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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, 2002
[ ] 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
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(State of Incorporation) (I.R.S. Employer Identification No.)
2901 Las Vegas Boulevard South
Las Vegas, Nevada 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 734-5110
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Securities registered pursuant to Section 12(b) of the Act: None
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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 _____
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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.
Based on the average bid price for the Registrant's Common Stock as
of March 6, 2003 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $13,523,081. As of March 6,
2003 the number of outstanding shares of the
Registrant's Common Stock was 3,606,155.
Documents incorporated by reference:
2003 definitive proxy statement (to be filed pursuant to Regualation 14A)
involving the election of directors: Part III of this Form 10-K.
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Page 1 of 44 pages
Exhibit Index Appears on Page 37 hereof.
1
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Item 1. Business............................................................3
General .........................................................3
Riviera Las Vegas................................................3
Riviera Black Hawk...............................................7
Geographical Markets.............................................8
Management Activities and New Venues.............................9
Competition.....................................................10
Employees and Labor Relations...................................12
Regulation and Licensing........................................12
Federal Registration............................................20
Item 2. Properties.........................................................21
Item 3. Legal Proceedings..................................................21
Item 4. Submission of Matters to a Vote of Security Holders................21
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters.....................................................21
Item 6. Selected Financial Data............................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................23
Results of Operations...........................................23
2002 Compared to 2001...........................................23
2001 Compared to 2000...........................................25
Liquidity and Capital Resources.................................28
Critical Accounting Policies....................................30
Recently and Adopted Accounting Standards.......................31
Item 7A. Qualitative and Quantitative Disclosure About Market Risk..........33
Forward Looking Statements......................................33
Item 8. Financial Statements and Supplementary Data........................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................35
Item 10. Directors and Executive Officers of the Registrant.................35
Item 11. Executive Compensation.............................................35
Item 12. Principal Shareholders.............................................35
Item 13. Certain Relationships and Related Transactions ....................35
Item 14. Controls and Procedures............................................35
Item 15. Exhibits and Reports on Form 8-K...................................36
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, owns and operates the Riviera Hotel & Casino ("Riviera Las Vegas")
located on Las Vegas Boulevard in Las Vegas, Nevada. Opened in 1955, the Riviera
Las Vegas has developed a long-standing reputation for delivering high quality,
traditional Las Vegas-style gaming, entertainment and other amenities.
Riviera Holdings Corporation, through its wholly owned subsidiary,
Riviera Black Hawk, Inc., owns and operates the Riviera Black Hawk Casino
("Riviera Black Hawk") a limited-stakes casino in Black Hawk, Colorado which
opened on February 4, 2000.
The Chief Decision Maker determines segments based upon geographic
gaming markets and also reviews corporate expenses separately. The Company has
two segments, the Las Vegas, Nevada market, the Black Hawk, Colorado market. The
segment information can be found in Note 16 of the Notes to the Consolidated
Financial Statements included in this document.
Riviera Las Vegas
General
Riviera Las Vegas is located on the corner of Las Vegas Boulevard and
Riviera Boulevard in Clark County, Nevada, across from Circus Circus. Riviera
Las Vegas targets 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.
Gaming
Riviera Las Vegas has 110,000 square feet of casino space. The casino
currently has approximately 1,450 slot machines and 31 gaming tables, including
blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) poker, Let It
Ride(R) and mini-baccarat. The casino also includes a keno lounge and a 200-seat
race and sports book.
Gaming operations at Riviera Las Vegas 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. We maintain 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. We maintain a capital investment program for the
upgrade of our slot machines.
Our current management team redirected our business away from
high-stakes wagerers in favor of the less volatile mid-level gaming customers.
In order to effectively pursue this strategy, we made several strategic changes
including reconfiguring the casino space, installing new slot machines, reducing
the number of gaming tables and eliminating the baccarat room. In addition, we
implemented stricter credit policies. As a result, the percentage of table game
dollar volume represented by credit play declined from approximately 24% in 1993
to 6% in 2002. Also, in 2002, revenues from slots and tables were approximately
77% and 20% of total gaming revenue, respectively, as compared to 60% and 34%,
respectively, in 1993.
During 2002, we continued a number of initiatives at Riviera Las
Vegas to increase slot play, including the replacement of older slot machines,
with new machines utilizing the ticket in/ticket out technology to improve
service and convenience to our customers, and maintaining our slot host program.
Slot hosts are our employees who interact with patrons as goodwill ambassadors
to generate loyalty. Our strategy is to continue to increase slot play through
marketing programs and other improvements, including (i) our ongoing slot
upgrade program, (ii) addition of new signage, (iii) promotion of the Riviera
Las Vegas Player's Club, (iv) sponsorship of slot tournaments, (v) creation of
promotional programs, (vi) marketing of the "Slot Frenzy" and "$40 for $20(R)"
slot promotions, and (vii) "Nickel Town(R)". Nickel Town is comprised primarily
of penny and nickel slot machines, the fastest growing segment of the Las Vegas
slot market.
3
Hotel
Riviera Las Vegas' hotel is comprised of five hotel towers with
approximately 2,100 guest 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. By the end of 2001 we completed refurbishment of all of our approximately
2,100 hotel rooms and suites. Despite the significant increase in rooms on the
Las Vegas Strip since 1997, we believe Riviera Las Vegas has attained room
occupancy rates that are among the highest on the Las Vegas Strip with 97.5% for
1994, 97.0% for 1995, 98.2% for 1996, 95.7% for 1997, 95.2% for 1998, 97.5% for
1999, 96.6% for 2000, 91.5% for 2001 and 89.6% for 2002 (based on available
rooms). The average occupancy rate citywide (metropolitan area) was 84.0% in
2002 according to the Las Vegas Convention and Visitors Authority.
Restaurants
The quality, value and variety of food services are critical to
attracting Las Vegas visitors. Riviera Las Vegas offers five (5) bars and four
(4) restaurants and serves an average of approximately 5,312 meals per day,
including banquets and room service. Riviera completely remodeled its buffet in
2001 upgrading the ambiance and food quality, featuring cuisine from various
countries as well as a carving station. The following table outlines, for each
restaurant, the type of service provided and total seating capacity:
Name Type Seating Capacity
Kady's Coffee Shop 290
Kristofer's Steak and Seafood 162
Ristorante Italiano Italian 126
World's Fare Buffet All-you-can-eat 366
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944
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In addition, Riviera Las Vegas operates a snack bar and continental
breakfast buffet as well as a fast-food court operated by a third party. The
food court has 200 seats and several fast-food restaurants, including Burger
King(R), Pizza Hut(R), Panda Express(R), Quiznos(R) and La Salsa(R).
Convention Center
Riviera Las Vegas features 160,000 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. Riviera Las Vegas hosted 378 conventions in 2002. The hotel
currently has over 708,000 convention related advance bookings of rooms through
2006 consisting of approximately 469,000 definite bookings and approximately
239,000 tentative bookings. In 2002 approximately 29.0% of the rooms were
occupied for conventions, and management estimates that 30.1% of its rooms will
be occupied for conventions in 2003.
The Royal Pavilion portion of the convention center, which opened in
February 1999, and represents approximately 60,000 square feet of our convention
facility, features state-of-the-art convention, meeting and banquet facilities,
teleconferencing and satellite uplink capability and twelve (12) skyboxes.
Entertainment
Riviera Las Vegas has one of the most extensive entertainment
programs in Las Vegas, offering up to eight different regularly scheduled shows
and special appearances by headline entertainers in concert. We believe
entertainment provides an attractive marketing tool to attract customers to the
Riviera. Riviera Las Vegas' entertainment program includes such well received
shows as Splash(R) (a variety show), An Evening at La Cage(R) (a female
impersonation show), Crazy Girls(R) (an adult revue), featured comedians at the
Riviera Comedy Club and up to four different regularly scheduled shows in our
LeBistro Theater. We
4
update our shows continually in response to customer surveys and to keep them
fresh. Tickets for the shows are offered at reasonable prices in keeping with
our emphasis on mid-level customers. The Riviera Mardi Gras shows of "La Cage"
and the "Comedy Club" received First Place and Third Place awards, respectively,
for "Best Las Vegas Shows" from What's On Magazine.
The following table outlines, for each entertainment center, the type
of service provided and total seating capacity:
Name Type Seating Capacity
Splash Variety 875
La Cage Female impersonation 575
Crazy Girls Adult Revue 375
Comedy Club Comedy 350
Le Bistro Variety 190
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2,365
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In addition, Riviera Las Vegas presents major concerts which since
1998 have included performers such as The Beach Boys, Billy Ray Cyrus, Rich
Little, Drew Carey, Damon Wayans, Titus, Brett Butler and D.L. Hughley. The
addition of the Royale Pavilion has enabled us to increase attendance at special
events since, in the past, the then existing facilities could not accommodate
the demand for tickets.
We believe that our substantial entertainment revenue is attributable
to the popularity of the in-house productions supplemented by focused marketing
and consistent advertising messages.
Future Expansions
We continue to explore the possible development of an approximately
60,000 square-foot entertainment complex to be constructed directly over the
casino, which could contain specialty themed entertainment that will appeal to
the Riviera Las Vegas' main target audience, adults aged 45 to 65. The exit from
the complex would deliver patrons to the casino. We would require partners to
finance, develop and operate the entertainment attraction. We have executed a
Letter of Intent with a potential partner and are in the process of negotiating
a formal agreement.
We are exploring a number of options for the development of our
existing 26-acre site. These options include a joint venture for the development
of a time-share condominium tower or an additional hotel tower and parking
garage. Under the terms of our $215 million Bond Indenture, we could contribute
up to 6 acres of land to such projects and if we decide to develop a time-share
tower a third party would construct and sell time-share units and arrange
financing. We believe that additional rooms adjacent to the Las Vegas Convention
Center would be particularly attractive to business customers and would provide
a base for additional casino customers. The development of a time-share tower,
hotel tower or parking facility would require additional financing and, in the
case of the time-share tower, a joint venture partner, none of which we have in
place at this time.
Marketing Strategies-Las Vegas
We have developed a marketing program intended to develop a loyal
following of repeat slot and mid-level table game customers. We believe we have
been able to successfully attract these patrons using Riviera Las Vegas'
restaurants, hotel accommodations and entertainment and by focusing on customer
service. We have adopted a selective approach to the extension of credit to
these customers in order to reduce volatility of operating results. We use our
research data to tailor promotional offers to the specific tastes of targeted
customers. All slot and table players are encouraged to join the Riviera Las
Vegas Player's Club and to fill out surveys that provide us with personal
information and preferences and tracks their level of play. Members of the
Riviera Las Vegas 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.
Riviera Las Vegas 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 expanding Riviera Las Vegas' core conventioneer customer base. In
developing an overall marketing program, we conduct extensive, ongoing research
of our target customers' preferences through surveys, one-on-one interviews and
focus groups.
5
Create Repeat Customers
Generating customer loyalty is a critical component of our business
strategy as retaining customers is less expensive than attracting new ones. We
have developed a focused and coordinated marketing program intended to develop a
loyal customer base which emphasizes (i) providing a high level of service to
our customers to ensure an enjoyable experience while at the Riviera Las Vegas,
(ii) responding to customer surveys and (iii) focusing marketing efforts and
promotional programs on customers with positive gaming profiles. We use our
research data to tailor promotional offers to the specific tastes of targeted
customers. All slot and table players are encouraged to join the Riviera Las
Vegas Player's Club which tracks their level of play, and to fill out surveys
that provide the Riviera Las Vegas with personal information and preferences.
Members of the Riviera Las Vegas 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. We design promotional offers targeted at certain mid-level
gaming patrons that are expected to provide significant revenues based upon
their historical gaming patterns. We contact these customers through a
combination of direct mail and telemarketing by an in-house marketing staff and
independent representatives located in major cities. Riviera Las Vegas uses a
proprietary database which is linked to our player tracking system to help
identify customers' requirements and preferences, thereby allowing Riviera Las
Vegas to customize promotions to attract repeat visitors. We offer customers
personalized service, credit availability and access to a variety of
complimentary or reduced-rate room, dinner and entertainment reservations. We
use a specialized multi-tiered marketing approach to attract customers in each
of our major markets. Slot and table game tournaments and special events are
designed for specific levels of play. Utilizing our proprietary database our
marketing department then targets and invites the customers most appropriate for
the customized events. In addition, we host an array of special events,
including slot and table tournaments, designed to attract customers for an
extended stay. We have found that this individualized marketing approach has
provided significant revenues and profitable repeat business.
Provide Extensive Entertainment Options
We also focus on attracting our guests through a range of
entertainment opportunities. Riviera Las Vegas has one of the most extensive
entertainment programs in Las Vegas with up to eight different regularly
scheduled shows and special appearances by headline entertainers. In addition to
providing a positive impact on our profitability, the shows attract additional
gaming revenue. Surveys indicate that approximately 73% of the show patrons come
from outside the hotel and approximately 72% of these individuals gamble at
Riviera Las Vegas before or after the shows.
Attract Walk-In Traffic
We seek to maximize the number of people who patronize the Riviera
Las Vegas who are not guests in the hotel by capitalizing on Riviera Las Vegas'
prime Strip location, convention center proximity and the Riviera's several
popular in-house productions. Riviera Las Vegas is well situated on the Las
Vegas Strip near Circus Circus, Stardust Hotel & Casino, Westward Ho Casino &
Hotel, Sahara Hotel & Casino, Las Vegas Hilton and the Las Vegas Convention
Center. We strive to attract customers from those facilities, as well as
capitalize on the visitors in Las Vegas in general, with the goal of increasing
walk-in traffic by (i) the development and promotion of Nickel Town, (ii)
providing a variety of quality, value-priced entertainment and dining options,
and (iii) promoting "Slot Frenzy," the "Free Pull" and the "$40 for $20" slot
promotions, and placing them inside the casino.
Focus on Convention Customers
This market 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. Riviera Las Vegas targets convention business because
it typically provides patrons willing to pay higher room rates and we are able
to provide certain advance planning benefits, since conventions are usually
booked two years in advance of the event date. We focus our marketing efforts on
conventions whose participants have the most active gaming profile and higher
room rate, banquet and function spending habits. Riviera Las Vegas also benefits
from our proximity to the Las Vegas Convention Center which makes us attractive
to city-wide conventioneers looking to avoid the congestion that occurs during a
major convention, particularly at the south end of the Las Vegas Strip. In 2002
we derived 29.1% of our hotel occupancy from convention customers and consider
them a critical component of our customer base. We believe that the completed
expansion of the Riviera Las Vegas' convention facility in February 1999, from
100,000 to 160,000 square feet, has accommodated the growth in size and number
of groups that presently use the facility, attracted new convention groups and
increased the percentage of rooms occupied by conventioneers.
6
Tour and Travel Operators
We have found that many of our 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
us to maintain occupancy rates at the highest levels throughout the year. We
have developed specialized marketing programs and cultivated relationships with
wholesale operators, travel agents and major domestic air carriers to expand
this market. Our four largest tour and travel operators currently account for
approximately 20.9% of the available 2,100 room bookings per night. We make an
effort to convert many tour and travel customers who meet our target customer
gaming profile into repeat slot customers.
Riviera Black Hawk
Business
Our wholly owned subsidiary, Riviera Black Hawk, opened on February
4, 2000. Located in Black Hawk, Colorado, approximately 40 miles west of Denver,
our casino is one of the first three encountered when traveling from Denver to
the adjacent gaming cities of Black Hawk and Central City. Our casino features
the fourth largest number of gaming devices in the market with approximately
1,000 slot machines and 9 blackjack tables. In Colorado, each slot machine and
each table game is considered one gaming device.
We also offer a variety of non-gaming amenities designed to further
differentiate our casino including:
o parking for 520 vehicles, of which 92% are covered, with convenient
and free self-park and valet options;
o a newly remodeled 252-seat casual buffet-styled restaurant;
o a Pizza Hut(R);
o two themed bars; and
o an entertainment center with seating for approximately 440 people.
The initial participants in this market were small, privately held
gaming facilities whose inability to offer convenient parking and a full range
of traditional casino amenities limited the growth of this market. Subsequently,
larger casinos offering such amenities have entered the market, have been
gaining market share and have contributed to the consistent growth in the
overall market. As of December 31, 2002, there were 25 casinos in the Black
Hawk/Central City market, with 11 casinos each offering more than 400 gaming
devices. Isle of Capri, located across the street from our casino with
approximately 1,120 gaming machines and 1,000 covered parking spaces, has been
the market leader in terms of win per gaming device.
Marketing strategy
We attract customers to our casino by implementing marketing
strategies and promotions designed specifically for this market. In so doing, we
hope to create customer loyalty and benefit from repeat visits by our customers.
Specific marketing programs to support this strategy include the Riviera Black
Hawk Player's Club and "V.I.P." services offered to repeat gaming customers. The
Riviera Black Hawk Player's Club is a promotion that rewards casino play and
repeat visits to the casino with various privileges and amenities such as cash
bonuses, logo gift items and invitations to special events, such as parties and
concerts. We have used the Player's Club promotion in our casino in Las Vegas
and, in our capacity as manager of the Riviera Black Hawk, have tailored it for
the Black Hawk/Central City market to implement at our casino. "V.I.P." services
are available to the highest level of players and include special valet and
self-parking services, complimentary food and entertainment offerings and
special events specifically designed for this group of customers.
7
We benefit from strong "walk-in" traffic due to the proximity of our
casino to the Colorado Central Station and the Isle of Capri Casino. We have and
continue to develop specific marketing programs designed to attract these
"walk-in" customers. We emphasize quality food and beverage amenities with
customer friendly service as a marketing tool. In addition, we provide
entertainment programs designed to meet the tastes of the Black Hawk/Central
City market, such as live music performances by popular regional and national
groups, comedians and boxing.
We rely on database marketing in order to best identify target
customer segments of the population and to tailor the casino's promotions and
amenities to our core group of customers. We use the current database to
identify and stratify slot players living primarily in Colorado for appropriate
incentives. Approximately 203,000 of these slot players have been identified as
of December 31, 2002. In addition, we promote our casino by advertising in
newspapers, on billboards and on the radio in the local areas.
Geographical Markets
The 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 number of visitors who traveled to Las Vegas during the 16-year period from
1986 through 2002 increased at a steady and significant rate from 15.2 million
in 1986 to 35.0 million in 2002, a compound annual growth rate of 6.3%. Just
over 35 million people visited Las Vegas in 2001, a 2.3% decline from 2000.
Visitor volume dropped drastically following the September 11,2001 terrorist
attacks. Visitor volume increased 0.2% to slightly over 35 million in 2002, as
compared to 2001. Clark County gaming continued to be a strong and growing
business with Clark County gaming revenues increasing at a compound annual
growth rate of 8.7% from $2.4 billion in 1986 to just under $7.7 billion in
2000. Clark County gaming revenues dropped 0.1% to just over $7.6 billion in
2001 and were flat at $7.6 billion in 2002. The terrorist attacks of September
11, 2001 have had, and may continue to have, an adverse effect on the number of
visitors traveling to Las Vegas. Additional terrorist attacks or a war could
also have an adverse effect on the number of visitors traveling to Las Vegas.
Gaming and tourism are the major attractions of Las Vegas, complemented by
warm weather and the availability of many year-round recreational activities.
Although Las Vegas' principal market is 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. The events of September 11, 2001
have had, and may continue to have, an adverse impact on the number of Latin
American and Pacific Rim visitors coming to Las Vegas. Japan Air Lines ceased
its daily non-stop service between Tokyo and Las Vegas after September 11,
2001 but reinstated non-stop service three days per week in March 2002.
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 89% from approximately 67,000 at the end of 1989 to 126,787 at the end of
2002, giving Las Vegas the most hotel and motel rooms of any metropolitan area
in the world. Despite this significant increase in the supply of rooms, the Las
Vegas hotel occupancy rate exceeded 84% for each of the years from 1993 through
2002. During the calendar year 2002 1,327 new hotel rooms opened in Las Vegas.
We believe that the growth in the Las Vegas market has been enhanced
as a result of (i) a dedicated program by the Las Vegas Convention and Visitors
Authority 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
1988, approximately 1.7 million delegates attended conventions in Las Vegas and
generated approximately $1.3 billion of economic impact. Even though the
terrorist attacks negatively impacted major city-wide conventions, the number of
convention delegates had increased to 5.1 million in 2002 with in excess of $5.9
billion of economic impact.
During the past nine 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 22.5 million in 1993 to an estimated 35.0 million
in 2002. Construction has recently been completed on numerous roadway
enhancements to improve access to the Airport. McCarran Airport is ranked among
the 11 and 7 busiest airports in the world and North America, respectively,
based on passenger activity.
8
The Black Hawk/Central City Market
Gaming was first introduced to the Black Hawk/Central City market in
October 1991 following a state-wide referendum where Colorado voters approved
limited stakes gaming for three historic mining towns, namely Black Hawk,
Central City and Cripple Creek. Limited stakes gaming is defined as a maximum
single bet of $5.00. Black Hawk and Central City are contiguous cities located
approximately 40 miles west of Denver and about 10 miles north of Interstate
Highway 70, the main east-west artery from Denver. Historically, these two gold
mining communities were popular tourist towns. However, since the inception of
casino gaming in October 1991, gaming establishments has displaced many of the
former tourist-related businesses.
The first casino in the Black Hawk/Central City market was opened in
October 1991 with 14 casinos open by the end of that year. The pace of expansion
increased further in 1992 with the number of casinos in the market peaking at 42
casinos. However, due to a trend of consolidation in the market and the
displacement of small casinos by the entry of larger, better capitalized
operators, the number of casinos has declined to 25 as of December 31, 2002.
The Black Hawk/Central City market primarily caters to "day-trip"
customers from Denver, Boulder, Fort Collins and Golden as well as Cheyenne,
Wyoming. We believe an estimated adult population exceeding 2.7 million people
resides within this 100-mile radius of Black Hawk. In addition, we believe that
residents within a 100-mile radius of the City of Black Hawk had an estimated
average household income in excess of $55,000 per annum in 2002.
Since 1992, the number of gaming devices in the Black Hawk/Central
City market has grown approximately 52% from 7,252 devices in 1992 to 11,012
devices in 2002. Gaming revenues in the Black Hawk/Central City market grew by
7.3% in 2002 over 2001. The City of Black Hawk itself experienced a 9.6%
increase in gaming revenue in 2002.
The City of Black Hawk has experienced more significant growth in
gaming revenues than Central City since 1992. The popularity of Black Hawk in
comparison to Central City is due primarily to Black Hawk's superior access to
major highways, as patrons must first pass through Black Hawk to access Central
City from Denver. Due to this superior location, larger casino operators have
focused on building in the City of Black Hawk. As a result, casinos in Black
Hawk now generally feature a larger average number of gaming devices, a wider
variety of amenities and convenient free parking for patrons.
Management Activities and New Venues
In order to capitalize on our expertise and reputation as successful
operators of casino properties, we formed Riviera Gaming Management, Inc., our
wholly owned subsidiary, for the primary purpose of obtaining casino management
contracts in Nevada and other jurisdictions. Riviera Gaming Management offers
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 development and
marketing programs. We believe that management contracts provide high margin
income with limited additional overhead and little or no capital expenditure
requirements. We are continually evaluating opportunities to manage other
casinos/hotels. Our objective is to obtain the right to a substantial equity
position in projects we would manage as part of the compensation for our
services.
New Venues
Our diversification efforts are proceeding with our endorsement by
Jefferson County, Missouri for a casino/hotel development project located
approximately 22 miles south of downtown St. Louis. We filed our formal
application with the Missouri Gaming Commission on October 9, 2002 and look
forward to presenting our project to the State of Missouri. We expect to make
our formal presentation before the Missouri Gaming Commission sometime in the
first half of 2003 and we anticipate a decision sometime this summer. Assuming
we were to receive approval from the state regulators, construction work should
start in the fall 2003, with a completion date in late 2005.
We filed an application with the New Mexico Racing Commission in March
of 2002 for a "racino" in Hobbs, New Mexico. The Commission plans to reopen
hearings for a horse-racing license in Hobbs in the spring of 2003 with a
decision to be made shortly thereafter.
9
Other Management Opportunities
We are continuously reviewing opportunities to expand and become a
multi-jurisdictional casino company with greater capital resources to enable us
to compete more effectively. The jurisdictions include, but are not limited to,
California, Mississippi, Pennsylvania, Missouri, New Mexico and Iowa. We may
also become involved in financially distressed casino properties where we
believe we may be able to effect a turn-around (similar to that which we
achieved at Riviera Las Vegas) and can obtain a significant equity stake.
Competition
Las Vegas, Nevada
Intense competition exists among companies in the gaming industry,
many of which have significantly greater resources than our Company. Riviera Las
Vegas faces competition from all other casinos and hotels in the Las Vegas area.
We believe that our most direct competition comes from certain large
casino/hotels located on or near the Las Vegas Strip which offer amenities and
marketing programs similar to those offered by the Riviera Las Vegas.
At December 31, 2002, the Las Vegas Convention and Visitors Authority
(LVCVA) indicated that there were 24 casinos on the Las Vegas Strip which had
over 1,000 available hotel rooms. Riviera Las Vegas is ranked as the 21st
largest Las Vegas Strip hotel/casino, based upon number of available hotel
rooms.
Las Vegas gaming square footage and room capacity are continuing to
grow and are expected to continue to increase during the next several years.
During calendar year 2002, approximately 1,327 new hotel rooms opened, and as of
December 31, 2002, there were approximately 1,000 hotel rooms under
construction. Existing and future expansions, additions and enhancements to
existing properties and construction of new properties by our competitors could
divert additional business from our facilities. There can be no assurance that
we will compete successfully in the Las Vegas market in the future.
During 2002, available room nights in the Las Vegas market increased
from 45.6 million to 46.2 million or 1.3%, while total room nights occupied
increased from 38.6 million to an estimated 38.8 million, or 0.5%. The ending
room inventory at December 31, 2002 was 126,787 compared to 126,610 at December
31, 2001, an increase of 177 rooms or 0.1%. This has had the effect of
intensifying competition. At Riviera Las Vegas, room occupancy decreased from
91.6% in 2001 to 89.6% in 2002 (still higher than the Las Vegas Strip
averageof 88.9%and 88.8%, respectfully). Room rates decreased by $2.53, or 4.1%
from $62.46 in 2001 to $59.93 in 2002.
We also compete to some extent with casinos in other states,
riverboat 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 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 our results of operations.
The number of casinos on Indian lands has increased since the
enactment of the Indian Gaming Regulatory Act of 1988. The voters in the State
of California addressed this issue on March 7, 2000 when they voted in favor of
Proposition 1A, an amendment to the California State constitution that allows
Las Vegas-style gambling on Indian lands in the state. While new gaming
jurisdictions have traditionally not materially impacted Las Vegas, the
expansion of gaming into California poses a more serious threat to the continued
growth of Las Vegas.
Our current business is highly dependent on gaming in Las Vegas.
Riviera Las Vegas derives a substantial percentage of its business from
tourists, including customers 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 our financial results. Possible
utility rate increases in California could also adversely affect our financial
results. The events of September 11, 2001 have had the most serious effect, and
could continue to have an adverse effect on our financial results. Additional
terrorist attacks or a war could also have an adverse effect on our financial
results.
10
Black Hawk, Colorado
The Black Hawk/Central City gaming market is characterized by intense
competition. The primary competitive factors in the market are location,
availability and convenience of parking, number of slot machines and gaming
tables, promotional incentives, hotel rooms, types and pricing of non-gaming
amenities, name recognition and overall atmosphere. Our main competitors are the
larger gaming facilities, particularly those with considerable on-site or nearby
parking and established reputations in the local market. As of December 31, 2002
there were 25 gaming facilities in the Black Hawk market with 11 casinos each
offering more than 400 gaming positions. Additional projects have also been
announced, proposed, discussed or rumored for the Black Hawk/Central City
market.
The gaming facilities near the intersection of Main and Mill Streets
provide significant competition to our casino. Colorado Central Station, which
has been one of the most successful casinos in Colorado, is located across the
street from our casino and has 754 slot machines, 15 gaming tables and
approximately 700 valet parking spaces. The Isle of Capri Casino, the most
successful casino in Colorado, which opened in December 1998, is located
directly across the street from our casino and features approximately 1,120 slot
machines, 14 table games, 1,000 parking spaces, and 235 hotel rooms. Isle of
Capri has recently announced its acquisition of Colorado Central Station,
pending regulatory approval. Isle of Capri has also announced its plan to
renovate Colorado Central Station with the addition of a 1,400 space parking
garage, a 165 room hotel and a restaurant on land immediately across Main Street
from Colorado Central Station and diagonally across from our casino. We believe
that the completion of the sale and the planned renovations will increase the
probability that more customers will frequent the immediate area serviced by
Isle of Capri, Colorado Central Station and our casino. We do not expect the
planned renovations to be complete until some time in 2004.
The number of hotel rooms currently in the Black Hawk/Central City
market is approximately 405, with only three gaming facilities providing hotel
accommodations to patrons. These include Harvey's Wagon Wheel Casino Hotel with
approximately 120 rooms, the Lodge at Black Hawk with approximately 50 rooms and
the Isle of Capri Casino with 235 rooms. Casinos offering hotel accommodations
for overnight stay may have a competitive advantage over our casino. However, we
believe that self-parking is a more effective utilization of our available space
and that providing hotel accommodations will not be a significant factor, but
instead will contribute to growth in the overall market.
Historically, the city of Black Hawk has enjoyed an advantage over
Central City because customers have to drive through Black Hawk to reach Central
City. Central City has received approval for the development of a road directly
connecting Central City and Black Hawk with Interstate 70 which would allow
customers to reach Central City without driving by or through Black Hawk. There
remain significant financial obstacles to the development of this road and it is
uncertain whether it will be developed over the near to intermediate term, or
developed at all.
Currently, limited stakes gaming in Colorado is constitutionally
authorized in Central City, Black Hawk, Cripple Creek and two Native American
reservations in southwest Colorado. However, gaming could be approved in other
Colorado communities in the future. The legalization of gaming closer to Denver
would likely have a material adverse effect on our future results of operations.
We also compete with other forms of gaming in Colorado, including lottery
gaming, and horse and dog racing as well as other forms of entertainment.
It is also possible that new forms of gaming could compete with our
casino. Currently, Colorado law does not authorize video lottery terminals.
However, Colorado law permits the legislature, with executive approval, to
authorize new types of lottery gaming, such as video lottery terminals. Video
lottery terminals are games of chance, similar to slot machines, in which the
player pushes a button that causes a random set of numbers or characters to be
displayed on a video screen. The player may be awarded a ticket, which can be
exchanged for cash or credit play. A Racing Industry Group has introduced a
proposed initiative for the legalization of Video Lottery Terminals at five
horse and dog racetracks in Colorado. The initiative proposes the authorization
of 500 Video Lottery Terminals per racetrack which would be governed by the
Colorado Lottery. The initiative would permit the Video Lottery Terminals in
three racetracks in Denver, one in Colorado Springs and one in Pueblo. This form
of gaming could compete with slot machine gaming.
Pursuant to a license agreement, Riviera Las Vegas licenses the use
at the Black Hawk casino of all of the trademarks, service marks and logos used
by Riviera Las Vegas. In addition, the license agreement provides that
additional trademarks, service marks and logos acquired or developed by us and
used at our other facilities will be subject to the license agreement.
11
Employees and Labor Relations
Riviera Las Vegas
As of December 31, 2002 Riviera Las Vegas had approximately 1,350 full-time
equivalent employees and had collective bargaining contracts with eight unions
covering approximately 800 of such employees including food and beverage
employees, rooms department employees, carpenters, engineers, stage hands,
musicians, electricians, painters and teamsters. Our agreements with the
Southern Nevada Culinary and Bartenders Union, which covers the majority of our
unionized employees, was renegotiated in 2002 and expires in the year 2007. The
Collective Bargaining Agreement with the Stage Hands Union expired in 2002 and
Collective Bargaining Agreements with the Operating Engineers and Musicians
expired in 1999. The Operating Engineers approved a new agreement that expires
in the year 2004. We are currently in negotiations with the Musicians and Stage
Hands Unions. The Agreements with the Carpenters and Painters expired in 2000.
New agreements, which expire in 2005, were negotiated with the Painters in 2000
and Carpenters in 2001. New agreements were negotiated with the Teamsters in
1998 and Electricians in 1999 and expire on April 1, 2003 and in 2004,
respectively. We are currently in negotiations with the Teamsters Union. On
November 27, 2000, the Transport Workers Union filed a petition with the
National Labor Relations Board to represent the Blackjack, Dice and Poker
Dealers (or, the "Dealers"). On February 8 and 9, 2001, the Dealers voted
against representation by this Union by a vote of 107 to 61. This group totaled
190 at the time of the vote. On June 17, 2002, the Teamsters Union filed a
petition with the NLRB to represent the clerks in the marketing department. On
July 26, 2002, the marketing clerks voted in favor of representation by the
Union by a vote of 5 to 1. We are currently negotiating with the Teamsters Union
in this regard. Although unions have been active in Las Vegas, we consider our
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 us.
Riviera Black Hawk
Riviera Black Hawk opened on February 4, 2000 with approximately 450
employees. As of December 31, 2002, the total number of employees was 323. The
Black Hawk/Central City labor market is very competitive. Riviera Black Hawk
believes that it will be able to maintain its current employee level. There can
be no assurance, however, that new and existing casinos will not affect Riviera
Black Hawk's ability to maintain its current employee level.
There are currently no collective bargaining agreements in Black Hawk casinos.
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. Our gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the "Nevada Commission"),
the State of Nevada Gaming Control Board, the Clark County Business Department
(collectively, the "Clark County Board"), 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; (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. Changes in such laws, regulations and
procedures could have an adverse effect on our gaming operations.
12
Riviera Operating Corporation is required to be and is licensed by
the Nevada Gaming Authorities (a "Corporate Licensee"). The gaming license held
by Riviera Operating Corporation requires the periodic payment of fees and taxes
and is not transferable. Riviera Operating Corporation is also licensed as a
manufacturer and distributor of gaming devices. Such licenses also require the
periodic payment of fees and are not transferable. We are registered by the
Nevada Commission as a publicly traded corporation (a "Registered Corporation")
and have been found suitable to own the stock of Riviera Operating Corporation.
As a Registered Corporation, we are 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, Riviera Operating
Corporation without first obtaining licenses and approvals from the Nevada
Gaming Authorities. We and Riviera Operating Corporation 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.
The Nevada Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, us or Riviera
Operating Corporation 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 Riviera Operating Corporation must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Our officers,
directors and key employees who are actively and directly involved in the gaming
activities of Riviera Operating Corporation 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 us or Riviera Operating Corporation, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require us or Riviera Operating Corporation to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
We and Riviera Operating Corporation 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 Riviera Operating Corporation must be reported to or approved by the Nevada
Commission.
If it were determined that the Nevada Act was violated by Riviera
Operating Corporation, the gaming license it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, we or Riviera Operating Corporation 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 license of Riviera Operating Corporation or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect our gaming operations.
Any beneficial holder of our 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 our 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 our 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.
13
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of our voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds our voting securities for
investment purposes only. An institutional investor shall not be deemed to hold
our 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 our board of directors, any change in
our corporate charter, bylaws, management, policies or operations, or any of our
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding our voting securities for investment purposes only.
Activities which are deemed to be consistent with holding our 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 our 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. We are subject to disciplinary action if, after we
receive notice that a person is unsuitable to be a stockholder or to have any
other relationship with us or Riviera Operating Corporation, we (i) pay that
person any dividend or interest upon voting our securities, (ii) allow that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pay remuneration in any form to that
person for services rendered or otherwise, or (iv) fail 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 of our debt securities to file applications, be investigated and be found
suitable to own such securities, 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, we can be sanctioned, including the loss of our
approvals, if without the prior approval of the Nevada Commission, we (i) pay to
the unsuitable person any dividend, interest, or any distribution whatsoever;
(ii) recognize any voting right by such unsuitable person in connection with
such securities; (iii) pay the unsuitable person remuneration in any form; or
(iv) make any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
We are 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. We are also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require our 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 us.
We may not make a public offering of our 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 ("Stock Pledge"), such as Riviera Operating
Corporation, 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 and agreements not to encumber such securities (collectively, "Stock
Restrictions") are ineffective without the prior approval of the Nevada
Commission.
14
Changes in control of a registered corporation 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
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 Riviera Operating Corporation'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 Riviera Operating Corporation, 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 or enter into associations that are harmful to
the State of Nevada or its ability to collect gaming taxes and fees, or employ,
have contact with or associate with 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 Riviera Las Vegas 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 Riviera Operating Corporation.
15
Colorado
Colorado Gaming and Liquor Regulation
Summary
In general we, Riviera Black Hawk, our principal executive officers
and those of Riviera Holdings, and any of our employees who are involved in our
gaming operations, are required to be found suitable for licensure by the
Colorado Gaming Commission. Colorado also requires that significant stockholders
of 5% or more of our stock be certified as suitable for licensure. Riviera Black
Hawk's original retail gaming license was approved by the Colorado Gaming
Commission on November 18, 1999, and has been successfully renewed each
subsequent year.
Background
Pursuant to an amendment to the Colorado Constitution, limited stakes
gaming became lawful in the cities of Central City, Black Hawk and Cripple Creek
on October 1, 1991. Limited stakes gaming means a maximum single bet of five
dollars on slot machines and in the card games of blackjack and poker.
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. Under the Colorado Amendment, 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. Persons under the
age of 21 cannot participate in limited stakes gaming. The Colorado Amendment
also 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 Act provides that, in addition to any other
applicable license fees, up to a maximum of 40% of the total amounts wagered
less payouts to players may be payable by a licensee for the privilege of
conducting limited stakes gaming. Such percentage is to be established by the
Colorado Commission annually.
The Colorado Act declares public policy on limited stakes gaming to
be that: (1) 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; (2) 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; (3) all establishments where limited gaming is conducted and where
gambling devices are operated, and all manufacturers, sellers and distributors
of certain gambling devices and equipment must therefore be licensed, controlled
and assisted to protect the public health, safety, good order and the general
welfare of the inhabitants of the state to foster the stability and success of
limited stakes gaming and to preserve the economy, policies and free competition
in Colorado; and (4) no applicant for a license or other affirmative commission
approval has any right to a license or to the granting of the approval sought.
Any license issued or other commission approval granted pursuant to the
provisions of this Article is a revocable privilege, and no holder acquires any
vested rights therein.
Regulatory Structure
The Colorado Act subjects the ownership and operation of limited
stakes gaming facilities in Colorado to extensive licensing and regulation by
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
Act also created the Colorado Division of Gaming within the Colorado Revenue
Department to license, regulate and supervise the conduct of limited stakes
gaming in Colorado. The division is supervised and administered by the Director
of the Division of Gaming.
16
Gaming Licenses
The Colorado Commission may issue:
o slot machine manufacturer or distributor,
o operator,
o retail gaming,
o support, and
o key employee gaming licenses.
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.
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 gaming licenses. A slot machine manufacturer or distributor
license is required for all persons who manufacture, import and distribute slot
machines in Colorado.
The Colorado Regulations require that every officer, director and
stockholder of private corporations or equivalent office or ownership holders
for non-corporate applicants, and every officer, director or stockholder holding
either a 5% or greater interest or controlling interest of a publicly traded
corporation or owners of an applicant or licensee shall be a person of good
moral character and submit to a full background investigation conducted by the
Division of Gaming and the Colorado Commission. The Colorado Commission may
require any person having an interest in a license to undergo a full background
investigation and pay the cost of investigation in the same manner as an
applicant.
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. A person may be found unsuitable because
of prior acts, associations or financial conditions. Acts that would lead to a
finding of unsuitability are those that would violate the Colorado Act or the
Colorado Regulations or that contravene the legislative purpose of the Colorado
Act.
17
Duties of licensees
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 applicant 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 licenses 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.
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
5% or greater, who have the ability to control the licensee, 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 gaming licenses, and all applications for gaming
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 Amendment, the Colorado Act or the Colorado Regulations are void
and unenforceable.
Taxes, fees and fines
The Colorado Amendment requires an annual tax of up to 40% on the
total amount wagered less all payouts to players. With respect to games of
poker, the tax is calculated based on the sums wagered which are retained by the
licensee as compensation. Annually during April, May and June, the Colorado
Commission, as mandated by the Colorado Regulations, shall conduct rule-making
hearings concerning the gaming tax rate and device fee rate for the subsequent
gaming year. However, rigid compliance with the Colorado Regulations is not
mandatory and shall in no way be construed to limit the time periods or subject
matters which the Colorado Commission may consider in determining the various
tax rates. Currently, the gaming tax is:
o .25% on the first $2 million of these amounts;
o 2% on amounts from $2 million to $4 million;
o 4% on amounts from $4 million to $5 million;
o 11% on amounts from $5 million to $10 million;
o 16% on amounts from $10 million to $15 million; and
o 20% on amounts over $15 million.
The Colorado Commission has eliminated the annual device fee for
gaming device machines, blackjack tables and poker tables.
18
The municipality of Black Hawk assesses an annual device fee of
$750.00 per device on all devices exceeding 50. There is no statutory limit on
state or city device fees, which may be increased at the discretion of the
Colorado Commission or the city. In addition, a business improvement fee of as
much as $7.42 per device and a monthly transportation authority device fee of
$8.84 per device also may apply depending upon the location of the licensed
premises in Black Hawk.
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 Gaming Act or the Colorado Regulations
generally constitutes a class 1 misdemeanor, except as may be specifically
otherwise provided within the Colorado Gaming Act, which may subject the
violator to fines or incarceration or both. A licensee who violates the Colorado
Gaming Act or Colorado Regulations is subject to suspension of the license for a
period of up to six months, fines or both, or to license revocation.
Requirements for publicly traded corporations
The Colorado Commission has enacted Rule 4.5, which imposes
requirements on publicly traded corporations holding gaming licenses in Colorado
and on gaming licenses 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. Such
requirements automatically apply to any ownership interest held by a publicly
traded corporation, holding company or intermediary company thereof, where the
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 the 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 no later than ten business days after 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 their distribution. Licensees to
whom Rule 4.5 applies must include in their charter documents provisions that:
restrict the rights of the licensees to issue voting interests or securities
except in accordance with the Colorado Gaming Act and the Colorado Regulations;
limit the rights of persons to transfer voting interests or securities of
licensees except in accordance with the Colorado Gaming 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
o 5% or more of any class of voting securities of a publicly traded
corporation that is required to include in its articles of organization
the Rule 4.5 charter language provisions or
o 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, 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
19
qualifying persons of these requirements. A qualifying person other
than an institutional investor whose interest equals 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.
The Colorado Regulations also provide for exemption from the
requirements for a finding of suitability when the Colorado Commission finds
such action to be consistent with the purposes of the Colorado Act.
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 interest. 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 or must apply for a key employee license.
Alcoholic Beverage Licenses
The sale of alcoholic beverages in gaming establishments is subject
to strict licensing, control and regulation by state and local authorities.
Alcoholic beverage licenses are revocable and nontransferable. 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, fines, or
both.
There are various classes of retail liquor licenses which may be
issued 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's hotel and restaurant license has been approved by both the local
licensing authority and the State Division of Liquor Enforcement.
Federal Registration
Riviera Operating Corporation 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.
Available Information
The Company files annual and quarterly reports and other information with
the Securities and Exchange Commission. You may read and copy any document that
the Company files at the Securities and Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
1-800-SEC-0300 for further information on the operation of the Public Reference
Room. Reports, proxy statements and other information regarding issuers,
including the Company, that file electronically with the Securities and Exchange
Commission are also available to the public from the Securities and Exchange
Commission's Web site at http://www.sec.gov.
The Company's internet address is www.theriviera.com
(http://www.theriviera.com). Through the "Investors" page at the Company's
internet website, the Company's annual report on Form 10-K, quarterly reports on
20
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, are
available free of charge, as soon as reasonably practical after such information
has been filed or furnished to the SEC.
Item 2. Properties
Riviera Hotel and Casino
The Riviera Las Vegas complex is located on the Las Vegas Strip, at
2901 Las Vegas Boulevard South, Las Vegas, Nevada and occupies approximately 26
acres. The buildings comprise approximately 1.8 million square feet, including
110,000 square feet of casino space, a 160,000 square foot convention, meeting
and banquet facility, approximately 2,100 hotel rooms (including approximately
169 luxury suites) in five towers, three restaurants, a buffet, four showrooms,
a lounge and approximately 2,300 parking spaces. In addition, executive and
other offices for Riviera Las Vegas are located on the property.
There are approximately 40 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 Riviera Las Vegas and Riviera Black Hawk properties are
encumbered by a first deed of trust securing the 11% Notes and the Company's
five-year senior secured credit facility.
Riviera Black Hawk
Riviera Black Hawk is located on 1.63 acres of land at 400 Main
Street, Black Hawk, Colorado. The buildings include approximately 325,000 square
feet and comprise 32,000 square feet of gaming space, parking for approximately
520 vehicles (substantially all of which are covered), a 252-seat buffet, two
bars and an entertainment center with seating for approximately 440 people.
The Riviera Black Hawk and Riviera Las Vegas properties are
encumbered by deeds of trust securing the 11% Notesand the Company's five-year
senior secured credit facility..
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Item 3. Legal Proceedings
We are a party to several routine lawsuits, either as a plaintiff or
as a defendant, arising from the normal operations of a hotel or casino. We do
not believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on the financial position or results of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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
(AMEX) on May 13, 1996 and was reported on the NASDAQ Bulletin Board prior to
that date. As of March 6, 2003, based upon information available to it, the
Company believes that there were approximately 425 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 its
subsidiaries which currently include the operations of Riviera Las Vegas and
Riviera Black Hawk. In addition, the indenture for the 11% Senior Secured Notes
and the Company's senior secured credit facility materially restrict the
Company's ability to pay dividends on its Common Stock.
21
The Company has been informed that it does not meet certain AMEX
listing requirements, (due to among other things, the Company's negative equity
and losses) and that, consequently, the AMEX intends to initiate steps that
could ultimately result in the delisting of the Company's common stock from the
American Stock Exchange.
The table below sets forth the high and low sales prices of the
Company's common stock by quarter for the years ended December 31, 2002 and
2001, based on sales prices reported by AMEX:
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002
HIGH $5.21 $8.25 $7.09 $5.80
LOW 4.15 5.20 5.90 4.32
2001
HIGH $7.38 $6.70 $6.35 $4.35
LOW 6.00 5.96 4.00 3.15
On March 6, 2003, 9100 shares were traded. The closing price on AMEX
reported for that date was $3.75 per share.
Equity Compensation Plan Information
- ---------------------- ------------------------- -------------------- -------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding options, future issuance under
options, warrants and warrants and rights equity compensation plans
rights (excluding securities
reflected in column (a))
(a) (b) (c)
- ---------------------- ------------------------- -------------------- -------------------------
Equity compensation
plans approved by 579,000 $6.35 99,000
security holders
- ---------------------- ------------------------- -------------------- -------------------------
Equity compensation
plans not approved by -0- -0- -0-
security holders
- ---------------------- ------------------------- -------------------- -------------------------
Total 579,000 $6.35 99,000
- ---------------------- ------------------------- -------------------- -------------------------
Item 6. Selected Financial Data
The following table sets forth a summary of selected financial data
for the Company for the years ended December 31 (in thousands, except Net Income
(Loss) per Common Share):
--------------------- ------------ ---------- --------- ---------- ----------
2002 2001 2000 1999 1998
--------------------- ------------ ---------- --------- ---------- ----------
Net Operating Revenue $188,292 $202,031 $201,531 $157,268 $159,955
Net Loss (24,722) (6,407) (4,215) (2,869) (4,057)
Net Loss Per
Diluted Common Share ($7.17) ($1.79) ($1.05) ($0.58) ($0.81)
Total Assets 235,896 267,818 283,710 288,990 244,909
Long-Term Debt 220,124 220,439 226,043 229,052 179,439
Dividends Declared -0- -0- -0- -0- -0-
--------------------- ------------ ---------- --------- ---------- ----------
22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
2002 Compared to 2001
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of cash rebates
and promotional allowances. Operating income from properties is presented as
shown on the Consolidated Statement of Operations. EBITDA from properties for
the purposes of this table excludes corporate expense and inter-company
management fees.
Year Ended December 31, $ Change % Change
(In Thousands) 2002 2001 Incr/(Decr) Incr/(Decr)
Net revenues:
Riviera Las Vegas $139,159 $152,985 $ (13,826) (9.0)%
Riviera Black Hawk 49,133 49,046 87 0.2 %
------- ------- ------ -----
Total Net Revenues $188,292 $202,031 $ (13,739) (6.8)%
======= ======= ======= =====
Operating Income
Riviera Las Vegas $ 12,265 $ 13,512 $ (1,247) (9.2)%
Riviera Black Hawk 7,350 7,622 (272) (3.6)%
Corporate Expenses (3,762) (4,163) 401 (9.6)%
------ ------ ----- -----
Total Operating Income $ 15,853 $ 16,971 $ (1,118) (6.6)%
======= ====== ======== =====
EBITDA:(1)
Riviera Las Vegas $ 23,951 $ 25,655 $ (1,704) (6.6)%
Riviera Black Hawk 13,400 12,722 678 5.3 %
Corporate Expenses (3,762) (4,163) 401 (9.6)%
------- ------ ------ -----
Total EBITDA $ 33,589 $ 34,214 $ (625) (1.8)%
======= ======= ===== =====
EBITDA margin
Riviera Las Vegas 17.2 % 16.8 % 0.4 %
Riviera Black Hawk 27.3 % 25.9 % 1.4 %
----- ----- -----
Total EBITDA Margin 17.8 % 16.9 % 0.9 %
====== ====== =====
Reconciliation of Income From Operations to EBITDA
2002 2001
Operating Income $15,853 $16,971
Depreciation 17,736 17,243
------ ------
EBITDA $33,589 $34,214
====== ======
23
(1) EBITDA consists of Earnings Before Interest, Income Taxes, Depreciation,
Amortization and other, net. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than
cash flows from operating activities, which are determined in accordance
with generally accepted accounting principles ("GAAP"), it is included
herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditures and
working capital requirements. Although EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs, management
believes that certain investors find EBITDA to be a useful tool for
measuring the ability of the Company to service its debt. EBITDA margin is
EBITDA as a percent of net revenues. The Company's definition of EBITDA
may not be comparable to other companies' definitions.
Riviera Las Vegas
Revenues
Riviera Las Vegas net revenues decreased by approximately $13.8 million, or
9.0%, from $153.0 million in 2001 to $139.2 million in 2002 primarily due to the
effects of the recession and the September 11, 2001 terrorist attacks. Casino
revenues decreased approximately $7.7 million or 11.5%, from $67.4 million
during 2001 to $59.6 million during 2002. Slot revenues were down 11.9%, while
table games revenues were down 8.5%. The hold percentages were comparable for
both table games and slot machines in 2002 and 2001. Room revenues decreased
$1.9 million, as the average room rate decreased $2.53 or 4.1% from $62.46 to
$59.93 and hotel occupancy decreased from 91.6% to 89.6%. The Las Vegas market
continues to recover from the impacts of September 11, 2001, however the
recovery has been slowed by the soft national economy and declining consumer
confidence in anticipation of a military action in Iraq. An LVCVA report
indicates that visitor volumes for the first eleven months of 2002 were equal to
2001 levels. Although occupancy is recovering on the weekends, the midweek
occupancy rates vary significantly from day to day primarily due to competitive
pressures. Entertainment revenues decreased by approximately $2.8 million, or
13.9%, from $20.4 million during 2001 to $17.6 million during 2002 as attendance
decreased 24.5%, which was partially offset by a 2.4% increase in ticket price.
Room sales to vacationers were down approximately 5.7% in 2002, which is an
important producer of show ticket sales and slot revenues. Other revenues
decreased by approximately $1.0 million, or 12.6%, from $8.5 million during 2001
to $7.5 million during 2002 due primarily to lower telephone revenues.
Operating Income
Operating Income decreased $1.2 million or 9.2% from $13.5 million in 2001
to $12.3 million in 2002 due to the decreased revenues, which were partially
offset by lower entertainment contract expenses, which are tied to revenues,
reduced casino expense due to lower volumes and reduced executive incentives and
Employee Stock Ownership Plan expense. During 2002 the Company changed its
segment reporting to present corporate expenses separately which were
previously included in the expenses at Riviera Las Vegas in prior years.
Prior year's expenses have been reclassified for comparison purposes.
EBITDA
Riviera Las Vegas EBITDA, as defined, decreased by approximately $1.7
million, or 6.6%, from $25.7 million in 2001 to $24.0 million in 2002. During
the same periods, EBITDA margin increased from 16.8% to 17.2% of net revenues.
Riviera Black Hawk
Revenues
Riviera Black Hawk recorded similar net revenues in 2002 as it had in
2001, from $49.0 million in 2001 to $49.1 million in 2002 as the operation held
on to market share in the face of increased competition which increased the
number of gaming machines by 7.8%. Casino revenues, primarily from slot
machines, decreased slightly by approximately $174,000, or 0.4%, from $46.7
million in 2001 to $46.5 million in 2002. Average slot machine win per unit
decreased from $148 per day in 2001 to $142 in 2002. Food and beverage revenues
increased by approximately $1.0 million, or 18.1%, from $5.6 million in 2000 to
$6.6 million in the 2001.
Operating Income
Operating income decreased $272,000 or 3.6% from $7.6 million in 2001 to $7.4
million in 2002 due to the increased competition and a slower economy in the
Denver area. General and administrative costs decreased $1.2 million. General
24
and administrative costs were 21.1% of revenues in the current year compared
with 23.5% in 2001 due to decreased health insurance costs. Depreciation
increased $874,000 or 23.3% in 2002 compared with 2001 due to a change to
accelerated depreciation on slot machines.
EBITDA
Riviera Black Hawk EBITDA, as defined, increased by approximately
$678,000, or 5.3%, from $12.7 million 2001 to $13.4 million in 2002. During the
same periods, EBITDA margin increased from 25.9% to 27.3% of net revenues.
Consolidated Operations
Other Income (Expense)
On June 26, 2002, the Company issued 11% Senior Secured Notes with a
principal amount of $215 million substantially all of which were later exchanged
for SEC-registered Notes of the Company having substantially the same terms.
Interest expense on the $215 million 11% Senior Secured Notes of $12.2 million
plus related amortization of loan fees totaled approximately $13.0 million. In
addition the interest expense on the retired 10% First Mortgage Notes, the
retired Black Hawk 13% First Mortgage Notes and equipment and other financing
costs totaled approximately $13.8 million in 2002 for combined total interest
expense of $26.8 million. This compares with $26.9 million in interest expense
in 2001. Fiscal 2002 results were affected by the loss on extinguishment of debt
totaling $11.2 million or $3.25 per share. The costs included the call premium
on the Company's refinanced 10% bonds and Riviera Black Hawk's refinanced 13%
bonds, the write off of unamortized deferred loan costs associated with the
refinanced bonds and the balance of the original issue discount on the 10%
bonds. Furthermore, the results were affected by approximately $2.7 million or
$0.78 per share of additional interest expense, net, incurred as a result of the
defeasance / retirement of the debt.
Net Loss
The consolidated net loss increased approximately $18.3 million from
$6.4 million in 2001 to $24.7 million in 2002 mainly due to the cost of
extinguishment of debt of $11.2 million and defeasance interest of $2.7 million
explained above and a tax benefit recorded by the Company of $2.2 million in
2001, while no tax benefits have been recorded in 2002.
EBITDA
Consolidated EBITDA, as defined, decreased approximately
$625,000, or 1.8%, from $34.2 million in 2001 to $33.6 million in 2002. During
the same periods, EBITDA margin increased from 16.9% to 17.8% of net revenues.
Results of Operations
2001 Compared to 2000
Special Factors Affecting Comparability of Results of Operations
Riviera Black Hawk was in the development stage during the first
quarter of 2000 until February 4, 2000 when it opened the casino. Accordingly,
the of operations for fiscal 2001 and fiscal 2000 results may not be comparable.
25
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of promotional
allowances. Operating income from properties is presented as shown on the
Consolidated Statement of Operations. EBITDA from properties for the purposes of
this table excludes corporate expense, pre-opening expense and inter-company
management fees.
Year Ended December 31, $ Change % Change
(In Thousands) 2001 2000 Incr/(Decr) Incr/(Decr)
Net revenues:
Riviera Las Vegas $ 152,985 $ 166,270 $ (13,285) (8.0)%
Riviera Black Hawk 49,046 35,261 13,785 39.1 %
------- ------- ------ -----
Total Net Revenues $ 202,031 $ 201,531 $ 500 0.2 %
======= ======= ====== ======
Operating Income (loss)
Riviera Las Vegas $ 13,512 $ 19,215 $ (5,703) (29.7)%
Riviera Black Hawk 7,622 1,881 5,741 305.2%
Corporate Expenses (4,163) (4,217) 54 1.3 %
-------- ------- ----- ------
Total Operating Income $ 16,971 $ 16,879 $ 92 0.5 %
======= ======= ===== ======
EBITDA:(1)
Riviera Las Vegas $ 25,655 $ 33,548 $ (7,893) (23.5)%
Riviera Black Hawk 12,722 6,597 6,125 92.8 %
Corporate Expenses (4,163) (4,217) 54 1.3 %
-------- ------- ----- -----
Total EBITDA $ 34,214 $ 35,928 $ (1,714) (4.8)%
======= ======== ===== =====
EBITDA margin
Riviera Las Vegas 16.8 % 20.2 % (4.1)%
Riviera Black Hawk 25.9 % 18.7 % 7.2 %
------ ------ -----
Total EBITDA Margin 16.9 % 17.8 % (0.5)%
====== ====== ======
Reconciliation Income From Operations to EBITDA
2001 2000
Operating Income $ 16,971 $ 16,879
Depreciation 17,243 17,827
Preopening Expenses 0 1,222
------ ------
Total $ 34,214 $ 35,928
====== ======
(1) EBITDA consists of Earnings Before Interest, Income Taxes, Depreciation,
Amortization, preopening and other, net. While EBITDA should not be construed as
a substitute for operating income or a better indicator of liquidity than cash
flows from operating activities, which are determined in accordance with
generally accepted accounting principles ("GAAP"), it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditures and working capital
requirements. Although EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs, management believes that certain investors find
EBITDA to be a useful tool for measuring the ability of the Company to service
its debt. EBITDA margin is EBITDA as a percent of net revenues. The Company's
definition of EBITDA may not be comparable to other companies' definitions.
26
Riviera Las Vegas
Revenues
Riviera Las Vegas net revenues decreased by approximately $13.3 million, or
8.0%, from $166.3 million in 2000 to $153.0 million in 2001 primarily due to the
effects of the recession and the September 11, 2001 terrorist attacks. Casino
revenues decreased approximately $6.7 million or 9.0%, from $74.1 million during
2000 to $67.4 million during 2001. Slot revenues were down 7.0%, while table
games revenues were down 13.6%. The hold percentages were comparable for both
table games and slot machines in 2001 and 2000. Room revenues were comparable to
the prior year, as the average room rate increased $3.50 or 6% from $59.00 to
$62.50 and hotel occupancy decreased from 96.6% to 91.6%. The decrease in air
travel, especially long-haul flights from the east coast, affected Riviera Las
Vegas more than many of its competitors. The Company's marketing efforts had
been concentrated on airline customers who traveled longer distances, paid more
for their tickets and had a larger gaming and entertainment budget. While this
strategy was successful in prior years, the effects of the September 11, 2001
terrorist attacks were devastating to this market segment. Subsequent to
September 11, 2001, gaming marketing expenditures were increased to protect and
promote the slot customer base. Increased room marketing efforts focus on
customers in the western United States and these efforts appear to be
successful, based on the pace of advance bookings. Call volumes, booking
patterns and occupancy began to normalize in mid-January 2002. In February 2002
Super Bowl, Chinese New Year and Presidents' Day weekend were successful and
occupancy is expected to increase steadily during the first and second quarter
of 2002. Although occupancy is recovering on the weekends, the midweek occupancy
rates vary significantly from day to day primarily due to competitive pressures.
Entertainment revenues decreased by approximately $4.1 million, or 16.7%, from
$24.5 million during 2000 to $20.4 million during 2001 as attendance decreased
approximately 27%, which was partially offset by a 13.6% increase in ticket
price. Competition for Riviera show customers, while significant all year,
intensified after September 11, 2001. Tour and travel room sales were down
approximately 50% in the fourth quarter of 2001, which is an important producer
of show ticket sales and slot revenues. Other revenues decreased by
approximately $1.4 million, or 13.9%, from $9.9 million during 2000 to $8.5
million during 2001 due primarily to lower telephone revenues.
Operating Income
Operating Income decreased $5.7 million or 29.7% from $19.2 million in 2000
to $13.5 million in 2001 due to the decreased revenues, which were partially
offset by lower entertainment contract expenses and a 9.4% or $1.4 million
reduction in depreciation expense. Entertainment costs are tied to revenues and
as a result of this relationship, the departmental results were similar to the
prior year. Depreciation decreased, as $20 million of equipment purchased in
1993 became fully depreciated in 2000. In addition, the September 11, 2001
terrorist attacks caused management to accelerate the timing and magnitude of
staffing reductions. In excess of 300 full-time equivalent employees were laid
off, based on the reduction in volumes. These events have caused the industry to
reevaluate their cost structures and adjust payrolls accordingly. During 2002
the Company changed its segment reporting to break out corporate expenses which
were shown as expenses at Riviera Las Vegas in prior years. Expenses for 2001
and 2000 have been reclassified for comparison purposes.
EBITDA
Riviera Las Vegas EBITDA, as defined, decreased by approximately $7.9
million, or 23.5%, from $33.5 million in 2000 to $25.7 million in 2001. During
the same periods, EBITDA margin decreased from 20.2% to 16.8% of net revenues.
Riviera Black Hawk
Special Factors Affecting Comparability of Results of Operations
Riviera Black Hawk was in the development stage during 1999 and until February
4, 2000 when the casino opened. Accordingly, the consolidated results of
operations for fiscal 2001 and 2000 may not be comparable.
27
Revenues
Riviera Black Hawk net revenues increased by approximately $13.8
million, or 39.1%, from $35.3 million in the 11 months of 2000 to $49.0 million
in the 12 months ended December 31, 2001 as the operation gained market share
and was, for the most part, unaffected by the events of September 11. Casino
revenues, primarily slot machines, increased by approximately $13.0 million, or
38.7%, from $33.6 million in the 11 months of 2000 to $46.7 million in the 12
months ended December 31, 2001. Average slot machine win per unit increased from
$114 per day in 2000 to $148 in 2001. Food and beverage revenues increased by
approximately $1.5 million, or 38.3%, from $4.0 million in the 11 months of 2000
to $5.6 million in the 12 months ended December 31, 2001. The remodeled buffet
and related marketing efforts resulted in a 45.6% increase in covers (customers)
and a 26.4% increase in average check (price).
Operating Income
Operating Income increased $5.7 million or 305% from $1.9 million in the 11
months of 2000 to $7.6 million in the 12 months ended December 31, 2001 due to
the increase in revenues and better margins as marketing costs were stabilized.
Staffing was also optimized as fu