10-Q 1 rbh10q_0301.txt RIVIERA BLACK HAWK 10Q 0301 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, 2001 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ---------------------- Commission file number 333-8163 --------------------------- Riviera Black Hawk, Inc. ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Colorado 86-0886265 ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (702) 794-9527 -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ------No ------- APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE LAST FIVE YEARS Indicate by check mark whether the Registrant has filed all documentation and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ---- ------- APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. The Registrant's Common Stock is owned 100% indirectly by its ultimate parent Riviera Holdings Corporation, a reporting company. As of April 30, 2001, the number of outstanding shares of the Registrant's Common Stock was 1,000. Riviera Black Hawk, Inc. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants' Report 2 Condensed Balance Sheets at March 31, 2001 (Unaudited) and December 31, 2000 3 Condensed Statements of Operations (Unaudited) for the Three Months ended March 31, 2001 and 2000 4 Condensed Statements of Cash Flows (Unaudited) for the Three Months ended March 31, 2001 and 2000 5 Notes to Condensed Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 12 PART II. OTHER INFORMATION Signature Page 14 1 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors Riviera Black Hawk, Inc. We have reviewed the accompanying condensed balance sheet of Riviera Black Hawk, Inc., (the "Company") as of March 31, 2001, and the related condensed statements of operations and of cash flows for the three months ended March 31, 2001 and 2000. 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 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 generally accepted auditing standards in the United States of America, the balance sheet of Riviera Black Hawk, Inc. as of December 31, 2000, and the related statements of operations, stockholders equity, and cash flows for the year then ended (not presented herein); and in our report dated February 14, 2001, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. DELOITTE & TOUCHE LLP April 23, 2001 Las Vegas, Nevada 2

5 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On August 18, 1997, Riviera Black Hawk, Inc. (the "Company" or "RBH") was formed. The Company is a wholly owned indirect subsidiary of Riviera Holdings Corporation. Riviera Black Hawk, Inc. was in the development stage during the first quarter of 2000 until February 4, 2000 when it opened the casino. Accordingly the results of operations for the fiscal 2001 and 2000 periods may not be comparable. Nature of Operations The primary line of business of the Company is the operation of the Riviera Black Hawk Casino in Black Hawk, Colorado, Casino operations are subject to extensive regulation in the State of Colorado by the Colorado Limited Gaming Control Commission and various other state and local regulatory agencies. Principles of Presentation The financial information at March 31, 2001, and for each of the three months ended March 31, 2000 is unaudited. However, such information reflects all adjustments (consisting solely of normal 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, 2001 are not necessarily indicative of the results that will be achieved for the entire year. These financial statements should be read in conjunction with the audited condensed financial statements and notes thereto for the year ended December 31, 2000, included in the Company's Annual Report on Form 10K. Earnings Per Share The Company is a wholly owned subsidiary of Riviera Holdings Corporation. There are no publicly traded shares of the Company's stock. In accordance with Financial Accounting Standards No. 128 "Earnings Per Share", no earnings per share data is presented herein. Estimates and Assumptions The preparation of condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires 6 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 accrued liabilities. Actual results may differ from estimates. Cash and cash equivalents and short term investments Amounts related to the Riviera Black Hawk casino project in Black Hawk, Colorado were restricted in use to that project or for the related 13% First Mortgage Notes interest payments. The restrictions were removed in August 2000. Revenue Recognition Casino Revenue - The Company recognizes, as gross revenue, the net win from gaming activities, which is the difference between gaming wins after deducting losses and loyalty club points paid in cash. Reclassifications Certain amounts have been reclassified in the accompanying financial statements to conform with the current year presentation. Recently Adopted Accounting Standards Recently Issued Accounting Standards - The Financial Accounting Standards Board 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 SFAS No. 133 in the quarter ending March 31, 2001. The adoption of this SFAS 133 had no impact on the Company or the Company's consolidated financial statements. The Emerging Issues Task Force of the American Institute of Certified Public Accountants ("EITF") 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 $78,000 of such sales incentive offers from Casino operating expense to net against Casino revenues for the first quarter of 2000. The Emerging Issues Task Force of the American Institute of Certified Public Accountants ("EITF") issued EITF No. 00-14 titled "Accounting for Certain Sales Incentives" on April 18,2001. The EITF concluded that when a company or vendor 7 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 $203,000 of such sales incentive offers from Casino operating expense to net against Casino revenues for the first quarter of 2000. 2. LONG TERM DEBT AND COMMITMENTS On June 3, 1999, the Company closed a $45 million private placement of 13% First Mortgage Notes. The net proceeds of the placement were used to fund the completion of RBH's casino project in Black Hawk, Colorado. The parent of RBH, Riviera Holdings Corporation, has not guaranteed the $45 million RBH Notes, but has agreed to a "Keep Well" of $5 million per year (or an aggregate limited to $10 million) for the first 3 years of RBH operations to cover if (i) the $5.85 million interest on such Notes is not paid by RBH and (ii) the amount by which RBH cash flow is less than $9.0 million as follows:

On February 14, 2001, the Company contributed approximately $3.1 million to RBH under this agreement for the Operating Period No. 1. The amount has been shown as Additional Paid in Capital. First quarter 2001 results indicate there will be no Keep Well amounts due on an annualized basis. The notes were issued at a cost in the amount of $3.5 million. The deferred financing costs, included in other assets, are being amortized over the life of the notes on a straight-line basis which approximates, the effective interest method. The 13% First Mortgage Note Indenture provides that the Company must offer to repurchase the 13% 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 13% Notes without a refinancing. The Board of Directors has authorized management to repurchase a portion of the 13% Notes on the open market or in negotiated transactions from time to time under the Permitted Investments provisions of the indenture. The 13% First Mortgage Note Indenture contains certain covenants, which limit the ability of the Company and its restricted subsidiaries, subject to certain exceptions, to: (1) 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 March 31, 2001, the Company believes that it is in compliance with the covenants. 8 SEGMENT REPORTING The Company is one of the reportable geographic segments of tis parent, Riviera Holdings Corporation, and markets directly to residents of metropolitan Denver, Colorado. Accordingly, it operates in a single segment. Management believes that substantially all revenues are derived from patrons visiting the Company from the Denver metropolitan area. Revenues from a foreign country or region may exceed 10 percent of all reported segment revenues; however, the Company cannot identify such information, based upon the nature of gaming operations. MANAGEMENT AGREEMENTS RBH has entered into a management agreement (the RBH Management Agreement) with Riviera Gaming Management of Colorado, Inc. (the Manager), a wholly owned subsidiary of Riviera Holdings Corporation, which, in exchange for a fee, manages RBH. The management fee consists of a revenue fee and a preformance fee. The revenue fee is based on 1 percent of net revenues (gross revenue less complimentaries) and is paid quarterly in arrears. The performance fee is based on the following percentages of EBITDA, 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 quarterly installments subject to year-end adjustment. The management fee began of February 4, 2000, the date of the opening of the Riviera Black Hawk Casino. If there is any default under the RBH Management Agreement, the Manager will not be entitled to receive management fees but will still be entitled to inter-company service fees. At March 31, 2001, RBH had accrued but not paid, and the Manager had recognized management fees of $882,000 of which $324,000 are for the three months ended March 31, 2001and $334,000 are for the three months ended March 31, 2000. These management fees are eliminated in consolidation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 including results of operations which commenced on February 4, 2000 Special Factors Affecting Comparability Riviera Black Hawk, Inc. was in the development stage during the first quarter 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. Revenues Net revenues increased by approximately $3.4 million, for the three months of operations in 2001 versus two months in 2000. Casino revenues were $7.3 million in 2000 and $10.5 million in 2001 as win per slot machine per day increased form $130 in the first quarter of 2000 to $142 in 2001. Food and beverage revenues were approximately $1.1 million in 2001, of which $826,000 was complimentary (promotional allowance). The World's Fare Buffet restaurant replaced the coffee shop in fourth quarter 2000 and has served as a marketing tool increasing customer traffic and slot drop over the first quarter 2000 when the restaurant was a coffee shop with a high-end menu. Other revenues were approximately $109,000 primarily from ATM transaction fees. Direct Costs and Expenses of Operating Departments Total direct costs and expenses of operating departments were approximately $5.3 million, in 2001. Casino expenses were approximately $5.3 million, 48.6% of casino revenues in the first quarter of 2001 compared with $2.4 million of 30.9% of casino revenues in 2000. In 2001 the marketing effort was strengthened to target higher end players with additional VIP and direct mail marketing resulting in increased membership in the slot club. Gaming taxes were only five percent for the first quarter of 2000 and compared to seventeen percent for the 9 first quarter of 2001. Consequently, gaming tax expense in first quarter 2000 was $900,000 less than 2001. Food and beverage costs of complimentary revenues are recorded as promotional allowances under GAAP. From an operational standpoint these expenses are recorded in the food and beverage department with the total cash and complimentary revenues. Food and beverage costs were approximately $320,000, or 28% of net food and beverage revenues compared to $355,000 or 49.9% in 2000. In the first quarter of 2001 the food and beverage departmental results increased approximately $100,000 from a loss to breakeven. Other Operating Expenses General and administrative expenses were approximately $2.8 million, or 25.2% of net revenues for 2001 compared with 22.6% of net revenues in 2000 due to increased property taxes and energy costs. Depreciation and amortization increased from $469,000 in 2000 to $883,000 in 2001, due to the additional month of operations. Income from Operations Income from operations in Black Hawk, Colorado increased approximately $184,000 or 16.0% due to slot revenue generated as a result of increased direct marketing and promotional activity for the casino in the first quarter of 2001. In 2000, these programs had not yet been instituted because business was generated by the "newness factor" of the property. EBITDA Riviera Black Hawk EBITDA, as defined, was $2.5 million, or 23.2% of net revenues in the first quarter of 2001 compared with $3.2 million or 41.8% of net revenues in 2000. The 41.8% margin was unusually high in 2000 due to the extraordinary grand opening volumes. Liquidity and Capital Resources At March 31, 2001, the RBH had cash and cash equivalents of $9.1 million. The Company had net shareholders equity of $29.1 million. The Company's net cash provided by operating activities was approximately $1.9 million for the period ending March 31, 2001. Management believes that the $9.1 million in cash and cash equivalents, and the "keep well" commitments from Riviera Holdings Corporation will be sufficient to cover the Company's budgeted capital expenditures of $2.4 million for 2001. Cash flow from operations may not be sufficient to pay 100% of the principal of the 13% Notes at maturity on May 1, 2005. Accordingly, the ability of the Company to repay the 13% Notes at maturity will be dependent upon its ability to refinance those notes. There can be no assurance that the Company will be able to refinance the principal amount of the 13% Notes at maturity. At any time prior to May 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the 13% notes issued under the indenture at a redemption price of 113% of the principal amount. On or after May 1, 2002, the Company may redeem all or a part of the notes at premiums beginning at 106.5% and declining each subsequent year to par in 2004. 10 The 13% Note Indenture provides that, in certain circumstances, the Company must offer to repurchase the 13% 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 13% 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 March 31, 2001, the Company believes that it is in compliance with the covenants. 11 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 60 days or less. As of March 31, 2001, we had $44.6 million in borrowings. The borrowings include $36 million remaining in bonds maturing in 2005. Interest under the bonds is based on a rate of 13% excluding contingent interest. Also included is $.6 million in a special improvement district bond offering with Black Hawk, Colorado. The Company's share of the debt on the Special Improvement District bonds is payable over ten years through December of 2009. The Special Improvement District bonds bear interest at 5.5%. Other borrowings include a vehicle loan of $20,000 maturing in 2004 with an interest rate of 9.0% and capital leases in the amount of $8.1 million at a weighted average interest rate of 10.8% payable over sixty months.

12 Forward Looking Statements The Private Securities Litigation Reform Act of 1997 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. 13 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 BLACK HAWK, INC. By: /s/ William L. Westerman William L. Westerman Chief Executive Officer and Director By: /s/Ronald P. Johnson Ronald P. Johnson President and Director By: /s/ Duane Krohn Duane Krohn Treasurer, Chief Financial Officer And Director Date: May 10, 2001 14

RIVIERA BLACK HAWK INC 10-Q