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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1997
[ ] Transition report pursuant to sections 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
For the transition period from to
Commission file number 000-21430
RIVIERA HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
(State of Incorporation) (I.R.S. Employer 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) 734-5110
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or amendment
to this Form 10-K. [X]
Based on the average bid price for the Registrant's Common Stock as
of March 26, 1998 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $53,843,000. As of February
28, 1998 the number of outstanding shares of the Registrant's Common Stock was
4,894,880.
Documents incorporated by reference: The Company's Proxy Statement dated April
30, 1998 relating to the Annual Meeting of Stockholders to be held June 24, 1998
is incorporated by reference in Part III hereof.
Page 1 of 68 Pages
Exhibit Index Appears on Page 63 hereof.
1
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Item 1. Business................................................................................................................3
General ................................................................................................................3
The Proposed Merger.....................................................................................................4
Growth Opportunities................................................................................................... 5
The Riviera.............................................................................................................5
Future Expansions .....................................................................................................10
Marketing Strategy.................................................................................................... 10
Las Vegas Market.......................................................................................................14
The Black Hawk Project.................................................................................................15
Colorado Market........................................................................................................16
Riviera Gaming Management............................................................................................. 16
Competition........................................................................................................... 17
Employees and Labor Relations..........................................................................................19
Regulation and Licensing...............................................................................................19
Federal Registration...................................................................................................28
Item 2. Properties.............................................................................................................28
Item 3. Legal Proceedings......................................................................................................28
Item 4. Submission of Matters to a Vote of Security Holders....................................................................28
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters...........................................29
Item 6. Selected Financial Data................................................................................................30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................30
Results of Operations..................................................................................................31
1997 Compared to 1996..................................................................................................32
1996 Compared to 1995..................................................................................................33
Liquidity and Capital Resources........................................................................................35
Year 2000 Project......................................................................................................36
Forward Looking Statements.............................................................................................36
Recently Adopted Accounting Standards..................................................................................36
Recently Issued Accounting Standards...................................................................................36
Item 8. Financial Statements and Supplementary Data, etc.......................................................................37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................58
Item 10. Directors and Executive Officers of the Registrant.....................................................................59
Item 11. Executive Compensation.................................................................................................59
Item 12. Principal Shareholders.................................................................................................59
Item 13. Certain Relationships and Related Transactions ........................................................................59
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.........................................................60
2
PART I
Item 1. Business
General
Riviera Holdings Corporation, a Nevada corporation (the "Company"),
through its wholly owned subsidiary, Riviera Operating Corporation, a Nevada
corporation ("ROC"), owns and operates the Riviera Hotel & Casino (the
"Riviera") located on Las Vegas Boulevard (the "Strip") in Las Vegas, Nevada.
Opened in 1955, the Riviera has developed a long-standing reputation for
delivering high quality, traditional Las Vegas-style gaming and entertainment.
The Riviera is situated on a 26-acre site, located across the Strip from Circus
Circus and across Paradise Road from the Las Vegas Hilton and the Las Vegas
Convention Center. The property features approximately 2,100 hotel rooms,
including 169 suites, 115,000 square feet of casino space, one of the largest
convention, meeting and banquet facilities in Las Vegas, four full-service
restaurants, a large buffet, four showrooms, an entertainment lounge, 47 food
and retail concessions and approximately 2,900 parking spaces. The casino
contains approximately 1,630 slot machines, 46 gaming tables, including poker, a
keno lounge and a 200-seat race and sports book. The Riviera offers one of the
most extensive entertainment programs in Las Vegas, including the such popular
shows as, Splash(R), An Evening at La Cage(R), Crazy Girls(R) and featured
comedians at the Riviera Comedy Club(TM).. The Company, through its gaming
management subsidiary, also manages the Four Queens Hotel and Casino ("Four
Queens") on Fremont Street in downtown Las Vegas and is developing a casino in
Black Hawk, Colorado.
From 1992 to the end of 1997, the Riviera's management team achieved
growth in EBITDA1 and profit margins. EBITDA has increased over 44% from $21.8
million in 1992 to $29.4 million in 1997 and EBITDA margins have improved from
15.1% to 19.1% over the same period. The Company achieved this growth through
the implementation of a number of strategic initiatives that included (i)
refocusing its marketing strategy from "high-rollers" to adult mid-level gaming
customers, a niche that management believes has been under served, (ii) focusing
on conventioneers who pay higher room rates, causing Riviera's ADR to increase
from $47 in 1992 to $58 in 1997, (iii) aggressively marketing its hotel
facilities resulting in occupancy rates growing from 90.6% in 1992 to 96.8% in
1997, (iv) emphasizing higher margin slot play which increased slot revenue by
23% from 1992 to 1997 and (v) investing approximately $54 million in capital
improvements since 1992. Management believes that it has also improved the
stability of EBITDA by providing a broad entertainment experience (1997
non-gaming revenues: 57% vs. 51% for other casinos on the Strip), focusing on
conventioneers (approximately 40% of midweek room nights pre-sold through June
2000) and developing a repeat and loyal customer base through proprietary
database marketing.
The Company, which was incorporated on January 27, 1993, is the
successor to Riviera, Inc., which filed for protection under Chapter 11 of the
United States Bankruptcy Code in December 1991. The Company acquired the Riviera
pursuant to a plan of reorganization which became effective on June 30, 1993.
On August 13, 1997 the Company completed an offering (the "Note
Offering") of $175 million principal aggregate amount of its 10% First Mortgage
Notes due 2004 (the "Notes") and, with the proceeds of the Note Offering,
defeased the outstanding $100 million principal amount of its 11% First Mortgage
Notes due 2002 (the "11% Notes"). The Note Offering was effected in accordance
with Rule 144A of the
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1 EBITDA consists of earnings before interest, income taxes, depreciation and
amortization (excluding Paulson Merger costs and write off of costs associated
with the secondary offering.) While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles ("GAAP"), it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. Although EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs, management believes that certain investors find
EBITDA to be a useful tool for measuring the ability of the Company to service
its debt.
3
Securities Act of 1933, as amended (the "Securities Act"). The Company has
registered under the Securities Act, securities identical to the Notes and has
completed an offer to exchange such registered securities for the Notes.
Since August 1996, Riviera Gaming Management - Elsinore, Inc.
("RGME"), an indirect wholly owned subsidiary of the Company, has been operating
the Four Queens located adjacent to the Golden Nugget on Fremont Street in
downtown Las Vegas under an interim management agreement for a fee of $83,333
per month. A long-term management agreement with Elsinore Corporation, a Nevada
corporation ("Elsinore"), the owner of the Four Queens, went into effect on
February 28, 1997, the effective date of the Chapter 11 plan of reorganization
of Elsinore.
The term of the management agreement is approximately 40 months,
subject to earlier termination or extension. RGME is paid a minimum annual
management fee of $1.0 million in equal monthly installments. In addition, RGME
receives a fee of 25% of the amount by which the Four Queens' EBITDA in any
fiscal year exceeds $8 million. RGME has received Warrants to purchase 1,125,000
shares of common stock of Elsinore, exercisable during the term or extended term
of the management agreement at an exercise price of $1.00 per share.
Either party can terminate the management agreement if (i)
substantially all the Four Queens' assets are sold, (ii) the Four Queens is
merged or (iii) a majority of the Four Queens' or Elsinore's shares are sold.
Upon such termination, RGME will receive a $2.0 million termination bonus minus
any amount realized or realizable upon exercise of the Warrants.
The Proposed Merger
The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement") with R&E Gaming Corp. ("R&E Gaming") and its wholly-owned
subsidiary RAS Acquisition Sub, Inc. ("RAS"), certain entities controlled by
Allen E. Paulson, a California businessman ("Paulson"), pursuant to which one of
such entities would be merged with and into the Company (the "Merger"). The
closing of the Merger is subject to a number of conditions, including (i)
approval by the affirmative vote of the holders of at least 60% of all issued
and outstanding shares of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company (excluding the shares of Common Stock owned by
Paulson or his affiliates) which approval was obtained at a special meeting held
February 5, 1998, (ii) Paulson's licensure by the Nevada Gaming Authorities
(as defined), (iii) the absence of any regulation, judgment or other law that
prohibits the consummation of the Merger or would prohibit or limit the
Company's ownership or control of a material portion of the Company's business
or assets following the Merger, and (iv) the absence of any material adverse
change in the Company's EBITDA (as defined in the Merger Agreement) for the
period commencing on April 1, 1997 through and including the most recent month
prior to such closing for which the Company's financial statements are
available. The holders of approximately 59% of the Company's Common Stock
entered into an option and voting agreement pursuant to which they voted for the
Merger. However, there can be no assurance that the conditions to the Merger
will be satisfied or waived or that the Merger will be consummated.
Paulson, through his wholly-owned affiliates, has entered into an
agreement to purchase the outstanding common stock of Elsinore. Such a sale
would be effective through the merger (the "Elsinore Merger") of a wholly-owned
subsidiary of a holding company owned by Paulson into Elsinore. Based upon
reports filed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of December 31, 1997, Morgens, Waterfall, Vintiadis &
Company, Inc. ("Morgens Waterfall"), one of the majority stockholders, together
with its affiliates, beneficially owned approximately 94% of the common stock
of Elsinore.
4
On February 25, 1998, the Company announced that it had been advised
by Paulson, President of R&E Gaming, that R&E Gaming is preserving its right not
to proceed with its acquisition of Elsinore and that an Option and Voting
Agreement relating to Elsinore between R&E Gaming and Morgens Waterfall is void
by reason of certain alleged misrepresentations.
R&E Gaming requested that Morgens Waterfall, SunAmerica Life Insurance
Company ("SunAmerica") and Keyport Insurance Life Company ("Keyport") confirm
the accuracy of certain representations and warranties in an Option and Voting
Agreement relating to Riviera. R&E Gaming also requested information to enable
it to determine whether Riviera is in compliance with certain of the covenants
in the Riviera Merger Agreement with R&E Gaming.
On March 20, 1998, the Company was notified (the "Termination
Notice") by Paulson on behalf of R&E Gaming and its wholly-owned subsidiary RAS
that the Merger Agreement, dated as of September 15, 1997, among the Company,
R&E Gaming and RAS is void and unenforceable against R&E Gaming and RAS, or
alternatively, of their intention to terminate the Riviera Merger Agreement. A
copy of the Termination Notice is filed as an exhibit to this Form 10-K. Riviera
disputes the factual and legal assertions in the Termination Notice and intends
to vigorously pursue its rights against Paulson, including collection of the
approximately $5,825,000 being held in escrow (the "Escrow Funds") by State
Street Bank and Trust Company of California, N.A. as escrow agent under an
Escrow Agreement dated as of September 15, 1997. The Escrow Funds consist of :
(i) $3.00 per share (20%) downpayment for approximately 1,555,585 shares of the
Company's common stock, which are not owned by the Morgans Waterfall managed
funds, SunAmerica, Keyport or Paulson and his affiliates, and (ii) interest at
the rate of 7% per annum on the $15.00 purchase price for such shares from June
1, 1997 to February 14, 1998. The escrowed funds include cash of $654,000 and a
letter of credit in the amount of $5.2 million which expires on June 10, 1998.
Growth Opportunities
Over the past several years, management initiated a number of
strategic changes at the Riviera to reposition the property to compete in the
Las Vegas gaming market. The Company has formulated a business and growth
strategy to maintain the competitive position of the Riviera as well as grow the
Company. The key elements of the Company's business and growth strategy are
discussed below.
Develop New Casino/Hotels
As part of the Company's strategy to diversify its revenue base and
leverage both the Riviera name and its management team, the Company pursues
development opportunities in both established and emerging gaming markets. The
Company has acquired for $15 million, a certain parcel of real property in Black
Hawk, Colorado (the "Black Hawk Land"), which management believes to be one of
the premier gaming sites in Colorado. The Company intends to use this site to
construct one of the largest gaming facilities in the adjacent gaming cities of
Black Hawk and Central City, Colorado (the "Black Hawk Project"). The Black Hawk
Project is expected to feature approximately 1,000 slot machines, 14 table
games, an approximately 500 space covered parking garage and entertainment and
food service amenities. Management believes this market has attractive
fundamentals, including (i) gaming limited to Black Hawk/Central City and
Cripple Creek in Colorado, (ii) consistent gaming revenue growth since 1992 to
over $430 million in 1997, (iii) slot machine dominated market due to statutory
limited stakes, (iv) one hour drive from central Denver and (v) approximately
2.3 million adults residing within 100 miles of Black Hawk. Management believes
that the proposed Riviera facility will be highly successful due to the
following attributes: (i) premier location: it will be the first gaming site
encountered when arriving from Denver, (ii) size and quality: it will be one of
the largest casinos in the market complete with restaurant and entertainment
options and (iii) superior parking: it will have on-site, covered self-parking,
which is critical in this market where parking is currently extremely limited.
The Black Hawk Project is an attractive investment opportunity that allows the
Company to create a multi-jurisdictional gaming company. The Company currently
estimates that total costs for completion of the Black Hawk Project will be
approximately $55 million. The Company purchased the Black Hawk Land in August
1997 for $15 million, which was financed by the net proceeds from the sale of
the Notes, and expects to finance the remainder of the Black Hawk Project from a
combination of third party financing and additional investment by the Company,
including up to an additional $15 million of the net
5
proceeds from the sale of the Notes. The Company has received an excavation
permit and expects to receive the other necessary permits in the near future,
with construction of the casino commencing shortly thereafter.
The casino is scheduled to open in 1999.
In addition to the Black Hawk Project, the Company also plans to
review and selectively acquire or develop casino/hotel properties both in Nevada
and other jurisdictions. Other than the Black Hawk Project, the Company does not
presently have any agreements in principle for involvement in any new or
financially troubled projects.
Manage Distressed Casino/Hotel Properties
The Company believes that there is increasing demand for the services
of skilled gaming and hospitality professionals. In order to capitalize on
management's reputation and experience as successful casino operators, the
Company formed Riviera Gaming Management, Inc. ("RGM") for the primary purpose
of obtaining casino management contracts with casinos/hotels in Nevada and other
jurisdictions. Since August 1996, RGME, as subsidiary of RGM, has managed the
Four Queens located adjacent to the Golden Nugget on Fremont Street in downtown
Las Vegas. Under the Four Queens management contract, RGME receives a guaranteed
minimum management fee of $1 million plus additional compensation if EBITDA of
the Four Queens exceeds $8 million per annum, and Warrants to purchase 1,125,000
shares of Elsinore common stock (equal to 18.5% of the equity of Elsinore on a
fully diluted basis) at $1.00 per share. Such management contract provides
significant revenues and upside equity potential with minimal additional
overhead and capital expenditure. RGME generated approximately $1 million in
management fees for the Company in 1997. Management is continually evaluating
opportunities to manage other casinos/hotels.
Further Develop the Riviera
The Company has engaged architects and designers to prepare an
overall expansion plan (the "Master Plan") for the existing 26-acre site. The
Company believes that implementation of the Master Plan will attract additional
customers.
Casino Roof Area
Future Phases may include development of an approximately 60,000
square foot domed shopping and entertainment complex to be constructed directly
over the casino and containing stores and entertainment that will appeal to the
Riviera's main target audience, adults aged 45 to 65. The exit from the complex
will be by an escalator which will deliver patrons to the casino. The Company
expects to find partners to finance, develop and operate the entertainment
attraction and retail stores. The Company also has approximately nine acres
available for additional development. The Company is exploring a number of
options in order to make the best use of this valuable land.
Additional Rooms
Management believes that additional rooms adjacent to the Las Vegas
Convention Center would be particularly attractive to business customers and
would provide a base of additional casino customers. Potential development
projects include the construction of a new convention or time share hotel tower
and additional parking facilities. Either project would require additional
financing, and/or a joint venture partner, neither of which is in place at this
time.
The Riviera
The Riviera is located on the corner of the Strip and Riviera Drive,
across from Circus Circus. The back of the 26-acre property fronts Paradise Road
across from the Las Vegas Hilton and the Las Vegas Convention Center. The
Riviera is strategically located to take advantage of the high tourist traffic
along the Strip as well as the increasing number of convention customers that
use the Las Vegas Convention Center.
6
The Company recently completed an extensive capital investment
program. When the Company acquired the Riviera on June 30, 1993, it embarked on
a refurbishing and upgrading program and has invested approximately $54 million
in such efforts through the end of 1997. Between July 1, 1993 and December 31,
1997, the Company spent approximately: (i) $22 million refurbishing its 2,100
rooms, including installation of a card key entry system and new telephone
computer switch equipment and other similar upgrades, (ii) $9 million upgrading
its slot machines to be competitive with slot machines of other Las Vegas Strip
casinos and reducing the average age of the equipment to less than three years,
(iii) $3 million remodeling bars, restaurants and convention banquet areas, (iv)
$1 million remodeling the show rooms and upgrading light and sound equipment,
(v) $10 million upgrading the life safety, heating and cooling and other back of
the house support systems, (vi) $4 million upgrading its computer systems,
including casino rating software, slot tracking systems and payroll management
systems, all with the objective of controlling costs and enhancing customer
service, and (vii) developing Nickel Town at a cost of $5 million.
Gaming
The Riviera has 115,000 square feet of casino space. The casino
currently has approximately 1,630 slot machines and 46 gaming tables, including
blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) poker, baccarat,
Let It Ride(R) and poker. The casino also includes a keno lounge and a 200-seat
race and sports book.
Gaming operations at the Riviera are continually updated to respond
to both changing market conditions and customer demand in an effort to attract
new customers and encourage repeat customer business through player tracking and
database management. The Company maintains a slot players club, through which
members receive special promotions and targeted mailings. New and innovative
slot and table games have been introduced based on customer feedback. Management
devotes substantial time and attention to the type, location and player activity
of all its slot machines. The Company recently completed an extensive capital
investment program for the upgrade of its slot machines.
The current management team has made an effort to redirect its
business away from high-stakes wagerers in favor of focusing on highly
profitable, less volatile mid-level gaming customers consistent with its focused
marketing efforts. In order to effectively pursue this strategy, management has
made several strategic changes including reconfiguring the casino space to
improve the flow of customer traffic, installing new slot machines and bill
acceptors, reducing the number of gaming tables and de-emphasizing baccarat. In
addition, management implemented stricter credit policies and reduced baccarat
table limits. As a result, the percentage of table game dollar volume
represented by credit play declined from approximately 24% in 1993 to 15% in
1997. Also, in 1997, revenues from slots and tables were approximately 75% and
25%, respectively, as compared to 55% and 45%, respectively, in 1992. Because
the extension of credit is not necessary for success with mid-level gaming
customers, losses on uncollectible and discounted receivables have declined
significantly. Receivables from casino operations declined from approximately
$2.9 million at December 31, 1993 to approximately $2.2 million at December 31,
1997 and the allowance for bad debts and discounts from casino operations
declined from approximately $800,000 to $433,000 during the same period. These
reductions have resulted primarily from the imposition of stricter credit
standards.
During 1997, the Company developed "Nickel Town(R)" on the corner of
Las Vegas Boulevard and Riviera Boulevard at the crosswalk from Circus Circus
and the local Strip bus stop for approximately $5 million. The 10,000 square
foot facility contains approximately 300 slot machines, a bar, snack bar and
souvenir shop. Food and beverage items are priced very attractively and promoted
extensively. Dramatic signage and lighting effects compatible with the
property's existing facade facing Las Vegas Boulevard create a "must see" effect
for passersby on both sides of Las Vegas Boulevard. The Company believes that
the nickel player represents the most rapidly growing segment of the Las Vegas
gaming market and is frequently neglected by the Company's major competitors who
focus their slot products on higher denominations. Two-thirds of the devices in
Nickel Town are nickel slot machines. Development of Nickel Town was completed
in December 1997.
7
Hotel
The Riviera's hotel is comprised of five hotel towers with
approximately 2,100 rooms, including 169 suites. Built in 1955 as part of the
original casino/hotel, the nine-story North Tower features 391 rooms and 11
suites. In 1967, the 12-story South Tower was built with 147 rooms and 31
suites. Another 220 rooms and 72 suites, including penthouse suites, were added
to the property through the construction of the 17-story Monte Carlo Tower in
1974. In 1977, the six-story San Remo Tower added 243 rooms and six suites to
the south side of the resort. The most recent phase of hotel expansion was
completed in 1988 upon the opening of the 930 room, 49 suite, 24-story Monaco
Tower. The Company recently completed the refurbishment of all of its hotel
rooms. Despite the significant increase in rooms on the Strip in the last three
years, management believes that the Riviera has attained room occupancy rates
that are among the highest on the Strip with 97.5% for 1994, 97.0% for 1995,
98.2% for 1996 and 96.8% for 1997 (based on available rooms). The average
occupancy rate for the Strip was 86.4% in 1997. Room revenue has increased from
$35.4 million in 1993 to $41.4 million in 1997, an increase of 16.9 %.
Management believes that this performance can be attributed to its targeted and
coordinated marketing strategy, particularly its focus on conventioneers.
Restaurants
The quality, value and variety of food services are critical to
attracting Las Vegas visitors. The Riviera offers four bars and five restaurants
and serves an average of approximately 5,000 meals per day, including banquets
and room service. The following table outlines, for each restaurant, the type of
service provided and total seating capacity:
Seating
Name Type Capacity
Kady's Coffee Shop 290
Kristofer's Steak and Seafood 162
Rik' Shaw Chinese 124
Ristorante Italiano Italian 126
World's Fare Buffet All-you-can-eat 432
---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,134
=====
In addition, the Riviera has a food court operated by a third party.
The food court has 200 seats and several fast-food restaurants.
Convention Center
The Riviera features 100,000 square feet of convention, meeting and
banquet space. The convention center is one of the largest in Las Vegas and is
an important feature that attracts customers. The facility can be reconfigured
for multiple meetings of small groups or large gatherings of up to 5,000 people.
The Riviera hosts approximately 150 conventions per year. As of December, 1997,
convention related advance bookings of rooms totaled approximately 450,000,
which includes 365,000 definite bookings and 85,000 tentative bookings. On
average, approximately 25% of the rooms are occupied for conventions.
The Company has increased its emphasis on the convention segment of
its business and the Clark County Planning Commission has recently approved the
expansion of the Company's convention facility. In 1998, the Company plans to
expand its convention center from 100,000 to 150,000 square feet by constructing
new, state-of-the-art convention, meeting and banquet facilities. The new
facilities will connect to the existing convention facility and the main hotel
buildings by a covered walkway. The Company expects the expanded convention
center to be one of the premier convention facilities in Las Vegas, ideally
positioned to take advantage of the growing convention business in 1998.
8
The new facility will generate increased banquet, rental and
entertainment revenue. In addition, the Company believes that with the expanded
state-of-the-art facilities, hotel room nights occupied by conventioneers will
increase as a percentage of total room nights. This will increase the Riviera's
average daily room rate since convention rates are considerably more than those
for all other occupancy segments. The Company's architect is currently
finalizing drawings for permitting and bidding. Construction commenced in the
first quarter of 1998 and is expected to be completed by the end of 1998.
Entertainment and Other
The Riviera has one of the most extensive entertainment programs in
Las Vegas, offering four different regularly scheduled shows and special
appearances by headline entertainers in concert. The four in-house productions
are regularly updated. In December 1994, the award winning Splash production was
closed in order to revise the show and remodel the showroom for the new Splash,
which opened on June 23, 1995. The readers of the Las Vegas Review Journal
recently voted The Riviera Comedy Club the number one comedy club in Las Vegas
and the Crazy Girls bronze sculpture in front of the Hotel as the best visitor
photo opportunity in Las Vegas. A summary of the shows and times is outlined
below:
Seating
Show Type Performance Times Capacity
- ----------------------------- ---------------------------- ------------------------------------------ --------------
Splash Variety show Twice a night, seven nights per 950
week
- ----------------------------- ---------------------------- ------------------------------------------ --------------
An Evening at La Cage Female impersonation Twice a night, five nights per week; 575
three times on Wednesday
- ----------------------------- ---------------------------- ------------------------------------------ --------------
Crazy Girls Adult-oriented Twice a night, five nights per week; 410
production three times a night on Saturday
- ----------------------------- ---------------------------- ------------------------------------------ --------------
The Riviera Comedy Stand-up comedy Twice a night, five nights per week; 350
Club three times a night on Friday &
Saturday
- ----------------------------- ---------------------------- ------------------------------------------ --------------
Other entertainment includes the 200-seat Le Bistro entertainment
lounge located in the casino which offers live performances six times per night.
In addition, the Riviera presents major concerts, including 1996 and 1997
performers such as the Beach Boys, the Pointer Sisters, Drew Carey, Air Supply,
Frankie Avalon, Bobby Vee, Dion, and the Doobie Brothers.
Entertainment revenues have increased from $16.5 million in 1993 to
$20.9 million in 1997, a 26.7% increase. Management believes that this increase
is attributable to the increasing popularity of the in-house productions.
Future Expansions
Future plans for the development of the Riviera include development
of an approximately 60,000 square-foot domed shopping center and entertainment
complex to be constructed directly over the casino and containing stores and
entertainment that will appeal to the Riviera's main target audience, adults
aged 45 to 65. The exit from the complex will be by an escalator which will
deliver patrons to the casino. The Company expects to find partners to finance,
develop and operate the entertainment attraction and retail stores.
9
The Company also has approximately six acres of its existing 26-acre
site available for additional development. The Company is exploring a number of
options in order to make the best use of this valuable land, including a joint
venture for the development of a time-share condominium tower, an additional
hotel tower and parking garage. Under the terms of the Company's Bond Indenture,
the Company could contribute up to 6 acres of land to such a project and if the
Company decides to develop a time share tower a third party would construct and
sell time-share units and arrange financing. Management believes that additional
rooms adjacent to the Las Vegas Convention Center would be particularly
attractive to business customers and would provide a base for additional casinos
customers. The development of a time-share tower or parking facility would
require additional financing and, in the case of the time-share tower, a joint
venture partner, none of which the Company has in place at the time.
Marketing Strategy
Since 1992, the Riviera's management team implemented numerous
programs aimed at repositioning the Riviera and refocusing its marketing
efforts. Such initiatives included targeting California and the southwestern
United States and emphasizing mid-level gaming customers, particularly slot
players, as opposed to "high rollers." Management believes that adult mid-level
gaming customers are under-served. Management reconfigured the casino space to
improve the flow of customer traffic, installed new slot machines and bill
acceptors, reduced the number of gaming tables and de-emphasized baccarat. In
addition, management reduced credit limits, outsourced the Company's sports book
and shifted to pari-mutuel horse wagering, thereby decreasing the volatility of
gaming revenues. Also, improved hotel marketing efforts resulted in one of the
highest room occupancy rates on the Strip.
The Riviera will continue to emphasize marketing programs that appeal
to slot and mid-level table game customers with a focus on creating repeat
customers and increasing walk-in traffic. In addition, a key marketing focus is
maintaining and expanding Riviera's core conventioneer customer base. In
developing its overall marketing programs, the Company conducts extensive,
ongoing research of its target customers' preferences through written surveys,
one-on-one interviews and focus groups.
Continue to Improve Performance of the Riviera
The Riviera will continue to emphasize marketing programs that appeal
to slot and mid-level table game customers with a focus on creating repeat
customers and increasing walk-in traffic. Key elements of this strategy include
offering a value-oriented experience by providing a variety of hotel rooms,
restaurants and entertainment, with some of Las Vegas' most popular shows, all
at reasonable prices. The Company has completed an extensive capital investment
program at the Riviera, including completion of the upgrade of its slot machines
and the refurbishment of substantially all its hotel rooms. The Company further
capitalized on the Riviera's prime Strip frontage and proximity to the Las Vegas
Convention Center through additional development and expansion on the existing
26-acre site. To attract walk-in traffic from the nearby hotel casinos and
motels (Circus Circus, Westward Ho, Stardust, Sahara, and Las Vegas Hilton)
which have more than 10,000 rooms, the Company developed Nickel Town on the
corner of the Strip and Riviera Boulevard at the crosswalk from Circus Circus
and the local Strip bus stop for approximately $5 million. The 10,000 square
foot facility contains approximately 300 slot machines, a bar, snack bar and
souvenir shop. Food and beverage items are priced very attractively and promoted
extensively. Dramatic signage and lighting effects compatible with the
property's existing facade facing Las Vegas Boulevard create a "must see" effect
for passersby on both sides of the Strip. The Company believes that the nickel
player represents the most rapidly growing segment of the Las Vegas gaming
market and is frequently neglected by the Company's major competitors who focus
their slot products on higher denominations. Two-thirds of the devices in Nickel
Town are nickel slot machines. Development of Nickel Town was completed in
December 1997.
Emphasize Slot Play
10
Management instituted a number of initiatives at the Riviera to
increase slot play, including the replacement of old slot machines, the
installation of bill acceptors and the addition of slot hosts. The Company's
strategy is to continue to increase slot play through marketing programs and
other improvements, including (i) the Company's slot upgrade program, which was
completed in December 1997, (ii) addition of new signage, (iii) promotion of the
Riviera Player's Club, (iv) sponsorship of slot tournaments, (v) creation of
promotional programs, (vi) marketing of the "World's Loosest Corner of Slots"
and "$40 for $20" slot promotions, and (vii) the opening of Nickel Town(sm) at
the end of 1997.
During 1997, the Company developed "Nickel Town" on the corner of The
Las Vegas Strip and Riviera Boulevard at the crosswalk from Circus Circus and
the local Strip bus stop for approximately $5 million as described above.
One of the Company's most successful permanent promotions is its "$40
for $20" slot promotion which attracts slot players to the casino. The promotion
offers $40 of slot play on certain promotional machines for $20 cash. If the
customer does not win a jackpot or at least $40, a prize with a retail value of
at least $20 is awarded. While the Riviera's competitors' promotions normally
result in a cost (loss) to the casino department, this innovative program has a
positive EBITDA (exclusive of ancillary slot play) which is used to offset other
marketing costs, including "free pulls," drawings, advertising and general
marketing. The sign-up counter and the promotion machines are located near an
entrance to the casino and often draw long lines of patrons. The Company has
introduced this promotion at the Four Queens and has been approached to license
this promotion to other casinos as well, which it may do in the future. Another
successful promotion is the "World's Loosest Corner of Slots" which is an area
of the casino that contains banks of slot machines with the guaranteed highest
pay back percentages of any similar machines in Las Vegas. Like the "$40 for
$20" slot promotion, the "World's Loosest Corner of Slots" is located near an
entrance to the casino to attract walk-in traffic. These promotions have
produced significant income from both repeat and walk-in customers within the
Riviera's targeted market segments.
Create Repeat Customers
Generating customer loyalty is a critical component of management's
business strategy as retaining customers is less expensive than attracting new
ones. The Company has developed a focused and coordinated marketing program
intended to develop a loyal customer base which emphasizes (i) providing a high
level of service to its customers to ensure an enjoyable experience while at the
Riviera, (ii) responding to customer surveys and (iii) focusing marketing
efforts and promotional programs on customers with positive gaming profiles. The
Company uses its research data to tailor promotional offers to the specific
tastes of targeted customers. All slot and table players are encouraged to join
the Riviera Player's Club which tracks their level of play, and to fill out
surveys that provide the Riviera with personal information and preferences.
Members of the Riviera Player's Club earn bonus points based upon their level of
play, redeemable for free gifts, complimentary services or cash rebates.
Promotional offers are made to qualifying customers through direct mail and
telemarketing. The Company designs promotional offers targeted at certain
mid-level gaming patrons that are expected to provide significant revenues based
upon their historical gaming patterns. The Company contacts these customers
through a combination of direct mail and telemarketing by an in-house marketing
staff and independent representatives located in major cities. The Riviera uses
a proprietary database which is linked to its player tracking system to help
identify customers' requirements and preferences; thereby allowing the Riviera
to customize promotions to attract repeat visitors. The Company offers customers
personalized service, credit availability and access to a variety of
complimentary
11
or reduced-rate room, dinner and entertainment reservations. Management uses a
specialized multi-tiered marketing approach to attract customers in each of its
major market segments. Slot and table game tournaments and special events are
designed for specific levels of play. Utilizing its proprietary database the
Company's marketing department then targets and invites the customers most
appropriate for the customized events. In addition, the Company hosts an array
of special events, including slot and table tournaments, designed to attract
customers for an extended stay. Management has found that this individualized
marketing approach has provided significant revenues and profitable repeat
business.
Provide Extensive Entertainment Options
The Company also focuses on attracting its guests through a range of
entertainment opportunities. The Riviera has one of the most extensive
entertainment programs in Las Vegas with four different regularly scheduled
shows and special appearances by headline entertainers. In addition to providing
a positive impact on the Company's profitability, the shows attract additional
gaming revenue. Surveys indicate that approximately 80% of the show patrons come
from outside the hotel and approximately 66% of these individuals gamble at the
Riviera before or after the shows. In addition, the Riviera offers a variety of
quality dining options, a range of accommodations from deluxe rooms to penthouse
suites, a 75,000 square-foot pool area with an olympic-size swimming pool,
tennis courts, fitness center, spa and 47 retail outlets located throughout the
property. The Company believes that it offers a value-oriented experience by
providing a variety of hotel rooms, restaurants and entertainment, with some of
Las Vegas' most popular shows, all at reasonable prices.
The Company believes entertainment provides an attractive marketing
tool to attract customers to the Riviera. The Riviera offers one of the most
extensive entertainment programs in Las Vegas, including such well received
shows as Splash (a variety show), An Evening at La Cage (a female impersonation
show), Crazy Girls (an adult revue) as well as featured comedians at the Riviera
Comedy Club. The Company updates its shows continually in response to customer
surveys and to keep them fresh. Tickets for the shows are offered at reasonable
prices in keeping with the Company's emphasis on mid-level customers.
Attract Walk-In Traffic
The Company seeks to maximize the number of people who patronize the
Riviera that are not guests in the hotel by capitalizing on Riviera's prime
Strip location, convention center proximity and the Riviera's several popular
in-house productions. The Riviera is well situated on the Las Vegas Strip near
Circus Circus, The Stardust Hotel & Casino, the Westward Ho Casino & Hotel, the
Las Vegas Hilton and the Las Vegas Convention Center. Management strives to
attract customers from those facilities, as well as capitalize on the growth in
Las Vegas visitors in general, with the goal of increasing walk-in traffic by
(i) the development of Nickel Town. (ii) providing a variety of quality,
value-priced entertainment and dining options, and (iii) promoting the "World's
Loosest Corner of Slots" and "$40 for $20" slot promotions, and placing them
near the entrances to the casino.
Focus on Convention Customers
This market segment consists of two groups: (i) those trade
organizations and groups that hold their events in the banquet and meeting space
provided by a single hotel and (ii) those attending city-wide events, usually
held at the Las Vegas Convention Center. The Riviera targets convention business
because it typically provides patrons willing to pay higher room rates and it
provides certain advance planning benefits, since conventions are usually booked
two years in advance of the event date. The Riviera has 100,000 square feet of
exhibit, meeting and banquet space (one of the largest convention facilities
provided by a casino/hotel in Las Vegas) making it attractive to large groups.
Management focuses its marketing efforts on conventions whose participants have
the most active gaming profile and higher room rate, banquet and function
spending
12
habits. The Riviera also benefits from its proximity to the Las Vegas Convention
Center which makes it attractive to city-wide conventioneers looking to avoid
the congestion that occurs during a major convention, particularly at the south
end of the Strip. The Company is currently expanding its 100,000 square foot
convention, meeting and banquet facility to 150,000 square feet at an estimated
cost of approximately $15 million. The Company derives approximately 25% of its
hotel occupancy from convention customers and considers them a critical
component of its customer base. Management believes that an expansion of the
convention space will accommodate the growth in the size and number of the
groups that presently use the facility and attract new convention groups.
The Company focuses its marketing efforts in the southwestern United
States during the spring and summer months and in the mid western United States
during the fall and winter months to effectively capitalize on the vacation
patterns of the Riviera's target customers in those markets. Marketing efforts
in California are consistent throughout the year reflecting the constant flow of
California residents to Las Vegas. Management has found that many of its
customers use tour and travel "package" options to reduce the cost of travel,
lodging and entertainment. These packages are produced by wholesale operators
and travel agents and emphasize mid-week stays. Tour and travel patrons often
book at off-peak periods enabling the Company to maintain occupancy rates at the
highest levels throughout the year. Management has developed specialized
marketing programs and cultivated relationships with wholesale operators, travel
agents and major domestic air carriers to expand this market. The Company's four
largest tour and travel operators, currently account for approximately 500 room
bookings per night. The Company has successfully converted many tour and travel
customers who meet the Company's target customer profile into repeat customers.
In addition to focusing on convention customers, the Company targets
the following segments of the Las Vegas market:
Mid-Level Gaming Customers
The Company has developed a marketing program intended to develop a
loyal following of repeat slot and mid-level table game customers. Management
believes it has been able to successfully attract these patrons using the
Riviera's restaurants, hotel accommodations and entertainment and by focusing on
customer service. Management has adopted a selective approach to the extension
of credit to these customers in order to reduce volatility of operating results.
The Company uses its research data to tailor promotional offers to the specific
tastes of targeted customers. All slot and table players are encouraged to join
the Riviera Player's Club and to fill out surveys that provide the Riviera with
personal information and preferences and tracks their level of play. Members of
the Riviera Player's Club earn bonus points based upon their level of play,
redeemable for free gifts, complimentary services or cash rebates. Promotional
offers are made to qualifying customers through direct mail and telemarketing.
Tour and Travel
The tour and travel segment of the market consists of customers from
across the country who utilize "packages" to reduce the cost of travel, lodging
and entertainment. These packages are produced by wholesale operators and travel
agents and emphasize mid-week stays. Tour and travel patrons often book at
off-peak periods enabling the Company to maintain occupancy rates at the highest
levels throughout the year. Management has developed specialized marketing
programs and cultivated relationships with wholesale operators, travel agents
and major domestic air carriers to expand this market. The Company's four
largest tour and travel operators account for approximately 500 of the available
2,100 room bookings per night. The Company makes an effort to convert tour and
travel customers who meet the Company's target customer profile into repeat
customers.
13
Free and Independent Travelers
This market segment consists of persons who travel to Las Vegas from
all areas of the world, many of whom originate from the western United States.
These customers are not affiliated with groups and make their reservations
directly with the hotel or through independent travel agents. The Riviera
benefits from high name recognition with this market segment.
Las Vegas Market
Las Vegas is one of the largest and fastest growing entertainment
markets in the country. According to the Las Vegas Convention and Visitors
Authority (the "LVCVA"), the number of visitors traveling to Las Vegas has
increased at a steady and significant rate for the last eleven years from 15.2
million in 1986 to 30.5 million in 1997, a compound annual growth rate of 10%.
Clark County gaming has continued to be a strong and growing business with Clark
County gaming revenues increasing at a compound annual growth rate of 14% from
$2.4 billion in 1986 to $6.2 billion in 1997.
The Riviera targets the large and expanding Las Vegas tourist and
gaming market. Las Vegas is the largest city in Nevada, with a local population
in excess of one million, and is Nevada's principal tourist center. Gaming and
tourism are the major attractions, complemented by warm weather and the
availability of many year-round recreational activities. Although Las Vegas'
principal markets are the western region of the United States, most
significantly Southern California and Arizona, Las Vegas also serves as a
destination resort for visitors from all over the world. A significant
percentage of visitors originate from Latin America and Pacific Rim countries
such as Japan, Taiwan, Hong Kong and Singapore.
Historically, Las Vegas has had one of the strongest hotel markets in
the country. The number of hotel and motel rooms in Las Vegas has increased by
over 56% from approximately 67,000 at the end of 1989 to 105,000 at the end of
1997, giving Las Vegas the most hotel and motel rooms of any metropolitan area
in the country. Despite this significant increase in the supply of rooms, the
Las Vegas hotel occupancy rate exceeded 85% for each of 1993, 1994, 1995, 1996
and 1997. Since January 1, 1996 approximately 15,300 new hotel rooms opened, and
as of December 31, 1997 there were 15,000 hotel rooms under construction. The
LVCVA states that an additional 6,000 rooms not yet under construction will be
completed by the end of the year 2000. The LVCVA also lists 47,000 additional
rooms that are proposed but, at present, have undetermined completion dates.
However, the Company believes that many of these projects will not materialize.
The new rooms under construction are primarily being designed to attract the
high end gaming and convention customers, and based on construction costs will
be priced at rates well above those which have been or can be charged by the
Riviera based on the investment in its facility.
The Company believes that the growth in the Las Vegas market has been
enhanced as a result of (i) a dedicated program by the LVCVA and major Las Vegas
casino/hotels to promote Las Vegas as a major convention site, (ii) the
increased capacity of McCarran Airport and (iii) the introduction of large
themed "must see" destination resorts in Las Vegas. In 1987, approximately 1.7
million people attended conventions in Las Vegas and generated approximately
$1.2 billion of non-gaming economic impact. In 1997, the number of convention
delegates had increased to 3.5 million with approximately $4.4 billion of
non-gaming economic impact. According to the LVCVA, Las Vegas was the largest
convention market in the country in 1996.
During the past five years, McCarran Airport has expanded its
facilities to accommodate the increased number of airlines and passengers which
it services. The number of passengers traveling through McCarran Airport has
increased from approximately 15.6 million in 1987 to 30.3 million in 1997.
Construction has recently been completed on numerous roadway enhancements to
improve access to the
14
Airport. An additional runway has also been completed and is now operational.
The Airport has additional long-term expansion plans underway which will provide
three new satellite concourses, 60 additional gates and other facilities.
However, total available seats and flights have recently declined and there is
concern in the casino industry that the airlines have moved their planes to more
profitable routes for business travelers.
The Black Hawk Project
In August 1997, the Company acquired the Black Hawk Land, which
management believes to be the premier gaming site in Black Hawk, Colorado. The
property is currently the closest gaming site to Denver and is the first site
encountered when traveling from Denver to Black Hawk/Central City. The Black
Hawk/Central City market primarily serves the metropolitan Denver area and is
approximately an hour drive and 40 miles west of central Denver.
Located on South Main Street, the property is directly across from
the Colorado Central Station, owned by Anchor Gaming, which management believes
is the most successful casino in Colorado due to its location, size and
availability of parking. Unlike many other sites, the Riviera development site
is level and has a relatively broad footprint, which is expected to provide
significant cost and time savings in construction relative to other projects in
the market and can accommodate a large Las Vegas-style casino on one floor.
The development site comprises 71,000 square feet, zoned for gaming.
The casino building is expected to be approximately 62,000 square feet and
include approximately 1,000 slot machines and 14 table games. In addition, the
facility will provide entertainment, food and beverage service and will
incorporate an attached covered parking facility for approximately 520 vehicles.
The Company currently estimates that total costs for completion of
the Black Hawk Project will be approximately $55 million. The Company purchased
the Black Hawk Land in August 1997 for $15 million, which was financed by the
net proceeds from the sale of the Notes, and expects to finance the remainder of
the Black Hawk Project from a combination of third party financing and
additional investment by the Company, including up to an additional $15 million
of the net proceeds from the sale of the Notes. The Company has received an
excavation permit and expects to receive the other necessary permits in the near
future, with construction of the casino commencing shortly thereafter. The
Company expects to receive the necessary construction and other permits in the
near future, with construction of the casino commencing shortly thereafter. The
casino is scheduled to open in 1999.
Colorado Market
In November 1990, Colorado voters approved limited stakes gaming
($5.00 or less per wager) in two historic gold mining areas, Black Hawk/Central
City and Cripple Creek. Because of the $5.00 maximum bet, the casinos in
Colorado emphasize gaming machine play. Black Hawk and Central City are
contiguous, with Black Hawk being closer to Denver, and are located
approximately 40 miles west of Denver and 10 miles north of Interstate 70, the
main highway connecting Denver to many of Colorado's major ski resorts. Cripple
Creek is located approximately 45 miles from Colorado Springs and 75 miles from
Pueblo. Casinos located in the Black Hawk/Central City area serve primarily the
residents of Denver and Boulder, Colorado and surrounding communities.
Approximately three million people live within a 100-mile radius of the Black
Hawk/Central City area.
The following table sets forth statistical information relating to
the growth of the Black Hawk/Central City market compiled from data published by
the Colorado Department of Revenue:
15
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
--------- --------- -------- --------- ---------
Aggregate Gaming Revenues (Dollars in millions) $322 $309 $291 $243 $182
Revenue Per Slot Machine Per Day 96 93 85 80 70
Average Number of Slot Machines 8,625 8,446 8,636 7,705 6,922
Average Number of Casinos in Operation 32 33 32 34 36
Riviera Gaming Management
In order to capitalize on management's expertise and reputation as
successful operators of casino properties, the Company formed RGM, a wholly
owned subsidiary of the Company, for the primary purpose of obtaining casino
management contracts in Nevada and other jurisdictions. RGM provides services
such as assisting new venue licensee applicants in designing and planning their
gaming operations and managing the start-up of new gaming operations. These
services include casino design, equipment selection, employee recruitment and
training, control and accounting systems and marketing programs. Management
believes that management contracts provide high margin income with limited
additional overhead and little or no capital expenditure requirements.
Management is continually evaluating opportunities to manage other
casinos/hotels. The Company's objective is to obtain the right to a substantial
equity position in projects it would manage as part of the compensation for its
services.
Four Queens Management Agreement
Since August 1996, RGME has been operating the Four Queens located
adjacent to the Golden Nugget on Fremont Street in downtown Las Vegas under an
interim management agreement for a fee of $83,333 per month. A long-term
management agreement with Elsinore, the owner of the Four Queens, went into
effect on February 28, 1997, the effective date of the Chapter 11 plan of
reorganization of Elsinore.
The term of the management agreement is approximately 40 months,
subject to earlier termination or extension. Either party may terminate if the
Four Queens' cumulative EBITDA for the first two fiscal years is less than $12.8
million. The term can be extended by an additional 24 months at RGME's option,
if the Four Queens' cumulative EBITDA for the three fiscal years of the term is
at least $19.2 million. EBITDA is currently running between $5 and $6 million
per year. RGME is paid a minimum annual management fee of $1.0 million in equal
monthly installments. In addition, RGME receives a fee of 25% of the amount by
which the Four Queens' EBITDA in any fiscal year exceeds $8 million. RGME has
received Warrants to purchase 1,125,000 shares of common stock of Elsinore,
exercisable during the term or extended term of the management agreement at an
exercise price of $1.00 per share.
Either party can terminate the management agreement if (i)
substantially all the Four Queens' assets are sold, (ii) the Four Queens is
merged or (iii) a majority of the Four Queens' or Elsinore's shares are sold.
Upon such termination, RGME will receive a $2.0 million termination bonus minus
any amount realized or realizable upon exercise of the Warrants.
Competition
16
Las Vegas, Nevada
Intense competition exists among companies in the gaming industry,
many of which have significantly greater resources than the Company. The Riviera
faces competition from all other casinos and hotels in the Las Vegas area.
Management believes that the Riviera's most direct competition comes from
certain large casino/hotels located on or near the Strip which offer amenities
and marketing programs similar to those offered by the Riviera.
Las Vegas gaming square footage and room capacity are continuing to
grow and are expected to continue to increase significantly during the next
several years. Since January 1, 1996 approximately 15,300 new hotel rooms
opened, and as of December 31, 1997 there were 15,000 hotel rooms under
construction (which combined constitutes a 34% increase in the number of hotel
and motel rooms in Las Vegas), and the LVCVA states that an additional 6,000
rooms not yet under construction will be completed by the end of the year 2000.
The LVCVA also lists 47,000 additional rooms that are proposed but, at present,
have undetermined completion dates. Existing and future expansions, additions
and enhancements to existing properties and construction of new properties by
the Company's competitors could divert additional business from the Company's
facilities. There can be no assurance that the Company will compete successfully
in the Las Vegas market in the future.
During 1997, available rooms nights in the Las Vegas market increased
from 33.9 million to 37.6 million or 11%, while total room nights occupied
increased from 30.6 million to 32.5 million or 6%. The ending room inventory at
December 31, 1997 was 105,000 compared to 99,000 at December 31, 1996, an
increase of 6,000 rooms or 6%. This has had the effect of intensifying
competition, resulting in declining occupancy and average room rates throughout
the Las Vegas market. Although the Company was able to increase its room rates
nominally which offset a less than 2% decline in occupancy, there is no
certainty that the Company can continue to maintain its present level of room
revenue considering the competitive situation.
Black Hawk, Colorado
Intense competition also characterizes the Black Hawk/Central City,
Colorado market. There are approximately 32 casinos currently operating in this
market in addition to casinos located in Cripple Creek. Several new development
projects and expansion plans have been announced, including a casino by a joint
venture between Jacobs Entertainment, Ltd. and the owner/operator of Gilpin
Hotel Casino (under construction and scheduled to open in 1998), and a casino on
property adjacent to the Black Hawk Land by a joint venture between Casino
America and Nevada Gold. Two additional projects have been announced which are
subject to financing. Colorado does not limit the total number of gaming
licenses available for issuance in Colorado and there are no minimum facility
size requirements. The Company believes that many Colorado casinos may not be
operating profitably. A number of Colorado casinos have ceased operations, and
others have either filed for bankruptcy protection, closed temporarily or
reduced the number of their employees.
In May 1997, the Colorado Legislature passed a bill permitting the
installation of a minimum of 500 video lottery terminals at each licensed horse
and greyhound racetrack then located in Colorado Springs, Pueblo, Byers,
Loveland, Commerce City and Arapahoe County. The Governor of Colorado vetoed the
bill on June 4, 1997 labeling it as a "back-door expansion of gambling." There
is no reason, however, to believe that there will not be renewed efforts to pass
similar legislation during the 1998 or subsequent legislative sessions.
The Company also competes, to some extent, with casinos in other
states, river boat and Native American gaming ventures, state-sponsored
lotteries, on- and off-track wagering, card parlors and other forms of legalized
gaming in the United States, as well as with gaming on cruise ships and
international
17
gaming operations. In addition, certain states have recently legalized or are
considering legalizing casino gaming in specific geographical areas within those
states. Any future development of casinos, lotteries or other forms of gaming in
other states, particularly areas close to Nevada, such as California, could have
a material adverse effect on the Company's results of operations.
The current business of the Company is entirely dependent on gaming
in Las Vegas. The Riviera derives a substantial percentage of its business from
tourists, principally from Southern California and the southwestern United
States. Weakness in the economy of Southern California has in the past and could
in the future adversely affect the financial results of the Company. Until the
Black Hawk Casino opens, the Company's operations will be primarily dependent
upon the results of operations achieved by the Riviera on the Las Vegas Strip.
Any significant disruption in operations at the Riviera would have a material
adverse effect on the Company.
Employees and Labor Relations
As of December 31, 1997, the Riviera employed approximately 2,100
persons and had collective bargaining contracts with eight unions covering
approximately 1,300 of such employees including food and beverage employees,
rooms department employees, carpenters, engineers, stage hands, musicians,
electricians, painters and teamsters. The Company's agreements with the Southern
Nevada Culinary and Bartenders Union and Stage Hands Union, which cover the
majority of the Company's unionized employees, were renegotiated in 1994 and
expired on May 31, 1997 and June 1, 1997, respectively. The Riviera, along with
the other Las Vegas hotels are currently negotiating with these unions and
anticipate that new contracts will be agreed upon during the second quarter of
1998. The Culinary and Bartenders Union is currently concentrating on its
negotiations with the larger gaming companies and is expected to intensify its
negotiations with the Riviera after preliminary agreements have been reached
with the larger gaming companies. The Stage Hands Union's negotiations are
proceeding at a steady pace and agreement on details of the contract is
anticipated during the second quarter of 1998. The expiration date of the
Teamsters contract is March 31, 1998. The Company is currently in negotiation
and anticipates satisfactory settlement in the second quarter of 1998. The
Operating Engineers, Carpenters, Painters and Electricians Unions' collective
bargaining agreements were renewed in 1995 and generally expire in 1998. The
Musicians Union's collective bargaining agreement expires on September 21, 1999.
Although unions have been active in Las Vegas, management considers its employee
relations to be satisfactory. There can be no assurance, however, that new
agreements will be reached without union action or will be on terms satisfactory
to the Company.
Regulation and Licensing
Nevada
Nevada Gaming Authority
The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) The Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively the "Nevada Act") and (ii) various local ordinances and
regulations. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Commission, the Nevada Board, the Clark County
Board and the City of Las Vegas. The Nevada Commission, the Nevada Board, the
Clark County Board and the City of Las Vegas are collectively referred to as the
"Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time and in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures;
18
(iii) the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for internal fiscal
affairs and the safeguarding of assets and revenues, providing reliable record
keeping and requiring the filing of periodic reports with the Nevada Gaming
Authorities; (iv) the prevention of cheating and fraudulent practices; and (v)
providing a source of state and local revenues through taxation and licensing
fees. Change in such laws, regulations and procedures could have an adverse
effect on the Company's gaming operations.
ROC is required to be licensed by the Nevada Gaming Authorities. The
gaming license held by ROC requires the periodic payment of fees and taxes and
is not transferable. ROC is also licensed as a manufacturer and distributor of
gaming devices. Such licenses also require the periodic payment of fees and are
not transferable. The Company is registered by the Nevada Commission as a
publicly traded corporation (a "Registered Corporation") and has been found
suitable to own the stock of ROC. ROC is also registered by the Nevada
commission as an Intermediary Company and has been found suitable to own the
stock of RGM which has been registered by the Nevada Commission as an
Intermediary Company and has been found suitable to own the stock of its
subsidiary Riviera Gaming Management-Elsinore, Inc. ("RGME"). RGME has been
licensed as the manager of the Four Queens and such license is not transferable.
ROC and RGME are each a Corporate Licensee (collectively, the "Corporate
Licensees") under the terms of the Nevada Act. As a Registered Corporation, the
Company is required periodically to submit detailed financial and operating
reports to the Nevada Commission and to furnish any other information which the
Nevada Commission may require. No person may become a stockholder of, or receive
any percentage of profits from, the Corporate Licensees without first obtaining
licenses and approvals from the Nevada Gaming Authorities. The Company, ROC, RGM
and RGME have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, findings of suitability and licenses required
in order to engage in gaming activities and manufacturing and distribution
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use
or play in Nevada, or for distribution outside of Nevada, must be manufactured
by licensed manufacturers, distributed or sold by licensed distributors and
approved by the Nevada Commission. The approval process includes rigorous
testing by the Nevada Board, a field trial and a determination as to whether the
gaming device meets strict technical standards that are set forth in the
regulations of the Nevada Gaming Authorities. Associated equipment must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, the Company, ROC, RGM
or RGME in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
certain key employees of ROC and RGME must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors and key employees of the Company
and RGM who are actively and directly involved in the gaming activities of ROC
or RGME may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing or
a finding of suitability must pay all the costs of the investigation. Any change
in a corporate position by a licensed person must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, ROC, RGM or RGME the companies involved would
have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company, ROC, RGM or RGME to terminate the employment
of any person
19
who refuses to file appropriate applications. Determinations of suitability or
of questions pertaining to licensing are not subject to judicial review in
Nevada.
The Company, ROC and RGME are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by ROC
must be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by ROC or
RGME, the gaming licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, ROC, RGM and RGME and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the casino and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for reasonable rental value of the casino) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of the gaming licenses of ROC or
RGME or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless
of the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the corporate charter, bylaws,
management, policies or operations of the Registered Corporation, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are deemed to be consistent with
holding voting securities for investment purposes only include: (i) voting on
all matters voted on by stockholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice
20
that a person is unsuitable to be a stockholder or to have any other
relationship with the Company, ROC, RGM or RGME, the Company (i) pays that
person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming licensee.
The Nevada Commission may, in its discretion, require the holder of
any debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation, if it has reason to believe that such ownership would be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. In addition, (i) a Corporate Licensee may not guarantee a security
issued by a Registered Corporation pursuant to a public offering, or hypothecate
its assets to secure the payment or performance of the obligations evidenced by
such a security, without the prior approval of the Nevada Commission, (ii) the
pledge of the stock of a Corporate Licensee or Intermediary Company ("Stock
Pledge"), such as ROC, RGM and RGME, is void without the prior approval of the
Nevada Commission, and (iii) restrictions upon the transfer of an equity
security issued by a Corporate Licensee, or Intermediary Company and agreements
not to encumber such securities (collectively, "Stock Restrictions") are
ineffective without the prior approval of the Nevada Commission.
Changes in control of the Company through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming Licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
21
productive corporate gaming. The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming Licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the
type of gaming or activity involved, are payable to the State of Nevada and to
the County in which the ROC's and RGME's operations are conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenues received; (ii) the number of gaming devices operated; or
(iii) the number of table games operated. A casino entertainment tax is also
paid by casino operations where entertainment is furnished in connection with
the selling of food, refreshments or merchandise. Nevada Licensees that hold a
license to manufacture and distribute slot machines and gaming devices, such as
ROC, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of personal unsuitability.
Other Nevada Regulation
The sale of alcoholic beverages at the Riviera is subject to
licensing, control and regulation by the Clark County Board. All licenses are
revocable and are not transferable. The Clark County Board has full power to
limit, condition, suspend or revoke any such license, and any such disciplinary
action could (and revocation would) have a material adverse affect upon the
operations of ROC.
Colorado
Colorado Gaming Regulation
Pursuant to an amendment to the Colorado Constitution (the "Colorado
Amendment"), limited stakes gaming became lawful in the cities of Central City,
Black Hawk and Cripple Creek on October 1, 1991. The Colorado Amendment defines
limited stakes gaming as the use of slot machines and the card games of
blackjack and poker, with a maximum single bet of five dollars.
22
Limited stakes gaming is confined to the commercial districts of
these cities as defined by Central City on October 7, 1981, by Black Hawk on May
4, 1978, and by Cripple Creek on December 3, 1973. In addition, the Colorado
Amendment restricts limited stakes gaming to structures that conform to the
architectural styles and designs that were common to the areas prior to World
War I, and which conform to the requirements of applicable city ordinances
regardless of the age of the structures. The Colorado Amendment provides that no
more than 35% of the square footage of any building and no more than 50% of any
one floor of any building may be used for limited stakes gaming. The Colorado
Amendment prohibits limited stakes gaming between the hours of 2:00 a.m. and
8:00 a.m., and allows limited stakes gaming to occur in establishments licensed
to sell alcoholic beverages.
Further, the Colorado Amendment provides that, in addition to any
other applicable license fees, up to a maximum of 40% of the Adjusted Gross
Proceeds ("AGP") of limited stakes gaming operations may be payable by a
licensee for conducting limited stakes gaming. Such percentage is to be
established by the Colorado Limited Gaming Control Commission (the "Colorado
Commission") per the Colorado Limited Gaming Act of 1991 (the "Colorado Act").
The Colorado legislature promulgated the Colorado Act to implement
the provisions of the Colorado Amendment. The Colorado Act was signed onto law
on June 4, 1991 and has been amended subsequently.
The Colorado Act declares public policy on limited stakes gaming to
be that: (i) the success of limited stakes gaming is dependent upon public
confidence and trust that licensed limited stakes gaming is conducted honestly
and competitively; the rights of the creditors of licensees are protected;
gaming is free from criminal and corruptive elements; (ii) public confidence and
trust can be maintained only by strict regulation of all persons, locations,
practices, associations and activities related to the operation of licensed
gaming establishments and the manufacture or distribution of gaming devices and
equipment; (iii) all establishments where limited stakes gaming is conducted and
where gambling devices are operated and all manufacturers, sellers and
distributors of certain gambling devices and equipment must be licensed,
controlled and assisted to protect the public health, safety, good order and
general welfare of the inhabitants of the state to foster the stability and
success of limited stakes gaming and to preserve the economy and policies of
free competition in Colorado; and (iv) no applicant for a license or other
approval has any right to a license or to the granting of the approval sought.
The Colorado Act subjects the ownership and operation of limited
stakes gaming facilities in Colorado to extensive regulation by the Colorado
Commission and prohibits persons under the age of 21 from participating in
limited stakes gaming. No limited stakes gaming may be conducted in Colorado
unless all appropriate gaming licenses are approved by and obtained from the
Colorado Commission. The Colorado Commission has full and exclusive authority to
promulgate, and has promulgated, rules and regulations governing the licensing,
conducting and operating of limited stakes gaming (the "Colorado Regulations").
Such authority does not require any approval by or delegation of authority from
the Colorado Department of Revenue (the "Colorado Revenue Department"). The
Colorado Act also created the Division of Gaming within the Colorado Revenue
Department to license, implement, regulate and supervise the conduct of limited
stakes gaming in Colorado, supervised and administered by the Director of the
Division of Gaming ("Division Director").
The Colorado Commission may issue licenses for: (i) slot machine
manufacturer or distributor, (ii) operator, (iii) retail gaming, (iv) support
and (v) key employee gaming. The first three licenses require annual renewal by
the Colorado Commission. Support and key employee licenses are issued for two
year periods and are renewable by the Division Director. The Colorado Commission
has broad discretion to condition, suspend for up to six months, revoke, limit
or restrict a license at any time and also has the authority to impose fines.
23
An applicant for a gaming license must complete comprehensive
application forms, pay required fees and provide all information required by the
Colorado Commission and the Division of Gaming. Prior to licensure, applicants
must satisfy the Colorado Commission that they are suitable for licensing.
Applicants have the burden of proving their qualifications and must pay the full
cost of any background investigations.
There is no limit on the cost of such background investigations.
Gaming employees must hold either a support or key employee license.
Every retail gaming licensee must have a key employee licensee in charge of all
limited stakes gaming activities when limited stakes gaming is being conducted.
The Colorado Commission may determine that a gaming employee is a key employee
and, require that such person apply for a key employee license.
A retail gaming license is required for all persons conducting
limited stakes gaming on their premises. In addition, an operator license is
required for all persons who engage in the business of placing and operating
slot machines on the premises of a retailer. However, a retailer is not required
to hold an operator license. No person may have an ownership interest in more
than three retail licenses. A slot machine manufacturer or distributor license
is required for all persons who manufacture, import or distribute slot machines
in Colorado.
The current practice of the Colorado Commission is to require the
following persons and entities to complete background investigation forms, and
to provide comprehensive information and to submit to a full background
investigation: (a) persons or entities owning (either directly or on a
pass-through basis) 5% or more of a privately traded entity licensee, (b)
persons or entities owning (either directly or on a pass-through basis) 10% or
more of a publicly traded entity licensee, (c) directors and officers of the
licensees, and (d) in certain circumstances, directors and officers of entities
described at (a) and (b) above. But, the Colorado authorities retain the
discretion to require any person or entity with an interest in a licensee
(directly or on a pass-through basis) to submit such information and undergo
full investigation. The purpose of the investigation is to determine each such
person's or entity's qualifications and suitability for licensure.
Persons found unsuitable by the Colorado Commission may be required
immediately to terminate any interest, association or agreement with or
relationship to a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant also may jeopardize the licensee's license or the applicant's
application. A license approval may be conditioned upon the termination of any
relationship with unsuitable persons.
An applicant or licensee must report to the Division of Gaming or
Colorado Commission all leases not later than 30 days after the effective date
of the lease. Also, an applicant or a licensee, upon the request of the Colorado
Commission or the Division Director, must submit copies of all written gaming
contracts and summaries of all oral gaming contracts to which it is or intends
to become a party. The Division Director or the Colorado Commission may require
changes in the lease or gaming contract before an application is approved or
participation in such agreement is allowed or may require termination of the
lease or gaming contract.
The Colorado Act and the Colorado Regulations require licensees to
maintain detailed records that account for all business transactions. Records
must be furnished upon demand to the Colorado Commission, the Division of Gaming
and other law enforcement authorities. The Colorado Regulations also establish
extensive playing procedures and rules of play for poker, blackjack and slot
machines. Retail gaming licensees must adopt comprehensive internal control
procedures. Such procedures must be approved in advance by the Division of
Gaming and include the areas of accounting, surveillance, security, cashier
operations, key control and fill and drop procedures, among others. No gaming
devices may be used in limited stakes gaming without the approval of the
Division Director or the Colorado Commission.
24
Licensees have a continuing duty to immediately report to the
Division of Gaming the name, date of birth and social security number of all
persons who obtain an ownership, financial or equity interest in the licensee of
five (5) percent or greater, or who have the ability to control the licensee, or
who have the ability to exercise significant influence over the licensee, or who
loan any money or other thing of value to the licensee. Licensees must report to
the Division of Gaming all licenses, and all applications for licenses, in
foreign jurisdictions.
With limited exceptions applicable to licensees that are publicly
traded entities, no person may sell, lease, purchase, convey or acquire any
interest in a retail gaming or operator license or business without the prior
approval of the Colorado Commission.
All agreements, contracts, leases, or arrangements in violation of
the Colorado Act or the Colorado Regulations are void and unenforceable.
The Colorado Amendment requires an annual tax of as much as 40% on
the AGP from limited stakes gaming. Currently, the gaming tax on AGP is: 2% on
the first $2 million of AGP; 4% on AGP from $2 million to $4 million; 14% on AGP
from $4 million to $5 million; 18% on AGP from $5 million to $10 million; and
20% on AGP over $10 million. The gaming tax is paid monthly, with licensees
required to file returns by the 15th of the following month. Gaming taxes are
established as of July 1st the following 12 months.
The Colorado Commission requires all gaming licensees to pay an
annual device fee for each slot machine, blackjack table and poker table. The
current device fee is $56.25 through June 30, 1998. The municipality of Black
Hawk assesses an annual device fee of $750 per device. There is no statutory
limit on state or city device fees, which may be increased at the discretion of
the Colorado Commission or Black Hawk. In addition, a business improvement fee
of as much as $102 per device and a transportation authority device fee of $77
per device also may apply depending upon the location of the licensed premises
in Black Hawk. The current annual business improvement fee is $89.04.
Black Hawk also imposes taxes and fees on other aspects of the
businesses of gaming licensees, such as parking, alcoholic beverage licenses and
other municipal taxes and fees. Significant increases in these fees and taxes,
or the imposition of new taxes and fees, may occur.
Violation of the Colorado Act or any of the Colorado Regulations is a
criminal offense. Gaming licensees violating the Colorado Act or the Colorado
Regulations may, in addition to being subject to fines, suspension for as long
as six months or revocation of the gaming license, commit a class 1 misdemeanor
which may result in incarceration or fines or both.
The sale of alcoholic beverages in gaming establishments is subject
to strict licensing, control and regulation by state and local authorities and
requires a liquor license. Alcoholic beverage licenses are revocable and
non-transferable. State and local licensing authorities have full power to
limit, condition, suspend for as long as six months or revoke any such licenses.
Violation of state alcoholic beverage laws may constitute a criminal offense
resulting in incarceration or fines or both.
There are various classes of retail liquor licenses under the
Colorado Liquor Code. A gaming licensee may sell malt, vinous or spirituous
liquors only by the individual drink for consumption on the premises. Even
though a retail gaming licensee may be issued various classes of retail liquor
licenses such gaming licensee may only hold liquor licenses of the same class.
An application for an alcoholic beverage license in Colorado requires notice,
posting and a public hearing before the local liquor licensing authority prior
to approval of the same. The Colorado Department of Revenue's Liquor Enforcement
Division must also approve the application. Riviera Black Hawk, Inc.'s
application for a liquor license was approved on
25
February 25, 1998 by the Black Hawk City Council. The liquor license application
now only requires approval of the State licensing authority.
The Colorado Commission has enacted Rule 4.5, which imposes
requirements on publicly traded corporations holding gaming licenses in Colorado
and on gaming licensees owned directly or indirectly by a publicly traded
corporation whether through a subsidiary or intermediary company. The term
"publicly traded corporation" includes corporations, firms, limited liability
companies, trusts, partnerships and other forms of business organizations even
if created under the laws of a foreign country. Such requirements shall
automatically apply to any ownership interest held by a publicly traded
corporation, holding company or intermediary company thereof, where such
ownership interest directly or indirectly is, or will be upon approval of the
Colorado Commission, 5% or more of the entire licensee. In any event, if the
Colorado Commission determines that a publicly traded corporation, or a
subsidiary, intermediary company or holding company has the actual ability to
exercise influence over a licensee, regardless of the percentage of ownership
possessed by said entity, the Colorado Commission may require that entity to
comply with the disclosure regulations contained in Rule 4.5.
Under Rule 4.5, gaming licensees, affiliated companies and
controlling persons commencing a public offering of voting securities must
notify the Colorado Commission within 10 days of the initial filing of a
registration statement with the Securities and Exchange Commission. Licensed
publicly traded corporations are also required to send proxy statements to the
Division of Gaming within 5 days after distribution of such statement. Licensees
to whom Rule 4.5 applies must include in their articles of organization or
similar charter documents provisions that: restrict the rights of the licensees
to issue voting interests or securities except in accordance with the Colorado
Act and the Colorado Regulations; limit the rights of persons to transfer voting
interests or securities of licensees except in accordance with the Colorado Act
and the Colorado Regulations; and provide that holders of voting interests or
securities of licensees found unsuitable by the Colorado Commission may, within
60 days of such finding of unsuitability, be required to sell their interests or
securities back to the issuer at the lesser of the cash equivalent of the
holders' investment or the market price as of the date of the finding of
unsuitability. Alternatively, the holders may, within 60 days after the finding
of unsuitability, transfer the voting interests or securities to a suitable
person (as determined by the Colorado Commission). Until the voting interests or
securities are held by suitable persons, the issuer may not pay dividends or
interest, the securities may not be voted, they may not be included in the
voting or securities of the issuer, and the issuer may not pay any remuneration
in any form to the holders of the securities.
Pursuant to Rule 4.5, persons who acquire direct or indirect
beneficial ownership of (i) 5% or more of any class of voting securities of a
publicly traded corporation required to include in its articles of organization
the Rule 4.5 charter language provisions, or (ii) 5% or more of the beneficial
interest in a gaming licensee directly or indirectly through any class of voting
securities of any holding company or intermediary company of a licensee (all
such persons hereinafter referred to as "qualifying persons"), shall notify the
Division of Gaming within 10 days of such acquisition, are required to submit
all requested information and are subject to a finding of suitability as
required by the Division of Gaming or the Colorado Commission. Licensees also
must notify any qualifying persons of these requirements. A qualifying person
whose interests equal 10% or more must apply to the Colorado Commission for a
finding of suitability within 45 days after acquiring such securities. Licensees
must also notify any qualifying persons of these requirements. Whether or not
notified, qualifying persons are responsible for complying with these
requirements.
A qualifying person who is an institutional investor under Rule 4.5
and who individually or in association with others, acquires, directly or
indirectly, the beneficial ownership of 15% or more of any class of voting
securities must apply to the Colorado Commission for a finding of suitability
within 45 days after acquiring such interests. A qualifying person who is an
institutional investor and whose interests equal 10%, but less than 15%, may not
be required to apply for suitability, provided such person fulfills reporting
requirements required by the Colorado Regulations.
26
Pursuant to Rule 4.5, persons found unsuitable by the Colorado
Commission must be removed from any position as an officer, director, or
employee of a licensee, or from a holding or intermediary company. Such
unsuitable persons also are prohibited from any beneficial ownership of the
voting securities of any such entities. Licensees, or affiliated entities of
licensees, are subject to sanctions for paying dividends or distributions to
persons found unsuitable by the Colorado Commission, or for recognizing voting
rights of, or paying a salary or any remuneration for services to, unsuitable
persons. Licensees or their affiliated entities also may be sanctioned for
failing to pursue efforts to require unsuitable persons to relinquish their
interests. The Colorado Commission may determine that anyone with a material
relationship to, or material involvement with, a licensee or an affiliated
company must apply for a finding of suitability.
Currently, no gaming licenses in Colorado have been granted in
connection with the Black Hawk Project. Applications have been made for a retail
gaming license. Applications for key employee gaming licenses have also been
made. Additional gaming and support license applications will have to be made
and approved prior to the opening of the casino.
Federal Registration
ROC is required to annually file with the Attorney General of the
United States in connection with the sales, distribution, or operations of slot
machines. All requisite filings for the present year have been made.
Item 2. Properties
The Riviera complex is located on the Las Vegas Strip, occupies
approximately 26 acres and comprises approximately 1,700,000 square feet,
including 115,000 square feet of casino space, 100,000 square foot convention,
meeting and banquet facility, approximately 2,100 hotel rooms (including
approximately 169 luxury suites) in five towers, four restaurants, a buffet,
four showrooms, a lounge and approximately 2,900 parking spaces. In addition,
executive and other offices for the Riviera are located on the property.
There are 47 food and retail concessions operated under individual
leases with third parties. The leases are for periods from one year to ten years
and expire over the next five years.
The entire Riviera complex is encumbered by a first deed of trust
securing the Notes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
The Company also owns the Black Hawk Land, which is a 71,000 square
foot parcel of real property in Black Hawk, Colorado.
Item 3. Legal Proceedings
The Company is a party to several routine lawsuits both as plaintiff
and as defendant arising from the normal operations of a hotel. Management does
not believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on the financial position or results of operations of
the Company.
27
Item 4. Submission of Matters to a Vote of Security Holders
None.
28
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Common Stock began trading on the American Stock
Exchange on May 13, 1996 and was reported on the NASDAQ Bulletin Board prior to
that date. As of March 12, 1998, based upon information available to it, the
Company believes that there were approximately 1,300 beneficial holders of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock and does
not currently expect to pay any dividends (cash or otherwise) on its Common
Stock for the foreseeable future. The Company's ability to pay dividends is
primarily dependent upon receipt of dividends and distributions from ROC. In
addition, the indenture for the First Mortgage Notes restricts the Company's
ability to pay dividends on its Common Stock.
The table below sets forth the bid and ask sales prices by quarter
for the years ended December 31, 1997, 1996 AND 1995, based on information
provided by certain brokers who have had transactions in the Company's Common
Stock during the year:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997
BID $ 12.88 $ 12.25 $ 12.13 $ 12.75
ASK 14.50 14.13 15.50 14.94
1996
BID $ 7.50 $11.00 $14.00 $12.94
ASK 9.75 17.75 17.13 15.63
1995
BID 3.00 3.50 8.25 7.00
ASK 4.63 9.13 11.50 10.00
On March 26, 1998 (the Most recent trade date of the Company's common
stock), 1,600 shares were traded closing at $11.00 per share.
29
Item 6. Selected Financial Data
The following table sets forth a summary of selected financial data for the
Company and, prior to the Company's emergence from Bankruptcy in June 1993, the
Hotel and Casino division of Riviera, Inc., the Company's predecessor, for the
years ended December 31:
Years Ended December 31, Six Months Ended
Combined December June
31, 30,
1997 1996 1995 1994 1993 1993 1993
---- ---- ---- ---- ---- ---- ----
(Successor) (Predecessor)
(*dollars in thousands)
Total Operating Revenue $153,793 $164,409 $151,146 $153,921 $148,922 $76,220 $72,702
Net Income 2,088 8,440 6,344 4,790 8,235 2,607 5,6281
Basic Earnings per Share on
Weighted Average Common
Shares Outstanding. $.42 $1.73 $1.32 $1.00 N/A $.54 N/A
Diluted Earnings per Share
on Weighted Average
Common and Common
Equivalent Shares. $.40 $1.63 $1.25 $1.00 N/A $.54 N/A
Total Assets 347,866 167,665 157,931 151,925 143,704 143,704 150,836
Long-Term Debt, including 277,876 105,878 107,822 110,409 112,677 112,677 119,959
current portion.
*except for Net Income Per Common Share
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The current management team successfully guided the Company through
its emergence from bankruptcy in June 1993. From 1992 to the end of 1997, the
Riviera's management team has achieved growth in EBITDA and profit margins.
EBITDA increased over 35% from $21.8 million in 1992 to $29.4 million in 1997
and EBITDA margins improved from 15.1% to 19.1% in 1997 over the same period.
The Company achieved this growth through the implementation of a number of
strategic initiatives that included (i) refocusing its marketing strategy from
"high-rollers" to adult mid-level gaming customers, a niche that
- --------
1 There was no accrual of interest subsequent to December 18, 1991. If accrued,
interest expense on these obligations would have totaled $10.4 million for the
six months ended June 30, 1993.
30
management believes has been under served, (ii) focusing on conventioneers who
pay higher room rates, causing Riviera's ADR to increase from $47 in 1992 to $58
in 1997, (iii) aggressively marketing its hotel facilities resulting in
occupancy rates growing from 90.6% in 1992 to 96.8% in 1997, (iv) emphasizing
higher margin slot play which increased slot revenue by 33.0% from 1992 to 1996
and (v) investing approximately $54 million in capital improvements since 1992.
Management believes that it has also improved the stability of EBITDA by
providing a broad entertainment experience (1997 non-gaming revenues: 57% vs.
51% for other casinos on the Strip in 1997, focusing on conventioneers
(approximately 30% of mid-week room nights pre-sold through June 1999) and
developing a repeat and loyal customer base through proprietary database
marketing.
Results of Operations
The following table sets forth certain of the Company's operating
information for the years ended December 31, 1997, 1996 and 1995. Revenues and
promotional allowances are shown as a percentage of net revenues. Departmental
costs are shown as a percentage of departmental revenues. All other percentages
are based on net revenues.
1997 1996 1995
Revenues:
Casino 46.6% 48.9% 51.2%
Rooms 26.9% 25.4% 26.4%
Food and Beverage 14.0% 13.8% 14.5%
Entertainment 13.6% 13.2% 10.0%
Other 7.1% 6.3% 5.8%
Less promotional allowances -8.3% -7.7% -7.9%
------------ ------------ ------------
Net revenues 100.0% 100.0% 100.0%
Costs and Expenses
Casino(1) 59.4% 59.1% 58.6%
Rooms(1) 42.9% 45.0% 47.1%
Food and Beverage(1) 72.9% 70.3% 72.0%
Entertainment(1) 74.2% 74.8% 73.5%
Other(1) 27.5% 28.0% 30.7%
Selling, general and administrative 19.4% 19.1% 19.6%
Depreciation and amortization 6.8% 5.0% 4.5%
Total Costs and expenses 87.7% 85.8% 86.1%
Income from Operations 12.3% 14.2% 13.9%
Interest expense on $100 million notes -7.2% -6.7% -7.3%
Interest income on Treasury Bills to retire $100 million 1.5% 0.0% 0.0%
Interest expense, other -4.6% -0.6% -0.9%
Interest income, other 1.3% 0.7% 0.8%
Other (income) expense, net -1.0% -0.3% 0.0%
------------ ------------ ------------
Income before provision for income taxes 2.2% 7.8% 6.4%
Provision for income taxes -0.9% -2.7% -2.2%
------------ ------------ ------------
Net Income 1.4% 5.1% 4.2%
============ ============ ===========
EBITDA Margin 19.1% 19.2% 18.4%
(1) Shown as a percentage of corresponding departmental revenue.
31
1997 Compared to 1996
Revenues
Net revenues decreased by approximately $10.6 million, or 6.5%, from
$164.4 million in 1996 to $153.8 million in 1997. Casino revenues decreased by
approximately $8.8 million, or 10.9%, from $80.4 million during 1996 to $71.6
million during 1997 due to a general softness in the gaming market in Las Vegas.
Room revenues decreased by approximately $400,000, or 1.0%. from $41.8 million
1996 to $41.4 million in 1997 as a result of a decrease in hotel occupancy from
98.2% to 96.8%. The decrease in occupancy was partially offset by an increase in
ADR from $57.07 in 1996 to $58.24 in 1997. Food and beverage revenues decreased
approximately $1.0 million, or 4.6%, from $22.6 million 1996 to $21.6 million
during 1997 due to fewer covers in the bars and restaurants. Entertainment
revenues decreased by approximately $900,000, or 4.1%, from $21.8 million during
1996 to $20.9 million during 1997, due to the reduction in number of covers for
the Splash variety show. Other revenues increased by approximately $600,000, or
5.4%, from $10.4 million during 1996 to $11.0 million during 1997 due primarily
to management fees of approximately $1.0 million for operating the Four Queens
Hotel and Casino in downtown Las Vegas. In 1996 the Company received a refund of
$576,000 from a union health and welfare trust fund for reduced premiums.
Promotional allowances remained relatively unchanged at approximately $12.6
million during 1996 an $12.7 million in 1997.
Direct Costs and Expenses of Operating Departments
Total direct costs and expenses of operating departments decreased by
approximately $6.9 million, or 6.8%, from $101.5 million in 1996 to $94.6
million in 1997. Casino expense decreased by approximately $5.0 million, or
10.5%, from $47.5 million during 1996 to $42.5 million during 1997 but casino
expenses as a percent of casino revenue increased from 59.1% to 59.4%, due to
the decrease in casino revenues. Room costs decreased approximately $1.0 million
, or 5.6%, from $18.8 million during 1996 to $17.8 million for 1997, and, room
costs as a percentage of room revenues decreased from 45.0% during 1996 to 42.9%
during 1997. Payroll and linen costs were reduced due to the lower occupancy .
Hotel bad debts expense decreased $200,000 due to the implementation of tighter
credit policies. Food and beverage costs decreased by approximately $200,000, or
1.1%, from $15.9 million during 1996 $15.7 million during the 1997 period
resulting from a corresponding decrease in revenues. However, food and beverage
costs as a percentage of food and beverage revenues increased from 70.3% during
1996 to 72.9% during 1997 because of reduced beverage promotional revenue from
the casino bars. Entertainment costs decreased by approximately $800,000, or
4.9%, from $16.3 million during 1996 to $15.5 million during 1997 due to the
reduced expenses associated with lower covers in Splash. Entertainment expense
as a percentage of entertainment revenues decreased from 74.8% during 1996 to
74.2% in 1997 due to a reduction in the number of special headliner events.
Other expenses increased by approximately $100,000, or 3.3%, from $2.9 million
to $3.0 million due to the corresponding increase in other revenues.
Other Operating Expenses
Selling, general and administrative expenses decreased by
approximately $1.6 million, or 5.1%, from $31.5 million for 1996 to $29.8
million 1997 due to decreased incentive plan costs associated with lower
earnings. As a percentage of total net revenues, selling, general and
administrative expenses increased from 19.1% during the 1996 period to 19.4%
during the 1997 period as a result of spreading of fixed costs over a smaller
revenue base in the 1997 period. Depreciation and amortization increased by
approximately $2.3 million, or 27.7%, from $8.2 million during the 1996 period
to $10.5 million during the 1997 period due to capital expenditures of $21.0
million during the 1997 period.
32
Other Income (Expense)
Interest expense, other increased by $6.1 million because the Company
issued 10% First Mortgage Notes of $175.0 million on August 13, 1997 in addition
to carrying the 11% $100 million Notes until June 1, 1998, when they will be
redeemed. The Company used part of the proceeds of the10% First Mortgage Notes
to purchase United States Government securities at a cost of $104.3 million
which were deposited into an irrevocable trust held to retire the $100 million
notes. Interest income on these securities was $2.3 million in 1997. Interest
income, other increased approximately $759,000 or 65.0%, from $1.2 million to
$1.9 million because of the increased cash balances from the remaining proceeds
of the $175.0 million notes.
During the first quarter of 1997 the Company withdrew its secondary
offering due to market conditions and, as a result, charged costs totaling
$850,000 to other expense. Also during 1997, approximately $400,000 in merger
and acquisition costs related to the R&E Gaming Corporation Plan of Merger were
charged to other expense as required under GAAP.
Net Income
As a result of the factors discussed above and a decrease in income
taxes of approximately $3.1 million at a 34.5% effective rate, net income
decreased by approximately $6.4 million, or 75.3%, from $8.4 million during 1996
to $2.1 million during 1997.
EBITDA
EBITDA decreased by approximately $2.1 million, or 6.8%, from $31.5
million in 1996 to $29.4 million in 1997. During the same periods, EBITDA
margins were 19.2% and 19.1%, respectively.
1996 Compared to 1995
Revenues
Net revenues increased by approximately $13.3 million, or 8.8%, from
$151.1 million in 1995 to $164.4 million in 1996. Casino revenues increased by
approximately $3.0 million, or 3.9%, from $77.3 million in 1995 to $80.4 million
in 1996 due primarily to a $2.9 million, or 5.4%, increase in slot revenues as a
result of an increase in promotional activities directed at slot players. Room
revenues increased by approximately $2.0 million, or 5.0%, from $39.8 million in
1995 to $41.8 million in 1996 as a result of an increase in hotel occupancy from
97.0% to 98.2% (based on available rooms) and an increase in average room rate
of $2.40, or 4.4%. Food and beverage revenues increased approximately $700,000,
or 3.4%, from $21.9 million in 1995 to $22.6 million in 1996 due to additional
covers in the bars and restaurants. Entertainment revenues increased by
approximately $6.6 million, or 43.4%, from $15.2 million in 1995 to $21.8
million in 1996. This was principally due to the reopening of Splash, a variety
show which had been closed during the first half of 1995 for show revisions and
theater remodeling. Other revenues increased by approximately $1.6 million, or
18.1%, from $8.8 million in 1995 to $10.4 million in 1996 due primarily to a
refund of $576,000 from a union health and welfare trust fund for reduced
premiums and general increases in other revenues such as telephone, gift shops
and box office commissions. In addition, the Company received management fees of
approximately $400,000 for operating the Four Queens Hotel and Casino in
downtown Las Vegas beginning in August 1996. Promotional allowances increased by
approximately $700,000, or 6.4%, from $11.9 million in 1995 to $12.6 million in
1996 due to additional complimentary show tickets for the Splash and an increase
in complimentaries associated with casino and slot marketing programs.
33
Direct Costs and Expenses of Operating Departments
Total direct costs and expenses of operating departments increased by
approximately $7.7 million, or 8.2%, from $93.7 million in 1995 to $101.5
million in 1996. Casino expense increased by approximately $2.2 million, or
4.8%, from $45.3 million in 1995 to $47.5 million in 1996 due to a corresponding
increase in casino revenues and casino expenses as a percent of casino revenues
increased from 58.6% to 59.1%, primarily due to increased entertainment
promotional allowances upon the reopening of Splash on June 23, 1995. Room costs
were mostly flat for 1996 compared to 1995, however, room costs as a percentage
of room revenues decreased from 47.1% in 1995 to 45.0% in 1996 as room revenues
increased while room costs remained relatively constant. Food and beverage costs
increased by approximately $150,000, or .9%, from $15.8 million in 1995 to $15.9
million in 1996 resulting from a corresponding increase in revenues. Food and
beverage costs as a percentage of food and beverage revenues decreased from
72.0% in 1995 to 70.3% in 1996 because food and beverage revenue increased while
payroll and other costs remained relatively constant. Entertainment costs
increased by approximately $5.1 million, or 45.0%, from $11.2 million in 1995 to
$16.3 million in 1996 due to the additional expenses associated with operating
Splash for a full year in 1996. Entertainment expense as a percentage of
entertainment revenues increased from 73.5% in 1995 to 74.7% in 1996 due to a
revision in the Splash producer's agreement. Other expenses increased by
approximately $300,000, or 11.0%, from $2.7 million to $2.9 million due to a
corresponding increase in other revenues.
Other Operating Expenses
Selling, general and administrative expenses increased by
approximately $1.8 million, or 6.2%, from $29.6 million in 1995 to $31.5 million
in 1996 due to increased incentive plan costs required to retain personnel in
the competitive gaming environment. As a percentage of total net revenues,
selling, general and administrative expenses decreased from 19.6% in 1995 to
19.1% in 1996 as a result of lower general marketing expenses and the spreading
of fixed costs over a larger revenue base in 1996. Depreciation and amortization
increased by approximately $1.4 million, or 20.6%, from $6.8 million in 1995 to
$8.2 million in 1996.
Other Income (Expense)
Interest expense decreased by approximately $400,000, or 3.0%, from
$12.5 million in 1995 to $12.1 million in 1996 while interest income remained
constant at $1.1 million in 1995 and 1996. This was due to a reduction in
average debt outstanding, an increase in average cash balances, and a decrease
in the investment yield in 1996. Other income increased by $505,000 due to a
gain on the final payment of certain unsecured notes in the fourth quarter of
1996, offset by a loss due to the change in terms of one of the Company's Notes.
Net Income
As a result of the factors discussed above, net income increased by
approximately $2.1 million, or 33.0%, from $6.3 million in 1995 to $8.4 million
in 1996. The effective income tax rate was 34.4% for 1995 and 1996.
EBITDA
EBITDA increased by approximately $3.7 million, or 13.3%, from $27.8
million in 1995 to $31.5 million in 1996. In the same periods, EBITDA margin
increased from 18.4% to 19.2% of net revenues.
34
Liquidity and Capital Resources
The Company had cash and cash equivalents of $65.1 million at
December 31, 1997, which increased $39.4 million from December 31, 1996.
Significant debt service on the First Mortgage Notes is paid in February and
August and should be considered in evaluating cash increases in the second and
fourth quarters.
For the year ended December 31, 1997, the Company's net cash provided
by operating activities was $17.5 million compared to $18.3 million for 1996.
EBITDA for 1997 and 1996 was $29.4 million and $31.5 million, respectively,
which was adequate to cover the Company's debt service and capital expenditures.
Management believes that sufficient cash flow will be available to cover the
Company's debt service and enable investment in budgeted capital expenditures
for the next 12 months.
Scheduled interest payments on the 11% Notes is provided by the
"contractual defeasance" whereby a portion of the proceeds from the new Notes
was used to acquire U.S. Treasury Securities sufficient to pay the interest on
the 11% Notes in December 1997 and the interest, principal and premium due June
1, 1998 when the final release of obligation will be accomplished through
redemption of the 11% Notes. Substantially all of the covenants on the 11% Notes
were released as a result of the "contractual defeasance".
Cash flow from operations is not expected to be sufficient to pay
100% of the principal of the Notes at maturity on August 15, 2004. Accordingly,
the ability of the Company to repay the 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 Notes at maturity. The
Notes are not redeemable at the option of the Company until August 15, 2001, and
thereafter are redeemable at premiums beginning at 105.0% and declining each
subsequent year to par in 2003.
The Indenture pursuant to which the Notes were issued (the "Note
Indenture") provides that, in certain circumstances, the Company 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 Merger is specifically excluded from the defined
transactions which would be considered a change in control.
The 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 and ROC 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
ROC 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. Management believes the Company is in compliance with the
covenants of the Note Indenture.
In February 1997, the Company entered into a $15.0 million, five
year reducing revolving line of credit (the "Credit Facility"). The Credit
Facility bears interest at prime plus 0.5% or LIBOR plus 2.9%. The Company has
not utilized this line of credit. The Credit Facility was modified as a result
of the Notes and the proposed Merger. The modifications included an increase in
the allowable funded debt to EBITDA ratio to 4.75 to one. The Company is not
currently meeting this requirement and therefore, cannot draw down on the Credit
Facility at this time. The Credit Facility is callable upon a change in control
other than the Merger.
35
Management considers it important to the competitive position of the
Riviera that expenditures be made to upgrade the property. Capital expenditures
totaled approximately $36.4 million in 1997 including $16.6 million for the
Black Hawk Project, $14.9 million in 1996, $7.8 million in 1995 and $8.9 million
in 1994. Capital expenditures were financed from cash flow and the proceeds from
the Notes.
The Company currently estimates that total costs for completion of
the Black Hawk Project will be approximately $55 million. The Company purchased
the Black Hawk Land in August 1997 for $15 million, which was financed by the
net proceeds from the sale of the Notes, and expects to finance the remainder of
the Black Hawk Project from a combination of third party financing and
additional investment by the Company, including up to an additional $15 million
of the net proceeds from the sale of the Notes. The Company has received an
excavation permit and expects to receive the other necessary permits in the near
future, with construction of the casino commencing shortly thereafter. The
Company expects to receive the necessary construction and other permits in the
near future, with construction of the casino commencing shortly thereafter. The
casino is scheduled to open in 1999.
Year 2000 Project
The Company has conducted a review of its computer systems to
identify those areas that could be affected by the "Year 2000" issue and is in
the process of replacing many of its legacy systems to improve overall business
performance and to accommodate business for the "Year 2000". However, given the
inherent risks for a project of this magnitude and the resources required,
actual results could differ materially from those anticipated by the Company.
The Company expects its "Year 2000" date conversion project to be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Company may rely also will be timely converted or that
such failure to convert by another company would not have an adverse impact on
the Company's systems. The estimated costs directly or indirectly associated
with the project are currently expected to be approximately $200,000. Such
amounts have been , or will be, expensed to general and administrative expense
except for new systems which will be capitalized in accordance with GAAP.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 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.
Recently Adopted Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 requires the
presentation of basic net income per share and diluted net income per share.
Basic per share amounts are computed by dividing net income by average shares
outstanding in the period. Diluted per share amounts are computed by dividing
net income by average shares outstanding plus the dilutive effect of common
share equivalents outstanding in the period.
36
Recently Issued Accounting Standards
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. This statement
requires businesses to disclose comprehensive income and its components in their
financial statements. Management intends to comply with the disclosure
requirements of this statement in the year ending December 31, 1998.
The FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement redefines how operating
segments are determined and requires qualitative disclosure of certain financial
and descriptive information about a company's operating segments. The Company
will adopt SFAS No. 131 in the year ending December 31, 1998. Management has not
finalized its analysis of which operating segments it will report on to comply
with SFAS No. 131.
Item 8. Financial Statements and Supplementary Data, etc.
Financial Statements
For The Years Ended December 31, 1997, 1996, and 1995
Independent Auditors' Report
RIVIERA HOLDINGS CORPORATION
D.B.A. RIVIERA HOTEL & CASINO
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------------
Page
Independent Auditors' Report 38
Consolidated Balance Sheets as of December 31, 1997 and 1996 39
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 40
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996, 41
and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 42
Notes to Consolidated Financial Statements 43-57
37
INDEPENDENT AUDITORS' REPORT
Riviera Holdings Corporation
d.b.a. Riviera Hotel & Casino
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Riviera Holdings
Corporation and subsidiaries (the "Company") d.b.a. Riviera Hotel & Casino as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ Deloitte & Touche, LLP
Las Vegas, Nevada
February 6, 1998
38
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
(In Thousands, Except Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 65,151 $ 25,747
Accounts receivable, net 4,938 5,113
Inventories 3,509 3,039
Prepaid expenses and other assets 4,554 2,692
------------------------
Total current assets 78,152 36,591
------------------------
U.S. TREASURY BILLS HELD TO RETIRE $100 MILLION NOTES 106,596
PROPERTY AND EQUIPMENT, NET 153,611 127,760
OTHER ASSETS 9,299 2,853
RESTRICTED CASH FOR PERIODIC SLOT PAYMENTS 208 461
-----------------------
TOTAL ASSETS $ 347,866 $ 167,665
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 36 $ 1,297
Accounts payable 10,890 8,733
Current income taxes payable 413
Accrued interest, other 6,570 33
Accrued expenses 8,795 9,521
-----------------------
Total current liabilities 26,619 19,997
-----------------------
DEFERRED INCOME TAXES PAYABLE 5,958 4,626
$100 MILLION NOTES TO BE RETIRED BY THE U.S. TREASURY BILLS 100,000
OTHER LONG-TERM LIABILITIES 4,076 3,210
LONG-TERM DEBT, NET OF CURRENT PORTION 173,436 104,581
-----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock ($.001 par value; 20,000,000 shares authorized; 4,903,680 shares at December 31,
1997; and 4,922,503 shares at December 31, 1996, issued and outstanding) 5 5
Additional paid-in capital 13,711 13,919
Notes receivable from employee stockholders (207) (853)
Retained earnings 24,268 22,180
-----------------------
Total stockholders' equity 37,777 35,251
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 347,866 $ 167,665
=======================
See notes to consolidated financial statements.
39
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996,
and 1995 (In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------------------- --------------------------
1997 1996 1995
REVENUES:
Casino $ 71,624 $ 80,384 $ 77,337
Rooms 41,412 41,835 39,848
Food and beverage 21,603 22,641 21,895
Entertainment 20,895 21,778 15,180
Other 10,956 10,398 8,758
--------------------------------------
Total 166,490 177,036 163,018
Less promotional allowances 12,697 12,627 11,873
--------------------------------------
Net revenues 153,793 164,409 151,145
--------------------------------------
COSTS AND EXPENSES:
Direct costs and expenses of operating departments:
Casino 42,537 47,509 45,325
Rooms 17,781 18,834 18,787
Food and beverage 15,747 15,916 15,768
Entertainment 15,514 16,287 11,165
Other 3,011 2,916 2,691
Other operating expenses:
Selling, general and administrative 29,840 31,454 29,618
Depreciation and amortization 10,485 8,212 6,811
--------------------------------------
Total costs and expenses 134,915 141,128 130,165
--------------------------------------
INCOME FROM OPERATIONS 18,878 23,281 20,980
--------------------------------------
OTHER INCOME (EXPENSE):
Interest expense on $100 million notes (11,067) (11,063) (11,022)
Interest income on Treasury Bills held to retire $100 million notes 2,267
Interest expense, other (7,137) (1,022) (1,431)
Interest income, other 1,926 1,167 1,149
Other, net (1,470) 505
--------------------------------------
Total other income (expense) (15,481) (10,413) (11,304)
--------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,397 12,868 9,676
PROVISION FOR INCOME TAXES 1,309 4,428 3,332
--------------------------------------
NET INCOME $ 2,088 $ 8,440$ 6,344
======================================
EARNINGS PER SHARE DATA:
Weighted average common shares outstanding 4,913 4,880 4,800
--------------------------------------
Basic earnings per share $ 0.42 $ 1.7 $ 1.32
--------------------------------------
Weighted average common & common equivalent shares 5,214 5,169 5,058
--------------------------------------
Diluted earnings per share $ 0.40 $ 1.6 $ 1.25
---------------------------------------
See notes to consolidated financial statements.
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In Thousands, Except Share Amounts)
- ------------------------------------------------------------------------------------------------------------ --------------
Notes
Receivable
Additional from
Shares Common Paid-In Retained Employee
Outstanding Stock Capital Earnings Shareholders Total
Balances, January 1, 1995 4,800,000 $ 5 $ 12,537 $ 7,396 $ $ 19,938
Net income 6,344 6,344
------------------------------------------------------------------------
Balances, December 31, 1995 4,800,000 5 12,537 13,740 26,282
Stock issued under employee stock purchase plan 137,000 1,543 (1,383) 160
Collections of stockholders' receivables 332 332
Refunds on employee stock purchases (17,600) (198) 198
Director compensation plan 3,103 37 37
Net income 8,440 8,440
------------------------------------------------------------------------
Balances, December 31, 1996 4,922,503 5 13,919 22,180 (853) 35,251
Stock issued under employee stock purchase plan 6,200 71 (71)
Collections of stockholders' receivables 425 425
Refunds on employee stock purchases (25,900) (292) 292
Director compensation plan 877 13 13
Net income 2,088 2,088
------------------------------------------------------------------------
Balances, December 31, 1997 4,903,680 $ 5 $ 13,711 $ 24,268 $ (207) $ 37,777
========================================================================
See notes to consolidated financial statements.
40
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Amounts in Thousands)
- ------------------------------------------------------------------------------------ ----------------------- -----------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,088 $ 8,440 $ 6,344
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,485 8,212 6,811
Provision for bad debts (16) 524 478
Provision for gaming discounts (84) 232 143
Gain on disposition of long-term debt, net (505)
Interest expense 11,067 12,085 12,453
Interest paid (11,420) (12,072) (12,489)
Interest expense, other 7,103
Changes in operating assets and liabilities:
Increase in U.S. Treasury Bills purchased to retire $100 million notes (2,267)
Decrease (increase) in accounts receivable 276 (1,535) 126
Decrease (increase) in inventories (470) (853) 86
Increase in prepaid expenses and other assets (1,862) (90) (212)
Decrease in restricted cash for periodic slot payments 253 578 318
Increase in accounts payable 2,167 166 1,033
Increase (decrease) in accrued expenses (726) 104 758
Increase (decrease) in current income taxes payable (413) 362 (522)
Increase in deferred income taxes payable 1,332 1,603 1,013
Increase in non-qualified pension plan obligation to CEO upon retirement 755 1,039 400
----------------------------
Net cash provided by operating activities 18,268 18,290 16,740
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment, other (19,752) (14,923) (7,836)
Capital expenditures - Black Hawk, Colorado (16,582)
Increase in other assets - Black Hawk, Colorado (100)
Decrease (increase) in other assets (6,346) 1,906 (382)
----------------------------
Net cash used in investing activities (42,780) (13,017) (8,218)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 172,848 209 176
U.S. Treasury Bills purchased to retire $100 million notes (104,329)
Payments on long-term borrowings (5,041) (2,226) (3,159)
Proceeds from issuance of stock to employees and directors 13 197
Collections of notes receivable from employees 425 332
-----------------------------
Net cash provided by (used in) financing activities 63,916 (1,488) (2,983)
-----------------------------
INCREASE IN CASH AND CASH EQUIVALENTS: 39,404 3,785 5,539
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR: 25,747 21,962 16,423
-----------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR: $ 65,151 $ 25,747 $ 21,962
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 1,860 $ 2,463 $ 2,852
=============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Stock issued to employees for notes receivable 71 1,383
==================
Non-cash reductions of long-term debt 845
==========
See notes to consolidated financial statements.
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--Riviera Holdings Corporation and its wholly-owned
subsidiary, Riviera Operating Corporation ("ROC"), (together the "Company"),
were incorporated on January 27, 1993, in order to acquire all assets and
liabilities of Riviera, Inc. Casino-Hotel Division on June 30, 1993, pursuant to
a plan of reorganization.
In July 1994 management established a new division, Riviera Gaming Management,
Inc. ("RGM") for the purpose of obtaining management contracts in Nevada and
other jurisdictions. In August 1995 RGM incorporated in the state of Nevada as a
wholly owned subsidiary of ROC.
Nature of Operations--The primary line of business of the Company is the
operation of the Riviera Hotel and Casino ("the Riviera") on the "Strip" in Las
Vegas, Nevada. The Company is engaged in a single industry segment, the
operation of a hotel/casino with restaurants and related facilities. The
Company, through its gaming management subsidiary, also manages the Four Queens
Hotel and Casino in downtown Las Vegas (see Note 13). In 1997 Riviera Gaming
Management of Colorado, Inc. and its 100 percent owned subsidiaries were
incorporated to acquire land and construct and operate a casino in Black Hawk,
Colorado.
Casino operations are subject to extensive regulation in the State of Nevada by
the Gaming Control Board and various other state and local regulatory agencies.
Management believes that the Company's procedures for supervising casino
operations, for recording casino and other revenues, and for granting credit
comply, in all material respects, with the applicable regulations.
Principles of Consolidation--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, ROC and RGM entities.
All material intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents--All highly liquid investments securities with a
maturity of three months or less when acquired are considered to be cash
equivalents. The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for
Certain Investments in Debt and Equity Securities.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under SFAS 115, are carried on the
consolidated balance sheets in the cash and cash equivalents category. SFAS 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities, and requires such securities to be classified as either held-to-
maturity, trading, or available-for-sale. Management determines the appropriate
classification of its investment securities at the time of purchase and
re-evaluates such determination at each balance sheet date. Held to maturity
securities are required to be carried at amortized cost. At December 31, 1997
and 1996, securities classified as held to maturity were comprised of debt
securities issued by the U.S. Treasury and other U.S. government corporations
and agencies and repurchase agreements with an amortized cost of $50,534,000 and
$19,756,000, respectively, maturing in three months or less.
41
Inventories--Inventories consist primarily of food, beverage, gift shop, and
promotional inventories; and are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment--Property and equipment are stated at cost, and
capitalized lease assets are stated at the present value of future minimum lease
payments at the date of lease inception. Interest incurred during construction
of new facilities or major additions to facilities is capitalized and amortized
over the life of the asset. Depreciation is computed by the straight-line method
over the shorter of the estimated useful lives or lease terms, if applicable, of
the related assets, which range from 5 to 40 years. The costs of normal
maintenance and repairs are charged to expense as incurred. Gains or losses on
disposals are recognized as incurred.
Other Assets--Other assets include bond offering costs and commissions, which
are amortized over the life of the debt, and are included in interest expense.
Restricted Cash for Periodic Slot Payments--At December 31, 1997 and 1996, the
Company had interest-bearing deposits with a commercial bank in the amount of
$208,000 and $461,000, respectively, which are restricted as to use. These
amounts represent deposits required by the State of Nevada Gaming Control Board
to fund periodic slot payments due customers through the year 2000.
Fair Value Disclosure as of December 31, 1997--
Cash and cash equivalents, accounts receivable, restricted cash for periodic
slot payments, accounts payable, and accrued liabilities--The carrying value of
these items is a reasonable estimate of their fair value.
Long-term Debt--The fair value of the Company's long-term debt (including the
$100 million Notes to be retired by the U.S. Treasury Bills) is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. Based on
the borrowing rates currently available to the Company for debt with similar
terms and average maturities, the estimated fair value of long-term debt is
approximately $276,638,000.
Casino Revenue--The Company recognizes, as gross revenue, the net win from
gaming activities, which is the difference between gaming wins and losses.
Promotional Allowances--Promotional allowances consist primarily of
accommodations, entertainment, and food and beverage services furnished without
charge to customers. The retail value of such services is included in the
respective revenue classifications and is then deducted as promotional
allowances. The estimated costs of providing promotional allowances are
classified as costs of the casino operating department through interdepartmental
allocations. These allocations for the years ended December 31, 1997, 1996, and
1995, are as follows (amounts in thousands):
1997 1996 1995
Food and beverage $ 6,130 $ 6,671 $ 6,570
Rooms 1,704 1,410 1,451
Entertainment 2,623 2,592 2,280
-------------------------------------------
Total costs allocated to casino $ 10,457 $ 10,673 $ 10,301
===========================================
Federal Income Taxes--The Company and its subsidiaries file a consolidated
federal tax return. The Company accounts for income taxes in accordance with
SFAS 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes reflect the net tax effects of
42
(i) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes;
and (ii) operating loss and tax credit carryforwards.
Estimates and Assumptions--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used by the Company include
estimated useful lives for depreciable and amortizable assets, certain accrued
liabilities and the estimated allowance for receivables. Actual results may
differ from estimates.
Reclassifications--Certain reclassifications have been made to the 1996 and 1995
financial statements to conform with the current year presentation. These
reclassifications had no effect on the Company's net income.
Recently Adopted Accounting Standards--See Note 16 for recently adopted
Accounting Standards.
Recently Issued Accounting Standards--The FASB issued SFAS No. 130, Reporting
Comprehensive Income, which is effective for fiscal years beginning after
December 15, 1997. This statement required businesses to disclose comprehensive
income and its components in their financial statements. Management intends to
comply with the disclosure requirements of this statement in the year ending
December 31, 1998.
The FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information, which is effective for fiscal years beginning after
December 15, 1997. This statement redefines how operating segments are
determined and requires qualitative disclosure of certain financial and
descriptive information about a company's operating segments. The Company will
adopt SFAS No. 131 in the year ending December 31, 1998. Management has not
finalized its analysis of which operating segments it will report on to comply
with SFAS No. 131.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31 (amounts in
thousands):
1997 1996
Casino $ 2,211 $ 2,280
Hotel 3,115 3,479
Other 158
----------------------------
Total 5,484 5,759
Less allowance for bad debts and discounts 546 646
----------------------------
Total $ 4,938 $ 5,113
============================
43
Changes in the casino and hotel allowance for bad debts and discounts for the
years ended December 31, 1997, 1996 and 1995, consist of the following (amounts
in thousands):
1997 1996 1995
Beginning balance $ 646 $ 741 $ 1,424
Write-offs (438) (912) (1,358)
Recoveries 49 61 54
Provision for bad debts 372 524 478
Provision for gaming discounts (83) 232 143
----------------------------------------
Ending balance $ 546 $ 646 $ 741
========================================
3. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following at December 31
(amounts in thousands):
1997 1996
Prepaid gaming taxes $ 1,286 $ 1,039
Prepaid federal income taxes 1,190
Prepaid insurance 263 304
Other prepaid expenses 1,815 1,349
-------------------------
Ending balance $ 4,554 $ 2,692
=========================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (amounts in
thousands):
1997 1996
Land and improvements $ 36,751 $ 21,751
Buildings and improvements 80,322 77,455
Equipment, furniture, and fixtures 67,793 51,650
Construction in progress 2,326
-------------------------
Total property and equipment 187,192 150,856
Less accumulated depreciation 33,581 23,096
-------------------------
Net property and equipment $ 153,611 $ 127,760
==========================
In 1997 approximately $771,000 in interest costs was capitalized on construction
projects. Certain of the Company's property and equipment is pledged as
collateral to secure debt (see Note 8).
44
5. OTHER ASSETS
Other assets consist of the following at December 31 (amounts in thousands):
1997 1996
Deposits $ 725 $ 1,178
Bond offering costs and commissions, net 7,327 403
Other 1,247 1,272
-----------------------------
Total $ 9,299 $ 2,853
=============================
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consist of the following at December 31 (amounts in thousands):
1997 1996
Outstanding chip and token liability $ 681 $ 836
Casino account deposits 203 498
Miscellaneous gaming 716 982
------------------------
Total liabilities related to gaming activities 1,600 2,316
Accounts payable to vendors 7,944 5,118
Hotel deposits 969 1,123
Other 377 176
------------------------
Total $ 10,890 $ 8,733
========================
Accrued expenses consist of the following at December 31 (amounts in thousands):
1997 1996
Payroll, related payroll taxes, and employee benefits $ 5,593 $ 5,279
Incentive plans and profit sharing 1,982 3,012
Other 1,220 1,230
------------------------
Total $ 8,795 $ 9,521
========================
45
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following at December 31 (amounts in
thousands):
1997 1996
Periodic slot payments due to customers through 2000, pre-funded
by restricted cash (see Note 1) $ 208 $ 461
Non-qualified pension plan obligation to the CEO of the Company,
payable in 20 quarterly installments upon expiration of his
employment contract, plus accrued interest 3,868 2,749
--------------------------
Total other long term liabilities $ 4,076 $ 3,210
==========================
46
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (amounts in thousands):
1997 1996
11% First Mortgage Notes maturing on December 31, 2002, bearing interest at the
rate of 11% per annum, payable semi-annually on June 30 and December 31,
redeemable beginning June 1, 1998, at 104.3125%; 1999 at 102.8750%; 2000 at
101.4375%; and 2001 and thereafter at 100%. (Note 9 describes the
reclassification in the current year.) $ 100,000
10% First Mortgage Notes maturing on August 15, 2004, bearing interest at the
rate of 10% per annum, payable semi-annually on February 15 and August 15 of
each year, redeemable beginning August 1, 2001, at 105%; 2002 at 102.5%; and
2003 and thereafter at 100%. These notes are collateralized by the physical
structures
comprising the Riviera Hotel and Casino. $ 172,963
Unsecured, non-interest bearing promissory note in an original principal amount
of $8,000,000 (the "Class 13/14 Note") to settle the claims of the former sole
shareholder and his affiliates, discounted
at 12%. 4,707
Capitalized lease obligations (See Note 11) 741 986
Unsecured, promissory notes in the original principal amount of $441,262,
bearing interest at the rate of 8.5% per annum, payable
monthly and maturing December 31, 1998. 96 185
---------------------------
Total long-term debt 173,800 105,878
Less current maturities by terms of debt 364 1,297
---------------------------
Total $ 173,436 $ 104,581
===========================
Maturities of long-term debt for the years ending December 31, were as follows
(amounts in thousands):
1998 $ 364
1999 281
2000 192
2001
2002
Thereafter 172,963
--------------
Total $ 173,800
==============
During the fourth quarter of 1996 the Company made the final payment on the note
issued to settle the Class 12 claim, which was less than what was recorded, and
resulted in income of approximately $845,000. Also during the fourth quarter of
1996, the terms of the Class 13/14 Note were revised, which resulted in a
decrease in the
47
discount rate from 16.8 percent to 12.0 percent and increased principal,
resulting in additional expense of $340,000. Other net income for the year ended
December 31, 1996, includes the net effect of the above transactions.
Other income (expense) for the year ended December 31, 1997 includes $850,000
of costs for a canceled secondary offering.
In February 1997, the Company entered into a $15.0 million, five year reducing
revolving line of credit (the "Credit Facility"). The Credit Facility bears
interest at prime plus 0.5% or LIBOR plus 2.9%. The Company has not utilized
this line of credit. The Credit Facility was modified as a result of the 10%
Notes and the proposed Merger. The modifications included an increase in the
allowable funded debt to EBITDA ratio to 4.75 to one. The Company is not
currently meeting this requirement and, therefore, cannot draw down on the
Credit Facility at this time. The Credit Facility is callable upon a change in
control other than the Merger.
On August 13, 1997, the Company issued 10 percent First Mortgage Notes (the "10%
Notes") with a principal amount of $175 million dollars. The 10% Notes were
issued at a discount in the amount of $2.2 million. The discount is being
accreted over the life of the note on a straight line basis. The 10% 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. A portion
of the proceeds from the 10% Notes totaling $4.5 million was paid to a bank to
retire the Class 13/14 Notes. As described in Note 9, a portion of the proceeds
was invested in U.S. Treasury Notes to pay the 11% First Mortgage Notes. The
Company has registered under the Securities Act of 1933, as amended, securities
identical to the 10% Notes. On January 8, 1998, the Company completed an
exchange offer for such registered securities for the First Mortgage Notes
effective January 1, 1998.
The First Mortgage Notes are unconditionally guaranteed by all existing and
future restricted subsidiaries of the Company, which will not initially include
Riviera Colorado Holdings, Inc. and Riviera Black Hawk, Inc. ("RBH"). As of
December 31, 1997, RBH had no operations. At December 31, 1997, RBH only had
assets of approximately $16.3 million, which represents the cost of the land for
the Black Hawk project and construction in progress. Therefore, the Company has
not included separate financial information for the guarantors as of December
31, 1997. The Company intends to disclose such additional information in the
future as the subsidiary develops.
The Company has credit facilities totaling $1,100,000 at banks for letters of
credit issued periodically to foreign vendors for purchases of merchandise.
9. $100 MILLION NOTES TO BE RETIRED BY THE U.S. TREASURY BILLS
On August 13, 1997, the Company used part of the proceeds from the 10% Notes to
purchase United States Government Securities (the "Securities") at a cost of
$109.8 million, which was deposited into an irrevocable trust. These Securities,
together with interest that will be earned by the Securities will be used to pay
the principal, interest, and call premium of $4,313,000 due on the 11% Notes on
June 1, 1998, which is the earliest date the 11% Notes can be redeemed. Interest
earned from the Securities is included in interest income on Treasury Bills held
to retire $100 million . The interest expense from the 10% Notes and from the
11% Notes are reported separately on the consolidated statements of income. As a
part of the funding for the retirement of these notes, substantially all the
covenants (other than payment of principal and interest) were released.
48
10. FEDERAL INCOME TAXES
SFAS 109 requires the Company to compute deferred income taxes based upon the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
The effective income tax rates on income attributable to continuing operations
differ from the statutory federal income tax rates for the year ended December
31, 1997, 1996, and 1995, as follows (amounts in thousands):
1997 1996 1995
Amount Rate Amount Rate Amount Rate
Taxes at federal statutory rate $ 1,189 35.0 % $ 4,504 35.0 % $ 3,386 35.0 %
Other 120 3.5 % (76) (1.0)% (54) (1.0)%
------------------------------------------------------------------------
Provision for income taxes $ 1,309 38.5 % $ 4,428 34.0 % $ 3,332 34.0 %
========================================================================
The tax effects of the items comprising the Company's net deferred tax liability
consist of the following at December 31 (amounts in thousands):
1997 1996
Deferred Tax Liabilities:
Basis in long-term debt obligations $ 150 $ 457
Reserve differential for hospitality and gaming activities 1,214 1,133
Difference between book and tax depreciable property 6,955 5,226
Other 867 806
-------------------------
Total 9,186 7,622
-------------------------
Deferred Tax Assets:
Reserves not currently deductible 1,845 1,806
Bad debt reserves 191 226
AMT and other credits 1,192 964
-------------------------
Total 3,228 2,996
-------------------------
Net deferred tax liability $ 5,958 $ 4,626
=========================
The Company has $1,185,000 of alternative minimum tax credit available to offset
future income tax liabilities. The credit has no expiration date.
11. LEASING ACTIVITIES
The Company leases certain equipment under capital leases. These agreements have
been capitalized at the present value of the future minimum lease payments at
lease inception and are included with property and equipment. Management
estimates the fair market value of the property and equipment subject to the
leases approximates the net present value of the leases. The leased property and
equipment consist primarily of signs and air conditioning equipment.
49
The following is a schedule by year of the minimum rental payments due under
capital leases, as of December 31, 1997 (amounts in thousands).
1998 $ 441
1999 429
2000 227
---------
Total minimum lease payments 1,097
Less taxes, maintenance, and insurance 270
Less interest portion of payments 86
Present value of net minimum lease payments $ 741
=========
Rental expense for the years ended December 31, 1997, 1996, and 1995, was
approximately $275,000, $334,000, and $406,000, respectively.
In addition, the Company leases retail space to third parties under terms of
noncancelable operating leases which expire in various years through 2003.
Rental income, which is included in other income, for the years ended December
31, 1997, 1996, and 1995, was approximately $1,555,000, $1,573,000, and
$1,533,000, respectively. At December 31, 1997, the Company had future minimum
annual rental income due under noncancelable operating leases as follows:
1998 $ 1,374
1999 903
2000 581
2001 376
2002 203
Thereafter 149
-----------
Total $ 3,586
===========
12. COMMITMENTS AND CONTINGENCIES
The Company is party to several routine lawsuits, both as plaintiff and
defendant, arising from normal operations of a hotel. Management does not
believe that the outcome of such litigation in the aggregate, will have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Proposed Merger--On September 15, 1997, the Company entered into a Agreement and
Plan of Merger with R&E Gaming Corp., an entity controlled by Allen E. Paulson,
pursuant to which the Company would be acquired by R&E Gaming and Riviera
shareholders would receive $15 per share in cash for each share of Riviera
common stock owned by them, plus an amount equal to seven percent per annum from
June 1, 1997, to the date of the closing. As part of its review of the
transaction, the Company's Board of Directors received an opinion from its
financial advisor, Ladenburg, Thalmann & Co., Inc., as to the fairness, from a
financial point of view, of the consideration to be received in the merger by
the Company's shareholders. In connection with the execution of the merger
agreement, shareholders owning approximately 56 percent of the outstanding,
fully diluted Company shares have granted R&E Gaming an option to purchase their
shares at the same price that all shareholders would receive in the merger and
have agreed to vote in favor of the transaction. Closing of the merger is
subject to a number of conditions, including approval by the Nevada Gaming
Authorities. On February 5, 1998, at a special meeting the shareholders approved
the merger. There can be no assurance that the conditions to the merger will be
met or that the merger will be consummated. See Note 17, Subsequent Events.
50
A subsidiary of R&E Gaming has entered into an agreement to purchase the
outstanding common stock of Elsinore Corporation, the primary asset of which is
the Four Queens Hotel and Casino in Downtown Las Vegas, Nevada. Since August
1996 Riviera Gaming Management-Elsinore, Inc. (RGME), an indirect subsidiary of
the Company, has been managing the Four Queens under a contract which guarantees
RGME a minimum management fee plus additional compensation based on EBITDA
improvement of the Four Queens, and warrants to purchase 1,125,000 shares of
Elsinore common stock (equal to 18.4 percent of the equity of Elsinore on a
fully diluted basis) at $1.00 per share. See Note 17, Subsequent Events.
Other income (expense) for the year ended December 31, 1997, includes $400,000
in costs relating to the proposed Paulson merger.
Black Hawk Project--The Company has begun construction on a casino in Black
Hawk, Colorado, on a site which was purchased for $15 million in August 1997. As
of December 31, 1997, the Company had expended approximately $16.7 million on
the project. The Company entered into a contract for a gross maximum price of
$24.5 million for the construction of the casino. The Company estimated the cost
of the project at $55 million.
Employees and Labor Relations--As of December 31, 1997, the Riviera employed
approximately 2,100 persons and had collective bargaining contracts with eight
unions covering approximately 1,300 of such employees, including food and
beverage employees, rooms department employees, carpenters, engineers, stage
hands, musicians, electricians, painters, and teamsters. The Company's
agreements with the Southern Nevada Culinary and Bartenders Union and Stage
Hands Union, which cover the majority of the Company's unionized employees, were
renegotiated in 1994 and expired on May 31, 1997, and June 1, 1997,
respectively. The Riviera, along with the other Las Vegas hotels are currently
negotiating with these unions and anticipate that new contracts will be agreed
upon during the second quarter of 1998. The Culinary and Bartenders Union is
currently concentrating on its negotiations with the larger gaming companies and
is expected to intensify its negotiations with the Riviera after preliminary
agreements have been reached with the larger gaming companies. The Stage Hands
Union's negotiations are proceeding at a steady pace and agreement on details of
the contract is anticipated during the second quarter of 1998. The expiration
date of the Teamsters contract is March 31, 1998. The Company is currently in
negotiation and anticipates satisfactory settlement in the second quarter of
1998. The Operating Engineers, Carpenters, Painters, and Electricians Unions'
collective bargaining agreements were renewed in 1995 and generally expire in
1998. The Musicians Union's collective bargaining agreement expires on September
21, 1999. Although unions have been active in Las Vegas, management considers
its employee relations to be satisfactory. There can be no assurance, however,
that new agreements will be reached without union action or will be on terms
satisfactory to the Company.
13. MANAGEMENT AGREEMENTS
From August 1996 until February 1997, RGM has been operating the Four Queens
adjacent to the Golden Nugget on Fremont Street in downtown Las Vegas under an
interim management agreement for a fee of $83,333 per month. A long-term
management agreement (the "Management Agreement") with Elsinore Corporation
("Elsinore"), the owner of the Four Queens, went into effect on February 28,
1997, the effective date of the Chapter 11 plan of reorganization of Elsinore.
The Company believes that the terms of the Management Agreement are no less
favorable to the Company than if the Company had negotiated with an independent
party. The term of the Management Agreement is approximately 40 months, subject
to earlier termination or extension. Either party may terminate if cumulative
earnings before interest, taxes, depreciation, and amortization ("EBITDA") for
the first two fiscal years is less than $12.8 million. The term can be extended
by an additional 24 months at RGM's option, if cumulative EBITDA for the three
fiscal years of the term is at least $19.2 million. RGM is paid a minimum annual
management fee of $1.0 million, payable in equal monthly installments. In
addition, RGM receives a fee of 25 percent of the amount by which the Four
Queens EBITDA exceeds $8 million in any fiscal year. RGM has received warrants
to purchase 1,125,000 shares of common stock of Elsinore, exercisable during the
term or extended term of the management agreement at an exercise price of $1 per
share. Either party can terminate the Management Agreement if (i) substantially
all the Four Queens' assets are sold; (ii) the Four Queens is merged; or (iii) a
majority of the Four Queens' or Elsinore's shares are sold. Upon such
51
termination RGM will receive a $2.0 million termination bonus minus any amount
realized or realizable upon exercise of the warrants.
14. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS
The Company has an employment agreement with Mr. Westerman, Chairman of the
Board and Chief Executive Officer of the Company. This agreement includes an
annual base salary, an incentive bonus based upon the extent of adjusted
operating earnings, contributions to a Non-Qualified Pension Plan, and
contributions to a Profit Sharing and 401(k) Plan. In addition, the Company has
termination fee agreements with each of the Directors, Executive Officers, and
Significant Employees pursuant to which each of such employees will be entitled
to receive one year's salary and health insurance benefits if their employment
with the Company is terminated within one year of a change of control of the
Company and without cause, or the involuntary termination of Mr. Westerman.
The Company has an incentive compensation plan, covering employees of the
Company who, in the opinion of the Chairman of the Board, either serve in key
executive, administrative, professional, or technical capacities with the
Company or other employees who also have made a significant contribution to the
successful and profitable operation of the Company. The amount of the bonus is
based on operating earnings before depreciation, amortization, interest expense,
provision for income taxes, extraordinary losses and gains, any provisions or
payments made pursuant to the Plan, and any provisions or payments made pursuant
to the incentive compensation of the Chairman and Chief Executive Officer.
During the years ended December 31, 1997, 1996, and 1995, the Company recorded
accrued bonuses of $1,282,000, $2,588,000, and $2,123,000, respectively, based
upon the above incentive compensation plan and the incentive compensation plan
established for the Chairman of the Board under his employment agreement.
The Company contributes to multi-employer pension plans under various union
agreements to which the Company is a party. Contributions, based on wages paid
to covered employees, were approximately $1,604,199, $1,650,000, and $1,576,000
for the years ended December 31, 1997, 1996, and 1995. These contributions were
for approximately 1,400 employees, including food and beverage employees, room
department employees, carpenters, engineers, stage hands, electricians,
painters, and teamsters. The Company's share of any unfunded liability related
to multi-employer plans, if any, is not determinable.
The Company sponsors a Profit Sharing and 401(k) Plan which incurred
administrative expenses of approximately $44,000, $34,000 and $59,000 for the
years ended 1997, 1996, and 1995.
The profit sharing component of the Profit Sharing and 401(k) Plan provides that
the Company will make a contribution equal to one percent of each eligible
employee's annual compensation if a prescribed annual operating earnings target
is attained and an additional 1/10th of one percent thereof for each $200,000 by
which operating earnings is exceeded, up to a maximum of three percent thereof.
The Company may elect not to contribute to the Profit Sharing and 401(k) Plan if
it notifies its employees by January of the Profit Sharing and 401(k) Plan year.
An employee will become vested in the Company's contributions based on the
employee's years of service. An employee will receive a year of vesting service
for each plan year in which the employee completed 1,000 hours of service.
Vesting credit will be allocated in 20 percent increments for each year of
service commencing with the attainment of two years of service. An employee will
be fully vested following the completion of six years of service.
The 401(k) component of the Profit Sharing and 401(k) Plan provides that each
eligible employee may contribute up to 15 percent of such employee's annual
compensation, and that the Company will contribute one percent of each
employee's annual compensation for each four percent of compensation contributed
by the employee, up to a maximum of two percent. All non-union employees of the
Company are eligible to participate in the Profit Sharing and 401(k) Plan after
twelve consecutive months of service with the Company.
52
ROC is a party to termination fee agreements with certain significant employees
pursuant to which each such employee is entitled to receive one year's salary
and benefits if his or her employment with ROC is terminated within one year of
a change of control of the Company or ROC, or the involuntary termination of Mr.
Westerman's employment. The estimated total amount that would be payable under
all such agreements at December 31, 1997, is approximately $1.8 million in
salaries and $400,000 in benefits.
ROC is a party to stay bonus agreements with certain significant employees
pursuant to which each such employee is entitled to receive one year's salary
(less the amount of any incentive bonus paid in 1997 for 1996) in the event
there is a change of control of the Company. The agreements expire on December
31, 1997. The estimated total amount that would be payable under all such
agreements is approximately $353,000.
15. STOCK OPTION PLANS
At a meeting held on July 27, 1993, the Company's Board of Directors adopted a
stock option plan providing for the issuance of both non-qualified and incentive
stock options (as defined in the Internal Revenue Code). This stock option plan
was ratified by the Company's shareholders at the April 26, 1994, annual
meeting. The number of shares available for purchase under the Stock Option Plan
as adopted was 120,000 (as adjusted pursuant to antidilution provisions). The
stockholders approved a four-for-one stock split, increasing the number of
shares of Common Stock available for purchase under the Stock Option Plan to
480,000. Options were granted for 228,000 shares for 1993; 132,000 shares for
1994; none for 1995; and 110,000 for 1996. No options were exercised in 1995,
1996, or 1997. On November 21, 1996, the Company amended the Stock Option Plan,
which was approved at the annual meeting held on May 8, 1997, to increase the
number of shares available under the Stock Option Plan from 480,000 shares to
1,000,000 shares and granted options to purchase 300,000 additional shares to
Mr. Westerman. Options vest 25 percent one year after the date of grant and 25
percent each subsequent year. The term of an option can in no event be
exercisable more than ten years (five years in the case of an incentive option
granted to a shareholder owning more than 10 percent of the Common Stock), or
such shorter period, if any, as may be necessary to comply with the requirements
of state securities laws, from the date such option is granted.
On March 5, 1996, the Board of Directors adopted an employee stock purchase plan
(the "Stock Purchase Plan"), which was approved by the stockholders on May 10,
1996. A total of 300,000 shares of common stock (subject to adjustment for
capital changes) in the aggregate may be granted under the stock purchase plan.
The Stock Purchase Plan is administered by the compensation committee. The
purchase price per share of stock shall be 85 percent of per share market value
of the common stock on the purchase date. On May 31, 1996, approximately 560
union and non-union employees participated in the 1996 employee stock purchase
plan. Under the plan, 137,000 shares were issued to employees at $11.26 (85
percent of market price at May 10, 1996), for $160,000 cash and the balance in
notes receivable of $1,383,000 which are payable over two years via payroll
deduction. During 1997, 25,900 shares were returned through the plan as the
result of refunds to the employees. During 1997, 6,200 shares were reissued at
$11.47 for notes receivable of $71,145.
On May 10, 1996, the shareholders approved a Nonqualified Stock Option Plan for
Non-Employee Directors (the "Nonqualified Stock Option Plan") and a Stock
Compensation Plan for Directors serving on the Compensation Committee (the
"Stock Compensation Plan"). The total number of shares available for purchase
under each plan is 50,000. Pursuant to the Nonqualified Stock Option Plan, two
directors were granted options to purchase 4,000 shares at an exercise price of
$13.25, which represented fair market value. As of December 31, 1997, 3,980
shares were issued pursuant to the Stock Compensation Plan at $12.08 per share.
The Company has adopted the disclosures-only provision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the date of grant for awards consistent with the provisions
of SFAS 123, the Company's net income and pro forma net income common share and
common share equivalent would have been decreased to the pro forma amounts
indicated below at December 31 (in thousands, except per share amounts).
53
1997 1996
Net income - as reported $ 2,088 $ 8,440
Net income - pro forma $ 2,058 $ 8,380
Basic earnings per common share - as reported $ 0.42 $ 1.73
Basic earnings per common share - pro forma $ 0.42 $ 1.72
Diluted earnings per common and common share equivalent - as reported $ 0.40 $ 1.63
Diluted earnings per common and common share equivalent - pro forma $ 0.39 $ 1.61
54
16. EARNINGS PER SHARE
For the year ended December 31, 1997, the Company adopted FASB Statement No.
128, Earnings per Share. This statement established standards for computing and
presenting earnings per share ("EPS") and required restatement of all
prior-period EPS data presented. Basic EPS is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed by dividing net income by the weighted number of common and
common equivalent shares outstanding for the period. Options to purchase common
stock, whose exercise price was greater than the average market price for the
period, have been excluded from the computation of diluted EPS. Such
antidilutive options outstanding for the twelve months ended December 31, 1997,
1996, and 1995, were 410,000, 414,000 and zero (0), respectively. A
reconciliation of income and shares for basic and diluted EPS is as follows:
FOR THE YEAR ENDED 1997
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS
Income available to common stockholders $ 2,088 4,913 $ 0.42
=========
Effect of dilutive securities
Options 301
--------------- -------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 2,088 5,214 $ 0.40
=============== ============= =========
FOR THE YEAR ENDED 1996
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS
Income available to common stockholders $ 8,440 4,880 $ 1.73
=========
Effect of dilutive securities
Options 289
--------------- -------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 8,440 5,169 $ 1.63
=============== ============= =========
FOR THE YEAR ENDED 1995
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS
Income available to common stockholders $ 6,344 4,800 $ 1.32
=========
Effect of dilutive securities
Options 258
--------------- -------------
Diluted EPS
Income available to common stockholders plus
assumed conversions $ 6,344 5,058 $ 1.25
=============== ============= =========
On November 16, 1995, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Articles of Incorporation to increase the
authorized shares of common stock from 5,000,000 to 20,000,000 and a
four-for-one stock split. Accordingly, per share information, average number of
shares outstanding, and number of shares outstanding in the accompanying
consolidated financial statements have been adjusted for the stock split as of
the earliest date presented (January 1, 1995).
55
17. SUBSEQUENT EVENTS (UNAUDITED)
On February 25, 1998 the Company announced that Riviera Holdings Corporation has
been advised by Allen E. Paulson, President of R&E Gaming Corporation, that R&E
Gaming is preserving its right not to proceed with its acquisition of Elsinore
Corporation, and it alleges that an Option and Voting Agreement relating to
Elsinore between it and majority shareholder, Morgens Waterfall, is void by
reason of certain alleged misrepresentations.
R&E Gaming Corporation has requested information to enable it to determine
whether the Company is in compliance with certain of the covenants in the
Company Merger Agreement with R&E Gaming. R&E Gaming has also requested that
Morgens, Waterfall, Vintiadis and Company, Inc. ("Morgens Waterfall"),
SunAmerica, and Keyport Life confirm the accuracy of certain representations and
warranties in an Option and Voting Agreement relating to the Company. The
Company has and will furnish all information that R&E Gaming reasonably requests
and believes that it is in full compliance with all of its obligations under the
Company Merger Agreement.
On March 5, 1998, Mr. Westerman exercised a clause in the Agreement that
requires the Company to establish a trust for the money in his retirement fund
as permitted in his employment agreement following shareholder approval of a
"change in control." The approval by the shareholders of the merger on February
5, 1998, constituted a change of control. The Company has entered into an
agreement with Mr. Westerman to address funding the trust amount in the event
the merger is not consummated.
On March 20, 1998, R&E Gaming Corporation notified the Company that R&E Gaming
considered the merger agreement with Riviera "void and unenforceable" or
alternatively of R&E's "intention to terminate" and "demand repayment of all
moneys and letters of credit". Riviera disputes R&E Gaming's factual and legal
assertions and will vigorously pursue collection of the approximately $6 million
being held in escrow related to the merger.
56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
57
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 30, 1998, relating to the Annual Meeting
of Stockholders to be held on June 24, 1998, and is made a part hereof.
Item 11. Executive Compensation
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 30, 1998, relating to the Annual Meeting
of Stockholders to be held on June 24, 1998, and is made a part hereof.
Item 12. Principal Shareholders
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 30, 1998, relating to the Annual Meeting
of Stockholders to be held on June 24, 1998, and is made a part hereof.
Item 13. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 30, 1998, relating to the Annual Meeting
of Stockholders to be held on June 24, 1998, and is made a part hereof.
58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements.
The following Independent Auditors' Report and the Consolidated
Financial Statements of the Company are incorporated by reference into this Item
14 of Form 10-K by Item 8 hereof:
- - Independent Auditors' Report dated February 6, 1998.
- - Consolidated Balance Sheets as of December 31, 1997 and 1996.
- - Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995.
- - Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
- - Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
- - Notes to Consolidated Financial Statements.
(a)(2) List of Financial Statement Schedules.
No financial statement schedules have been filed herewith since they
are either not required, are not applicable, or the required information is
shown in the consolidated financial statements or related notes.
(a)(3) List of Exhibits.
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index herein, which information is incorporated by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Commission during the
fourth quarter ended December 31, 1997.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM L. WESTERMAN Chairman of the Board, Chief
William L. Westerman Executive Officer and President March 26, 1998
/s/ DUANE R. KROHN Treasurer (Principal Financial
Duane R. Krohn and Accounting Officer) March 26, 1998
/s/ ROBERT R. BARENGO Director March 26, 1998
Robert R. Barengo
/s/ WILLIAM FRIEDMAN Director March 26, 1998
William Friedman
/s/ PHILIP P. HANNIFIN Director March 26, 1998
Philip P. Hannifin
60
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1* Agreement and Plan of Merger, dated September 15, 1997, by and among R&E Gaming
Corp., Riviera Acquisitions Sub, Inc., and Riviera Holdings Corporation (see Exhibit
10.1 to Current Report on Form 8-K filed with the Commission on September 29, 1997,
Commission File No. 0-21430)
3.1* Second Restated Articles of Incorporation of the Company (see Exhibit
3.1 to Registration Statement on Form S-4 filed with the Commission on
September 10, 1997, Commission File No. 0-21430)
3.2* Bylaws of the Company (see Exhibit 3.2 to Registration Statement on
Form S-4 filed with the Commission on September 10, 1997, Commission
File No. 0-21430)
3.3* Articles of Incorporation of Riviera Operating Corporation (see Exhibit 3.3 to
Registration Statement on Form S-4 filed with the Commission on September 10, 1997,
Commission File No. 0-21430)
3.4* Bylaws of Riviera Operating Corporation (see Exhibit 3.4 to Registration Statement
on Form S-4 filed with the Commission on September 10, 1997,
Commission File No. 0-21430)
3.5* Articles of Incorporation of Riviera Gaming Management, Inc. (see
Exhibit 3.5 to Registration Statement on Form S-4 filed with the
Commission on September 10, 1997, Commission File No. 0-21430)
3.6* Bylaws of Riviera Gaming Management, Inc. (see Exhibit 3.6 to
Registration Statement on Form S-4 filed with the Commission on
September 10, 1997, Commission File No. 0-21430)
3.7* Articles of Incorporation of Riviera Gaming Management -- Elsinore, Inc.
(see Exhibit 3.7 to Registration Statement on Form S-4 filed with the
Commission on September 10, 1997, Commission File No. 0-21430)
3.8* Bylaws of Riviera Gaming Management -- Elsinore, Inc. (see Exhibit 3.8
to Registration Statement on Form S-4 filed with the Commission on
September 10, 1997, Commission File No. 0-21430)
3.9* Articles of Incorporation of Riviera Gaming Management of Colorado,
Inc. (see Exhibit 3.9 to Amendment No. 1 to Registration Statement on
Form S-4 filed with the Commission on December 9, 1997, Commission
File No. 0-21430)
61
3.10* Bylaws of Riviera Gaming Management of Colorado, Inc. (see Exhibit
3.10 to Amendment No. 1 to Registration Statement on Form S-4 filed
with the Commission on December 9, 1997, Commission File No. 0-21430)
4.1* Indenture dated as of August 13, 1997 between the Company and Norwest Bank
Minnesota, N.A., as trustee, the Guarantors party thereto, Jefferies & Company, Inc.
and Ladenburg Thalmann & Co. Inc. (see Exhibit 4.2 to Current Report on Form 8-K
filed with the Commission on August 18, 1997, Commission File No. 0-21430)
4.2* Form of the Company's 10% Senior Notes due 2004 (included in Exhibit 4.1)
5.1* Opinion of Dechert Price & Rhoads re: legality (see Exhibit 5.1 to Amendment No.
1 to Registration Statement on Form S-4 filed with the Commission on December 9,
1997, Commission File No. 0-21430)
10.1* Registration Rights Agreement dated as of August 13, 1997 by and among
the Company, the Guarantors party thereto, Jefferies & Company, Inc.
and Ladenburg Thalmann & Co. Inc. (see Exhibit 4.1 to Current Report
on Form 8-K filed with the Commission on August 18, 1997, Commission
File No. 0-21430)
10.2* Purchase Agreement dated August 8, 1997 among the Company, the Guarantors party
thereto, Jefferies & Company, Inc. and Ladenburg Thalmann & Co., Inc. (see Exhibit
1.1 to Current Report on Form 8-K filed with the Commission on August 18, 1997,
Commission File No. 0-21430)
10.3* Lease Agreement between Riviera, Inc. and Mardi Gras Food Court, Inc.
dated April 1, 1990 (see Exhibit 10.1 to Form 10, Commission File No. 0-21430)
10.4* Amendment to Lease Agreement between Riviera, Inc. and Mardi Gras
Food Court, Inc. dated April 1, 1990 (see Exhibit 10.2 to Registration
Statement Form S-1 filed with the Commission on August 11, 1993, File No. 33-67206)
10.5* Lease Agreement between Riviera, Inc. and Leroy's Horse and Sports
Place (see Exhibit 10.3 to Form 10, Commission File No. 0-21430)
10.6* Indemnity Agreement, dated June 30, 1993, from Riviera, Inc. and
Meshulam Riklis in favor of the Company and Riviera Operating
Corporation (see Exhibit 10.7 to Registration Statement Form S-1 filed
with the Commission on August 11, 1993, File No. 33-67206)
62
10.7* Indemnity Agreement, dated June 30, 1993, from the Company in favor
of IBJ Schroder Bank & Trust Company (see Exhibit 10.8 to Registration
Statement Form S-1 filed with the Commission on August 11, 1993, File
No. 33-67206)
10.8* Equity Registration Rights Agreement, dated June 30, 1993, among the
Company and the Holders of Registerable Shares (see Exhibit 10.9 to
Registration Statement Form S-1 filed with the Commission on
August 11, 1993, File No. 33-67206)
10.9* Operating Agreement, dated June 30, 1993, between the Company and Riviera Operating
Corporation (see Exhibit 10.15 to Registration Statement Form S-1 filed with
the Commission on August 11, 1993, File No. 33-67206).
10.10* Adoption Agreement regarding Profit Sharing and 401(k) Plans of the Company (see
Exhibit 10.16 to Registration Statement Form S-1 filed with the Commission on
August 11, 1993, File No. 33-67206)
10.11* Howard Johnson & Company Regional Defined Contribution Plan, dated March 16, 1990
(adopted by the Company pursuant to the Adoption Agreement filed as Exhibit 10.17
to Registration Statement Form S-1 filed with the Commission on August 11, 1993,
File No. 33-67206)
10.12* Employment Agreement between Riviera, Inc. and William L.
Westerman, dated January 6, 1993 (see Exhibit 10.18 to Form 10,
Commission File No. 0-21430)
10.13* Form of Agreement between the Company and Directors (see Exhibit
10.19 to Form 10, Commission File No. 0-21430)
10.14* Form of Termination Fee Agreement (see Exhibit 10.20 to Form 10,
Commission File No. 0-21430)
10.15* Restricted Account Agreement, dated June 30, 1993, among Riviera
Operating Corporation, IBJ Schroder Bank & Trust Company and Bank
of America Nevada (see Exhibit 10.22 to Registration Statement Form S-1
filed with the Commission on August 11, 1993, File No. 33-67206)
10.16* Disbursement Agreement, dated June 30, 1993, between the Company and IBJ Schroder
Bank & Trust Company (see Exhibit 10.23 to Registration Statement Form S-1 filed with
the Commission on August 11, 1993, File No. 33-67206)
10.17* Tax Sharing Agreement between the Company and Riviera Operating
Corporation dated June 30, 1993 (see Exhibit 10.24 to Amendment No. 1
63
to Registration Statement Form S-1 filed with the Commission on August
19, 1993, File No. 33-67206)
10.18* The Registrant's 1993 Stock Option Plan (see Exhibit 10.25 to
Amendment No. 1 to Registration Statement Form S-1 filed with the
Commission on August 19, 1993, File No. 33-67206)
10.19* Form of Stay Bonus Agreement (see Exhibit 10.27 to Form 10-Q filed with the
Commission on November 9, 1994, Commission File No. O-21430)
10.20* Amendment dated February 19, 1995, to Lease Agreement between
Riviera, Inc. and Mardi Gras Food Court, Inc. (filed with Exhibits 10.3
and 10.4)
10.21* Amendment dated September 30, 1994, to Employment Agreement
between Riviera, Inc. and William L. Westerman (filed with Exhibit 10.12)
10.22* Management Agreement by and between Elsinore Corporation, Four
Queens, Inc. and Riviera Gaming Management Corp. -- Elsinore (see
Exhibit 10.30 to Form 10-K for the fiscal year ended December 31, 1996,
Commission File No. 000-21430)
10.23* Employment Agreement dated as of November 21, 1996 by and between
the Company, Riviera Operating Corporation and William L. Westerman
(see Exhibit 10.31 to Form 10-K for the fiscal year ended December 31,
1996, Commission File No. 000-21430)
10.24* Revolving Line of Credit Loan Agreement dated February 28, 1997 by and between the
Company, Riviera Operating Corporation and U.S. Bank of Nevada (see Exhibit 10.32 to
Form 10-K for the fiscal year ended December 31, 1996, Commission
File No. 000-21430)
10.25* Letter of Intent dated March 4, 1997 between the Company and Eagle Gaming, L.P.
(see Exhibit 10.33 to Form 10-K for the fiscal year ended December 31, 1996,
Commission File No. 000-21430)
10.26* Deed of Trust, Assignment of Rents, Leases, Fixture Filing and Security Agreement,
dated August 13, 1997, executed by Riviera Holdings Corporation for the benefit of
Norwest Bank Minnesota, National Association (see Exhibit 10.1 to Form 8-K
filed August 18, 1997, Commission File No. 000-21430)
10.27* Security Agreement, dated August 13, 1997, by and among Riviera
Holdings Corporation, Riviera Operating Corporation, Riviera Gaming
Management, Inc., Riviera Gaming Management of Colorado, Inc.,
Riviera Gaming Management -- Elsinore, Inc. and Norwest Bank
64
Minnesota, National Association (see Exhibit 10.2 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.28* Stock Pledge and Security Agreement, dated August 13, 1997, executed
by Riviera Holdings Corporation (see Exhibit 10.3 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.29* Stock Pledge and Security Agreement, dated August 13, 1997, executed
by Riviera Operating Corporation (see Exhibit 10.4 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.30* Stock Pledge and Security Agreement, dated August 13, 1997, executed
by Riviera Gaming Management, Inc. (see Exhibit 10.5 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.31* Restricted Account Agreement, dated August 13, 1997, by and among
Riviera Holdings Corporation, Norwest Bank Minnesota, National
Association and U.S. Bank of Nevada (see Exhibit 10.6 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.32* First Amendment to Revolving Line of Credit Loan Agreement, dated
August 12, 1997, between Riviera Holdings Corporation, Riviera
Operating Corporation and U.S. Bank (see Exhibit 10.7 to Form 8-K filed
August 18, 1997, Commission File No. 000-21430)
10.33* Escrow Agreement, dated September 15, 1997, by and among R&E
Gaming Corp., Riviera Holdings Corporation, and State Street Bank and
Trust Company of California (see Exhibit 10.2 to Form 8-K filed
September 29, 1997, Commission File No. 000-21430)
22.1* Subsidiaries of the Company (see Exhibit 21.1 to Registration Statement
on Form S-4 filed with the Commission on September 10, 1997,
Commission File No. 0-21430)
23.1* Consent of Deloitte & Touche LLP (see Exhibit 23.1 to Amendment No.
1 to Registration Statement on Form S-4 filed with the Commission on
December 9, 1997, Commission File No. 0-21430)
23.2* Consent of Dechert Price & Rhoads (included in Exhibit 5.1)
23.3* Consent of Schreck Morris (see Exhibit 23.3 to Amendment No. 1 to
Registration Statement on Form S-4 filed with the Commission on
December 9, 1997, Commission File No. 0-21430)
23.4* Consent of Holme Roberts & Owen LLP (see Exhibit 23.4 to Amendment
No. 1 to Registration Statement on Form S-4 filed with the Commission
on December 9, 1997, Commission File No. 0-21430)
65
27.1 Financial Data Schedule for the period
ended 12/31/97
27.2 Financial Data Schedule for the period
ended 9/30/97
27.3 Financial Data Schedule for the period
ended 6/30/97
27.4 Financial Data Schedule for the period
ended 3/31/97
27.5 Financial Data Schedule for the period
ended 12/31/96
27.6 Financial Data Schedule for the period
ended 9/30/96
27.7 Financial Data Schedule for the period
ended 6/30/96
27.8 Financial Data Schedule for the period
ended 3/31/96
99.1 Letter, dated March 20, 1998, from R&E Gaming Corp. to the Company
regarding the Company's Agreement and Plan of Merger
* The exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such exhibits is a reference
to the copy of the exhibit heretofore filed with the Commission, to which
there have been no amendments or changes.
66