Item 2. Property
Riviera Black Hawk is located on 1.63 acres of land at 400 Main Street, Black Hawk, Colorado. The buildings include approximately 325,000 square feet and comprise 32,000 square feet of gaming space, parking for approximately 520 vehicles (substantially all of which are covered), a 252-seat buffet, two bars and an entertainment center with seating for approximately 440 people.
The entire Riviera Black Hawk complex is encumbered by a first deed of trust securing the 13% Notes.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 3.
Item 3. Legal Proceedings
We may be a party to several routine lawsuits both as plaintiff and as defendant arising from the normal operations of a casino. We do not believe that the outcome of such litigation, in the aggregate, will have a material adverse effect on the financial position or results of our operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
Not applicable.
Item 6.
Item 6. Selected Financial Data
The following table sets forth a summary of selected financial data for the Company for the years ended December 31, in thousands:
(1) The Company was in the development stage from its inception on August 18, 1997 through February 4, 2000. During fiscal 2000 and 1999, the Company recognized $1,222,000 and $595,000 in preopening expenses, respectively. There were no operations in 1999.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations
2001 Compared to 2000
Special Factors Effecting Comparability of Results of Operations
The Riviera Black Hawk was in the development stage during the first half of 2000 until February 4, 2000 when it opened the casino. Accordingly, the results of operations for the fiscal 2001 and fiscal 2000 results may not be comparable.
The following table sets forth, for the periods indicated, certain operating data for Riviera Black Hawk. EBITDA for the purposes of this table excludes, pre-opening expense and inter-company management fees. Operating income is presented as shown on the Statement of Operations.
(2) EBITDA consists of Earnings Before Interest, income Taxes, Depreciation, Amortization, preopening expenses, intercomany management fees and other, net. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles ("GAAP"), it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditures and working capital requirements. Although EBITDA is not necessarily a measure of the Company's ability to fund its cash needs, management believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA margin is EBITDA as a percent of net revenues. The Company's definition of EBITDA may not be comparable to other companies' definitions.
(3) Shown as a percentage of net revenue.
Revenues
Riviera Black Hawk net revenues increased by approximately $13.8 million, or 39.1%, from $35.3 million in the 11 months of 2000 to $49.0 million in the 12 months ended December 31, 2001 as the operation gained market share and was unaffected by the events of September 11. Casino revenues, primarily
slot machines, increased by approximately $13.0 million, or 38.7%, from $33.6 million in the 11 months of 2000 to $46.7 million in the 12 months ended December 31, 2001. Average slot machine win per unit increased from $114 per day in 2000 to $148 in 2001. Food and beverage revenues increased by approximately $1.5 million, or 38.3%, from $4.0 million in the 11 months of 2000 to $5.6 million in the 12 months ended December 31, 2001. The remodeled buffet and related marketing efforts resulted in a 45.6% increase in covers (customers) and a 26.4% increase in average check (price).
Income from Operations
Income from operations increased $5.7 million or 305% from $1.9 million in the 11 months of 2000 to $7.6 million in the 12 months ended December 31, 2001 due to the increase in revenues and better margins as marketing costs were stabilized. Staffing was also optimized as full-time equivalent employees were reduced from 450 at the opening in February 2000 to 371 at the end of 2001. Although general and administrative costs increased $1.7 million, they were 23.5% of revenues in the current year compared with 27% in 2000. Preopening expense decreased $1.2 million and intercompany management fees based on revenue and EBITDA increased $797,000. Depreciation increased $809,000 or 27.5% in 2001 compared with the 11 months of operations in 2000.
EBITDA
Riviera Black Hawk EBITDA, as defined, increased by approximately $6.1 million, or 92.8%, from $6.6 million in the 11 months of 2000 to $12.7 million in the 12 months ended December 31, 2001. During the same periods, EBITDA margin increased from 18.7% to 25.9% of net revenues.
Other Income (Expense)
Interest expense on the 13% First Mortgage Notes combined with its interest on capital leases totaled $6.7 million in 2001 compared to $7.7 million in 2000. Capitalized interest was $577,000 in 2000, which related to capitalized amounts prior to the completion of the casino project.
Net Income
Net income increased approximately $3.5 million from a loss of $2.9 million in 2000 to a profit of $589,000 in 2001. Income from operations accounted for $5.9 million of the increase and interest expense declined $947,000 due to the repurchase of a portion of the 13% first Mortgage Notes. These increases were partially offset by a $219,000 reduction of interest income due to lower interest rates, $577,000 less capitalized interest and a $2.4 million increase in income taxes due to the increase in pretax income.
2000 Compared to 1999
Special Factors Effecting Comparability of Results of Operations
Riviera Black Hawk was in the development stage during 1999 and until February 4, 2000 when the casino opened. Accordingly, the consolidated results of operations for fiscal 2000 and 1999 may not be comparable.
The following table sets forth, for the periods indicated, certain operating data for Riviera Black Hawk. EBITDA for the purposes of this table excludes, pre-opening expense and inter-company management fees. Operating income is presented as shown on the Statement of Operations.
Revenues
Riviera Black Hawk opened on February 4, 2000. It had net revenues of approximately $35.3 million for the approximate eleven-month period in 2000. Casino revenues were $33.6 million, including $31.9 million in slot revenue and $1.7 million in table games revenue.
Food and beverage revenues were approximately $4.0 million, of which $2.8 million were complimentary (promotional allowance). Other revenues were approximately $0.4 million primarily from ATM transaction fees.
EBITDA
Riviera Black Hawk EBITDA, as defined, was $6.6 million, or 18.7%, of net revenues.
Other Income (Expense)
Interest expense on the $45 million 13% First Mortgage Notes issued by Riviera Black Hawk in June 1999 combined with its interest from capital leases totaled $7.7 million in 2000. Capitalized interest was $577,000 in 2000, which was from the Black Hawk, Colorado project, decreased approximately $2.5 million from 1999.
Net Loss
The net loss increased approximately $2.4 million from $.5 million in 1999 to $2.9 million in 2000 due primarily to higher preopening expense and higher interest expense offset by lower capitalized interest in 2000. Federal income tax benefits as a percent of losses were higher in 2000 because the Company had fewer permanent tax adjustments in fiscal 2000 compared to 1999, when there were no operations.
Liquidity and Capital Resources
At December 31, 2001, RBH had cash and cash equivalents of $11.5 million. The Company may transfer the $3.3 million due to its parent if demanded. During 2001, the payment of management fees totaling $2 million was restricted wntil the fixed charge coverage ratio as defined, reached 1.5 to one. As of December 31, 2001, there was no restriction on the payment of the management fees to the parent. The Company had net shareholder's equity of $29.9 million.
The Company's net cash provided by operating activities was approximately $8.6 million for the year ended December 31, 2001. Management believes that the $11.5 million in cash and cash equivalents will be sufficient to cover the Company's budgeted capital expenditures for the next 12 months of approximately $2.4 million.
As of December 31, 2000, Riviera Holdings Corporation contributed $15.1 million to acquire land for the casino in Black Hawk and $14.9 million in cash for developing the land for the casino. During 2001, Riviera Holdings made additional contributions of $3,045,000 under the terms of the Keepwell Agreement, for total cash contributions to date of $33 million.
During 2001, Riviera Black Hawk repurchased $3.5 million of the 13% Notes on the open market at par.
Cash flow from operations may not be sufficient to pay 100% of the principal of the $45 million 13% Notes at maturity on May 1, 2005. Accordingly, the ability of Riviera Black Hawk to repay the Notes at maturity may be dependent upon our future cash flows and our ability to refinance those notes. There can be no assurance that the Company will be able to refinance the principal amount of the Notes at maturity. Although Riviera Black Hawk, Inc. can, at any time prior to May 1, 2001, redeem up to 35% of the aggregate principal amount of the 13% notes at 113% with the proceeds of a qualified public offering, the subsidiary may not redeem 100% of the 13% Notes until May 1, 2002, at premiums beginning at 106.5% and declining each subsequent year to par in 2004.
The 13% Note Indentures provide that, in certain circumstances, Riviera Black Hawk must offer to repurchase the 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 would be unable to pay the principal amount of the Notes without a refinancing.
The 13% Note Indenture contains certain covenants, which limit the ability of the Company and its restricted subsidiaries, subject to certain exceptions, to: (i) incur additional indebtedness; (ii) pay dividends or other distributions, repurchase capital stock or other equity interests or subordinated indebtedness; (iii) enter into certain transactions with affiliates; (iv) create certain liens; sell certain assets; and (v) enter into certain mergers and consolidations. As a result of these restrictions, the ability of the Company 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 would be required to curtail or defer certain of their capital expenditure programs under these circumstances, which could have an adverse effect on the Company's operations. At December 31, 2001, the Company believes that it is in compliance with the covenants.
Recently Adopted Accounting Standards
The FASB issued SFAS No. 133, "Accounting for Derivatives," which is effective for fiscal years beginning after June 15, 2000. This statement defines derivatives and requires qualitative disclosure of certain financial and descriptive information about a company's derivatives. The Company adopted SEAS No. 133 in the quarter ended March 31, 2001. The adoption of this SEAS 133 had no impact on the Company or the Company's consolidated financial statements.
The EITF of the American Institute of Certified Public Accountants issued EITF No. 00-22 Titled "Accounting for "Points" and Certain Other Timed-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future" on January 18, 2001. The EITF concluded that when a company or vendor offers to a customer (a) free or discounted products or services that will be delivered (either by the vendor or by another unrelated entity) at a future date (1) as a result of a single revenue transaction with the customer or (2) only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period and (b) a rebate or refund of a determinable cash amount only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period, such rebates should be reported as a reduction of revenues. This EITF was required to be adopted by the Company during the first quarter of 2001. As a result of adopting EITF 00-22, the Company reclassified approximately $2.6 million of such "Points" from Casino operating expense to net against Casino revenues for the period ended December 31, 2000.
The EITF of the American Institute of Certified Public Accountants issued EITF No. 00-14 titled "Accounting for Certain Sales Incentives" on April 18,2001. The EITF concluded that when a company or vendor offers its customers sales incentives including discounts, coupons, rebates and free products or services, such sales incentives should be reported as reduction of revenues. The EITF concluded that when a company or vendor offers its customers sales incentives including discounts, coupons, rebates, and free products or services, such sales incentives should be reported as a reduction of revenues. This EITF was required to be adopted by the Company during the fourth quarter of 2001. Early adoption is permitted. The Company chose to adopt this EITF in the first quarter of 2001. As a result of adopting EITF 00-14, the Company reclassified approximately $1.8 million of such sales incentive offers "cash vouchers" from Casino operating expense to net against Casino revenues for the period ended December 31, 2000.
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations.
The FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" in June of 2001. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement 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. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial position and results of operations.
The FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" in August of 2001. This Statement address financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that opinion). This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently assessing, but has not yet determined the impact of SFAS No. 144 on its financial position and results of operations.
Critical Accounting Policies
The preparation of the Company's consolidated financial statements requires the Company's management to adopt accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management periodically evaluates its policies, estimates and assumptions related to, these policies. The Company operates in a highly regulated industry. For both our Las Vegas, Nevada and Black Hawk, Colorado operations we are subject to regulations that describe and regulate operating and internal control procedures. The majority of our casino revenue is in the form of cash, personal checks or gaming chips and tokens, which by their nature do not require complex estimations. We estimate certain liabilities with payment periods that extend for longer than several months. Such estimates include customer loyalty liabilities, self-insured medical and workers compensation costs and litigation costs. We believe that these estimates are reasonable based upon our past experience with the business and based upon our assumptions related to possible outcomes in the future. Future actual results will likely differ from these estimates.
The Company has determined that the following accounting policies and related estimates are critical to the preparation of the Company's consolidated financial statements:
Long-lived Assets:
The Company has a significant investment in long-lived property and equipment. The Company estimates that the undiscounted future cash flows expected to result from the use of these assets exceeds the current carrying value of these assets. Any adverse change to the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results. The Company estimates useful lives for its assets based on historical experience, estimates of assets' commercial lives, and the likelihood of technological obsolescence. Should the actual useful life of a class of assets differ from the estimated useful life, the Company would record an impairment charge. The Company reviews useful lives, obsolescence, and assesses commercial viability of these assets periodically.
We utilize estimates related to cash flow projections related to the application of SFAS 109 for the realization of deferred tax assets. Our estimates 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 negatively impacted by numerous unforeseen events including changes to regulations affecting how we operate our business, changes in the labor market or economic downturns in the areas where we operate.
Item 7a.
Item 7a. 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 90 days or less.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1998 provides a "safe harbor" for certain forward-looking statements. Certain matters discussed in this filing could be characterized as forward-looking statements such as statements relating to plans for future expansion, as well as other capital spending, financing sources and effects of regulation and competition. Such forward-looking statements involve important risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements
Item 8.
Item 8. Financial Statements and Supplementary Data
See financial statements included in Item 14 (a).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 10.
Item 10. Directors and Executive Officers of the Registrant (not applicable)
Item 11.
Item 11. Executive Compensation (not applicable)
Item 12.
Item 12. Security Ownership of certain Beneficial Owners and Management (not applicable)
Item 13.
Item 13. Certain Relationships and Related Transactions
The Company has a management agreement (the "Management Agreement") with Riviera Gaming Management of Colorado, Inc., (the "Manager") an indirect wholly owned subsidiary of Riviera Holdings Corporation, which will manage the Company. The management fee consists of a revenue fee and a performance fee. The revenue fee is based on one percent of net revenues (gross revenues less complimentaries) and is payable quarterly in arrears. The performance fee is based on the following percentages of EBITDA (earnings before interest, taxes, depreciation and amortization, whose components are based on generally accepted accounting principles): (1) 10 percent of EBITDA from $5 million to $10 million, (2) 15 percent of EBITDA from $10 million to $15 million and (3) 20 percent of EBITDA in excess of $15 million. The performance fee is based on the preceding quarter's EBITDA, paid in quarterly installments subject to year-end adjustment. Under the 13% bond indenture, the management fees cannot be paid to the parent unless the fixed charge coverage ratio exceeds 1.5 to one. Therefore, subsequent to the first quarter of 2000, these fees totaling approximately $1.9 million have not been paid. In addition, inter-company charges for the cost of labor, goods and services provided by the parent totaling approximately $1.4 million remain unpaid at December 31, 2001 and are evidenced by notes receivable. It is anticipated that these advances will be repaid in 2002.
PART IV Item 14.