assets were created through advances from RHC.
12
8. SEGMENT DISCLOSURES
The Company determines its segments based upon review process of the chief
decision maker who reviews by geographic gaming market segments: Riviera Las
Vegas and Riviera Black Hawk. The key indicator reviewed by the chief decision
maker is EBITDA as defined below. All intersegment revenues have been
eliminated.
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2003 2002 2003 2002
Net revenues:
Riviera Las Vegas $36,027 $37,039 $71,762 $71,748
Riviera Black Hawk 12,301 12,627 24,057 24,416
---------- --------- --------- ---------
Total net revenues $48,328 $49,666 $95,819 $96,164
========== ========= ========= =========
Income (loss) from operations:
Riviera Las Vegas $3,703 $4,588 $7,953 $7,897
Riviera Black Hawk 2,034 2,181 3,604 3,609
Corporate Expenses (3) (1,305) (1,062) (2,416) (2,124)
---------- --------- --------- ---------
Total income from operations $4,432 $5,707 $9,141 $9,382
========== ========= ========= =========
EBITDA (1):
Riviera Las Vegas $6,378 $7,479 $13,403 $13,774
Riviera Black Hawk 3,510 3,749 6,535 6,695
Corporate Expenses (3) (1,305) (1,062) (2,416) (2,124)
---------- --------- --------- ---------
Total EBITDA $8,583 $10,166 $17,522 $18,345
========== ========= ========= =========
EBITDA margins (2):
Riviera Las Vegas 17.7% 20.2% 18.7% 19.2%
Riviera Black Hawk 28.5% 29.7% 27.2% 27.4%
---------- --------- --------- ---------
Total EBITDA 17.8% 20.5% 18.3% 19.1%
========== ========= ========= =========
(1)EBITDA consists of earnings before interest, income taxes, depreciation, and
amortization. EBITDA is presented solely as a supplemental disclosure because
management believes that it is 1) a widely used measure of operating performance
in the gaming industry, and 2) a principal basis for valuation of gaming
companies by certain analysts and investors. Management uses property-level
EBITDA (EBITDA before corporate expense) as the primary measure of the Company's
business segment properties' performance, including the evaluation of operating
personnel. EBITDA should not be construed as an alternative to operating income,
as an indicator of the Company's operating performance, as an alternative to
cash flows from operating activities, as a measure of liquidity, or as any other
measure determined in accordance with generally accepted accounting principles.
The Company has significant uses of cash flows, including capital expenditures,
interest payments and debt principal repayments, which are not reflected in
EBITDA. Also, other companies that report EBITDA information may calculate
EBITDA in a different manner than the Company. A reconciliation of EBITDA to
operating income is included in the following financial schedules.
(2) EBITDA margin is EBITDA as a percent of net revenues.
(3) Corporate expenses increased in 2003 as due to additional professional fees
and costs associated with corporate governance, business proposals and the
shareholder vote on the removal of certain voting restrictions in the Company's
articles of incorporation.
13
Riviera Holdings Corporation
Reconciliation of Operating Income (Loss) to EBITDA
($ in 000's) Depreciation
Net Interest Operating Management
Net Income Expense(5) Income/(Loss) Fee EBITDA
Second Quarter 2003
Riviera Las Vegas $ 3,660 $ (43) $ 3,703 $ 3,059 $ (384) $ 6,378
Riviera Black Hawk (22) (2,056) 2,034 1,092 384 3,510
Corporate (6,074) (4,769) (1,305) - - (1,305)
------------------------------------------------------------
$ (2,436) $ (6,868) $ 4,432 $ 4,151 - $ 8,583
------------------------------------------------------------
Second Quarter 2002
Riviera Las Vegas $ (251) $ (4,839) $ 4,588 $ 3,302 $ (411) $ 7,479
Riviera Black Hawk 542 (1,639) 2,181 1,157 411 3,749
Corporate (1,379) (317) (1,062) - - (1,062)
------------------------------------------------------------
$ (1,088) $ (6,795) $ 5,707 $ 4,459 - $ 10,166
------------------------------------------------------------
Six Months ended
June 30, 2003
Riviera Las Vegas $ 7,868 $ (85) $ 7,953 $ 6,180 $ (730) $ 13,403
Riviera Black Hawk (512) (4,116) 3,604 2,201 730 6,535
Corporate (11,951) (9,535) (2,416) - - (2,416)
------------------------------------------------------------
$ (4,595)$ (13,736) $ 9,141 $ 8,381 - $ 17,522
------------------------------------------------------------
Six Months ended
June 30, 2002
Riviera Las Vegas $ (1,803) $ (9,700) $ 7,897 $ 6,647 $ (770) $ 13,774
Riviera Black Hawk 322 (3,287) 3,609 2,316 770 6,695
Corporate (2,441) (317) (2,124) - - (2,124)
------------------------------------------------------------
$ (3,922)$ (13,304) $ 9,382 $ 8,963 - $ 18,345
------------------------------------------------------------
June 30, December 31,
2003 2002
Assets (4): (in thousands)
Riviera Las Vegas $ 118,371 $ 123,740
Riviera Black Hawk 62,727 64,493
-----------------------
Total assets $ 181,098 $ 188,233
=======================
(4)Asset represent property and equipment and intangible assets, net of
accumulated depreciation and amortization.
(5)Interest expense net of interest income
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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
The following table sets forth, for the periods indicated, certain operating
data for the Riviera Las Vegas and Riviera Black Hawk. Income from Operations
includes intercompany management fees.
Second Quarter
Incr/ %Incr/
(In Thousands) 2003 2002 (Decr) (Decr)
---- ---- ------ ------
Net revenues:
Riviera Las Vegas $36,027 $37,039 $(1,012) -2.7%
Riviera Black Hawk 12,301 12,627 (326) -2.6%
------ ------ -----
Total Net Revenues $48,328 $49,666 $(1,338) -2.7%
======= ======= ========
Income (Loss) from Operations
Riviera Las Vegas $3,703 $4,588 $(885) -19.3%
Riviera Black Hawk 2,034 2,181 (147) -6.7%
----- ----- -----
Property Income from Operations 5,737 6,769 (1,032) -15.2%
Corporate Expenses (1,305) (1,062) (243) -22.9%
------- ------- -----
Total Income from Operations $4,432 $5,707 $(1,275) -22.3%
====== ====== ========
Operating Margins
Riviera Las Vegas 10.3% 12.4% -2.1%
Riviera Black Hawk 16.5% 17.3% -0.8%
Consolidated 9.2% 11.5% -2.3%
Riviera Las Vegas
Revenues
Net revenues decreased by approximately $1.0 million, or 2.7%, from
$37.0 million in 2002 to $36.0 million in 2003 due primarily to decreased casino
revenues, which were partially offset by increased hotel revenues.
Casino revenues decreased by approximately $1.6 million, or 9.3%, from
$17.0 million during 2002 to $15.5 million during 2003 due to a 9.8% decrease in
slot machine revenue.
Room revenue increased $562,000, or 5.3%, from $10.7 million in 2002 to
$11.2 million in 2003 due to an increase in convention room nights. Hotel
occupancy decreased to 93.4%, down from last year's 95.8% and average daily room
rate increased $3.74 from $56.70 in 2002 to $60.44 in 2003. Rev Par (revenue per
available room), however, increased 3.9% or $2.11 to $56.43. Convention room
nights increased from 28.7% to 34.5% of total occupancy, while gaming occupancy
decreased from 17.6% to 14.3%.The increases in convention business are due, in
part, to the reinvestment of internal cash flows in excess of $100 million in
the property, including $25 million to double the size of our convention
facilities and $20 million in the last five years to refurbish our hotel rooms.
15
Promotional allowances increased by approximately $158,000, or 4.1%,
from $3.9 million during 2002 to $4.0 million during 2003 primarily due to
increases in comps related to increased convention activity.
Costs and Expenses
Casino expenses decreased $898,000 or 9.7% from $9.3 million in 2002 to
$8.4 million in 2003 due to decreased casino activity. Casino expenses as a
percentage of casino revenues remained constant at 54%.
Rooms departmental costs and expenses increased by 6.2% in the quarter,
due primarily to the wage scale increases under the renewed union contracts.
Income from Operations
Income from operations in Las Vegas decreased $885,000, or 19.3%, from
$4.6 million in 2002 to $3.7 million in 2003 due to the $1.0 million or 2.7%
decrease in net revenues as explained above.
Riviera Black Hawk
Revenues
Net revenues decreased by approximately $326,000 or 2.6% from $12.6
million in 2002 to $12.3 million in 2003. Food and beverage revenues were
approximately $1.5 million in 2003, of which $1.0 million was complimentary
(promotional allowance). The Denver area economy continued to show weakness
during the quarter. These negative factors resulted in a decrease in gaming
revenues for the Black Hawk market, however we were able to increase market
share during the quarter. 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 $147,000, or
6.7%, from $2.2 million in 2002 to $2.0 million in 2003 due to the $326,000
decrease in revenues.
Consolidated Operations
Other Income (Expense)
Interest income decreased $126,000 from $137,000 in 2002 to
$11,000 in 2003 as a result of the lower cash balances available for investment
and decreasing rates. Corporate expenses increased 243,000 or 22.9% from $1.1
million in 2002 to $1.3 million in 2003 as a result of additional professional
fees and costs associated with corporate governance, business proposals and the
shareholder vote on the removal of certain voting restrictions in the Company's
articles of incorporation.
Net Income (Loss)
Net loss increased $1.3 million or 123.9% from a net loss of
$1.1 million in 2002 to a net loss of $2.4 million in 2003 due primarily to
decreased net revenues as discussed above.
16
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
The following table sets forth, for the periods indicated, certain operating
data for the Riviera Las Vegas and Riviera Black Hawk. Operating Income includes
intercompany management fees.
Six Months Ended
Incr/ % Incr/
(In Thousands) 2003 2002 (Decr) (Decr)
---- ---- ------ ------
Net revenues:
Riviera Las Vegas $71,762 $71,748 $14 0.0%
Riviera Black Hawk 24,057 24,416 (359) -1.5%
------ ------ -----
Total Net Revenues $95,819 $96,164 $(345) -0.4%
======= ======= ======
Income (Loss) from Operations
Riviera Las Vegas $7,953 $7,897 $56 0.7%
Riviera Black Hawk 3,604 3,609 (5) -0.1%
----- ----- ---
Property Income from Operations 11,557 11,506 51 0.4%
Corporate Expenses (2,416) (2,124) (292) -13.7%
------- ------- -----
Total Income from Operations $9,141 $9,382 $(241) -2.6%
====== ====== ======
Operating Margins
Riviera Las Vegas 11.1% 11.0% 0.1%
Riviera Black Hawk 15.0% 14.8% 0.2%
Consolidated 9.5% 9.8% -0.3%
Riviera Las Vegas
Revenues
Net revenues were approximately $71.8 million for both 2002 and 2003
due primarily to decreased casino revenues which were partially offset by
increased hotel revenues.
Casino revenues decreased by approximately $1.2 million, or 3.7%, from
$31.9 million during 2002 to $30.7 million during 2003 primarily due to a
decrease of $896,000 or 3.7% in slot machine revenue.
Room revenue increased $1.1 million, or 5.0%, from $21.4 million in
2002 to $22.5 million in 2003 due to an increase in convention room nights.
Hotel occupancy increased to 92.7%, up from last year's 91.9% and average daily
room rate increased $1.76 to $61.13 in 2003 from $59.37 in 2002. Rev Par
(revenue per available room) increased 3.9% or $2.13 to $56.67. Convention room
nights were up 5.8% while gaming occupancy decreased 3.3%.The change in our
occupancy mix has stimulated increases in entertainment and food and beverage
revenues.
Entertainment revenues increased by approximately $341,000, or 4.1%,
from $8.4 million during 2002 to $8.8 million during 2003 due primarily to an
increase in our Le Bistro Theater revenues.
17
Promotional allowances increased by approximately $491,000, or 7.0%,
from $7.0 million during 2002 to $7.5 million during 2003 primarily due to
increases in comps related to higher convention activity.
Costs and Expenses
Casino expenses decreased $1.1 million or 6.2% from $18.1 million in
2002 to $17.0 million in 2003 due to reduced casino activity.
Rooms departmental costs and expenses increased by 6.7% as occupancy
increased, requiring more variable labor costs. In addition, wage scale
increases under the renewed union contracts contributed to the increased costs.
Income from Operations
Income from operations in Las Vegas increased $56,000, or 0.7%, from
$7.9 million in 2002 to $8.0 million in 2003 based on comparable revenues and
decreased costs as management was able to maintain operating margins.
Riviera Black Hawk
Revenues
Net revenues decreased by approximately $359,000, or 1.5%, from $24.4
million in 2002 to $24.1 million in 2003. Casino revenues decreased $269,000, or
1.2%, from $23.0 million in 2002 and $22.8 million in 2003.
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 was
approximately $3.6 million in both 2002 and 2003 as a
result of refining direct marketing and promotional programs for the casino to
match the economic conditions in the Denver area.
Consolidated Operations
Other Income (Expense)
Interest expense increased $227,000 due to costs associated
with the $30 million credit facility and increased amortization of loan fees.
Interest expense on the $215 million 11% Senior Secured Notes issued by the
Company (the "11% Notes") of $11.8 million plus related amortization of loan
fees and other financing costs totaled approximately $13.0 million in 2003.
Interest expense on equipment and other financing totaled approximately $796,000
for the first six months of 2003.
Interest income decreased $205,000 from $229,000 in 2002 to $24,000 in
2003 as a result of the lower cash balances available for investment and
decreasing rates. Corporate expenses increased $292,000 or 13.7% from $2.1
18
million in 2002 to $2.4 million in 2003 as a result of additional professional
fees and costs associated with corporate governance, business proposals and the
shareholder vote on the removal of certain voting restrictions in the Company's
articles of incorporation.
Net Income (Loss)
Net loss increased $673,000 or 17.2% from a net loss of $3.9
million in 2002 to a net loss of $4.6 million in 2003 due primarily to decreased
operating income and increased net interest costs.
Liquidity and Capital Resources
At June 30, 2003, the Company had cash and cash equivalents of $20.7 million.
The cash and cash equivalents increased $468,000 during the first six months of
2003, as a result of $3.7 million of cash provided by operations, $1.6 million
of cash outflow for investing activities and $1.6 million outflow for financing
activities. Cash balances include amounts that could be required to fund the
Chief Executive Officer's pension obligation in a rabbi trust with 5 days
notice. (See Note 7 to the 2002 annual consolidated financial statements, Other
Long-Term Liabilities included in Form 10-K as filed with the SEC on March 17,
2003.) Effective April 1, 2003, the Company began paying Mr. Westerman $250,000
per quarter from his pension plan. In exchange for these payments, Mr. Westerman
has agreed to continue his forbearance of his right to receive full transfer of
his pension fund balance to the rabbi trust. This does not limit his ability to
give the five-day notice at any time. Although there is no current intention to
require this funding, under certain circumstances the Company might have to
disburse approximately $5.9 million for this purpose in a short period.
Management believes that cash flow from operations, combined with the $20.7
million cash and cash equivalents and the $30 million revolving credit facility,
will be sufficient to cover the Company's debt service and enable investment in
budgeted capital expenditures for 2003 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 11% Notes at maturity on June 15, 2010. Accordingly, our ability to repay
the 11% Notes at maturity may be dependent upon our ability to refinance them.
There can be no assurance that we 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
subsidiaries must offer to repurchase the 11% Notes, upon the occurrence of a
change of control, at 101% of the principal amount. Each Bondholder has the
right but not the obligation to accept this offer. In the event of such
mandatory redemption or repurchase prior to maturity, the Company and its
subsidiaries would be unable to pay the principal amount of the 11% Notes
without a refinancing.
At any time prior to June 15, 2005, the Company may on any one or more occasions
redeem up to 35% of the aggregate principal amount of the 11% Notes at a
redemption price of 111% of the principal amount, plus accrued and unpaid
interest and liquidated damages, if any, to the redemption date, with the net
cash proceeds of one or more public equity offerings; provided that:
(1) at least 65% of the aggregate principal amount of the 11% Notes
19
remains outstanding immediately after the occurrence of such redemption
(excluding such notes held by the Company or its subsidiaries); and
(2) the redemption occurs within 45 days of the date of the closing
of such public equity offering.
Except pursuant to the preceding paragraph, the 11% Notes are not redeemable at
the Company's option prior to June 15, 2006.
On or after June 15, 2006, the Company may redeem all or part of the 11% Notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and liquidated damages, if any, on the 11% Notes redeemed, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on June 15 of the years indicated below:
Year Percentage
---- ----------
2006 ................................105.500%
2007.................................103.667%
2008.................................101.833%
2009 and thereafter..................100.000%
The 11% Notes contain certain covenants, which limit the ability of the Company
and its restricted subsidiaries, subject to certain exceptions, to do, among
other things, the following: (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 or 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 June 30, 2003, the Company believes that it is in compliance with the
covenants of the 11% Notes and the $30 million revolving credit facility.
Subsequent Amendment of Articles of Incorporation
On July 15, 2003 the shareholders of the Company approved an amendment to
Article 3, Section 7, of our Articles of Incorporation. The amendment became
effective on July 18, 2003. Prior to the amendment, the Articles of
Incorporation contained two distinct limitations on common stock voting rights
of a Substantial Stockholder, which is defined as a person who, within a three
year period, acquires beneficial ownership of more than 10% of the Company's
outstanding common stock.
The first limitation was that a Substantial Stockholder's voting power was
reduced by 99% for all shares of common stock owned in excess of 10%(the "10%
Limit"). The second limitation was a nullification of the Substantial
Stockholder's ability to vote any of his shares of common stock that exceeded
15% of the outstanding shares of common stock (the "15% Limit"). The Substantial
Stockholder was able to avoid the 10% Limit by either making a cash tender offer
for all outstanding shares of common stock, or by obtaining a waiver by our
Board of Directors. The Substantial Stockholder could only avoid the 15% Limit
by making a cash tender offer for all outstanding shares of common stock.
20
The 15% Limit could not be waived by our Board of Directors, even if we
considered a particular person's infusion of new capital into the Company to be
in the best interests of the Company.
The amendment of the Articles of Incorporation, which eliminated the 15% Limit,
left the 10% Limit intact. Consequently, the Board of Directors now has the
authority to waive the voting limitations in the Articles of Incorporation when
the Board of Directors considers such a waiver to be appropriate for the
Company. This may include instances where the Board of Directors chooses to
pursue an opportunity to increase The Company's equity base or to attract a
strategic partner that could provide additional financial resources for the
Company.
Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. ("SFAS No. 143"). 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 adopted SFAS
No. 143 and it had no effect on its financial position or results of operations.
In June 2002, the FASB issued SFAS 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 adopted SFAS No. 146 and it
had no effect on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation.
Although it does not require use of fair value method of accounting for
stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148's amendment of the transition and annual disclosure requirements
are effective for fiscal years ending after December 15, 2002. The amendment of
disclosure requirements of APB No. 28 is effective for interim periods beginning
21
after December 15, 2002. The Company adopted SFAS No. 148 and it had no effect
on its financial position or results of operations.
Recently Issued Accounting Standards
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. Additionally, a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial liability recognition and measurement provisions of FIN No. 45 apply
prospectively to guarantees issued or modified after December 31, 2002. The
disclosure requirements in FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has
determined that FIN No. 45 did not have a material impact on its financial
position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which addresses consolidation by business enterprises where equity
investors do not bear the residual economic risks and rewards. These entities
have been commonly referred to as "special purpose entities." Companies are
required to apply the provisions of FIN No. 46 prospectively for all variable
interest entities created after January 31, 2003. The Company has determined
that FIN No. 46 did not have a material impact on its financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is applied prospectively and is effective for contracts
entered into or modified after June 30, 2003, except for SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 and certain provisions relating to forward purchases and
sales on securities that do not yet exist. The Company has not determined the
effect, if any, that SFAS No. 149 will have on its consolidated financial
statements.
In May 2003, the FASB issued FIN No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company will adopt the standard during the third
quarter beginning on July 1, 2003. The Company is currently evaluating the
effects, if any, that this Statement will have on its financial position and
results of operations.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our 2002 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 2002 Form 10-K filed
with the SEC on March 17, 2003.
22
Forward-Looking Statements
This report includes "forward-looking statements," as defined in 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 the date of this report. 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 our substantial indebtedness, debt service requirements and
liquidity constraints;
o risks related to our 11% Notes and to high-yield securities and
gaming securities generally;
o changes in our business strategy, capital improvements or
development plans;
o the need for additional capital to support capital
improvements and development;
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, and competitors 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;
23
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;
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; 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.
24
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 June 30, 2003, we had $218.6 million in borrowings. The borrowings include
$215 million in 11% Notes maturing in 2010 and capital leases maturing at
various dates through 2005. Interest under the $215 million 11% Notes is based
on a fixed rate of 11%. The equipment loans and capital leases have interest
rates ranging from 5.4% to 13.5%. The borrowings also include $812,000 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 ten years beginning in 2000. The SID bonds bear
interest at 5.5%.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Amounts in Fair Value
thousands) 2003 2004 2005 2006 2007 Thereafter Total at 6/30/03
Long Term Debt Including
Current Portion
Equipment loans and
capital leases Las Vegas $642 $1,019 $ 11 $ 1,672 $ 1,672
Average interest rate 8.0% 7.8% 8.4%
11% Senior Secured Notes $215,000 $215,000 $212,850
Less unamortized Discount $ (2,815) $ (2,815) $ (2,815)
Average interest rate 11.8%
Capital leases
Black Hawk, Colorado $1,048 $2,263 $ 658 $ 3,969 $ 3,969
Average interest rate 10.8% 10.8% 10.8%
Special Improvement
District Bonds
Black Hawk, Colorado $ 52 $ 109 $ 116 $ 124 $ 129 $ 282 $ 812 $ 812
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Total all long-term debt,
including current portion $218,638 $216,488
Other Long Term Liabilities
CEO pension plan obligation $500 $1,000 $1,000 $1,000 $ 1,000 $ 1,400 $ 5,900 $ 5,900
11.8% 11.8% 11.8% 11.8% 11.8% 11.8%
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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
On April 15, 2003, a class action complaint was filed in the Clark
County, Nevada District Court (Case No. A466204) in the name of Brian Placzek,
on behalf of himself and all others similarly situated, against the Company and
Company directors William L. Westerman, Robert R. Barengo, Jeffrey A. Silver and
Paul A. Harvey (the "Placzek Action"). The complaint was served on the Company
on April 28, 2003. The named plaintiff in this action is a shareholder of the
Company. In the complaint, the plaintiff seeks an order which would require the
individual defendants to take the following actions, among others: cooperate
with any individual who makes a bona fide offer to acquire the Company, take
steps that are calculated to result in a buy-out or takeover of the Company at
the highest price, comply with their fiduciary duties, and reimburse the
plaintiff's class for damages, costs and disbursements related to the lawsuit.
The complaint states that the named plaintiff also seeks to have all of the
Company's public shareholders, excluding the defendants, certified as a class
for purposes of the class action suit and seeks to be the representative of the
class. On July 10, 2003, the defendants filed a Motion to Dismiss the Placzek
Action against all defendants on the grounds that the Placzek Action was filed
without the authorization of the plaintiff. This Motion to Dismiss has not yet
been heard or ruled upon. An amended complaint was filed in the Placzek Action
on July 11, 2003, alleging, among other things, that the Director defendants are
attempting to entrench themselves in their position of control.
On May 2, 2003, a class action complaint was filed in the Clark
County, Nevada District Court (Case No. A467159) in the name of Paul Rosa
against the Company and Company directors William L. Westerman, Robert R.
Barengo, Jeffrey A. Silver, Paul A. Harvey and Vincent L. DiVito (the "Rosa
Action"). The named plaintiff in this action is a shareholder of the Company and
also seeks to have all of the Company's public shareholders, excluding
defendants and related shareholders, certified as a class for purposes of the
class action law suit. On July 21, 2003, the defendants filed a Motion to
Dismiss the Rosa Action on the grounds that the complaint fails to state a claim
upon which relief may be granted. This Motion to Dismiss has not yet been heard
or ruled upon.
26
The plaintiffs in both of these lawsuits are represented by the same
law firm. Both complaints assert, among other things, that the defendants
violated their fiduciary duties because they did not take affirmative steps in
furtherance of an offer by a third party to purchase all of the outstanding
Common Stock at a premium price. That offer was contingent upon, among other
things, a waiver by the holders of the 11% Notes of the right to an accelerated
repayment of the 11% Notes at a premium, which would be triggered by that third
party's purchase of the Common Stock.
We believe the claims in these lawsuits are without merit and we intend
to defend against them vigorously.
The Company is a party to several routine lawsuits, either as plaintiff
or as defendant, arising from the normal operations of a hotel or casino. 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 31.
(b) During the second quarter of 2003, the Company filed reports on
Form 8-K on April 22, June 3 and June 6, 2003. The Form 8-K dated June 3 and
June 5 reported Item Nos. 5 and 7. The April 22, 2003 filing reported Item Nos.
7, 9 and 12 and included summary financial information for the Company's first
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: August 7, 2003
28
CERTIFICATIONS
I, William L. Westerman, the Chief Executive Officer of Riviera Holdings
Corporation, 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 controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 7, 2003
William L. Westerman
William L. Westerman
Chairman of the Board and
Chief Executive Officer
29
I, Duane Krohn, the Chief Financial Officer of Riviera Holdings Corporation,
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 controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 7, 2003
Duane Krohn
Duane Krohn
Treasurer and
Chief Financial Officer
30
Riviera Holdings Corporation
Form 10Q
June 30, 2003
Exhibit No. Description
99.1 CEO Officers Certification
99.2 CFO Officers Certification
31