-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LyfrbgUUh7Ge1S3jxKywCJuPNLRzE+GT3QhV8iy2qKgtiByuyW5Xc3g5YOWqM0l1 DqApHoThrjHENfQNg5sgFg== 0000899647-02-000005.txt : 20020415 0000899647-02-000005.hdr.sgml : 20020415 ACCESSION NUMBER: 0000899647-02-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVIERA HOLDINGS CORP CENTRAL INDEX KEY: 0000899647 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 880296885 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21430 FILM NUMBER: 02580318 BUSINESS ADDRESS: STREET 1: 2901 LAS VEGAS BLVD SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027345110 MAIL ADDRESS: STREET 1: 2901 LAS VEGAS BLVD S CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K 1 rhc10k_2001.txt RHC10K_2001 ==================================================================== 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, 2001. [ ] Transition report pursuant to sections 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the transition period from to --------------- ------------------- Commission file number 000-21430 RIVIERA HOLDINGS CORPORATION (Exact name of Registrant as specified in its charter) Nevada 88-0296885 - ------------------------------- ---------------- (State of Incorporation) (I.R.S. Employer Identification No.) 2901 Las Vegas Boulevard South Las Vegas, Nevada 89109 - --------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 734-5110 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K. Based on the average bid price for the Registrant's Common Stock as of March 18, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $18,546,950. As of March 18, 2002 the number of outstanding shares (net of treasury shares) of the Registrant's Common Stock was 3,566,721. Documents incorporated by reference: ==================================================================== Page 1 of 40 pages Exhibit Index Appears on Page 35 hereof. 1
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 TABLE OF CONTENTS Item 1. Business.....................................................................................3 General ..................................................................................3 Riviera Las Vegas.........................................................................3 Riviera Black Hawk........................................................................7 Geographical Markets......................................................................8 Management Activities.....................................................................9 Competition............................................................................. 10 Employees and Labor Relations............................................................11 Regulation and Licensing.................................................................12 Federal Registration.....................................................................20 Item 2. Properties..................................................................................20 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................22 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 2001 Compared to 2000....................................................................23 2000 Compared to 1999....................................................................25 Liquidity and Capital Resources..........................................................27 Critical Accounting Policies.............................................................29 Accounting pronouncements................................................................29 Item 7A. Qualitative and Quantitative Disclosure About Market Risk...................................31 Forward Looking Statements...............................................................31 Item 8. Financial Statements and Supplementary Data.................................................32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........32 Item 10. Directors and Executive Officers of the Registrant..........................................32 Item 11. Executive Compensation......................................................................32 Item 12. Principal Shareholders......................................................................32 Item 13. Certain Relationships and Related Transactions .............................................32 Item 14. Exhibits and Reports on Form 8-K............................................................33
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. 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 1,500 slot machines and 34 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 and bill acceptors, 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 2001. Also, in 2001, revenues from slots and tables were approximately 78% and 22% of total gaming revenue, respectively, as compared to 60% and 34%, respectively, in 1993. During 2001, we continued a number of initiatives at Riviera Las Vegas to increase slot play, including the replacement of older slot machines 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)". At the end of 1997, we opened Nickel Town on the corner of Las Vegas Boulevard and Riviera Boulevard at the crosswalk from Circus Circus and the local Las Vegas Boulevard bus stop. Nickel Town is comprised primarily of 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 and 91.5% for 2001 (based on available rooms). The average occupancy rate citywide was 88.9% in 2001 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:
Seating Capacity Name Type Kady's Coffee Shop 290 Kristofer's Steak and Seafood 162 Ristorante Italiano Italian 126 World's Fare Buffet All-you-can-eat 366 --- 944 ===
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 approximately 382 conventions in 2001. The hotel currently has over 740,000 convention related advance bookings of rooms through 2005 consisting of approximately 490,700 definite bookings and approximately 249,360 tentative bookings. In 2001 approximately 30.4% of the rooms were occupied for conventions, and management estimates that 32.5% of its rooms will be occupied for conventions in 2002. 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 five 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), as well as featured comedians at the Riviera Comedy Club. We 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. 4 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 ----- 2,365 =====
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 a specialty themed restaurant, and entertainment that will appeal to the Riviera Las Vegas' main target audience, adults aged 45 to 65. The exit from the complex would be by an escalator delivering patrons to the casino. We would require partners to finance, develop and operate the entertainment attraction and restaurant. To date no such partners have been identified. 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 $175 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. 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 5 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 four 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 30% of the show patrons come from outside the hotel and approximately 67% 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 2001 we derived approximately 30.4% 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. 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 6 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 26.3% 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 986 slot machines and 12 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, 2001, 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 1,145 gaming machines and 1,000 covered parking spaces, has been the market leader in terms of win per gaming device. The Hyatt Casino with 1,332 gaming machines and 22 table games opened on December 20, 2001. 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, are tailoring 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. 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. 7 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 150,000 of these slot players have been identified as of December 31, 2001. 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 14-year period from 1986 through 2000 increased at a steady and significant rate from 15.2 million in 1986 to 35.8 million in 2000, 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 terrorist attacks. 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. 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. 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 markets are the western region of the United States, most significantly Southern California and Arizona, Las Vegas also serves as a destination resort for visitors from all over the world. A significant percentage of visitors originate from Latin America and Pacific Rim countries such as Japan, Taiwan, Hong Kong and Singapore. 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 but has plans of reinstituting that service 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 85% from approximately 67,000 at the end of 1989 to 126,610 at the end of 2001, 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 2001. During the calendar year 2001 approximately 2,340 hotel rooms opened as a result of the opening of the Palms and Green Valley Ranch casinos, which are off the strip. 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 4.0 million in 2001 with in excess of $4.8 billion of economic impact. During the past eight 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 35.2 million in 2001. Construction has recently been completed on numerous roadway enhancements to improve access to the Airport. McCarran Airport is ranked among the 10 busiest airports in the world based on passenger activity. 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. 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 8 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, 2001. 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 2.4 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 $50,000 per annum in 2001. Since 1992, the number of gaming devices in the Black Hawk/Central City market has grown approximately 78% from 7,252 devices in 1992 to 12,907 devices in 2001. Win per gaming device per day has continued to grow despite the increase in the number of gaming devices. Gaming revenues in the Black Hawk/Central City market grew by 8.2% in 2001 over 2000. The City of Black Hawk itself experienced a 10.3% increase in gaming revenue in 2001. 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. These factors have contributed to growth in Black Hawk gaming revenues of 783% since 1992 compared to a negative growth for Central City of 16% over the same period. The number of gaming devices in the City of Black Hawk has increased 242% since 1992, while the number of gaming devices in Central City has declined 43% over the same period. Management Activities 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 provides services such as assisting new venue licensee applicants in designing and planning their gaming operations and managing the start-up of new gaming operations. These services include casino design, equipment selection, employee recruitment and training, control and accounting systems 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. Four Queens Management Agreement Riviera Gaming Management-Elsinore, Inc., our indirect wholly owned subsidiary, operated the Four Queens Hotel and Casino, located adjacent to the Golden Nugget on Fremont Street in Downtown Las Vegas, pursuant to a Management Agreement effective as of February 27, 1997. This agreement terminated on December 30, 1999. 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. On September 29, 1999, Riviera Gaming Management entered into an agreement with Peninsula Gaming LLC to provide consulting services to Diamond Jo's Riverboat Casino in Dubuque, Iowa. This agreement terminated on September 30, 2000. 9 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, 2001, the Las Vegas Convention and Visitors Authority 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 20th 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 2001, approximately 2,340 new hotel rooms opened, and as of December 31, 2001, there were no 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 2001, available room nights in the Las Vegas market increased from 44.7 million to 45.6 million or 2.1%, while total room nights occupied decreased from 39.8 million to an estimated 38.6 million, or 2.9%. The ending room inventory at December 31, 2001 was 126,610 compared to 124,270 at December 31, 2000, an increase of 2,340 rooms or 1.9%. This has had the effect of intensifying competition. At Riviera Las Vegas, room occupancy decreased from 96.7% in 2000 to 91.6% in 2001 (still much higher than the Las Vegas Strip average). However, room rates increased by $3.52, or 6.0% from $58.86 in 2000 to $62.46 in 2001, due primarily to an increase in convention rooms sold and a reduction in tour and travel rooms sold as a result of the September 11th terrorist attacks. 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, principally from Southern California and the southwestern United States. Weakness in the economy of Southern California has in the past, and could in the future, adversely affect our financial results. Recent power shortages, and 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. 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, 2001 there were 25 gaming facilities in the Black Hawk market with 11 casinos each offering more than 400 gaming positions. The Hyatt Casino, which features 1,335 slot machines, opened on December 20, 2001. Other projects have also been 10 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 approximately 700 slot machines, 20 gaming tables and approximately 700 valet parking spaces. The Isle of Capri Casino, the most successful casino in Colorado, operated by Casino America, which opened in December 1998, is located directly across the street from our casino and features approximately 1,145 slot machines, 14 table games, 1,000 parking spaces, and 235 hotel rooms. The number of hotel rooms currently in the Black Hawk/Central City market is approximately 450, 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. 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. Employees and Labor Relations Riviera Las Vegas As of December 31, 2001 Riviera Las Vegas had approximately 1,411 full-time equivalent employees and had collective bargaining contracts with eight unions covering approximately 813 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 and Stage Hands Union, which cover the majority of our unionized employees, were renegotiated in 1998 and expire in the year 2002. 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 Union. 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 in 2003 and 2004, respectively. On November 27, 2000, the Transport Workers Union filed a petition with the NLRB to represent the Blackjack, Dice and Poker Dealers (or, the "Dealers"). On February 11 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. 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, 2001, the total number of employees was 371. 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. Riviera Operating Corporation is required to be licensed by the Nevada Gaming Authorities. 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. Riviera Operating Corporation is also registered by the Nevada Commission as an intermediary company and has been found suitable to own the stock of Riviera Gaming Management, which has been registered by the Nevada Commission as an Intermediary company and has been found suitable to own the stock of its subsidiary Riviera Gaming Management-Elsinore. Riviera Gaming Management-Elsinore was licensed as the manager of the Four Queens. Riviera Operating Corporation is, and Riviera Gaming Management-Elsinore was corporate licensee ("Corporate Licensee") under the terms of the Nevada Act. 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, a Corporate Licensee (a licensed casino) without first obtaining licenses and approvals from the Nevada Gaming Authorities. We and Riviera Operating Corporation have obtained, and Riviera Gaming Management and Riviera Gaming Management-Elsinore previously 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 management agreement for Riviera Gaming Management-Elsinore to manage the Four Queens terminated December 30, 1999 and therefore the registration and license of Riviera Gaming Management-Elsinore are no longer in effect after that date. 12 All gaming devices that are manufactured, sold or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers, distributed or sold by licensed distributors and approved by the Nevada Commission. The approval process includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming device meets strict technical standards that are set forth in the regulations of the Nevada Gaming Authorities. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, 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 (a corporate licensee) 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. 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 13 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 security to file applications, be investigated and be found suitable to own our debt security of a Registered Corporation, if it has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, 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 or Intermediary company and agreements not to encumber such securities (collectively, "Stock Restrictions") are ineffective without the prior approval of the Nevada Commission. Changes in control of Riviera Holdings 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 14 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 the Riviera Operating Corporation, Riviera Gaming Management and Riviera Gaming Management-Elsinore 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. 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. 15 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. 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. 16 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. 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. 17 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. The municipality of Black Hawk assesses an annual device fee of $62.50 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 constitutes a class 1 misdemeanor 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 18 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 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. 19 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. 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 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 entire Riviera Las Vegas complex is encumbered by a first deed of trust securing the 10% Notes. 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 entire Riviera Black Hawk complex is encumbered by a first deed of trust securing the 13% Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 20 Item 3. Legal Proceedings Paulson, et al. v. Jefferies, Riviera Holdings Corporation, et al., United States District Court for the Central District of California, No. CV 98-2644 (ABC) (the "California Action"). We and the plaintiffs to this action entered into a Settlement Agreement dated as of July 2, 1999. The Settlement Agreement was conditioned upon the United States District Court for the Central District of California (the "Court") entering a Settlement Bar Order and Final Judgment and provided that upon the entering of such an Order: (i) we would pay plaintiff Allen E. Paulson (and his heirs or successors) ("Paulson") $3,477,412 ($7.50 per share) for the 463,655 shares of Riviera Holdings Corporation common stock owned by Paulson, (ii) Paulson would receive $1,522,587.50 from the funds being held in escrow for the benefit of holders of Riviera Holdings Corporation's Contingent Value Rights ("CVRs"), (iii) the remainder of the escrow of approximately $4,340,000 would be distributed to the holders of the CVRs, and (iv) Paulson would file an amended complaint which eliminated allegations of wrongdoing against us. On October 7, 1999, the Court entered a Settlement Bar Order and Final Judgment which dismissed the California Action against us with prejudice, and barred the other defendants to the lawsuit from seeking indemnification against us for claims arising under the federal securities laws or for state law claims arising out of the transactions underlying the plaintiffs' federal security law claims. Shortly after the entry of the Settlement Bar Order, we acquired Paulson's stock, and funds were disbursed from escrow as per the terms of the Settlement Agreement. Morgens, Waterfall, Vintiadis & Company, Inc., v. Riviera Holdings Corporation, - ------------------------------------------------------------------------------- William L. Westerman, Robert R. Barengo, Richard L. Barovick and James N. Land, - ------------------------------------------------------------------------------- Jr., as Directors of Riviera Holdings Corporation, United States District - ---------------------------------------------------- Court for the District of Nevada (CV-S-99-1383-JBR (RLH)) (the "Nevada Action"). The plaintiff in this action ("Morgens, Waterfall") is a shareholder of Riviera Holdings Corporation and a defendant to the California Action. On September 30, 1999, Morgens, Waterfall commenced this action in Nevada state court, where it sought an order enjoining us from obtaining a Settlement Bar Order in the California Action. We and the other defendants to the Nevada Action removed the action to the United States District Court for the District of Nevada on October 1, 1999. This removal to federal court divested the state court of jurisdiction to consider Morgens, Waterfall's motion for injunctive relief. Morgens, Waterfall filed a complaint with the court, but it did not serve the complaint on any of the defendants. On November 1, 1999, Morgens, Waterfall served a notice of motion to remand the Nevada Action from the Nevada federal court back to Nevada state court. We and the other defendants opposed the motion, and on May 24, 2000, the Court denied Morgens, Waterfall's motion. On January 31, 2000, Morgens, Waterfall served an Amended Summons and a First Amended Verified Complaint on Riviera Holdings Corporation with subsequent service on directors. The Amended Complaint asserted four claims for relief. On April 17, 2000, the Company and its directors moved to dismiss Morgens, Waterfall's Amended Complaint. In response, Morgens, Waterfall opposed the directors' motion but "conceded" its claim against the Company. As a consequence, Morgens, Waterfall no longer asserted any claim against the Company, but it has opposed dismissing the Company from the action on the ground that the Company was a "nominal defendant" with respect to the derivative claims asserted by Morgens, Waterfall against the directors. On October 1, 2001 Morgens, Waterfall, the Company and the directors entered into a Settlement Agreement settling the Nevada Action. That Settlement Agreement provides that plaintiff would release its claims with prejudice against each defendant and each defendant would release its claims with prejudice against plaintiff conditioned upon Mr. Westerman accepting service of a subpoena to personally appear and testify at the trial of the California Action and that Mr. Westerman appear and testify at the trial of the California Action. We are also a party to several routine lawsuits both as plaintiff and as defendant arising from the normal operations of a hotel. 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. 21 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's Common Stock began trading on the American Stock Exchange on May 13, 1996 and was reported on the NASDAQ Bulletin Board prior to that date. As of March 2, 2002, based upon information available to it, the Company believes that there were approximately 600 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 Riviera Operating Corporation. In addition, the indenture for the First Mortgage Notes restricts the Company's ability to pay dividends on its Common Stock. The table below sets forth the bid and ask sales prices by quarter for the years ended December 31, 2001 and 2000, based on information provided by certain brokers who have had transactions in the Company's Common Stock during the year:
First Second Third Fourth Quarter Quarter Quarter Quarter -------- ------- ------- ------- 2001 ---- HIGH $7.38 $6.70 $6.35 $4.35 LOW 6.00 5.96 4.00 3.15 2000 ---- HIGH $7.88 $8.13 $8.13 $7.63 LOW 5.88 6.75 6.75 6.50
On March 18, 2002, (the most recent trade date of the Company's common stock), 1,500 shares were traded closing at $5.20 per share. 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):
---------------------------------- ------------ ------------ ----------- ------------ ------------ 2001 2000 1999 1998 1997 ---------------------------------- ------------ ------------ ----------- ------------ ------------ Net Operating Revenue $202,031 $201,531 $157,268 $159,955 $153,793 Net Income (Loss) (6,407) (4,215) (2,869) (4,057) 2,088 Net Income (Loss) Per Diluted Common Share ($1.79) ($1.05) ($0.58) ($0.81) $0.40 Total Assets 267,818 283,710 288,990 244,909 347,866 Long-Term Debt 220,439 226,043 229,052 179,439 175,512 ---------------------------------- ------------ ------------ ----------- ------------ ------------
22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 2001 Compared to 2000 Special Factors Effecting Comparability of Results of Operations 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 results of operations for the fiscal 2001 and fiscal 2000 results may not be comparable. The following table sets forth, for the periods indicated, certain operating data for Riviera 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 Inc/(Decr) Incr/(Decr) Net revenues: Riviera Las Vegas $ 152,985 $ 166,038 $(13,053) (7.9)% Riviera Black Hawk 49,046 35,261 13,785 39.1 % Riviera Gaming Management - 232 (232) (100.0)% --------- --------- --------- -------- Total Net Revenues $ 202,031 $ 201,531 $ 500 0.2 % ========= ========= ========= ======== Operating Income Riviera Las Vegas $ 9,350 $ 14,910 $ (5,560) (37.2)% Riviera Black Hawk 7,622 1,881 5,741 305.2 % Riviera Gaming Management (1) 88 (89) (101.1)% --------- --------- --------- -------- Total Operating Income $ 16,971 $ 16,879 $ 92 0.5 % ========= ========= ========= ======== EBITDA:(1) Riviera Las Vegas $ 21,493 $ 29,243 $ (7,750) (26.5)% Riviera Black Hawk 12,722 6,597 6,125 92.8 % Riviera Gaming Management (1) 88 (89) (101.1)% --------- --------- --------- -------- Total EBITDA $ 34,214 $ 35,928 $ (1,714) (4.8)% ========= ========= ========= ======== EBITDA margin Riviera Las Vegas 14.0 % 17.5 % (3.5)% Riviera Black Hawk 25.9 % 18.7 % 9.3 % Riviera Gaming Management 37.8 % (37.8)% ------ ------ ------- Total EBITDA Margin 16.9 % 17.4 % (0.5)% ====== ====== =======
(1) EBITDA consists of Earnings Before Interest, income Taxes, Depreciation, Amortization, preopening expenses, 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. 23 Riviera Las Vegas Revenues Riviera Las Vegas net revenues decreased by approximately $13.1 million, or 7.9%, from $166.0 million in 2000 to $153.0 million in 2001 primarily due to the effects of the recession and the September 11 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 11th terrorist attacks were devastating to this market segment. Subsequent to September 11th, 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 11th. 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. Income from Operations Income from operations decreased $5.6 million or 37.2% from $14.9 million in 2000 to $9.3 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 11th 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. EBITDA Riviera Las Vegas EBITDA, as defined, decreased by approximately $7.8 million, or 26.5%, from $29.2 million in 2000 to $21.5 million in 2001. During the same periods, EBITDA margin decreased from 17.5 % to 14.0% of net revenues. Riviera Black Hawk Special Factors Effecting Comparability of Results of Operations Riviera Black Hawk was in the development stage during 1999 and until February 4, 2000 when the casino opened. Accordingly, the consolidated results of operations for fiscal 2001 and 2000 may not be comparable. 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 24 approximately $1.5 million, or 38.3%, from $4.0 million in the 11 months of 2000 to $5.6 million in the 12 months ended December 31, 2001. The remodeled buffet and related marketing efforts resulted in a 45.6% increase in covers (customers) and a 26.4% increase in average check (price). Income from Operations Income from operations increased $5.7 million or 305% from $1.9 million in the 11 months of 2000 to $7.6 million in the 12 months ended December 31, 2001 due to the increase in revenues and better margins as marketing costs were stabilized. Staffing was also optimized as full-time equivalent employees were reduced from 450 at the opening in February 2000 to 350 at the end of 2001. Although general and administrative costs increased $1.7 million, they were 23.5% of revenues in the current year compared with 27% in 2000. Depreciation increased $809,000 or 27.5% in 2001 compared with the 11 months of operations in 2000. EBITDA Riviera Black Hawk EBITDA, as defined, increased by approximately $6.1 million, or 92.8%, from $6.6 million in the 11 months of 2000 to $12.7 million in the 12 months ended December 31, 2001. During the same periods, EBITDA margin increased from 18.7% to 25.9% of net revenues. Consolidated Operations Other Income (Expense) Interest expense on the $175 million 10% First Mortgage Notes issued by the Company of $17.5 million plus related amortization of loan fees and equipment and other financing costs totaled approximately $20.1 million in 2001 and 2000. Interest expense on the $45 million 13% First Mortgage Notes issued by Riviera Black Hawk in June 1999 combined with its interest from capital leases totaled $6.7 million in 2001 compared with $7.7 million in 2000. Capitalized interest of $616,000 in 2000 was primarily from the Black Hawk, Colorado project. Other expenses, net include an insurance reimbursement of Paulson litigation costs of $1.2 million in 2000. Net Loss The consolidated net loss increased approximately $2.2 million from $4.2 million in 2000 to $6.4 million in 2001. The effective income tax benefit rates decreased from 37.2% in 2000 to 25.9% in 2001 because of permanent timing differences for certain travel and entertainment expenses, along with adjustments for tax credits which were considered deductions in prior years. EBITDA Consolidated EBITDA, as defined, decreased approximately $1.7 million, or 4.8%, from $35.9 million in 2000 to $34.2 million in 2000. During the same periods, EBITDA margin decreased from 17.4% to 16.9% of net revenues. Revenues 2000 Compared to 1999 Special Factors Effecting Comparability of Results of Operations Riviera Black Hawk was in the development stage during 1999 and until February 4, 2000 when the casino opened. Accordingly, the consolidated results of operations for fiscal 2000 and 1999 may not be comparable. 25 The following table sets forth, for the periods indicated, certain operating data for Riviera Las Vegas and Riviera Black Hawk. EBITDA from properties for the purposes of this table excludes corporate expense, preopening expense and intercompany management fees. Operating income from properties is presented as shown on the Consolidated Statement of Operations.
Year Ended December 31, $ Change % Change (In Thousands) 2000 1999 Inc/(Decr) Incr/(Decr) Net revenues: Riviera Las Vegas $ 166,038 $ 156,204 $ 9,834 6.2 % Riviera Black Hawk 35,261 0 35,261 Riviera Gaming Management 232 1,064 (832) (78.2)% --------- --------- -------- ------ Total Net Revenues $ 201,531 $ 157,268 $ 45,263 29.0 % ========= ========= ======== ======= Income (loss) from Operations Riviera Las Vegas $ 14,910 $ 10,641 $ 4,269 40.1 % Riviera Black Hawk 1,881 (595) 2,476 (416.0)% Riviera Gaming Management 88 1,047 (959) (91.6)% -------- -------- ------- ------ Total Operating Income $ 16,879 $ 11,093 $ 5,786 (52.1)% ======== ======== ======= ====== EBITDA:(1) Riviera Las Vegas $ 29,243 $ 24,631 $ 4,612 18.7 % Riviera Black Hawk 6,597 1 6,596 Riviera Gaming Management 88 1,047 (959) (91.6)% -------- -------- -------- ------ Total EBITDA $ 35,928 $ 25,679 $ 10,249 39.9 % ======== ======== ======== ====== EBITDA margin Riviera Las Vegas 17.61% 15.87% 2.00% 11.00% Riviera Black Hawk 18.71% Riviera Gaming Management 37.93% 98.40% (60.0)% (61.5)% ------- ------- ------ ------- Total EBITDA Margin 17.83% 16.33% 1.00% 8.50% ======= ======= ====== =======
Riviera Las Vegas Revenues Net revenues increased by approximately $9.8 million, or 6.2%, from $156.2 million in 1999 to $166.0 million in 2000 due primarily to increased room and entertainment revenues as described below. Casino revenues increased by approximately $0.8 million, or 1.1%, from $73.2 million during 1999 to $74.0 million during 2000 due to an increase in slot machine revenue. Room revenues increased by approximately $3.9 million, or 9.8% from $39.9 million during 1999 to $43.8 million during 2000 as a result of an increase in average room rate of $5.16, or 10%, which was offset by a slight decrease in hotel occupancy from 97.5% to 96.6%. Food and beverage revenues increased approximately $1.7 million, or 6.4%, from $25.1 million during 1999 to $26.8 million during 2000 due to higher cover counts and modestly increased prices. Entertainment revenues increased by approximately $3.5 million, or 16.7, from $21.0 million during 1999 to $24.5 million during 2000 due primarily to the increase in Splash revenues as a result of the showroom renovation and the new show which opened in late 1999. Other revenues decreased by approximately $0.7 million, or 6.7%, from $10.6 million during 1999 to $9.9 million during 2000 due primarily to decreased management fees from Riviera Gaming Management-Elsinore's contract which expired December 30, 1999. Promotional allowances decreased by approximately $0.6 million, or 4.4%, from $13.6 million during 1999 to $13.0 million during 2000 primarily due to decreases in comps related to lower table games activity. 26 Income from Operations Income from operations increased $4.2 million, or 40.1%, from $10.6 million in 1999 to $14.9 million in 2000 due to the increased revenues. EBITDA Riviera Las Vegas EBITDA, as defined, increased by approximately $4.6 million, or 18.7%, from $24.6 million in 1999 to $29.2 million in 2000. During the same periods, EBITDA margin increased from 15.7 % to 17.5% of net revenues. Riviera Black Hawk Revenues Riviera Black Hawk opened on February 4, 2000. It had net revenues of approximately $35.3 million for the approximate eleven-month period in 2000. Casino revenues were $33.6 million, including $31.9 million in slot revenue and $1.7 million in table games revenue. Food and beverage revenues were approximately $4.0 million, of which $2.8 million were complimentary (promotional allowance). Other revenues were approximately $0.4 million primarily from ATM transaction fees. EBITDA Riviera Black Hawk EBITDA, as defined, was $6.6 million, or 18.7%, of net revenues. Consolidated Operations Other Income (Expense) Interest expense on the $175 million 10% First Mortgage Notes issued by the Company of $17.5 million plus related amortization of loan fees and equipment and other financing costs totaled approximately $20.1 million in 2000 and 1999. Interest expense on the $45 million 13% First Mortgage Notes issued by Riviera Black Hawk in June 1999 combined with its interest from capital leases totaled $7.7 million in 2000. Capitalized interest was $616,000 in 2000, which was primarily from the Black Hawk, Colorado project, decreased approximately $2.4 million from 1999. In 2000, Other expenses, net include an insurance reimbursement of Paulson litigation costs of $1.2 million which were incurred in 1999. Net Loss The consolidated net loss increased approximately $1.3 million from $2.9 million in 1999 to $4.2 million in 2000 due primarily to higher total interest expense offset by lower capitalized interest in 2000. Federal income tax benefits as a percent of losses were lower in 2000 because the Company reflected the results of an audit by the Internal Revenue Service in 1999. The audit resulted in the release of reserves of $2.2 million for taxes on employee meals and other items, which were settled favorably to the Company. EBITDA Consolidated EBITDA, as defined, increased by approximately $10.2 million, or 39.9%, from $25.7 million in 1999 to $35.9 million in 2000. During the same periods, EBITDA margin increased from 16.3% to 17.8% of net revenues. Liquidity and Capital Resources The Company had cash and short-term investments of $46.6 million at December 31, 2001, which was a decrease of $5.6 million from 2000, which represents approximately the net reduction of long-term debt. Cash balances include amounts that may be required to fund the Chairman's pension obligation in a rabbi trust with 5 days notice. (See Note 7 to the financial statements, Other Long-Term Liabilities.) Although there is no current intention to require this funding, under certain circumstances, approximately $6.8 million could be disbursed in a short period. In addition, the Las Vegas operations are self insured for workmen's compensation claims. The State of Nevada requires that Riviera Holdings Corporation maintain a $2.5 million tangible net worth, as defined in the statute. If tangible net worth were to fall below $2.5 million, 27 the Company would have to fund a $2.5 million bond with the State or obtain workmen's compensation insurance at a significantly higher rate. The aggregate potential cash usage for these two items could approach $10 million, which would reduce the amounts available for other corporate purposes. For 2001, the Company's net cash provided by operating activities was $12.5 million compared to $19.4 million in 2000. Cash flows used in investing activities were $10.2 million in 2001 compared to $4.2 million in 2000. Net cash used in financing was $7.9 million in 2001 and $5.8 million in 2000, primarily due to the repurchase of treasury stock and Black Hawk First Mortgage Notes. EBITDA, as defined, for 2001 and 2000 was $34.2 million and $35.9 million, respectively. Management believes that cash flow from operations, combined with the $46.6 million cash and short-term investments, will be sufficient to cover the Company's debt service and enable investment in budgeted capital expenditures of $9 million for the next twelve months. Cash flow from operations is not expected to be sufficient to pay 100% of the principal of the $175 million 10% Notes at maturity on August 15, 2004 and the $45 million 13% Notes at maturity on May 1, 2005. Accordingly, the ability of the Company and its subsidiary to repay the Notes at maturity will be dependent upon its ability to refinance those notes. There can be no assurance that the Company and its subsidiary will be able to refinance the principal amount of the Notes at maturity. The 10% Notes were redeemable at the option of the Company beginning August 15, 2001, at premiums beginning at 105.0% and declining each subsequent year to par in 2003. Riviera Black Hawk, Inc. 13% Notes are redeemable beginning May 1, 2002 at premiums beginning at 106.5% and declining each subsequent year to par in 2004. The 10% and 13% Note Indentures provide that, in certain circumstances, the Company and its subsidiary must offer to repurchase the Notes upon the occurrence of a change of control or certain other events. In the event of such mandatory redemption or repurchase prior to maturity, the Company and its subsidiary would be unable to pay the principal amount of the Notes without a refinancing. The 10% Note Indenture contains certain covenants, which limit the ability of the Company and its restricted subsidiaries (and its unrestricted subsidiary Riviera Black Hawk, Inc. under the 13% Notes Indenture), subject to certain exceptions, to: (i) incur additional indebtedness; (ii) pay dividends or other distributions, repurchase capital stock or other equity interests or subordinated indebtedness; (iii) enter into certain transactions with affiliates; (iv) create certain liens; sell certain assets; and (v) enter into certain mergers and consolidations. As a result of these restrictions, the ability of the Company and its subsidiaries to incur additional indebtedness to fund operations or to make capital expenditures is limited. In the event that cash flow from operations is insufficient to cover cash requirements, the Company and its subsidiaries would be required to curtail or defer certain of their capital expenditure programs under these circumstances, which could have an adverse effect on operations. At December 31, 2001, the Company believes that it is in compliance with the covenants. In March 2002, the assets of Black Hawk became secondary collateral for the 10% Notes. Contractual Obligations The following table summarizes our contractual obligations and commitments as of December 31, 2001:
Payments Due by Period ------------------------------------------------------------------- Total 2002 2003 2004 2005 and Thereafter ------------------------------------------------------------------- Contractual obligations Long-term debt $ 220,439 3,151 3,125 178,168 35,995 Operating leases 52 52 Other long-term obligations 230 150 22 19 38 ------------------------------------------------------------------- Total contractual cash obligations $ 220,721 $ 3,353 $ 3,147 $ 178,187 $ 36,033
28 Other long-term obligations consist primarily of maintenance contracts, which extend for more than one year on equipment such as signage, elevators, copiers, etc. Critical Accounting Policies The preparation of the Company's consolidated financial statements requires the Company's management to adopt accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management periodically evaluates its policies, estimates and assumptions related to, these policies. The Company operates in a highly regulated industry. For both our Las Vegas, Nevada and Black Hawk, Colorado operations we are subject to regulations that describe and regulate operating and internal control procedures. The majority of our casino revenue is in the form of cash, personal checks or gaming chips and tokens, which by their nature do not require complex estimations. We estimate certain liabilities with payment periods that extend for longer than several months. Such estimates include customer loyalty liabilities, self-insured medical and workers compensation costs and litigation costs. We believe that these estimates are reasonable based upon our past experience with the business and based upon our assumptions related to possible outcomes in the future. Future actual results will likely differ from these estimates. The Company has determined that the following accounting policies and related estimates are critical to the preparation of the Company's consolidated financial statements: Long-lived Assets: The Company has a significant investment in long-lived property and equipment. The Company estimates that the undiscounted future cash flows expected to result from the use of these assets exceeds the current carrying value of these assets. Any adverse change to the estimate of these undiscounted future cash flows could necessitate an impairment charge that would adversely affect operating results. The Company estimates useful lives for its assets based on historical experience, estimates of assets' commercial lives, and the likelihood of technological obsolescence. Should the actual useful life of a class of assets differ from the estimated useful life, the Company would record an impairment charge. The Company reviews useful lives, obsolescence, and assesses commercial viability of these assets periodically. We utilize estimates related to cash flow projections related to the application of SFAS 109 for the realization of deferred tax assets. Our estimates are based upon recent operating results and budgets for future operating results. These estimates are made using assumptions about the economic, social and regulatory environments in which we operate. These estimates could be negatively impacted by numerous unforeseen events including changes to regulations affecting how we operate our business, changes in the labor market or economic downturns in the areas where we operate. Provision for Credit Losses The Company maintains a provision for estimated credit losses based on historical experience and specific customer collection issues. Any unforeseen change in customer liquidity or financial condition could adversely affect the collectibility of that account and the Company's operating results. Recently Adopted Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivatives, which is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 defines derivatives and requires qualitative disclosure of certain financial and descriptive information about a company's derivatives. The Company adopted SFAS No. 133 in the quarter ending March 31, 2001. The adoption of SFAS No. 133 had no impact on the Company or the Company's consolidated financial statements. 29 The Emerging Issues Task Force of the American Institute of Certified Public Accountants ("EITF") issued EITF No. 00-22, Accounting for `Points' and Certain Other Timed-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future, on January 18, 2001. EITF 00-22 concluded that when a company or vendor offers to a customer (a) free or discounted products or services that will be delivered (either by the vendor or by another unrelated entity) at a future date (1) as a result of a single revenue transaction with the customer or (2) only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period and (b) a rebate or refund of a determinable cash amount only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period, such rebates should be reported as a reduction of revenues. EITF 00-22 was required to be adopted by the Company during the first quarter of 2001. As a result of adopting EITF 00-22, the Company reclassified approximately $3.4 million and $905,000 of such sales incentive "Points" from Casino operating expense to net against Casino revenues for the twelve months ending December 31, 2000 and 1999, respectively. The EITF issued EITF No. 00-14, Accounting for Certain Sales Incentives, on April 18, 2001. The Company offers such sales incentives as "Cash Vouchers." EITF No. 00-14 concluded that when a company or vendor offers its customers sales incentives including discounts, coupons, rebates, and free products or services, such sales incentives should be reported as a reduction of revenues. EITF No. 00-14 is required to be adopted by the Company during the first quarter of 2002 and early adoption is permitted. The Company chose to adopt EITF No. 00-14 in the first quarter of 2001. As a result of adopting EITF No. 00-14, the Company reclassified approximately $1.9 million and $0 of such sales incentive "Cash Vouchers" from Casino operating expense to net against Casino revenues for the twelve months ending December 31, 2000 and 1999, respectively. Recently Issued Accounting Standards In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS No. 141 will have a significant impact on its financial statements. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS No. 142 on its financial position and results of operations. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Bulletin Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently assessing, but has not yet determined the impact of SFAS No. 144 on its financial position and results of operations. 30 Item 7A Disclosure Market risks relating to our operations result primarily from changes interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills with maturities of 90 days or less. Our equipment loans, leases and Special Improvement District debt is not subject to significant valuations adjustment due to interest rate changes. Although the Company's 13% and 10% Notes are publicly traded, it is not known how significantly these bonds react to market interest rate changes.
Interest Rate Sensitivity Principal (Notational Amount by Expected Maturity) Average Interest Rate (Amounts in Thousands) Fair Value 2002 2003 2004 2005 2006 Thereafter Total At 12/31/01 Long Term Debt Including Current Portion Equipment loans and capital leases-Las Vegas $1,198 $1,326 $988 $11 $3,523 $3,523 Average interest rate 7.8% 7.8% 8.4% 8.4% 10% First Mortgage Note $174,193 $174,193 $140,000 Average interest rate 10.0% Equipment loans, Black Hawk, Colorado $8 $8 $8 Average interest rate 11.2% Capital leases, Black Hawk, Colorado $1,848 $2,045 $2,263 $658 $6,814 $6,814 Average interest rate 10.8% 10.8% 10.8% 10.8% Special Improvement District Bonds-Black Hawk, Colorado casino project $97 $103 $109 $116 $124 $411 $960 $960 Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 13% First Mortgage Note, Black Hawk, Colorado casino project $34,941 $34,941 $34,941 Average interest rate 13.0%
Forward Looking Statements The Private Securities Litigation Reform Act of 1998 provides a "safe harbor" for certain forward-looking statements. Certain matters discussed in this filing could be characterized as forward-looking statements such as statements relating to plans for future expansion, as well as other capital spending, financing sources and effects of regulation and competition. Such forward-looking statements involve important risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. 31 Item 8. Financial Statements and Supplementary Data See Financial Statements included in Item 14(a). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding this item is incorporated by reference in the Company's Proxy Statement to be filed on or about April 9, 2002, relating to the Annual Meeting of Stockholders to be held on May 14, 2002 and is made a part hereof. Item 11. Executive Compensation Information regarding this item is incorporated by reference in the Company's Proxy Statement to be filed on or about April 9, 2002, relating to the Annual Meeting of Stockholders to be held on May 14, 2002 and is made a part hereof. Item 12. Principal Shareholders Information regarding this item is incorporated by reference in the Company's Proxy Statement to be filed on or about April 9, 2002, relating to the Annual Meeting of Stockholders to be held on May 14, 2002 and is made a part hereof. Item 13. Certain Relationships and Related Transactions Information regarding this item is incorporated by reference in the Company's Proxy Statement to be filed on or about April 9, 2002, relating to the Annual Meeting of Stockholders to be held on May 14, 2002 and is made a part hereof. 32 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) List of Financial Statements The following Independent Auditors' Report and the consolidated Financial Statements of the Company are incorporated by reference into this Item 14 of Form 10-K by Item 8 hereof: - Independent Auditor's Report. - Consolidated Balance Sheets as of December 31, 2001 and 2000. - Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999. - Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. - Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999. - Notes to Consolidated Financial Statements. (a)(2) List of Financial Statement Schedules No financial statement schedules have been filed herewith since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes. (a)(3) List of Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index herein, which information is incorporated by reference. (b) Reports on Form 8-K The Company filed the following current reports on Form 8-K: - Form 8-K filed October 6, 2000, announcing that Robert Vannucci was appointed President and Chief Operating Officer of the Company's wholly owned subsidiary, Riviera Operating Corporation. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized. RIVIERA HOLDINGS CORPORATION By:/s/ WILLIAM L. WESTERMAN ------------------------------ William L. Westerman Chief Executive Officer and President (Principal Executive Officer) March 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ WILLIAM L. WESTERMAN Chairman of the Board, Chief March 19, 2002 - ------------------------ Executive Officer and President William L. Westerman /s/ DUANE R. KROHN Treasurer (Principal Financial March 19, 2002 - ------------------------ and Accounting Officer) Duane R. Krohn /s/ ROBERT R. BARENGO Director March 19, 2002 - ------------------------ Robert R. Barengo /s/ JAMES N. LAND, JR. Director March 19, 2002 - ------------------------ James N. Land, Jr. /s/ JEFFREY A. SILVER Director March 19, 2002 - ------------------------ Jeffrey A. Silver /s/ PAUL A. HARVEY Director March 19, 2002 - ------------------------ Paul A. Harvey 34 EXHIBIT INDEX Exhibit Description Number 2.1* Agreement and Plan of Merger, dated September 15, 1997, by and among R&E Gaming Corp., Riviera Acquisitions Sub, Inc., and Riviera Holdings Corporation (see Exhibit 10.1 to Current Report on Form 8-K filed with the Commission on September 29, 1997, Commission File No. 0-21430) 3.1* Second Restated Articles of Incorporation of the Company (see Exhibit 3.1 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.2* Bylaws of the Company (see Exhibit 3.2 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.3* Articles of Incorporation of Riviera Operating Corporation (see Exhibit 3.3 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.4* Bylaws of Riviera Operating Corporation (see Exhibit 3.4 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.5* Articles of Incorporation of Riviera Gaming Management, Inc. (see Exhibit 3.5 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.6* Bylaws of Riviera Gaming Management, Inc. (see Exhibit 3.6 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.7* Articles of Incorporation of Riviera Gaming Management-Elsinore, Inc. (see Exhibit 3.7 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.8* Bylaws of Riviera Gaming Management - Elsinore, Inc. (see Exhibit 3.8 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 3.9* Articles of Incorporation of Riviera Gaming Management of Colorado, Inc.(see Exhibit 3.9 to Amendment No. 1 to Registration Statement on Form S-4 filed with the Commission on December 9, 1997, Commission File No. 0-21430) 35 3.10* Bylaws of Riviera Gaming Management of Colorado, Inc. (see Exhibit 3.10 to Amendment No. 1 to Registration Statement on Form S-4 filed with the Commission on December 9, 1997, Commission File No. 0-21430) 4.1* Indenture dated as of August 13, 1997 between the Company and Norwest Bank Minnesota, N.A., as trustee, the Guarantors party thereto, Jefferies & Company, Inc. and Ladenburg Thalmann & Co. Inc. (see Exhibit 4.2 to Current Report on Form 8-K filed with the Commission on August 18, 1997, Commission File No.0-21430) 4.2* Form of the Company's 10% Senior Notes due 2004 (included in Exhibit 4.1) 5.1* Opinion of Dechert Price & Rhoads re: legality (see Exhibit 5.1 to Amendment No. 1 to Registration Statement on Form S-4 filed with the Commission on December 9, 1997, Commission File No. 0-21430) 10.1* Registration Rights Agreement dated as of August 13, 1997 by and among the Company, the Guarantors party thereto, Jefferies & Company, Inc. and Ladenburg Thalmann & Co. Inc. (see Exhibit 4.1 to Current Report on Form 8-K filed with the Commission on August 18, 1997, Commission File No. 0-21430) 10.2* Purchase Agreement dated August 8, 1997 among the Company, the Guarantors party thereto, Jefferies & Company, Inc. and Ladenburg Thalmann & Co., Inc. (see Exhibit 1.1 to Current Report on Form 8-K filed with the Commission on August 18, 1997, Commission File No. 0-21430) 10.3* Lease Agreement between Riviera, Inc. and Mardi Gras Food Court, Inc. dated April 1, 1990 (see Exhibit 10.1 to Form 10, Commission File No. 0-21430) 10.4* Amendment to Lease Agreement between Riviera, Inc. and Mardi Gras Food Court, Inc. dated April 1, 1990 (see Exhibit 10.2 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, File No. 33-67206) 10.5* Lease Agreement between Riviera, Inc. and Leroy's Horse and Sports Place (see Exhibit 10.3 to Form 10, Commission File No. 0-21430) 10.6* Indemnity Agreement, dated June 30, 1993, from Riviera, Inc. and Meshulam Riklis in favor of the Company and Riviera Operating Corporation (see Exhibit 10.7 to Registration Statement Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.7* Indemnity Agreement, dated June 30, 1993, from the Company in favor of IBJ Schroder Bank & Trust Company (see Exhibit 10.8 to Registration Statement Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 36 10.8* Equity Registration Rights Agreement dated June 30, 1993, among the Company and the Holders of Registerable Shares (see Exhibit 10.9 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.9* Operating Agreement dated June 30, 1993, between the Company and Riviera Operating Corporation (see Exhibit 10.15 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.10* Adoption Agreement regarding Profit Sharing and 401(k) Plans of the Company (see Exhibit 10.16 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.11* Howard Johnson & Company Regional Defined Contribution Plan dated March 16, 1990 (adopted by the Company pursuant to the Adoption Agreement filed as Exhibit 10.17 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.12* Employment Agreement between Riviera, Inc. and William L. Westerman, dated January 6, 1993 (see Exhibit 10.18 to Form 10, Commission File No. 0-21430) 10.13* Form of Agreement between the Company and Directors (see Exhibit 10.19 to Form 10, Commission File No. 0-21430) 10.14* Form of Termination Fee Agreement (see Exhibit 10.20 to Form 10, Commission File No. 0-21430) 10.15* Restricted Account Agreement dated June 30, 1993, among Riviera Operating Corporation, IBJ Schroder Bank & Trust Company and Bank of America Nevada (see Exhibit 10.22 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.16* Disbursement Agreement dated June 30, 1993, between the Company and IBJ Schroder Bank & Trust Company (see Exhibit 10.23 to Registration Statement on Form S-1 filed with the Commission on August 11, 1993, Commission File No. 33-67206) 10.17* Tax Sharing Agreement between the Company and Riviera Operating Corporation dated June 30, 1993 (see Exhibit 10.24 to Amendment No. 1 to Registration Statement on Form S-1 filed with the Commission on August 19, 1993, Commission File No. 33-67206) 10.18* The Registrant's 1993 Stock Option Plan (see Exhibit 10.25 to Amendment No. 1 to Registration Statement on Form S-1 filed with the Commission on August 19, 1993, Commission File No. 33-67206) 10.19* Form of Stay Bonus Agreement (see Exhibit 10.27 to Form 10-Q filed with the Commission on November 9, 1994, Commission File No. 0-21430) 37 10.20* Amendment dated February 19, 1995 to Lease Agreement between Riviera, Inc. and Mardi Gras Food Court, Inc. (filed with Exhibits 10.3 and 10.4) 10.21* Amendment dated September 30, 1994, to Employment Agreement between Riviera, Inc. and William L. Westerman (filed with Exhibit 10.12) 10.22* Management Agreement by and between Elsinore Corporation, Four Queens, Inc. and Riviera Gaming Management Corp.- Elsinore (see Exhibit 10.30 to Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 0-21430) 10.23* Employment Agreement dated as of November 21, 1996 by and between the Company, Riviera Operating Corporation and William L. Westerman (see Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 0-21430) 10.24* Revolving Line of Credit Loan Agreement dated February 28, 1997 by and between the Company, Riviera Operating Corporation and U.S. Bank of Nevada (see Exhibit 10.32 to Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 0-21430) 10.25* Letter of Intent dated March 4, 1997 between the Company and Eagle Gaming, L.P.(see Exhibit 10.33 to Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 0-21430) 10.26* Deed of Trust, Assignment of Rents, Leases, Fixture Filing and Security Agreement dated August 13, 1997, executed by Riviera Holdings Corporation for the benefit of Norwest Bank Minnesota, National Association (see Exhibit 10.1 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.27* Security Agreement dated August 13, 1997, by and among Riviera Holdings Corporation, Riviera Operating Corporation, Riviera Gaming Management, Inc., Riviera Gaming Management of Colorado, Inc., Riviera Gaming Management - Elsinore, Inc. and Norwest Bank Minnesota, National Association (see Exhibit 10.2 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.28* Stock Pledge and Security Agreement dated August 13, 1997, executed by Riviera Holdings Corporation (see Exhibit 10.3 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.29* Stock Pledge and Security Agreement dated August 13, 1997, executed by Riviera Operating Corporation (see Exhibit 10.4 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 38 10.30* Stock Pledge and Security Agreement dated August 13, 1997, executed by Riviera Gaming Management, Inc. (see Exhibit 10.5 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.31* Restricted Account Agreement dated August 13, 1997, by and among Riviera Holdings Corporation, Norwest Bank Minnesota, National Association and U.S. Bank of Nevada (see Exhibit 10.6 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.32* First Amendment to Revolving Line of Credit Loan Agreement dated August 12, 1997, between Riviera Holdings Corporation, Riviera Operating Corporation and U.S. Bank (see Exhibit 10.7 to Form 8-K filed August 18, 1997, Commission File No. 0-21430) 10.33* Escrow Agreement dated September 15, 1997, by and among R&E Gaming Corp., Riviera Holdings Corporation, and State Street Bank and Trust Company of California (see Exhibit 10.2 to Form 8-K filed September 29, 1997, Commission File No. 0-21430) 10.34* Employment Agreement between the Company and Ronald P. Johnson effective July 1, 1998 (see Exhibit 10.34 to Form 10-Q filed November 6, 1998) 10.35* Employment Agreement between the Company and Duane R. Krohn effective July 1, 1998 (see Exhibit 10.35 to Form 10-Q filed November 6, 1998) 10.36* Employment Agreement between the Company and Robert A. Vannucci effective July 1, 1998 (see Exhibit 10.36 to Form 10-Q filed November 6, 1998) 10.37* Employment Agreement between the Company and Jerome P. Grippe effective July 1, 1998 (see Exhibit 10.37 to Form 10-Q filed November 6, 1998) 10.38* Consulting Agreement between Riviera Gaming Management, Inc. and Peninsula Gaming Partners, LLC, dated January 1, 2000 (see Exhibit 10.38 to Form 10-K filed March 20, 2000) 10.39* Amendment to Employment Agreement between the Company and Robert A. Vannucci effective October 1, 2000 (see Exhibit 10.39 to Form 10-K filed March 23,2001) 10.40* Amendment to Employment Agreement between the Company and William L. Westerman effective January 1, 2001 (see Exhibit 10.40 to Form 10-K filed March 23, 2001) 10.41* Deferred Compensation Plan dated November 1, 2000, adopted by the Company on October 2, 2000 (see Registration Statement on Form S-8 filed with the Commission on February 14, 2001) 39 10.42* Restricted Stock Plan dated January 2, 2001, adopted by the Company on October 2, 2000 (see Registration Statement on Form S-8 filed with the Commission on February 14, 2001) 21.1* Subsidiaries of the Company (see Exhibit 21.1 to Registration Statement on Form S-4 filed with the Commission on September 10, 1997, Commission File No. 0-21430) 99.1* Letter dated March 20, 1998, from R&E Gaming Corp. to the Company regarding the Company's Agreement and Plan of Merger * The exhibits thus designated are incorporated herein by reference as exhibits hereto. Following the description of such exhibits is a reference to the copy of the exhibit heretofore filed with the Commission, to which there have been no amendments or changes. (19094) 40
RIVIERA HOLDINGS CORPORATION TABLE OF CONTENTS - ------------------------------------------------------------------------------------------------------- Page INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED FINANCIAL STATEMENTS: Balance Sheets as of December 31, 2001 and 2000 F-2 Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999 F-3 Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000, and 1999 F-4 Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999 F-5 Notes to Consolidated Financial Statements F-7 Unaudited Quarterly Financial Data F-38
INDEPENDENT AUDITORS' REPORT Riviera Holdings Corporation Las Vegas, Nevada We have audited the accompanying consolidated balance sheets of Riviera Holdings Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche llp Las Vegas, Nevada February 12, 2002 F-1
RIVIERA HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (In Thousands, Except Share Amounts) - ------------------------------------------------------------------------------------------------------------------------ ASSETS 2001 2000 CURRENT ASSETS: Cash and cash equivalents $ 46,606 $ 52,174 Accounts receivable, net 3,528 5,548 Inventories 2,253 3,342 Prepaid expenses and other assets 3,083 4,599 ------- ------ Total current assets 55,470 65,663 PROPERTY AND EQUIPMENT, Net 200,531 207,030 OTHER ASSETS, Net 6,728 8,128 DEFERRED INCOME TAXES, Net 5,089 2,889 ------- ------- TOTAL $ 267,818 $ 283,710 ========= ========= LIABILITIES AND STOCKHOLDERS EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 3,151 $ 2,871 Accounts payable 8,200 9,731 Accrued interest 8,084 7,727 Accrued expenses 14,740 16,731 ------- ------- Total current liabilities 34,175 37,060 ------- ------- OTHER LONG-TERM LIABILITIES 7,391 6,533 ------- ------- LONG-TERM DEBT, Net of current portion 217,288 223,172 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS EQUITY: Common stock ($.001 par value; 20,000,000 shares authorized; 5,106,776 shares issued at December 31, 2001 and 2000, respectively) 5 5 Additional paid-in capital 13,485 13,446 Treasury stock (1,674,144 and 1,431,648 shares at December 31, 2001 and 2000, respectively) (11,246) (9,633) Retained earnings 6,720 13,127 ------- ------- Total stockholders equity 8,964 16,945 ------- ------- TOTAL $ 267,818 $ 283,710 ========= ========= See notes to consolidated financial statements.
F-2
RIVIERA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (In Thousands, Except Per Share Amounts) - ------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 REVENUES: Casino $ 114,039 $ 107,693 $ 73,181 Rooms 44,255 43,819 39,899 Food and beverage 31,256 30,756 25,117 Entertainment 20,692 24,526 20,994 Other 9,119 10,538 11,713 ------- ------- ------- Total revenues 219,361 217,332 170,904 Less promotional allowances 17,330 15,801 13,636 ------- ------- ------- Net revenues 202,031 201,531 157,268 ------- ------- ------- COSTS AND EXPENSES: Direct costs and expenses of operating departments: Casino 62,845 57,450 42,306 Rooms 23,339 23,364 21,909 Food and beverage 21,426 21,372 18,307 Entertainment 14,900 18,959 16,271 Other 3,068 3,146 3,228 Other operating expenses: General and administrative 42,239 41,312 29,568 Preopening expenses - Black Hawk, Colorado project 1,222 595 Depreciation and amortization 17,243 17,827 13,991 ------- ------- ------- Total costs and expenses 185,060 184,652 146,175 ------- ------- ------- INCOME FROM OPERATIONS 16,971 16,879 11,093 ------- ------- ------- OTHER (EXPENSE) INCOME: Interest expense (26,864) (27,805) (23,448) Interest income 1,274 2,429 2,255 Interest capitalized 616 4,733 Other, net (28) 1,171 (1,963) ------- ------- ------- Total other expense (25,618) (23,589) (18,423) ------- ------- ------- LOSS BEFORE BENEFIT FOR INCOME TAXES (8,647) (6,710) (7,330) BENEFIT FOR INCOME TAXES (2,240) (2,495) (4,461) ------- ------- ------- NET LOSS $ (6,407) $ (4,215) $ (2,869) ======= ======= ======= EARNINGS PER SHARE DATA: Loss per share Basic and diluted $ (1.79) $ (1.05) $ (0.58) ======= ======= ======= Weighted-average common and common equivalent shares 3,573 4,013 4,978 ======= ======= ======= See notes to consolidated financial statements.
F-3
RIVIERA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (Dollars In Thousands, Except Share Amounts) - ------------------------------------------------------------------------------------------------------------------------------ Notes Receivable Common Stock Additional Treasury Stock from ----------------------- Paid-in Retained --------------------------- Employee Shares Amount Capital Earnings Shares Amount Shareholders Total BALANCE, JANUARY 1, 1999 5,107,676 $ 5 $ 13,457 $ 20,211 (34,300) $ (167) $ (3) $ 33,503 Refunds on employee stock purchases (900) (11) 3 (8) Purchase of treasury stock (549,455) (2,948) (2,948) Net loss (2,869) (2,869) --------- ---- ------- ------- --------- ------- ---- -------- BALANCE, DECEMBER 31, 1999 5,106,776 5 13,446 17,342 (583,755) (3,115) 27,678 Purchase of treasury stock (847,893) (6,518) (6,518) Net loss (4,215) (4,215) --------- ---- ------- ------- --------- ------- ---- -------- BALANCE, DECEMBER 31, 2000 5,106,776 5 13,446 13,127 (1,431,648) (9,633) 16,945 Purchase of treasury stock, general (158,437) (993) (993) Purchase of treasury stock, deferred compensation trust (118,091) (786) (786) Issuance of restricted stock 39 34,032 166 205 Net loss (6,407) (6,407) --------- ---- ------- ------- --------- ------- ---- -------- BALANCE, DECEMBER 31, 2001 5,106,776 $ 5 $ 13,485 $ 6,720 (1,674,144) $ (11,246) $ $ 8,964 ========= ==== ======= ======= ========= ======= ==== ======== See notes to consolidated financial statements.
F-4
RIVIERA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (In Thousands) - --------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (6,407) $ (4,215) $ (2,869) Adjustments to reconcile net loss to net cash provided by operating activities: Gain on sale of equipment (55) Depreciation and amortization 17,243 17,827 13,991 Provision for bad debts 225 326 297 Provision for gaming discounts (70) 45 Interest expense 26,864 27,805 23,448 Interest paid (23,490) (24,410) (20,132) Interest capitalized on construction projects (616) (4,733) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net 1,865 (877) 50 Decrease (increase) in inventories 1,089 90 (705) Decrease (increase) in prepaid expenses and other assets 1,516 (607) 39 Increase (decrease) in accounts payable (1,748) (2,071) (884) Increase (decrease) in accrued expenses (2,420) 7,348 1,896 Increase (decrease) in deferred compensation plan obligation 579 Increase(decrease) in deferred tax asset (2,200) (2,534) (3,478) Increase (decrease) in slot annuities payable (3) (55) Increase (decrease) in non-qualified pension plan obligation to CEO upon retirement (500) 1,247 (61) ------- ------- ------- Net cash provided by operating activities 12,546 19,355 6,749 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment, Las Vegas (7,622) (7,465) (11,735) Capital expenditures for property and equipment, Black Hawk (2,640) (16,969) (27,291) Interest capitalized on construction projects 616 4,733 Decrease (increase) in short-term investments 5,258 (5,258) Decrease (increase) in restricted funds 15,060 (15,060) Sale of equipment 174 Decrease (increase) in other assets 85 (661) (3,558) ------- ------- ------- Net cash used in investing activities (10,177) (4,161) (57,995) ------- ------- ------- See notes to consolidated financial statements. (Continued)
F-5
RIVIERA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (In Thousands) - ------------------------------------------------------------------------------------------------------------ 2001 2000 1999 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings $ - $ 9,552 $ 48,764 Payments on long-term borrowings (2,865) (2,299) (641) Purchase of treasury stock, general (993) (6,518) (2,948) Purchase of treasury stock, deferred compensation trust (786) Purchase of 13% Mortgage Notes - Black Hawk (3,500) (6,559) Issuance of restricted stock 166 Net cancellations of employee stock purchase plan, and exercise of employee stock options 41 (8) ------- ------- ------- Net cash (used in) provided by financing activities (7,937) (5,824) 45,167 ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,568) 9,370 (6,079) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 52,174 42,804 48,883 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $46,606 $52,174 $ 42,804 ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Income taxes (refunded) paid, State of Colorado $ (110) $ 110 ======== ======= SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Property acquired with accounts payable, Las Vegas, Nevada $ 132 ======== Property acquired with debt, Black Hawk, Colorado $ 454 $ 126 ======== ===== Property acquired with accounts payable, Black Hawk, Colorado $ 90 $ 304 $ 2,566 ======== ======= ====== Property acquired with debt, Las Vegas, Nevada $ 1,614 ====== See notes to consolidated financial statements. (Concluded)
F-6 RIVIERA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Nature of Operations - Riviera Holdings Corporation and its wholly owned subsidiary, Riviera Operating Corporation ("ROC") (together, the "Company"), were incorporated on January 27, 1993, in order to acquire all assets and liabilities of Riviera, Inc. Casino-Hotel Division on June 30, 1993, pursuant to a plan of reorganization. In August 1995, Riviera Gaming Management, Inc. ("RGM") incorporated in the State of Nevada as a wholly owned subsidiary of ROC for the purpose of obtaining management contracts in Nevada and other jurisdictions. The primary line of business of the Company is the operation of the Riviera Hotel & Casino (the "Riviera Las Vegas") on the Strip in Las Vegas, Nevada. The Company, through its gaming management subsidiary, also managed the Four Queens Hotel and Casino (owned by Elsinore Corporation) in downtown Las Vegas through December 1999 (see Note 13). RGM also provided services to Peninsula Gaming Partners LLC through September 2000 with respect to that company's riverboat, Diamond Jo, operating in Dubuque, Iowa. In February 2000, the Company opened its casino in Black Hawk, Colorado, which is owned through Riviera Black Hawk, Inc. ("RBH"), a wholly owned subsidiary of ROC. Riviera Gaming Management of Colorado, Inc. is a wholly owned subsidiary of RGM, and manages the Black Hawk casino. Casino operations are subject to extensive regulation in the states of Nevada and Colorado by the respective Gaming Control Boards and various other state and local regulatory agencies. Management believes that the Company's procedures comply, in all material respects, with the applicable regulations for supervising casino operations, recording casino and other revenues, and granting credit. Principles of Consolidation - The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, ROC and RGM, and their related subsidiary entities. All material intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents - All highly liquid investment securities with a maturity of three months or less when acquired are considered to be cash equivalents. The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investment securities, along with certain cash and cash equivalents that are not deemed securities under SFAS No. 115, are carried on the consolidated balance sheets in the cash and cash equivalents category. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities, and requires such securities to be classified as either held to maturity, trading, or available for sale. F-7 Management determines the appropriate classification of its investment securities at the time of purchase, including the determination as to restricted versus nonrestricted assets, and re-evaluates such determination at each balance sheet date. Held-to-maturity securities are required to be carried at amortized cost. At December 31, 2001 and 2000, securities classified as held to maturity comprised debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, and repurchase agreements, with an amortized cost of $27,449,767 and $34,754,983, respectively, maturing in three months or less. Inventories - Inventories consist primarily of food, beverage, gift shop, and promotional inventories, and are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property and Equipment - Property and equipment are stated at cost, and capitalized lease assets are stated at the present value of future minimum lease payments at the date of lease inception. Interest incurred during construction of new facilities or major additions to facilities is capitalized and amortized over the life of the asset. Depreciation is computed by the straight-line method over the shorter of the estimated useful lives or lease terms, if applicable, of the related assets, which range from 5 years for certain gaming equipment to 40 years for buildings. The costs of normal maintenance and repairs are charged to expense as incurred. Gains or losses on disposals are recognized as incurred. The Company periodically assesses the recoverability of property and equipment and evaluates such assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. Other Assets - Other assets include bond offering costs and commissions, which are amortized over the life of the debt. Such amortized costs are included in interest expense. Restricted Cash and Short-Term Investments - Amounts related to the Riviera Black Hawk Casino project in Black Hawk, Colorado, are restricted in use to that project or for the related 13% First Mortgage Notes interest payments. Stock-Based Compensation - The effect of stock options in the income statement is reported in accordance with Accounting Principles Board Statement No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosures-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for unissued stock options in the stock option plan (see Note 15). Fair Value Disclosures Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, and Accrued Expenses - The carrying value of these items is a reasonable estimate of their fair value. Long-Term Debt - The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Based on the borrowing rates currently available to the Company for debt with similar terms and average maturities, the estimated fair value of long-term debt outstanding is approximately $186,246,000 and $202,628,000 in 2001 and 2000, respectively. F-8 Revenue Recognition: Casino Revenue - The Company recognizes, as gross revenue, the net win from gaming activities, which is the difference between gaming wins and losses. Room Revenue, Food and Beverage Revenue, Entertainment Revenue, and Other Revenue - The Company recognizes room, food and beverage, entertainment revenue, and other revenue at the time that goods or services are provided Preopening Costs - The Company recognizes preopening costs when incurred. Promotional Allowances - Revenues include the estimated retail value of rooms, food and beverage, and entertainment provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowance. The estimated cost of providing these promotional allowances is charged to the casino department in the following amounts:
Year Ended December 31 ---------------------------------- 2001 2000 1999 Food and beverage $ 9,560 $ 9,007 $6,266 Rooms 1,195 1,297 1,676 Entertainment 1,950 1,319 1,312 ------- -------- ------- Total costs allocated to casino departments $12,705 $11,623 $9,254 ======= ======== ======
Federal Income Taxes - The Company and its subsidiaries file a consolidated federal tax return. The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes reflect the net tax effects of: (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (ii) operating loss and tax credit carryforwards. Estimates and Assumptions - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include estimated useful lives for depreciable and amortizable assets, certain accrued liabilities, realizability of deferred tax assets and liabilities, and the estimated allowances for receivables. Actual results may differ from estimates. Recently Adopted Accounting Standards - The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivatives, which is effective for fiscal years beginning after June 15, 2000. This statement defines derivatives and requires qualitative disclosure of certain financial and descriptive information about a company's derivatives. The Company adopted SFAS No. 133 in the quarter ending March 31, 2001. The adoption of SFAS No. 133 had no impact on the Company or the Company's consolidated financial statements. F-9 The Emerging Issues Task Force ("EITF") of the American Institute of Certified Public Accountants issued EITF No. 00-22, Accounting for `Points' and Certain Other Timed-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future, on January 18, 2001. EITF No. 00-22 concluded that when a company or vendor offers to a customer (a) free or discounted products or services that will be delivered (either by the vendor or by another unrelated entity) at a future date (1) as a result of a single revenue transaction with the customer or (2) only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period and (b) a rebate or refund of a determinable cash amount only if the customer completes a specified cumulative level of revenue transactions with the vendor or remains a customer of the vendor for a specified time period, such rebates should be reported as a reduction of revenues. This EITF No. 00-22 was required to be adopted by the Company during the first quarter of 2001. As a result of adopting EITF No. 00-22, the Company reclassified approximately $3.4 million and $905,000 of such "Points" from casino operating expense reducing casino revenues for the years ended December 31, 2000 and 1999, respectively. The EITF of the American Institute of Certified Public Accountants issued EITF No. 00-14, Accounting for Certain Sales Incentives, on April 18, 2001. EITF No. 00-14 concluded that when a company or vendor offers its customers sales incentives including discounts, coupons, rebates and free products or services, such sales incentives should be reported as a reduction of revenues. EITF No. 00-14 concluded that when a company or vendor offers its customers sales incentives including discounts, coupons, rebates, and free products or services, such sales incentives should be reported as a reduction of revenues. EITF No. 00-14 is required to be adopted by the Company during the first quarter of 2002. Early adoption is permitted. The Company chose to adopt EITF No. 00-14 in the first quarter of 2001. As a result of adopting EITF No. 00-14, the Company reclassified approximately $1.9 million and $0 of such sales incentive "Cash Vouchers" from casino operating expense to net against casino revenues for the years ended December 31, 2000 and 1999, respectively. Recently Issued Accounting Standards - In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS No. 141 will have a significant impact on its financial statements. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company has determined that the adoption of SFAS No. 142 will not have a material effect on its financial position and results of operations. F-10 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial position and results of operations. In August of 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 also amends APB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim period within those fiscal years. The Company is currently assessing, but has not yet determined the impact of SFAS No. 144 on its financial position and results of operations. 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at December 31 (in thousands):
2001 2000 Casino $ 1,761 $ 2,066 Hotel 3,252 4,812 ------- ------- Total 5,013 6,878 Allowance for bad debts and discounts (1,485) (1,330) ------- ------- Ending balance $ 3,528 $ 5,548 ======= =======
Changes in the casino and hotel allowance for bad debts and discounts for the years ended December 31, 2001, 2000, and 1999 consist of the following (in thousands):
2001 2000 1999 Beginning balance $1,330 $1,611 $1,314 Write-offs (122) (220) (872) Recoveries 45 29 107 Provision for bad debts and gaming discounts 232 (90) 1,062 ------- ------- ------- Ending balance $1,485 $1,330 $1,611 ======= ======= =======
F-11 3. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets consist of the following at December 31 (in thousands):
2001 2000 Prepaid gaming taxes $ 939 $ 1,440 Prepaid insurance 413 749 Other prepaid expenses 1,731 2,410 ------ ------ Total $3,083 $ 4,599 ====== ======
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31 (in thousands):
2001 2000 Land and improvements $ 38,130 $ 37,718 Buildings and improvements 143,414 142,115 Equipment, furniture, and fixtures 113,366 104,361 ------- ------- Total property and equipment 294,910 284,194 Accumulated depreciation (94,379) (77,164) ------- ------- Net property and equipment $200,531 $207,030 ======= =======
Approximately $0, $616,000 and $4,733,000 in interest costs were capitalized on construction projects in 2001, 2000, and 1999, respectively. Substantially all of the Company's property and equipment is pledged as collateral to secure debt (see Note 8). Repairs and maintenance that do not significantly improve the life of fixed assets are expensed as incurred. Costs for significant improvements that extend the expected life of fixed assets more than one year are capitalized and depreciated over the remaining extended life, using a straight-line method of depreciation. Property under capital leases totaled $11,242,000 and $11,242,000 with accumulated amortization of $4,507,000 and $2,258,000 at December 31, 2001 and 2000, respectively. 5. OTHER ASSETS Other assets consist of the following at December 31 (in thousands):
2001 2000 Deposits $ 177 $ 152 Bond offering costs and commissions, net of accumulated amortization of $6,756 and $5,187, respectively 4,916 6,585 Other 1,635 1,391 ------ ----- Total $6,728 $8,128 ====== =====
F-12 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable consist of the following at December 31 (in thousands):
2001 2000 Outstanding chip and token liability $ 597 $ 563 Slot club liabilities 1,283 1,115 Progressive liabilities 312 419 Casino account deposits and miscellaneous gaming 139 146 ----- ----- Total liabilities related to gaming activities 2,331 2,263 Accounts payable to vendors 4,406 5,196 Hotel deposits 1,032 1,189 Construction payables 304 Other 431 779 ----- ----- Total $8,200 $9,731 ===== =====
Accrued expenses consist of the following at December 31 (in thousands):
2001 2000 Payroll, related payroll taxes, and employee benefits $ 7,907 $ 7,999 Incentive, retention, and ESOP 2,639 4,831 Other 4,194 3,901 ------ ------ Total $14,740 $16,731 ====== ======
7. OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the nonqualified pension plan obligation to the CEO of the Company, payable upon expiration of his employment contract or with a change of control including accrued interest and deferred compensation plan liabilities for eligible employees. See Note 14 for a description of these plans.
2001 2000 Non qualified pension obligation, CEO, unfunded $ 4,163 $ 4,663 Accrued interest on pension, CEO, unfunded 2,649 1,870 Deferred compensation, funded 579 ------- ------- Total $ 7,391 $ 6,533 ======= =======
F-13 8. LONG-TERM DEBT Long-term debt consists of the following at December 31 (in thousands):
2001 2000 10% First Mortgage Notes maturing on August 15, 2004, bearing interest, payable semiannually on February 15 and August 15 of each year, redeemable beginning August 1, 2001 at 105%; 2002 at 102.5%; and 2003 and thereafter at 100%. These notes are collateralized by the land and physical structures comprising the Riviera Hotel and Casino and secondarily the assets of Riviera Black Hawk beginning in March 2002 $174,193 $173,885 13% First Mortgage Notes maturing on June 3, 2005, bearing interest, payable semiannually on November 3 and June 3 of each year; redeemable beginning May 1, 2002 at 106.5%; 2003 at 103.25%; and after 2004 at 100%. These notes are collateralized by the land and physical structures comprising the Riviera Black Hawk Casino 34,941 38,441 5.6% to 9% Notes collateralized by equipment and vehicles, payable monthly, including interest, maturing through October 2004 2,424 3,227 Capitalized lease obligations (see Note 10) 7,921 9,887 5.5% Special Improvement District Bonds - issued by the City of Black Hawk, Black Hawk, Colorado, interest and principal payable monthly over 10 years beginning in 2000 960 603 ------- ------- Total long-term debt 220,439 226,043 Current maturities by terms of debt (3,151) (2,871) -------- -------- Total $217,288 $223,172 ======== ========
Maturities of long-term debt for the years ending December 31 are as follows (in thousands):
2002 $ 3,151 2003 3,474 2004 177,553 2005 35,726 2006 124 Thereafter 411 -------- Total $ 220,439 ========
In February 1997, the Company entered into a $15.0 million, five-year reducing revolving line of credit (the "Credit Facility"). The Credit Facility bears interest at prime plus 0.5% or the London Interbank Offered Rate ("LIBOR") plus 2.9%. The Company has not utilized this line of credit because it does not meet the requirements under the ratio of the allowable funded debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA") of 4.75 to one. The Credit Facility is callable upon a change in control and expired in February 2002. F-14 On August 13, 1997, the Company issued 10% Notes with a principal amount of $175 million dollars. The 10% Notes were issued at a discount in the amount of $2.2 million. The discount is being accreted over the life of the notes on a straight-line basis, which approximates the effective interest method. The 10% Note Indenture contains certain covenants that limit the ability of the Company and its restricted subsidiaries, subject to certain exceptions, to: (i) incur additional indebtedness; (ii) pay dividends or other distributions and repurchase capital stock or other equity interests or subordinated indebtedness; (iii) enter into certain transactions with affiliates; (iv) create certain liens; (v) sell certain assets; and (vi) enter into certain mergers and consolidations. The Company has registered securities identical to the 10% Notes, under the Securities Act of 1933, as amended. On January 8, 1998, the Company completed an exchange offer for such registered securities for the 10% Notes effective January 1, 1998. The 10% Notes are unconditionally guaranteed by all existing and future restricted subsidiaries of the Company, which did not initially include RBH. RBH became collateral for the 10% Notes upon the filing of their financial statements with the Securities and Exchange Commission because certain consolidated operating ratios as defined in the 10% Notes were met as of December 31, 2001 which causes RBH to become a restricted subsidiary. On June 3, 1999, RBH completed a $45 million private placement of 13% First Mortgage Notes. The net proceeds of the placement were used to fund the completion of RBH's casino project in Black Hawk, Colorado. Riviera Holdings Corporation has not guaranteed the $45 million RBH notes, but has agreed to a "Keep Well Agreement" of $5 million per year (or an aggregate limited to $10 million) for the first three years of RBH operations to cover if (i) the $5.85 million interest on such notes is not paid by RBH and (ii) the amount by which RBH cash flow is less than $9.0 million per year. RBH has registered securities identical to the 13% Notes under the Securities Act of 1933, as amended. On January 4, 2000, RBH completed an exchange offer for such registered securities. The 13% First Mortgage Notes were issued at a cost in the amount of $3.5 million. The deferred financing cost is being amortized over the life of the notes on a straight-line basis, which approximates the effective interest method. The 13% First Mortgage Note Indenture provides that, in certain circumstances, RBH must offer to repurchase the 13% Notes upon the occurrence of a change of control or certain other events. In the event of such mandatory redemption or repurchase prior to maturity, RBH would be unable to pay the principal amount of the 13% Notes without a refinancing. The 13% First Mortgage Note Indenture contains certain covenants, which limit the ability of RBH and its restricted subsidiaries, subject to certain exceptions, to: (i) incur additional indebtedness; (ii) pay dividends or other distributions and repurchase capital stock or other equity interests or subordinated indebtedness; (iii) enter into certain transactions with affiliates; (iv) create certain liens and sell certain assets; and (v) enter into certain mergers and consolidations. As a result of these restrictions, the ability of the Company to incur additional indebtedness to fund operations or to make capital expenditures is limited. In the event that cash flow from operations is insufficient to cover cash requirements, the Company would be required to curtail or defer certain of their capital expenditure programs under these circumstances, which could have an adverse effect on RBH's operations. At December 31, 2001, RBH believes that it is in compliance with the covenants. The Company has a credit facility totaling $1,500,000 for letters of credit issued periodically to foreign vendors for purchases of merchandise. The letters require payment upon presentation of a valid voucher. F-15 The 5.5% Special Improvement District Bonds were issued by the City of Black Hawk, Colorado, in July 1998 for $2,940,000. The proceeds were used for road improvements and other infrastructure projects benefiting the Riviera Black Hawk Casino and another nearby casino. The projects were substantially completed in 2000 at a cost of $2,240,000, including interest and reserves. During 2001, another phase was completed. RBH's share of the final phase was $454,000. The excess proceeds have been returned to the bondholders by the City of Black Hawk, Colorado. RBH is responsible for 50 percent of the debt payable over 10 years beginning in 2000. 9. GUARANTOR INFORMATION The Company's 10.0% First Mortgage Notes (see Note 8) are guaranteed by a majority of the Company's wholly owned existing significant subsidiaries. These guaranties are full, unconditional, and joint and several. The following consolidating schedules present separate condensed financial statement information on a combined basis for the parent only, as well as the Company's guarantor subsidiaries and non-guarantor subsidiaries, as of and for the years ended December 31, 2001 and 2000. As of December 31, 1999, RBH had no operations as defined in the notes to consolidated financial statements. At December 31, 1999, RBH had total assets of approximately $72.8 million, which represented primarily cash and restricted cash and investments, other assets, the cost of the land for the Black Hawk Casino project, and construction in progress. Therefore, the Company has not included separate financial information for the guarantors as of December 31, 1999. The management fee to Riviera Holdings Corporation from guarantors represents cost to the Company of depreciation and interest expense on the 10% First Mortgage Notes. F-16
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------------ Combined Parent Combined Non- Elimination Combined ASSETS Only Guarantors Guarantors Entries Totals CURRENT ASSETS: Cash and cash equivalents $ 10,237 $ 24,910 $ 11,459 $ $ 46,606 Current assets 8,102 762 8,864 ------- ------ ------ ------- ------- Total current assets 10,237 33,012 12,221 55,470 PROPERTY AND EQUIPMENT, Net 130,938 2,044 67,549 200,531 OTHER ASSETS, NET 2,269 2,485 1,974 6,728 INVESTMENT IN SUBSIDIARIES 51,189 24,946 $ (76,135) (1) - DEFERRED INCOME TAXES 3,356 1,733 5,089 ------- ------ ------ ------- ------- TOTAL $ 194,633 $ 65,843 $ 83,477 $ (76,135) $ 267,818 ======= ====== ====== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ $ 1,198 $ 1,953 $ $ 3,151 Due to parent company 24,716 3,335 (28,051) (1) - Accounts payable 3,876 4,324 8,200 Accrued interest 6,563 1 1,520 8,084 Accrued expenses 13,092 1,648 14,740 ------- ------ ------ ------- ------- Total current liabilities 6,563 42,883 12,780 (28,051) (1) 34,175 ------- ------ ------ ------- ------- OTHER LONG-TERM LIABILITIES 7,391 7,391 ------- ------ ------ ------- ------- Long-term debt, Net of current portion 174,116 2,402 40,770 217,288 ------- ------ ------ ------- ------- STOCKHOLDERS EQUITY: Common stock 5 5 Additional paid-in capital 11,283 17,528 32,758 (48,084) (1) 13,485 Treasury stock (10,460) (786) (11,246) Retained earnings 13,126 (3,575) (2,831) 6,720 ------- ------ ------ ------- ------- Total stockholders equity 13,954 13,167 29,927 (48,084) 8,964 ------- ------ ------ ------- ------- TOTAL $ 194,633 $ 65,843 $ 83,477 $ (76,135) $ 267,818 ======= ====== ====== ======== ======= Elimination entries - (1) To eliminate investment in and advances to subsidiaries
F-17
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION DECEMBER 31, 2000 - ------------------------------------------------------------------------------------------------------------- Combined Parent Combined Non- Elimination Combined ASSETS Only Guarantors Guarantors Entries Totals CURRENT ASSETS: Cash and cash equivalents $ 11,957 $ 32,473 $ 7,744 $ 52,174 Current assets 12,489 1,000 13,489 ------- ------ ------ ------- ------- Total current assets 11,957 44,962 8,744 65,663 PROPERTY AND EQUIPMENT, Net 135,542 2,983 68,505 207,030 OTHER ASSETS, Net 3,156 2,887 2,510 $ (425) (1) 8,128 INVESTMENT IN SUBSIDIARIES 46,737 32,869 (79,606) (1) DEFERRED INCOME TAXES 764 2,125 2,889 ------- ------ ------ ------- ------- TOTAL $ 197,392 $ 84,465 $ 81,884 $ (80,031) $ 283,710 ======== ====== ====== ======= ======= LIABILITIES AND STOCKHOLDERS EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,101 $ 1,770 $ 2,871 Due to parent company 29,713 $ (29,713) (1) Accounts payable 6,565 3,591 (425) (1) 9,731 Accrued interest $ 6,563 2 1,162 7,727 Accrued expenses 13,440 3,291 16,731 ------- ------ ------ ------- ------- Total current liabilities 6,563 50,821 9,814 (30,138) (1) 37,060 ------- ------ ------ ------- ------- OTHER LONG-TERM LIABILITIES 6,533 6,533 ------- ------ ------ ------- ------- LONG-TERM DEBT, Net of current portion 173,885 3,510 45,777 223,172 ------- ------ ------ ------- ------- STOCKHOLDERS EQUITY: Common stock 5 5 Additional paid-in capital 13,447 20,179 29,713 (49,893) (1) 13,446 Treasury stock (9,633) (9,633) Retained earnings 13,125 3,422 (3,420) 13,127 ------- ------ ------ ------- ------- Total stockholders equity 16,944 23,601 26,293 (49,893) 16,945 ------- ------ ------ ------- ------- TOTAL $ 197,392 $ 84,465 $ 81,884 $ (80,031) $ 283,710 ======== ====== ====== ======= ======= Elimination entries - (1) To eliminate investment in and advances to subsidiaries.
F-18
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------------------------- Combined Parent Combined Non- Elimination Combined Only Guarantors Guarantors Entries Totals REVENUES: Casino $ 67,389 $ 46,650 $ 114,039 Rooms 44,255 44,255 Food and beverage 25,696 5,560 31,256 Entertainment 20,418 274 20,692 Other 8,547 572 9,119 Management fee $ 30,113 $(30,113)(1) - ------- ------ ------ ------- ------- Total revenues 30,113 166,305 53,056 (30,113) 219,361 Less promotional allowances 13,320 4,010 17,330 ------- ------ ------ ------- ------- Net revenues 30,113 152,985 49,046 (30,113) 202,031 COSTS AND EXPENSES: Direct costs and expenses of operating departments: Casino 40,197 22,648 62,845 Rooms 23,339 23,339 Food and beverage 19,333 2,093 21,426 Entertainment 14,823 77 14,900 Other 3,068 3,068 Other operating expenses: General and administrative 30,733 11,506 42,239 Management fees 28,759 1,354 (30,113) (1) - Depreciation and amortization 11,431 2,066 3,746 17,243 ------- ------ ------ ------- ------- Total costs and expenses 11,431 162,318 41,424 (30,113) 185,060 ------- ------ ------ ------- ------- INCOME (LOSS) FROM OPERATIONS 18,682 (9,333) 7,622 16,971 ------- ------ ------ ------- ------- OTHER (EXPENSE) INCOME: Interest expense (18,938) (1,186) (6,740) (26,864) Interest income 256 919 99 1,274 Other, net (28) (28) ------- ------ ------ ------- ------- Total other expense (18,682) (295) (6,641) (25,618) ------- ------ ------ ------- ------- LOSS BEFORE INCOME TAX BENEFIT (9,628) 981 (8,647) BENEFIT FOR INCOME TAXES (2,632) 392 (2,240) ------- ------ ------ ------- ------- NET LOSS $ $ (6,996) $ 589 $ $ (6,407) ======= ====== ====== ======= ======= Elimination entries - (1) To eliminate intercompany revenue and expense.
F-19
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 2000 Combined Parent Combined Non- Elimination Combined Only Guarantors Guarantors Entries Totals REVENUES: Casino $ 74,057 $ 33,636 $ 107,693 Rooms 43,819 43,819 Food and beverage 26,738 4,018 30,756 Entertainment 24,526 24,526 Other 9,607 374 $ 557 10,538 Management fee $ 31,140 557 (31,697)(1) ------ ------- ------ ------- ------- Total revenues 31,140 179,304 38,028 (31,140) 217,332 Less promotional allowances 13,034 2,767 15,801 ------ ------- ------ ------- ------- Net revenues 31,140 166,270 35,261 (31,140) 201,531 ------ ------- ------ ------- ------- COSTS AND EXPENSES: Direct costs and expenses of operating departments: Casino 40,174 17,286 57,450 Rooms 23,364 23,364 Food and beverage 19,773 1,599 21,372 Entertainment 18,954 5 18,959 Other 3,144 2 3,146 Other operating expenses: General and administrative 31,540 9,772 41,312 Management fees 30,583 557 (31,140) (1) Preopening expenses Black Hawk, Colorado 1,222 1,222 Depreciation and amortization 13,090 1,800 2,937 17,827 ------ ------- ------ ------- ------- Total costs and expenses 13,090 169,332 33,380 (31,140) 184,652 ------ ------- ------ ------- ------- INCOME FROM OPERATIONS 18,050 (3,052) 1,881 16,879 ------ ------- ------ ------- ------- OTHER (EXPENSE) INCOME: Interest expense (18,550) (1,568) (7,687) (27,805) Interest income 500 1,611 318 2,429 Interest capitalized 39 577 616 Other, net 1,171 1,171 ------ ------- ------ ------- ------- Total other (expense) income (18,050) 1,253 (6,792) (23,589) ------ ------- ------ ------- ------- LOSS BEFORE BENEFIT FOR (1,799) (4,911) (6,710) INCOME TAXES BENEFIT FOR INCOME TAXES (530) (1,965) (2,495) ------ -------- ------- ------- ------- NET LOSS $ - $ (1,269) $ (2,946) $ - $ (4,215) ====== ======== ======= ======= ======= Elimination entries - (1) To eliminate intercompany revenue and expense.
F-20
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2001 Combined Parent Combined Non- Elimination Combined Only Guarantors Guarantors Entries Total CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (6,996) $ 589 $ $ (6,407) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization $ 11,431 2,066 3,746 17,243 Provision for bad debts 89 136 225 Provision for gaming discounts (70) (70) Interest expense 18,938 1,186 6,740 26,864 Interest paid (17,500) (170) (5,820) (23,490) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net 2,005 (140) 1,865 Decrease (increase) in inventories 1,003 86 1,089 Decrease (increase) in prepaid expenses and other assets 1,360 156 1,516 Increase (decrease) in accounts payable (1,738) (10) (1,748) Increase (decrease) in accrued expenses (2,888) 468 (2,420) Increase (decrease) in deferred compensation plan obligation 579 579 Increase (decrease) in deferred tax asset (2,592) 392 (2,200) Increase (decrease) in other long term liabilities (500) (500) ------- ------- ------ ------ ------- Net cash provided by (used in) operating activities 12,869 (6,666) 6,343 12,546 ------- ------- ------ ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment (7,622) (2,640) (10,262) Decrease (increase) in other assets (13,800) 13,911 (26) 85 ------- ------- ------ ------ ------- Net cash used in investing activities (13,800) 6,289 (2,666) (10,177) ------- ------- ------ ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term borrowings (1,087) (1,778) (2,865) Purchase of treasury stock, general (993) (993) Increase in paid in capital 41 41 Purchase of treasury stock, deferred compensation trust (786) (786) Issuance of restricted stock 166 166 Advances to/from subsidiaries (2,271) 2,271 Purchase of 13% Mortgage Notes - Black Hawk (3,500) (3,500) Contribution of capital to Black Hawk, Inc. (3,045) 3,045 ------- ------- ------ ------ ------- Net cash (used in) provided by financing activities (786) (7,189) 38 (7,937) ------- ------- ------ ------ ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,717) (7,566) 3,715 (5,568) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,957 32,473 7,744 52,174 ------- ------- ------ ------ ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,240 $ 24,907 $ 11,459 $ $ 46,606 ======= ====== ====== ======= ======
F-21
RIVIERA HOLDINGS CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ Combined Parent Combined Non- Elimination Combined Only Guarantors Guarantors Entries Totals CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,269) $ (2,946) $ - $ (4,215) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization $ 13,090 1,800 2,937 17,827 Provision for bad debts 283 43 326 Provision for gaming discounts 45 45 Interest expense 18,550 1,568 7,687 27,805 Interest paid (17,500) (1,566) (5,344) (24,410) Interest capitalized on construction projects (39) (577) (616) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, net (669) (208) (877) (Increase) decrease in inventories 360 (270) 90 (Increase) decrease in prepaid expenses and other assets (1,226) 619 (607) (Increase) decrease in accounts payable (5,918) 3,847 (2,071) (Increase) decrease in accrued expenses 6,278 1,070 7,348 (Increase) decrease in deferred tax asset (569) (1,965) (2,534) (Increase) decrease in slot annuities payable (3) (3) (Increase) decrease in other long-term liabilities 1,247 1,247 ------- ------- ------ ------- Net cash provided by (used in) operating activities 14,140 322 4,893 19,355 ------- ------- ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment (7,465) (16,969) (24,434) Interest capitalized on construction projects 39 577 616 Decrease in short-term investments 2,438 2,820 5,258 Decrease in restricted funds 7,887 7,173 15,060 Decrease (increase) in other assets 1,389 (2,044) (6) (661) ------- ------- ------ ------- Net cash provided by (used in) investing activities 1,389 855 (6,405) (4,161) ------- ------- ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 34 9,518 9,552 Payments on long-term borrowings (1,076) (1,223) (2,299) Purchase of treasury stock (6,518) (6,518) Advances to/from subsidiaries (4,772) 5,301 (529) Purchase of 13% Mortgage Notes - Black Hawk (6,559) (6,559) Contribution of capital to Black Hawk, Inc. (6,239) 6,239 ------- ------- ------ ------- Net cash (used in) provided by financing activities (17,529) 4,259 7,446 (5,824) ------- ------- ------ ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,000) 5,436 5,934 - 9,370 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,957 27,037 1,810 42,804 ------- ------- ------ ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,957 $ 32,473 $ 7,744 $ - $ 52,174 ======= ======= ====== ===== =======
F-22 10. LEASING ACTIVITIES The Company leases certain equipment under capital leases. These agreements have been capitalized at the present value of the future minimum lease payments at lease inception and are included with property and equipment. Management estimates that the fair market value of the property and equipment, subject to the leases, approximates the net present value of the leases. The following is a schedule by year of the minimum rental payments due under capital leases, as of December 31, 2001 (in thousands).
2002 $ 2,979 2003 2,979 2004 2,979 2005 677 Total minimum lease payments 9,611 Taxes, maintenance, and insurance (295) Interest portion of payments (1,395) Present value of net minimum lease payments $ 7,921
Rental expense under operating leases for the years ended December 31, 2001, 2000, and 1999 was approximately $903,555, $1,133,983 and $453,772, respectively. Such leases were year to year in nature. In addition, the Company leases retail space (primarily to retail shops and fast food vendors) to third parties under terms of noncancelable operating leases that expire in various years through 2004. Rental income, which is included in other income, for the years ended December 31, 2001, 2000, and 1999, was approximately $1,800,000, $1,584,300 and $1,803,000, respectively. At December 31, 2001, the Company had future minimum annual rental income due under noncancelable operating leases as follows (in thousands):
2002 $ 1,356 2003 1,358 2004 1,358 2005 1,358 2006 1,358 Total $ 6,788
11. FEDERAL INCOME TAXES The Company computes deferred income taxes based upon the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. F-23 The effective income tax rates on income attributable to continuing operations differ from the statutory federal income tax rates for the year ended December 31 as follows (in thousands):
2001 2000 1999 ------------------------ ------------------------ ------------------------ Amount Rate Amount Rate Amount Rate Benefit for income taxes at federal statutory rate $ (3,026) (35.0)% $ (2,349) (35.0)% $ (2,565) (35.0)% Taxes, state, other 392 4.5 % Benefit from outcome of IRS examination (1,874) (25.6) Other 394 4.6 % (146) (2.2) (22) (0.2) -------- ------- ------- ------ -------- ------- Benefit for income taxes $ (2,240) (25.9)% $ (2,495) (37.2)% $ (4,461) (60.8)% ======== ======= ======= ====== ======== =======
Comparative analysis of the benefit for income taxes is as follows:
2001 2000 1999 Current $ 157 $ 1,223 $ (984) Deferred (2,397) (3,718) (3,477) ------- ------- ------- Total $(2,240) $(2,495) $(4,461) ======= ======= =======
The tax effects of the items composing the Company's net deferred tax (asset) liability consist of the following at December 31 (in thousands):
2001 2000 Deferred tax liabilities: Reserve differential for hospitality and gaming activities $ 559 $ 1,393 Difference between book and tax-depreciable property 4,845 5,217 Other 579 560 ------ ------ Total 5,983 7,170 ------ ------ Deferred tax assets: Net operating loss carryforward 4,383 3,309 Reserves not currently deductible 2,647 2,416 Bad debt reserves 583 483 AMT and other credits 3,459 3,851 ------ ------ Total 11,072 10,059 ------- ------ Net deferred tax asset $ 5,089 $ 2,889 ======== =======
The Company has $3,453,000 of alternative minimum tax ("AMT") credit and $7,000 of general business credit available to offset future income tax liabilities. The AMT credit has no expiration date. The credit will not begin to expire until 2012. The Company performed an analysis of the realizability of its deferred tax assets at December 31, 2001. The realizability of the assets related to Rivera Las Vegas is dependent upon future earnings and tax strategies which the Company may transact in 2002 and 2003. F-24 12. COMMITMENTS AND CONTINGENCIES The Company is party to several routine lawsuits, both as plaintiff and defendant, arising from the normal operations of a hotel. Management does not believe that the outcome of such litigation, in the aggregate, will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Allen Paulson Merger/Litigation - The Company and the plaintiffs to this action entered into a Settlement Agreement dated as of July 2, 1999. The Settlement Agreement was conditioned upon the United States District Court for the Central District of California (the "Court") entering a Settlement Bar Order and Final Judgment and provided that upon the entering of such an Order: (i) The Company would pay plaintiff Allen E. Paulson (and his heirs or successors) ("Paulson") $3,477,412 ($7.50 per share) for the 463,655 shares of Riviera Holdings Corporation common stock owned by Paulson, (ii) Paulson would receive $1,522,587.50 from the funds being held in escrow for the benefit of holders of Riviera Holdings Corporation's Contingent Value Rights ("CVRs"), (iii) the remainder of the escrow of approximately $4,340,000 would be distributed to the holders of the CVRs, and (iv) Paulson would file an amended complaint which eliminated allegations of wrongdoing against us. On October 7, 1999, the Court entered a Settlement Bar Order and Final Judgment which dismissed the California Action against us with prejudice, and barred the other defendants to the lawsuit from seeking indemnification against the Company for claims arising under the federal securities laws or for state law claims arising out of the transactions underlying the plaintiffs' federal security law claims. Shortly after the entry of the Settlement Bar Order, the Company acquired Paulson's stock, and funds were disbursed from escrow as per the terms of the Settlement Agreement. Morgens, Waterfall, Vintiadis Litigation (the "Nevada Action") - The plaintiff in this action ("Morgens, Waterfall") is a shareholder of Riviera Holdings Corporation and a defendant to the California Action. On September 30, 1999, Morgens, Waterfall commenced this action in Nevada state court, where it sought an order enjoining the Company from obtaining a Settlement Bar Order in the California Action. The Company and the other defendants to the Nevada Action removed the action to the United States District Court for the District of Nevada on October 1, 1999. This removal to federal court divested the state court of jurisdiction to consider Morgens, Waterfall's motion for injunctive relief. Morgens, Waterfall filed a complaint with the court, but it did not serve the complaint on any of the defendants. On November 1, 1999, Morgens, Waterfall served a notice of motion to remand the Nevada Action from the Nevada federal court back to Nevada state court. The Company and the other defendants opposed the motion, and on May 24, 2000, the Court denied Morgens, Waterfall's motion. On January 31, 2000, Morgens, Waterfall served an Amended Summons and a First Amended Verified Complaint on Riviera Holdings Corporation with subsequent service on directors. The Amended Complaint asserted four claims for relief. On April 17, 2000, the Company and its directors moved to dismiss Morgens, Waterfall's Amended Complaint. In response, Morgens, Waterfall opposed the directors' motion but "conceded" its claim against the Company. As a consequence, Morgens, Waterfall no longer asserted any claim against the F-25 Company, but it has opposed dismissing the Company from the action on the ground that the Company was a "nominal defendant" with respect to the derivative claims asserted by Morgens, Waterfall against the directors. On October 1, 2001 Morgens, Waterfall, the Company and the directors entered into a Settlement Agreement dated as of settling the Nevada Action. That Settlement Agreement provides that plaintiff would release its claims with prejudice against each defendant and each defendant would release its claims with prejudice against plaintiff conditioned upon Mr. Westerman accepting service of a subpoena to personally appear and testify at the trial of the California Action and that Mr. Westerman appear and testify at the trial of the California Action. Employees and Labor Relations - As of December 31, 2001, the Riviera had approximately 1,782 full-time equivalent employees and had collective bargaining contracts with eight unions covering approximately 813 of such employees, including food and beverage employees, rooms department employees, carpenters, engineers, stage hands, musicians, electricians, painters, and teamsters. The Company's agreements with the Southern Nevada Culinary and Bartenders Union and Stage Hands Union, which cover the majority of the Company's unionized employees, were renegotiated in 1998 and expire in the year 2002. Collective bargaining agreements with the operating engineers, painters, and electricians were renegotiated in 2000 and expire in 2004, 2005, and 2004, respectively. A new agreement was negotiated with the carpenters which expires in 2005. The Company is also in negotiations with the Musicians Union. A new agreement was negotiated with the Teamsters, which expires in 2003. Although unions have been active in Las Vegas, management considers its employee relations to be satisfactory. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company. Keep-Well Agreement - RBH and Riviera Holdings Corporation entered a Keep-Well Agreement wherein, if (1) RBH does not have the necessary funds to make a payment of fixed interest on the notes during its first three years of operations or (2) consolidated cash flow is less than $9.0 million in any of the first three years of operations, Riviera Holdings Corporation will be obligated to contribute cash to RBH to make up those amounts (up to a maximum of $5.0 million for any one operating year and $10.0 million in the aggregate). On February 14, 2001, the Company advanced approximately $3.1 million to RBH under this agreement. As of December 31, 2001, Riviera Holdings Corporation does not owe amounts under the Keep-Well Agreement. 13. MANAGEMENT AGREEMENTS From August 1996 until December 1999, RGM operated the Four Queens in downtown Las Vegas under a management agreement for a minimum annual management fee of $1.0 million. The Company completed its requirements under the agreement, and the Four Queens Management Agreement was terminated December 30, 1999. RBH has entered into a management agreement in principle (the "RBH Management Agreement") with Riviera Gaming Management of Colorado, Inc. (the "Manager"), a wholly owned subsidiary of Riviera Holdings Corporation, which, in exchange for a fee, manages RBH. The management fee consists of a revenue fee and a performance fee. The revenue fee is based on 1 percent of net revenues (gross revenues less complimentaries) and is payable quarterly in arrears. The performance fee is based on the following percentages of EBITDA, whose components are based on generally accepted accounting principles): (1) 10 percent of EBITDA from $5 million to $10 million, (2) 15 percent of EBITDA from $10 million to $15 million, and (3) 20 percent of EBITDA in excess of $15 million. The performance fee is based on the preceding quarterly installments subject to year-end adjustment. The management fee began on February 4, 2000, the date of the F-26 opening of the Riviera Black Hawk Casino. If there is any default under the RBH Management Agreement, the Manager will not be entitled to receive management fees but will still be entitled to inter-company service fees. At December 31, 2001, RBH had accrued but not paid, and the Manager had recognized management fees of $1,911,229 which are eliminated in consolidation. 14. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS Chairman - William L. Westerman serves as Chairman of the Board, President and Chief Executive Officer of the Company, and as Chairman of the Board and Chief Executive Officer of ROC. Under Mr. Westerman's existing employment agreement with the Company, which was last amended on December 6, 2000, Mr. Westerman shall be employed by the Company for an indefinite period subject to termination by either the Company or Mr. Westerman on not less than 120 days prior written notice. Mr. Westerman's base compensation is $600,000. Under his employment agreement, Mr. Westerman is entitled to participate in the Company's Senior Management Compensation Plan or such other executive bonus plan as shall be established by the Company's Board of Directors (collectively the "Plan"). If at least 80% of targeted net income, as defined by the Plan, is met, Mr. Westerman shall be entitled to receive a bonus under the Plan expressed as a percentage of his $600,000 base salary depending on the percentage of targeted net income realized by the Company in a particular year, with a maximum bonus of $900,000. Pursuant to the December 6, 2000 amendment, to the extent Mr. Westerman's bonus exceeds $400,000 in 2001 and each succeeding year, such excess amount shall be deducted from the principal balance of his retirement account at the time the bonus is paid. Mr. Westerman received an incentive bonus of $900,000 for 2001, $500,000 of which was deducted from the principal balance of his retirement account resulting in a net bonus of $400,000. The employment agreement provides that the Company fund a retirement account for Mr. Westerman. Pursuant to the employment agreement, an aggregate of $6,812,000 had been credited to the retirement account from its inception through December 31, 2001. Under the employment agreement, each year that Mr. Westerman continues to be employed, an amount equal to Mr. Westerman's base salary for that year was credited to the account on January 1 of that year. Pursuant to the December 6, 2000, amendment to Mr. Westerman's employment agreement, the January 1, 2001 contribution was the final principal contribution to the retirement account. As of December 31, 2001, none of this account has been funded. The Company retains beneficial ownership of all monies in the retirement account, which monies are earmarked to pay Mr. Westerman's retirement benefits. However, upon (i) the vote of a majority of the outstanding shares of Common Stock approving a "Change of Control" (as defined below), (ii) the occurrence of a Change of Control without Mr. Westerman's consent, (iii) a breach by the Company of a material term of the employment agreement or (iv) the expiration or earlier termination of the term of the employment agreement for any reason other than cause, Mr. Westerman has the right to require the Company to establish a "Rabbi Trust" for the benefit of Mr. Westerman. He also has the right to require the Company to fund such trust with an amount of cash equal to the amount then credited to the retirement account, including any amount to be credited to the retirement account upon a Change of Control. F-27 On February 5, 1998, the stockholders of the Company by a majority vote approved the Agreement and the Plan of Merger with R&E Gaming Corp. and its wholly-owned subsidiary Riviera Acquisition Sub, Inc. Such stockholder approval constituted a Change of Control. On March 5, 1998, subsequent to this Change of Control, Mr. Westerman exercised his right to require the Company to establish and fund a Rabbi Trust for his benefit. On March 20, 1998, Mr. Westerman and the Company entered into an agreement whereby Mr. Westerman waived his right to have the Company fund the Rabbi Trust in exchange for the Company agreeing to fund such Rabbi Trust within five business days after notice from Mr. Westerman. The merger agreement was subsequently terminated and litigation ensued. In the event that Mr. Westerman is no longer employed by the Company (except for termination for cause, in which case Mr. Westerman would forfeit all rights to monies in the retirement account), Mr. Westerman will be entitled to receive the amount in the retirement account (principal and current interest) in 20 equal quarterly installments as of the date he ceases to be employed by the Company. In the event that Mr. Westerman's Rabbi Trust has not yet been funded, the balance of principal and interest of the retirement account shall be paid directly to Mr. Westerman upon his retirement, termination (except for cause) or upon a change in control of the Company. As of December 31, 2001, none of the Trust has been funded. Pursuant to the employment agreement, the retirement account was credited quarterly with interest and shall be credited with additional amounts on the first day of each succeeding calendar quarter equal to the product of (i) the Company's average borrowing cost for the immediately preceding fiscal year, as determined by the Company's chief financial officer and (ii) the average outstanding balance in the retirement account during the preceding calendar quarter. This interest continues to accrue pursuant to the December 6, 2000 amendment. Total interest earned was $779,000 for 2001, $647,418 for 2000 and $487,729 for 1999. In the event the Rabbi Trust has been funded, upon Mr. Westerman's death, an amount equal to the applicable federal estate tax on the retirement account will be pre-paid prior to the date or dates such taxes are due. Mr. Westerman's employment agreement provides (a) that the sum of Mr. Westerman's base salary, bonus, and credits to his Retirement Account in any one year shall not exceed that which would have been payable under his previous employment agreement with the Company, and (b) that Mr. Westerman shall instruct the Company of any reductions in base salary, bonus, and credits to his retirement account necessary to comply with this limitation. The Company determined that for the year 1999, a reduction of $467,000 was necessary to comply with this provision. For 1998 the Company determined a reduction of $194,000 was necessary to comply with this provision. Prior to December 31, 1999, and December 31, 1998, Mr. Westerman instructed the Company that this be applied to reduce the amount to be credited to his retirement account from $600,000 to $133,000 and to $406,000 respectively. No such reductions under this provision were required in 2001 or 2000. Incentive Plan - The Company has an incentive compensation plan, covering employees of the Company who, in the opinion of the Chairman of the Board, either serve in key executive, administrative, professional, or technical capacities with the Company, or other employees who also have made a significant contribution to the successful and profitable operation of the Company. The amount of the bonus is based on operating earnings before depreciation, amortization, interest expense, provision for income taxes, extraordinary losses and gains, any provisions or payments made pursuant F-28 to the plan, and any provisions or payments made pursuant to the incentive compensation of the Chairman and Chief Executive Officer. During the years ended December 31, 2001, 2000, and 1999, the Company recorded accrued bonuses of $1,873,939, $2,258,500 and $1,871,632, respectively, based upon the above incentive compensation plan and the incentive compensation plan established for the Chairman of the Board under his employment agreement. Pension Plan Contributions - The Company contributes to multi-employer pension plans under various union agreements to which the Company is a party. Contributions, based on wages paid to covered employees, were approximately $1,672,000, $1,688,000 and $1,637,000, for the years ended December 31, 2001, 2000, and 1999, respectively. These contributions were for approximately 813 employees, including food and beverage employees, room department employees, carpenters, engineers, stagehands, electricians, painters, and teamsters. The Company's share of any unfunded liability related to multi-employer plans, if any, is not determinable. Profit Sharing and 401(k) Plans - On June 30, 1993, the Company and ROC assumed the combined profit sharing and 401(k) plans of Riviera, Inc. (the "Profit Sharing and 401(k) Plans") and the Company and ROC have continued the Profit Sharing and 401(k) Plans after June 30, 1993. The Company and ROC have amended the Adoption Agreement to provide that all current employees of Riviera Las Vegas who were employed on April 1, 1992, who were at least 21 years of age and who are not covered by a collective bargaining agreement are immediately eligible to participate in the Profit Sharing and 401(k) Plans. The amendment provides further that all current employees who were employed by Riviera Las Vegas after April 1, 1992, who are at least 21 years of age and who are not covered by a collective bargaining agreement are eligible to participate after one year of service at the Riviera Las Vegas. The Company has identical plans for its 100% indirectly owned subsidiary, Riviera Black Hawk, Inc., which operates its casino in Black Hawk, Colorado. Employees hired prior to June 30, 2000, who were at least 21 years of age and who were not covered by a collective bargaining agreement were immediately eligible to participate in the Profit Sharing and 401(k) Plans. After June 30, 2000, all new employees who are at least 21 years of age and who are not covered by a collective bargaining agreement are eligible to participate after one year of service at Riviera Black Hawk. The Company may make a contribution to the 401(k) component of the Plan in an amount not to exceed twenty-five percent (25%) of the first eight percent (8%) of each participant's compensation, which is contributed as a salary deferral. The Company also paid administrative costs of the Plan of $24,343, $25,000 and $21,851 for each of the three years ending December 31, 2001. The profit sharing component of the Profit Sharing and 401(k) Plans provides that the Company will make a contribution equal to 1% of each eligible employee's annual compensation if a prescribed annual operating earnings target is attained and an additional 1% thereof for each $2 million by which operating earnings is exceeded, up to a maximum of 3% thereof. The Company may elect not to contribute to the Profit Sharing and 401(k) Plans if it notifies its employees by January of the Profit Sharing and 401(k) Plans year. An employee will become vested in the Company's contributions based on the employee's years of service. An employee will receive a year of vesting service for each plan year in which the employee completed 1,000 hours of service. Vesting credit will be allocated in 20% increments for each year of service commencing with the attainment of two years of service. An employee will be fully vested following the completion of six years of service. F-29 Effective January 1, 2000, the Company suspended contributions to the Profit Sharing Plan and substituted contributions to an Employee Stock Ownership Plan ("ESOP"), (see "Employee Stock Ownership Plan", directly below). Employee Stock Ownership Plan - On October 2, 2000, the Board of Directors adopted an Employee Stock Ownership Plan ("ESOP"). The ESOP was established effective January 1, 2000 and replaces the profit sharing contribution component of the Profit Sharing and 401(k) Plans. The 401(k) component remains unchanged. The ESOP provides that all employees of Riviera Las Vegas and Riviera Black Hawk employed in the Plan Year who had completed a minimum of one thousand hours of service in that Plan Year, were employed through December 31 of that Plan Year, were at least 21 years of age and were not covered by a collective bargaining agreement are eligible to participate in the ESOP. The ESOP provides that the Company will make a contribution to the ESOP's participants of its Las Vegas and Black Hawk properties relative to the economic performance of each property. For Riviera Las Vegas, the Company will make a contribution equal to 1% of each eligible employee's annual compensation if a prescribed annual operating earnings target is attained and an additional 1% thereof for each $2 million by which operating earnings is exceeded, up to a maximum of 4% for 2000 and 5% thereafter. For Riviera Black Hawk, the Company will make a contribution equal to 1% of each eligible employee's annual compensation if a prescribed annual operating earnings target is attained and an additional 1% thereof for each $1 million by which operating earnings is exceeded, up to a maximum of 4% for 2000 and 5% thereafter. Under the ESOP, the Company contribution will be made in cash which will be used to buy Company common stock. Deferred Compensation Plan - On October 2, 2000, the Board of Directors adopted a Deferred Compensation Plan (the "Plan"). The purpose of the Plan is to provide eligible employees of the Company with the opportunity to defer the receipt of cash compensation. Participation in the non-qualified Plan is limited to highly compensated employees who receive compensation of at least $100,000. The deferred funds are maintained on the Company books as unfunded liabilities. All elections to defer the receipt of compensation must be made no later than the December 1st preceding the Plan Year to which the election relates and are irrevocable for the duration of that Plan Year. Six Company executives are currently participating in the Plan. Restricted Stock Plan - On October 2, 2000, the Board of Directors adopted a Restricted Stock Plan to provide incentives which will attract and retain highly competent persons as officers and key employees by providing them opportunities to receive restricted shares of the Company's Common Stock. Participants will consist of such officers and key employees of the Company as the Company's Compensation Committee determines to be significantly responsible for the success and future growth and profitability of the Company. Awards of restricted stock are subject to such terms and conditions as the Company determines to be appropriate at the time of the grant, including restrictions on the sale or other disposition of such shares and the provisions for the forfeiture of such shares for partial or no consideration upon termination of the participant's employment within specified periods or under certain conditions. Mr. Robert Vannucci and Mr. Jerome P. Grippe, President and Executive Vice President, respectively, of the Company's wholly-owned subsidiary, Riviera Operating Corporation, are currently the only participants in the Restricted Stock Plan. F-30 Key Employee Retention Plan - As a result of the scheduled openings of several new Las Vegas Strip properties in 1998, 1999 and 2000, an estimated 38,000 jobs had to be filled on the Las Vegas Strip, including approximately 5,000 supervisory positions. Because of the Riviera's performance and reputation, its employees were prime candidates to fill these positions. In the third quarter of 1998, management instituted an employee retention plan which covers approximately 85 executive, supervisory and technical support positions and includes a combination of employment contracts, stay put agreements, bonus arrangements and salary adjustments. Stay Bonus Agreements - Approximately 85 executive officers and significant employees (excluding Mr. Westerman) of ROC were party to agreements pursuant to which each such employee was entitled to receive a "stay bonus" (varying amounts) if the employee was discharged without cause (as defined in the stay bonus agreements), or continued to be employed by the Company on each of January 1, 2000, January 1, 2001 and June 30, 2001. The total amount that was payable under all such agreements was approximately $2.2 million, of which approximately $610,000 was paid in January, 2000, $1,068,000 was paid in January, 2001 and $462,500 was paid on June 30, 2001. Termination Fee Agreements - Approximately 85 executive officers and significant employees (excluding Mr. Westerman) of ROC have termination fee agreements effective through December 2001, pursuant to which each of such employees will be entitled to receive (1) either six months' or one year's base salary if their employment with the Company is terminated, without cause, within 12 or 24 months of a change of control of the Company or ROC; and (2) group health insurance for periods of either one or two years. The base salary payments are payable in biweekly installments subject to the employee's duty to mitigate by using his or her best efforts to find employment. The estimated total amount payable under all such agreements was approximately $5 million including $1.2 million in benefits, as of December 31, 2001. 15. STOCK OPTION PLANS Stock Compensation Plans - At December 31, 2001, the Company has three stock-based compensation plans, which are described below. The Company accounts for the fair value of its grants under those plans in accordance with APB 25. The compensation cost that has been charged against income for those plans was $142,977, $250,988, and $357,118 for 2001, 2000 and 1999, respectively. Under the 1993 Employee Stock Option Plan, the Company may grant options to its employees for up to one million shares of common stock. Under the 1996 Non-Qualified Stock Option Plan, the Company may grant options to non-employee directors for up to 50,000 shares of common stock. Under the 1996 Stock Compensation Plan, the Company may grant options to Directors serving on the Compensation Committee for up to 50,000 shares of common stock. Under these plans, the exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is 10 years (5 years in the case of an incentive option granted to a stockholder owning more than 10 percent of the common stock). Under the 1993 plan, options vest 25 percent on the date of grant and 25 percent each subsequent year. Under the 1996 plans, options vest over 5 years. Option Surrenders - On November 26, 1996, 414,000 stock options were granted to eighteen (18) Riviera executives at an option price of $13.625 per share, 320,000 of which were granted to Mr. Westerman. Two (2) of these executives' options totaling 11,000 shares have since been cancelled due to those executives leaving the Company, resulting in a balance of 403,000 options at $13.625 per share held by sixteen (16) Company executives. These options were vested in their entirety for these sixteen (16) executives. F-31 On January 16, 2001, the Board approved a Stock Option Surrender Plan (the "Surrender Plan"). Pursuant to the Surrender Plan, each executive could surrender all or any portion of his/her $13.625 options. Further, the Company may, but is not obligated, grant new options in an amount no less than the shares surrendered, to be issued no sooner than six (6) months and a day after the surrender of the $13.625 options. Any new options granted will be at the price of the Company's common stock on the date of grant and are subject to the vesting requirements of the Company's Employee Stock Option Plan. All sixteen (16) Company executives surrendered the entire balance of 403,000 of the $13.625 options effective January 31, 2001. The activity of the Stock Option Plan and the Non-Qualified Stock Option Plan is as follows:
Weighted- Average Per Share Exercise Stock Option Plan Shares Price ---------------- ------------- Outstanding at January 1, 2000 619,000 $ 10.75 Grants 97,000 $ 7.69 Cancelled (4,000) $ 7.69 --------- Outstanding at December 31, 2000 712,000 $ 10.35 Grants 170,500 $ 6.00 Cancelled (423,000) $ 13.28 --------- Outstanding at December 31, 2001 459,500 $ 6.04 ========= Non-Qualified Stock Option Plan Outstanding at January 1, 2000 14,000 $ 8.70 Automatic grant to directors 6,000 $ 7.75 Cancelled (6,000) $ 7.67 --------- Outstanding at December 31, 2000 14,000 $ 9.09 Automatic grant to directors 6,000 $ 6.55 Cancelled (4,000) $ 13.37 --------- Outstanding at December 31, 2001 16,000 $ 7.07 =========
Options Outstanding Options Exercisable ----------------------------------------- ------------------------ Number Weighted- Number Outstanding Average Weighted- Exercisable Weighted- at Remaining Average at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Prices 2001 Life Price 2001 Price $ 4.00 to $ 6.00 285,500 1.4 years $4.18 44,000 $4.32 $ 6.55 to $ 9.00 190,000 1.4 years $7.26 44,000 $7.13
F-32 No compensation cost has been recognized for unexercised options remaining in the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of grant for awards consistent with the provisions of SFAS No. 123, the Company's net loss and pro forma net loss per common share and common share equivalent would have been increased to the pro forma amounts indicated below at December 31 (in thousands, except per share amounts):
2001 2000 1999 Net loss - as reported $ (6,407) $ (4,215) $ (2,869) Net loss - pro forma $ (6,550) $ (4,466) $ (3,226) Basic loss per common share - as reported $ (1.79) $ (1.05) $ (0.58) Basic loss per common share - pro forma $ (1.83) $ (1.11) $ (0.65) Diluted loss per common and common share equivalent - as reported $ (1.79) $ (1.05) $ (0.58) Diluted loss per common and common share equivalent - pro forma $ (1.83) $ (1.11) $ (0.65)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000, and 1999, respectively: dividend yield of 0 percent for all years; expected volatility of 44 percent, 60 percent, and 62 percent; risk-free interest rates of 5.00 percent, 5.00 percent, and 5.46 percent; and expected lives of five years for all years. The weighted fair value of options granted in 2001, 2000, and 1999, was $2.34, $3.56 and $4.57, respectively. Due to the fact that the Company's stock option programs vest over many years and additional awards are made each year, the above pro forma numbers are not indicative of the financial impact, had the disclosure provisions of SFAS No. 123 been applicable to all years of previous option grants. The above numbers do not include the effect of options granted prior to 1995. 17. EARNINGS PER SHARE Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted number of common and common equivalent shares outstanding for the period. Options to purchase common stock, whose exercise price was greater than the average market price for the period, have been excluded from the computation of diluted EPS. Such antidilutive options outstanding for the years ended December 31, 2001, 2000, and 1999, were 495,500, 732,000 and 633,000, respectively. F-33 A reconciliation of income and shares for basic and diluted EPS is as follows (amounts in thousands, except per share amounts):
Year Ended 2001 ------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS - Loss available to common stockholders $(6,407) 3,573 $(1.79) Effect of dilutive securities - Options ----------- --------- --------- Diluted EPS - Loss available to common stockholders plus assumed conversions $(6,407) 3,573 $(1.79) =========== ========= ========= Year Ended 2000 ------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS - Loss available to common stockholders $(4,215) 4,013 $(1.05) Effect of dilutive securities - Options ----------- --------- --------- Diluted EPS - Loss available to common stockholders plus assumed conversions $(4,215) 4,013 $(1.05) =========== ========== ========= Year Ended 1999 ------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount Basic EPS - Loss available to common stockholders $(2,869) 4,978 $(0.58) Effect of dilutive securities - Options ----------- --------- --------- Diluted EPS - Loss available to common stockholders plus assumed conversions $(2,869) 4,978 $(0.58) =========== ========== =========
During 2001, 2000, and 1999, the Company purchased 276,528, 257,893 and 4,800 shares of treasury stock on the open market for approximately $1,779,000, $2,093,000 and $22,000, respectively. In addition to the purchase of stock from Paulson as described in Note 12, the Company purchased 81,000 of its shares from SunAmerica at $7.50 per share on October 18, 1999. This transaction reduced SunAmerica's ownership of the Company to under 15 percent. On February 8, 2000, the Company completed a tender offer wherein approximately 590,000 shares of stock were purchased for $7.50 per share. During 2001, the Company completed various tender offers wherein approximately 277,000 shares of stock were purchased at an average price of $6.43 per share. The Company used its cash and cash equivalents to purchase the shares. After giving effect to such share repurchases, the Company had 3,432,632 shares of common stock outstanding. Approximately 118,100 shares of treasury stock are held in the deferred compensation trust at December 31, 2001. F-34 18. SEGMENT DISCLOSURES The Company reviews its operations by its geographic gaming market segments: Riviera Las Vegas and Riviera Black Hawk. Since the management division represents all other revenue, it is also shown. All intersegment revenues have been eliminated.
(In thousands) 2001 2000 1999 Net revenues: Riviera Las Vegas $152,985 $166,037 $156,204 Riviera Black Hawk 49,046 35,261 Riviera Gaming Management 233 1,064 -------- -------- -------- Total net revenues $202,031 $201,531 $157,268 ======== ======== ======== Income (loss) from operations: Riviera Las Vegas $ 9,350 $ 14,910 $ 10,641 Riviera Black Hawk (Loss pertains to preopening expenses in 1999) 7,622 1,881 (595) Riviera Gaming Management (1) 88 1,047 -------- -------- -------- Total income from operations $ 16,971 $ 16,879 $ 11,093 ======== ======== ======== EBITDA: Riviera Las Vegas $ 21,493 $ 29,243 $ 24,631 Riviera Black Hawk 12,722 6,597 1 Riviera Gaming Management (1) 88 1,047 -------- -------- -------- Total EBITDA $ 34,214 $ 35,928 $ 25,679 ======== ======== ======== EBITDA margin (1): Riviera Las Vegas 14.0 % 17.5 % 15.7 % Riviera Black Hawk 25.9 16.6 Riviera Gaming Management 37.8 98.4 -------- -------- -------- Total EBITDA 16.9 % 17.4 % 16.2 % ======== ======== ======== December 31, -------------------------------- 2001 2000 Assets (2): Riviera Las Vegas $132,982 $138,525 Riviera Black Hawk 67,549 68,505 Riviera Gaming Management - - -------- -------- Total assets $200,531 $207,030 ======== ======== (1) Shown as a percentage of corresponding departmental revenue. (2) Assets represent property and equipment and intangible assets, net of accumulated depreciation and amortization.
F-35 EBITDA consists of earnings before interest, income taxes, depreciation and amortization (excluding preopening expense - Black Hawk, Colorado project, and Other, net, which includes expense and insurance recoveries from Paulson Merger and litigation activity in 1999 and 2000.) 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 expenditure, and working capital requirements. Although EBITDA is not necessarily a measure of the Company's ability to fund its cash needs, management believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. The Company's computation of EBITDA may not be comparable to other similarly titled measures of other companies. RIVIERA LAS VEGAS The primary marketing of the Riviera Las Vegas is not aimed toward residents of Las Vegas, Nevada. Significantly all revenues derived from patrons visiting the Riviera Las Vegas are from other parts of the United States and other countries. Revenues for the Riviera Las Vegas from a foreign country or region may exceed 10 percent of all reported segment revenues; however, the Riviera Las Vegas cannot identify such information, based upon the nature of gaming operations. RIVIERA BLACK HAWK The casino in Black Hawk, Colorado, primarily serves the residents of metropolitan Denver, Colorado. As such, management believes that significantly all revenues are derived from within 250 miles of that geographic area. 19. RELATED PARTY TRANSACTIONS Robert R. Barengo, a member of the Board of Directors of the Company, is a former director of American Wagering, Inc. ("AWI") and owns 7 percent of the outstanding stock of AWI, which leases approximately 12,000 square feet of the Riviera Hotel & Casino's casino floor. AWI is the operator of the Riviera Hotel & Casino's sport book operations and has operated under a lease arrangement since before Mr. Barengo was appointed to the board. The lease provides for rental payments based upon the monthly and annual revenues derived by AWIfrom the location. AWI paid aggregate rent to ROC of approximately $144,500, $188,000 and $250,000 in each of the years ended December 31, 2001, 2000, and 1999, respectively. The Company believes that the terms of the lease with AWI are at least as favorable to the Company and ROC as could have been obtained from unaffiliated third parties and are at lease as favorable as terms obtained by other casino hotels in Las Vegas. The Company entered into a letter agreement with Mr. Barengo, a member of the Bar of the State of Nevada, pursuant to which Mr. Barengo has been assisting the Company and its outside counsel in enforcing the Company's rights under the litigation related to the Paulson merger, the Morgens Waterfall litigation, and with related matters. Under such letter agreement, Mr. Barengo received a fee of $10,000 per month for his counseling services. Fees paid under this agreement were $0, $120,000 and $120,000 for the years ended December 31, 2001, 2000, and 1999, respectively. Mr. Barengo became an employee director in January 2001. He and the Company mutually terminated the agreement effective December 31, 2000. F-36 Jeffrey A. Silver, a member of the Board, is a shareholder in the law firm of Gordon & Silver, Ltd. ("Gordon & Silver"). Gordon & Silver has been engaged by the Company for the defense of various personal injury matters since 1993 and for general corporate matters in 2001. From January 1, 2001 through December 31, 2001, the Company paid fees to Gordon & Silver in the amount of $106,000 for the defense of various personal injury claims and handling of corporate matters. As Mr. Silver was not appointed to the Board until February 26, 2001, the fees incurred in 2001 were pursuant to a business relationship established prior to Mr. Silver's Board appointment. Additionally, Mr. Silver does not supervise the attorneys working on Company matters. Although the Company continues to utilize the services of Gordon & Silver, the Company believes that the fee arrangement is at least as favorable to the Company as in previous years. Peninsula Gaming Partners LLC ("PGP") engaged RGM to assist, on an interim basis in 2000, with transitional matters relating to the operations of the Diamond Jo gaming riverboat in Dubuque, Iowa. Such services included assisting in the selection of a new chief operating officer to oversee riverboat casino operations and other matters. RGM earned fees and expenses in the amount of $232,000 for the year ended December 31, 2000. PGP terminated its agreement with RGM in September 2000. Mr. Westerman served as a manager on the board of managers of Peninsula Gaming Partners, LLC until his resignation effective December 31, 2000. The Company believes that the fees were no less favorable than would have been paid in an arm's-length transaction. F-37
RIVIERA HOLDINGS CORPORATION UNAUDITED QUARTERLY FINANCIAL DATA (Amounts in thousands, except per share data) - --------------------------------------------------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 Year Ended December 31, 2001: Net Revenues $ 52,199 $ 54,828 $ 51,045 $ 43,959 Operating Income 5,445 6,282 3,013 2,233 Loss Before Tax Benefit (958) (124) (3,319) (4,246) Net Loss (658) (70) (2,500) (3,179) Loss Per Share, Basic $ (0.18) $ (0.02) $ (0.71) $ (0.92) Loss Per Share, Diluted $ (0.18) $ (0.02) $ (0.71) $ (0.92) Year Ended December 31, 2000: Net Revenues $ 49,699 $ 54,017 $ 51,357 $ 51,714 Operating Income 5,362 5,569 2,431 3,517 Income (Loss) Before Taxes (Benefit) 1,076 (1,051) (3,741) (2,994) Net Income (Loss) 675 (553) (2,358) (1,979) Earnings (Loss) Per Share, Basic $ 0.16 $ (0.14) $ (0.61) $ (0.53) Earnings (Loss) Per Share, Diluted $ 0.15 $ (0.14) $ (0.61) $ (0.53)
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