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 March 31, 2004
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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 of (IRS Employer Identification No.)
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
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 Registrant's
classes of common stock, as of the latest practicable date.
As of April 30, 2004, there were 3,614,585 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 March 31, 2004 and
December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature Page 23
Exhibits 24
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 March 31,
2004, and the related condensed consolidated statements of operations and of
cash flows for the three months ended March 31, 2004 and 2003. 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 reviews, 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, 2003, and the related
consolidated statements of operations, shareholders' equity, and of cash flows
for the year then ended (not presented herein); and in our report dated March
12, 2004, 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, 2003, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
May 3, 2004
Las Vegas, Nevada
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands, except share amounts) March 31, December 31,
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2004 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $21,711 $19,344
Accounts receivable, net 5,010 2,990
Inventories 1,969 2,026
Prepaid expenses and other assets 3,603 3,001
-------------------------------
Total current assets 32,293 27,361
PROPERTY AND EQUIPMENT, Net 179,192 180,293
OTHER ASSETS, Net 11,194 11,438
DEFERRED INCOME TAXES, Net 2,446 2,446
-------------------------------
TOTAL $225,125 $221,538
===============================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $3,201 $3,750
Accounts payable 8,579 8,072
Line of credit 2,000
Accrued interest 7,044 1,096
Accrued expenses 14,638 14,870
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Total current liabilities 33,462 29,788
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OTHER LONG-TERM LIABILITIES 5,509 5,912
-------------------------------
LONG-TERM DEBT, net of current portion 215,614 215,875
-------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock ($.001 par value;
20,000,000 shares authorized;
5,170,608 and 5,166,208 issued at
March 31, 2004 and December 31,
2003, respectively) 5 5
Additional paid-in capital 13,733 13,733
Treasury stock (1,682,358 shares
and 1,687,957 shares at March 31,
2004 and December 31, 2003,
respectively) (11,283) (11,320)
Accumulated deficit (31,915) (32,455)
--------------------------------
Total stockholders' deficiency (29,460) (30,037)
--------------------------------
TOTAL $225,125 $221,538
================================
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 Three Months Ended
(In thousands, except per share amounts) March 31
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REVENUES: 2004 2003
Casino $27,079 $26,377
Rooms 12,538 11,225
Food and beverage 8,800 8,013
Entertainment 4,656 4,399
Other 2,047 1,951
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Total revenues 55,120 51,965
Less promotional allowances 4,660 4,474
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Net revenues 50,460 47,491
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COSTS AND EXPENSES:
Direct costs and expenses of operating departments:
Casino 13,554 14,070
Rooms 6,364 5,853
Food and beverage 5,801 5,304
Entertainment 3,052 2,956
Other 715 649
Other operating expenses:
General and administrative 10,252 9,720
Depreciation and amortization 3,348 4,230
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Total costs and expenses 43,086 42,782
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INCOME FROM OPERATIONS 7,374 4,709
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OTHER (EXPENSE) INCOME :
Interest expense (6,840) (6,881)
Interest income 6 13
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Total other expense (6,834) (6,868)
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INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 540 (2,159)
PROVISION FOR INCOME TAXES 0 0
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NET INCOME (LOSS) $540 ($2,159)
=========== =========
INCOME (LOSS) PER SHARE DATA:
Income (Loss) per share:
Basic $ 0.15 $ (0.62)
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Diluted $ 0.15 $ (0.62)
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Weighted-average common shares outstanding 3,485 3,468
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Weighted-average common and common equivalent shares 3,548 3,468
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See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 Three Months Ended
(in thousands) March 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $540 ($2,159)
Adjustments to reconcile net income(loss)
to net cash provided by operating activities:
Depreciation and amortization 3,348 4,230
Provision for bad debts 76 80
Interest expense 6,840 6,881
Interest paid (218) (311)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (2,096) (225)
Decrease (increase) in inventories 57 184
Decrease (increase) in prepaid expenses
and other assets (602) 36
Increase (decrease) in accounts payable 507 (705)
Increase (decrease) in accrued liabilities (233) (1,206)
Increase (decrease) in deferred compensation
plan obligation (156) 8
Increase (decrease) in non-qualified pension
plan obligation to CEO upon retirement (418) (125)
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Net cash provided by operating activities 7,645 6,688
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment,
Las Vegas, Nevada (1,647) (439)
Capital expenditures - Black Hawk, Colorado (593) (276)
Decrease (increase) in other assets (164) (210)
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Net cash (used in) investing activities (2,404) (925)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (2,000)
Payments on long-term borrowings (911) (861)
Purchase of deferred compensation treasury
stock, net 37 (7)
Increase in paid-in capital 52
Issuance of restricted stock 25
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Net cash (used in) financing activities (2,874) (791)
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INCREASE IN CASH AND CASH EQUIVALENTS 2,367 4,972
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,344 20,220
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CASH AND CASH EQUIVALENTS, END OF PERIOD $21,711 $25,192
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $533 $13
See notes to condensed consolidated financial statements
5
RIVIERA HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
Riviera Holdings Corporation ("RHC") and its wholly owned subsidiary, Riviera
Operating Corporation ("ROC") (together with their wholly-owned subsidiaries,
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. The Company operates the Riviera Hotel &
Casino (the "Riviera Las Vegas") on the Strip in Las Vegas, Nevada.
In August 1995, Riviera Gaming Management, Inc. ("RGM") was 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 February 2000, the Company opened its casino in Black Hawk, Colorado, which
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 Black Hawk casino.
On March 15, 2002, Riviera Gaming Management of New Mexico, Inc. ("RGM New
Mexico") was incorporated in the State of New Mexico. On June 5, 2002, Riviera
Gaming Management of Missouri, Inc. ("RGM Missouri") was incorporated in the
State of Missouri. Each of these is a wholly owned subsidiary of RHC.
Casino operations are subject to extensive regulation in the states of Nevada
and Colorado by the respective Gaming Control Boards and various other state and
local regulatory agencies. Management believes that the Company's procedures
comply, in all material respects the applicable regulations for supervising
casino operations, recording casino and other revenues, and granting credit.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
The financial information at March 31, 2004 and for the three months ended March
31, 2004 and 2003 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 three months ended March 31, 2004 and 2003 are
not necessarily indicative of the results for the entire year.
6
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2003, included in the Company's Annual Report on Form 10-K.
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
months ended March 31, 2003 since the Company incurred net losses in that
period. The number of potentially dilutive options was 528,000 and 269,000 for
the three months ended March 31, 2003 and 2004 respectively.
Income Taxes
The cash flow projections used by the Company in the application of Statement of
Accounting Financial Standards ("SFAS") No. 109 for the realization of deferred
tax assets indicate that a valuation allowance should be recorded on the tax
benefits earned by the Company in 2003. The Company's results of operations for
the quarter ended March 31, 2004 indicated that a portion of the deferred tax
asset would be realized. As such, an adjustment to the valuation allowance of
$2.3 million was recorded to offset current period income tax expense. The
estimates used to determine the remaining valuation allowance 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 reported period. Significant estimates used by
the Company include estimated useful lives for depreciable and amortizable
assets, certain accrued liabilities, the estimated allowance for receivables and
cash flow projections for testing asset impairment. Actual results may differ
from estimates.
Stock-Based Compensation
As of March 31, 2004, 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 income (loss) and pro forma net loss per common share
and common share equivalent would have been decreased (increased) to the pro
forma amounts indicated below at March 31 (in thousands, except per share
amounts):
2004 2003
Net income (loss) as reported $ 540 $(2,159)
Deduct: Total stock-based employee compensation
expense determined under fair value-based methods
for awards net of related tax effects (50) (60)
---- ----
Net income (loss) pro forma $ 490 $ (2,219)
====== =======
Basic loss per common share as reported $ 0.15 $ (0.62)
Basic loss per common share pro forma $ 0.14 $ (0.64)
Diluted loss per common and common
share equivalent as reported $ 0.15 $ (0.62)
Diluted loss per common and common share
equivalent pro forma $ 0.14 $ (0.64)
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: dividend yield of 0%; expected volatility
of 52%; risk-free interest rate of 4.49%; and expected lives of 10 years. The
weighted fair value of options granted in 2003 was $4.96. There have been no
options granted in 2004.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued a proposed
standard that will impact the accounting for share based payments. The standard,
which is proposed to be effective for fiscal years beginning after December 15,
2004, would require that we recognize an expense for our share based payments,
including stock options. We are currently evaluating the provisions of this
proposed standard to determine its impact on our future financial statements.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R"),
Consolidation of Variable Interest Entities (revised December 2003), clarifying
Interpretation No. 46 and exempting certain entities from the provisions of FIN
46R. Generally, application of FIN 46R is required in financial statements of
public entities that have interests in certain structures, commonly referred to
as special-purpose entities, for periods ending after December 15, 2003, and,
for other types of variable interest entities for periods ending after March 15,
2004. FIN 46R addresses the consolidation by business enterprises of variable
interest entities under either of the following circumstances: (1) the entity
does not have sufficient equity investment at risk to permit it to finance its
activities without additional subordinated financial support, or (2) the
reporting company will hold a significant variable interest in, or have
significant involvement with, such variable interest entity. The adoption of FIN
46R did not have a material impact on the Company's financial position or
results of operations.
8
2. OTHER ASSETS
Other assets at March 31, 2004 and 2003 include deferred loan fees of
approximately $8.9 million and $10.5 million respectively, associated with the
refinancing of the Company's debt and capitalized costs associated with the RGM
Missouri proposed venture of approximately $600,000. RGM Missouri is an
unrestricted subsidiary of RHC.
3. LONG TERM DEBT AND COMMITMENTS
On June 26, 2002, we issued 11% Senior Secured Notes with a principal amount of
$215 million, substantially all of which were later exchanged for our Securities
Act of 1933-registered Notes 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. We
incurred fees of approximately $9.3 million with the issuance of the 11% Notes
which are included in other assets and are being amortized to interest expense
over the life of the indebtedness.
Effective July 26, 2002 we 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 March 31, 2004. We incurred loan
fees of approximately $1.5 million which are being expensed over the life of the
agreement.
4. LEGAL PROCEEDINGS
We are a party to several routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel/casino. We do not believe that the
outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
5. STOCK REPURCHASES
There were no shares of treasury stock purchased by the Deferred Compensation
Plan Trustee for the three months ended March 31, 2004 and 1,703 shares
purchased at $4.27 per share for the three months ended March 31, 2003. 5,569
shares were distributed to participants for the three months ended March 31,
2004 as required by the Deferred Compensation Plan.
6. ISSUANCE OF RESTRICTED STOCK
There were no shares of our stock issued under the Restricted Stock Plan for
executive compensation for the three months ended March 31, 2004 and 5,435
restricted shares issued at $4.60 per share for the three months ended March 31,
2003.
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.
9
8. EMPLOYMENT AGREEMENTS
Salary Continuation Agreements
Approximately 65 officers and significant employees (excluding Mr. Westerman and
Mr. Vannucci) of ROC have salary continuation agreements effective through
December 31, 2004, pursuant to which each of them will be entitled to receive
(1) either six months' or one year's base salary if his or her employment is
terminated, without cause, within 12 or 24 months of a change of control of the
Company or ROC; and (2) certain benefits for periods of either one or two years.
The base salary is payable in bi-weekly installments subject to the employee's
duty to mitigate by using his or her best efforts to find other employment. In
addition, four officers and significant employees have salary continuation
agreements effective through December 31, 2005, pursuant to which each of them
will be entitled to receive two year's base salary and certain benefits for two
years, if their employment is terminated without cause within twenty-four months
of a change of control of RHC or ROC. These four salary continuation agreements
are not subject to a duty to mitigate. As of March 31, 2004, the total amount
that would be payable under all such agreements if all payment obligations were
to be triggered was approximately $6.6 million, including $1.5 million in
benefits.
Employment Agreements
Mr. Vannucci serves as President of ROC and his employment agreement was last
amended on March 24, 2003. Mr. Vannucci's base compensation is $300,000. His
employment agreement contains a Salary Continuation Agreement. It also provides
for a "Normal Incentive Bonus" entitling Mr. Vannucci to participate in our
Incentive Compensation Plan.
Mr. Vannucci also receives compensation in the form of restricted stock pursuant
to our Restricted Stock Plan. Mr. Vannucci's agreement provides that he is to
receive $25,000 in our restricted Common Stock, based on the stock's market
value, from treasury on the first business day of each quarter, plus our
restricted Common Stock, based on the stock's market value, from treasury in the
same amount he receives pursuant to our Incentive Compensation Plan. Pursuant to
the Restricted Stock Plan, Mr. Vannucci is presently entitled to rights of
ownership with respect to the restricted shares, including the right to vote and
receive dividends. Mr. Vannucci may not, however sell, assign, pledge, encumber
or otherwise transfer any of the restricted shares so long as he is employed by
us, without our written consent. The restricted shares fully vest to Mr.
Vannucci upon his separation of employment from us, so long as such separation
is not a termination for cause. Mr. Vannucci's agreement was amended on March 4,
2003 and again on March 24, 2003 so that, commencing with the restricted stock
award of April 1, 2003 and for each quarter thereafter, Mr. Vannucci can choose
between receiving $25,000 in cash or $25,000 in restricted stock. Mr. Vannucci
choose to receive $25,000 in restricted common stock and $75,000 in cash in 2003
pursuant to this provision. Mr. Vannucci also has the choice between cash and
restricted stock as a match to his annual incentive bonus award. Mr. Vannucci
received no such matching award in 2003. Mr. Vannucci's agreement automatically
renews annually subject to 120 days prior written notice by him or us.
10
9. 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 Three Months
Ended Ended
March 31, March 31,
(In thousands) 2004 2003
Net revenues:
Riviera Las Vegas $37,323 $35,735
Riviera Black Hawk 13,137 11,756
------------ ------------
Total net revenues $50,460 $47,491
============ ============
Income (loss) from operations:
Riviera Las Vegas $5,672 $4,250
Riviera Black Hawk 2,810 1,570
Corporate Expenses (1,108) (1,111)
------------ ------------
Total income from operations $7,374 $4,709
============ ============
EBITDA (1):
Riviera Las Vegas $7,587 $7,025
Riviera Black Hawk 4,243 3,025
Corporate Expenses (1,108) (1,111)
------------ ------------
Total EBITDA $10,722 $8,939
============ ============
EBITDA margin (2):
Riviera Las Vegas 20.3% 19.7%
Riviera Black Hawk 32.3% 25.7%
------------ ------------
Total EBITDA 21.2% 18.8%
============ ============
(1)EBITDA consists of earnings before interest, income taxes, depreciation,
amortization. EBITDA is presented solely as a supplemental disclosure because
management believes that it is 1) a widely used measure of operating performance
in the gaming industry, and 2) a principal basis for valuation of gaming
companies by certain analysts and investors. Management uses property-level
EBITDA (EBITDA before corporate expense) as the primary measure of the Company's
business segment properties' performance, including the evaluation of operating
personnel. EBITDA should not be construed as an alternative to operating income,
as an indicator of the Company's operating performance, as an alternative to
cash flows from operating activities, as a measure of liquidity, or as any other
measure determined in accordance with generally accepted accounting principles.
The Company has significant uses of cash flows, including capital expenditures,
interest payments and debt principal repayments, which are not reflected in
EBITDA. Also, other companies that report EBITDA information may calculate
EBITDA in a different manner than the Company. A reconciliation of EBITDA to
operating income is included in the following financial schedules.
(2) EBITDA margin is EBITDA as a percent of net revenues.
11
Riviera Holdings Corporation
Reconciliation of Operating Income (Loss) to EBITDA:
($ In 000's) Net Provision Interest Operating
Income For Income Income & Income Management
(Loss) Tax (Expense) (Loss) Depreciation Fee EBITDA
-------- ---- ---------- ------- ------------ ---- -------
First Quarter 2004:
Riviera Las Vegas $3,636 $1,984 $ (52) $ 5,672 $ 2,367 $(452) $7,587
Riviera Black Hawk 803 - (2,007) 2,810 981 452 4,243
Corporate (3,899) (1,984) (4,775) (1,108) - - (1,108)
------- ------- ------- ------- ---- ---- -------
$ 540 $ - $(6,834) $ 7,374 $ 3,348 $ - $10,722
First Quarter 2003:
Riviera Las Vegas $2,663 $1,545 $ (42) $ 4,250 $ 3,121 $(346) $7,025
Riviera Black Hawk (490) (2,060) 1,570 1,109 346 3,025
Corporate (4,332) (1,545) (4,766) (1,111) - - (1,111)
------- ---------- ------- ------- ---- ---- -------
$(2,159) $ - $(6,868) $ 4,709 $ 4,230 $ - $8,939
RIVIERA LAS VEGAS REVENUES
The primary marketing effort of the Riviera Las Vegas is not aimed toward
residents of Las Vegas, Nevada. Substantially 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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overall Outlook
We own and operate the Riviera Hotel and Casino on the Strip in Las Vegas,
Nevada ("Riviera Las Vegas"), and the Riviera Black Hawk Casino in Colorado
("Riviera Black Hawk").
Our capital expenditures for Las Vegas are geared to maintain the hotel rooms
and amenities in sufficient condition to compete for our customers in the
convention market and the mature adult customer. Room rates and slot revenues
are the primary factors driving our operating margins. We use technology to
maintain labor costs at a reasonable level, including kiosks for hotel check-in
and slot club redemptions. In addition, we are in the process of updating our
gaming monitoring computer systems, including the capability for
"ticket-in/ticket-out" ("TITO") on our slot machines. At December 31, 2003
approximately 200 of our slot machines were on the temporary EZ Pay TITO System.
During the first half of 2004, we will be converting those machines and adding
approximately 200 additional slot machines to our new system. By the end of 2004
we anticipate that we will have 500 slot machines or approximately 35% of our
slot machines in Las Vegas, on TITO. Depending upon the success of these
conversions, we may accelerate the conversion of the remaining machines or we
may convert them based on normal replacement schedules. If we accelerate the
process, we would have to finance the additional slot machine purchases by using
our revolving credit facility or separate financing arrangements for $5 to $10
million.
In Black Hawk, the $5 maximum bet restricts table games to a minimum and the
area is basically a "locals" slot customer market. Our capital expenditures in
Black Hawk are geared to maintain competitive slot machines compared to the
market. The gaming authorities approved TITO systems in Colorado for Riviera on
December 16, 2003 and we had 35 of our slot machines on the TITO system as of
December 31, 2003. By the end of 2004 we anticipate that we will have
approximately 450 slot machines, or 45% of our slot machines in Black Hawk, on
TITO. Again, depending upon the success of these conversions, we may accelerate
the conversion of the remaining machines or we may convert them based on normal
replacement schedules. If we accelerate the process, we would have to finance
the additional slot machine purchases by using our revolving credit facility or
separate financing arrangements for approximately $3 million.
We are continuing to seek regional diversification through our proposal to build
a casino/hotel/entertainment complex in Jefferson County, Missouri. Our project
would be located approximately 27 miles south of downtown St. Louis. We and
three other candidates made a formal presentation before the Missouri Gaming
Commission on March 31, 2004. On April 29, 2004, the Missouri Gaming Commission
informed us that it would hold a public meeting on May 24, 2004 to continue its
examination of proposals for new casinos in the St. Louis City metropolitan
area. The meeting will be devoted to hearing from government officials from St.
Louis City, St. Louis County and Jefferson County and from the public. We
believe that our project is superior in that it generates substantial
incremental revenue for the state and is located in an area, which the
Commission Staff has previously identified as the preferred location for the
next license. We anticipate that the Commission will make a decision sometime in
July 2004.
13
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Income from Operations
includes intercompany management fees.
First Quarter Incr/ % Incr/
(In Thousands) 2004 2003 (Decr) (Decr)
---- ---- ------ ------
Net revenues:
Riviera Las Vegas $37,323 $35,735 $1,588 4.4%
Riviera Black Hawk 13,137 11,756 1,381 11.7%
------ ------ -----
Total Net Revenues $50,460 $47,491 $2,969 6.3%
======= ======= ======
Income (Loss) from Operations
Riviera Las Vegas $5,672 $4,250 $1,422 33.5%
Riviera Black Hawk 2,810 1,570 1,240 79.0%
----- ----- -----
Property Income from Operations 8,482 5,820 2,662 45.7%
Corporate Expenses (1,108) (1,111) 3 0.3%
------- ------- -
Total Income from Operations $7,374 $4,709 $2,665 56.6%
====== ====== ======
Operating Margins
Riviera Las Vegas 15.2% 11.9% 3.3%
Riviera Black Hawk 21.4% 13.4% 8.0%
Consolidated 14.6% 9.9% 4.7%
Riviera Las Vegas
Revenues
Net revenues increased by approximately $1.6 million, or 4.4%, from
$35.7 million in 2003 to $37.3 million in 2004 due primarily to increased hotel,
food and beverage and entertainment revenues.
Casino revenues decreased by approximately $807,000, or 5.3%, from
$15.2 million during 2003 to $14.4 million during 2004 due to a 4.8% decrease in
slot machine revenue. This decrease was due to lower slot coin-in, as the
business mix of customers in the hotel rooms included more higher-rate
convention customers in 2004, who generally gamble less than customers in other
room categories. .
Room revenue increased $1.3 million, or 11.7%, from $11.2 million in
2003 to $12.5 million in 2004 due to an increase in convention room revenue.
Hotel occupancy increased to 94.9%, up from 92.0% in last year's first quarter
and average daily room rate increased $5.10 from $61.84 in the first quarter of
2003 to $66.94 in 2004. Rev Par (revenue per available room) increased 11.6% or
$6.58 to $63.50. Convention room nights for the quarter were up 11,600 room
nights or 28.9 percent compared to the same period last year. Convention room
rates are typically higher than internet or vacation room rates. Our refined
internet strategy enabled us to achieve our desired balance of ADR and bookings.
The increase in occupied room nights and change in occupancy mix also stimulated
increases in the food and beverage and entertainment revenue centers.
14
Entertainment revenues increased by approximately $265,000, or 6.1%,
from $4.4 million during 2003 to $4.6 million during 2004 due primarily to a
17.4% increase in total tickets sold. Food and beverage revenues increased
$923,000, or 14.2%, from $6.5 million in 2003 to $7.4 million in 2004 due
primarily to our occupancy mix discussed above, banquets associated with
conventions, increased buffet volume and price increases.
Other revenues increased by approximately $97,000, or 5.3%, from $1.8
million during the first quarter of 2003 to $1.9 million during 2004 due
primarily to increased ATM revenues. Promotional allowances increased by
approximately $203,000, or 5.9%, from $3.5 million during 2003 to $3.7 million
during 2004 primarily due to increases in comps related to higher hotel
occupancy and related activity.
Costs and Expenses
Rooms departmental costs and expenses increased by 8.7% in the quarter,
as occupancy increased, requiring more variable labor costs. In addition, wage
scale increases under the new union contracts contributed to the increased
costs. Rooms department margins increased from 48% to 49%.
Food and beverage departmental costs and expenses increased 13.5% in
the quarter and margins remained relatively constant at approximately 27.5%.
Income from Operations
Income from operations in Las Vegas increased $1.4 million, or 33.5%,
from $4.3 million in 2003 to $5.7 million in 2004 due to the 4.4% increase in
net revenues as explained above.
Riviera Black Hawk
Revenues
Net revenues increased by approximately $1.4 million, or 11.7%, from
$11.7 million in the first quarter of 2003 to $13.1 million in 2004 due
primarily to increased casino revenue. Food and beverage revenues were
approximately $1.4 million in 2004, of which $1.0 million was complimentary
(promotional allowance). Casino revenue increased $1.5 million or 13.6%, from
$11.1 million in 2003 to $12.6 million in 2004 primarily due to the continued
strength of our marketing plan focused on profitably building slot revenues and
market share. Also having a beneficial impact on results in the first quarter
was better weather in February and March of this year compared the same period
to last year. Our business levels were also helped by the construction
disruption at a competing casino, resulting in more customers parking in our
garage and playing in our casino, particularly on weekdays. Income from
Operations
15
Income from operations in Black Hawk, Colorado increased $1.2 million, or
79.0%, from $1.6 million in the first quarter of 2003 to $2.8 million in 2004
due to increased casino revenues as discussed above.
Consolidated Operations
Other Income (Expense)
Interest on our $215 million 11% Senior Secured Notes (the
"11% Notes") of $5.9 million plus related amortization of loan fees and other
financing costs resulted in total interest expense of approximately $6.3 million
in the first quarter of 2004. Interest expense on equipment and other financing
totaled approximately $540,000 for the quarter. Total interest expense was
approximately $6.8 million in both periods.
Corporate expenses remained relatively unchanged between the first
quarters of 2003 and 2004.
Net Income (Loss)
Net loss decreased $2.7 million, or 125.0%, from a net loss of $2.2
million in 2003 to net income of $540,000 in 2004 due primarily to increased
operating income.
Liquidity and Capital Resources
At March 31, 2004, the Company had cash and cash equivalents of $21.7 million.
The cash and cash equivalents increased $2.4 million during the first three
months of 2004 compared to the first three months of 2003, as a result of $7.6
million of cash provided by operations, $2.4 million of cash outflow for
investing activities primarily due to capital expenditures and $2.8 million
outflow for financing activities primarily for repayment of debt. Cash balances
include amounts that could be required to fund the Chief Executive Officer's
pension obligation in a rabbi trust upon 5 days notice. (See Note 7 to the 2003
annual financial statements, Other Long-Term Liabilities included in Form 10K as
filed with the SEC.) The Company continues to pay 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 on the
part of Mr. Westerman 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 $21.7
million cash and cash equivalents and the $30 million revolving credit facility,
will be sufficient to cover the Company's debt service requirements and enable
investment in budgeted capital expenditures for 2004 for both the Las Vegas and
Black Hawk properties and provide initial investments in a potential project in
Missouri.
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.
16
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 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.
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 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
remains outstanding immediately after redemption (excluding 11%
Notes held by the Company and 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 RHC 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 or sell certain
assets; and (v) enter into certain mergers and consolidations. As a result of
these restrictions, the ability of the Company 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, which could have an adverse effect on operations.
At March 31, 2004, the Company believes that it is in compliance with the
covenants of the 11% Notes and the $30 million revolving credit facility.
17
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued a proposed
standard that will impact the accounting for share based payments. The standard,
which is proposed to be effective for fiscal years beginning after December 15,
2004, would require that we recognize an expense for our share based payments,
including stock options. We are currently evaluating the provisions of this
proposed standard to determine its impact on our future financial statements.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R"),
Consolidation of Variable Interest Entities (revised December 2003), clarifying
Interpretation No. 46 and exempting certain entities from the provisions of FIN
46R. Generally, application of FIN 46R is required in financial statements of
public entities that have interests in certain structures, commonly referred to
as special-purpose entities for periods ending after December 15, 2003, and, for
other types of variable interest entities for periods ending after March 15,
2004. FIN 46R addresses the consolidation by business enterprises of variable
interest entities under either of the following circumstances: (1) the entity
does not have sufficient equity investment at risk to permit it to finance its
activities without additional subordinated financial support, or (2) the
reporting company will hold a significant variable interest in, or have
significant involvement with, such existing variable interest entity. The
adoption of FIN 46R did not have a material impact on the Company's financial
position or results of operations.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our 2003 Form 10-K. 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 2003 Form 10-K filed on March
15, 2004.
American Stock Exchange
Riviera is traded on the American Stock Exchange ("AMEX") under the symbol RIV.
Recent informal discussions with AMEX staff indicate that the Company may meet
the standards of AMEX policy Sec. 1003(a). According to that policy, AMEX will
not normally consider suspending dealings in or delisting the securities of a
company which is below the earnings or net worth standards if the Company is in
compliance with the following:
(1) Total value of market capitalization of at least $50,000,000; or
total assets and revenue of $50,000,000 each in its last fiscal
year, or in two of its last three fiscal years; and
(2) The company has at least 1,100,000 shares publicly held, a
market value of publicly held shares of at least $15,000,000 and
at least 400 round lot shareholders.
Forward Looking Statements
This report includes "forward-looking statements" as defined in Section 21E of
the Securities Exchange Act of 1934, as amended ("the Exchange Act"). 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
18
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed in this report as well
as in the Company's most recent annual report on Form 10-K, and include the
Company's substantial leverage, the risks associated with the possible 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 respective 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 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; and
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;
19
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 economic downturns, 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 March 31, 2004, we had $218.8 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 11% Notes is based on 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 $705,000 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%.
20
Average Interest Rate
(Amounts in Fair Value
thousands) 2004 2005 2006 2007 2008 Thereafter Total at 3/31/04
Long Term Debt Including
Current Portion
Equipment loans and
capital leases Las Vegas $1,066 $ 740 $ 645 $ 685 $ 109 $ 3,245 $ 3,245
Average interest rate 7.2% 6.4% 6.0% 6.0% 6.0%
11% Senior Secured Notes $215,000 $215,000 $226,825
Less unamortized discount (2,511) (2,511) (2,511)
Average interest rate 11.8%
Capital leases
Black Hawk, Colorado $1,718 $ 658 $ 2,376 $ 2,376
Average interest rate 10.8% 10.8%
Special Improvement
District Bonds
Black Hawk, Colorado $ 54 $ 116 $ 124 $ 129 $ 137 $ 145 $ 705 $ 705
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Total all long-term debt $2,838 $ 1,514 $ 769 $ 814 $ 246 $212,634 $218,815 $230,640
Other Long-Term Liabilities
including Current Portion
CEO pension plan obligation $750 $1,000 $1,000 $1,000 $1,000 $1,173 $5,923 $5,923
Average interest rate 11.8% 11.8% 11.8% 11.8% 11.8% 11.8%
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Exchange Act as of the end of the
period covered by this quarterly report. Based on such evaluation, those
officers have concluded that, as of that date and of such period, our disclosure
controls and procedures are effective.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to several routine lawsuits, either as plaintiff or as
defendant, arising from the normal operations of a hotel/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 24.
21
(b) During the first quarter of 2004, the Company filed reports on Form
8-K on February 2 (Items 5 and 7) and February 10 (Items 7,9 and 12). The
February 10 filing included summary financial information for the Company's
fourth quarter 2003.
22
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: May 7, 2004
23
Exhibits
Exhibits:
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.