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UNITED STATES
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
For the fiscal year ended December 31, 2007
OR
[ ]TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES____ NO X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES____ NO X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definitions of "large
accelerated filer," "accelerated filer" and "small reporting company" in Rule
12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X
Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES____ NO X
Based on the closing sale price of the registrant's common stock on the American
Stock Exchange on June 30, 2007, the aggregate market value of the common stock
held by non-affiliates of the registrant was $443,999,838.
As of February 22, 2008 the number of outstanding shares of the registrant's
common stock was 12,456,555.
Documents incorporated by reference: Portions of the registrant's 2008
definitive annual meeting proxy statement on Schedule 14A (to be filed pursuant
to Regulation 14A) are incorporated by reference into Part III of this Form
10-K.
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Page 1 of 59 pages
Exhibit Index Appears on Page 51 hereof.
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
Item 1. Business........................................................4
General ........................................................4
Riviera Las Vegas...............................................4
Riviera Black Hawk..............................................9
Geographical Markets...........................................10
Competition....................................................11
Employees and Labor Relations..................................13
Regulation and Licensing.......................................14
Federal Registration...........................................22
Item 1A. Risk Factors...................................................22
Item 2. Properties.....................................................31
Item 3. Legal Proceedings..............................................32
Item 4. Submission of Matters to a Vote of Security Holders............32
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities..32
Item 6. Selected Financial Data........................................35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................35
Overall Outlook and Recent Developments.....................35
Results of Operations.......................................36
2007 Compared to 2006.......................................36
2006 Compared to 2005.......................................38
Liquidity and Capital Resources.............................39
Critical Accounting Policies................................41
Recently Issued Accounting Standards........................42
Forward-Looking Statements..................................43
Item 7A. Qualitative and Quantitative Disclosure About Market Risk......45
Item 8. Financial Statements and Supplementary Data....................47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................47
Item 9A. Controls and Procedures........................................47
Item 9B. Other Information..............................................49
Item 10. Directors, Executive Officers and Corporate Governance.........49
Item 11. Executive Compensation.........................................52
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................52
Item 13. Certain Relationships and Related Transactions
and Director Independence......................................52
Item 14. Principal Accountant Fees and Services.........................53
Item 15. Exhibits, Financial Statement Schedules...........................53
3
PART I
Item 1. Business
General
Riviera Holdings Corporation, a Nevada corporation (the "Company"), through
its wholly-owned subsidiary, Riviera Operating Corporation, owns and operates
the Riviera Hotel & Casino ("Riviera Las Vegas") located on the Las Vegas
Boulevard in Las Vegas, Nevada. Riviera Las Vegas opened in 1955, and has a
long-standing reputation for delivering traditional Las Vegas-style gaming,
entertainment and other amenities. The Company was incorporated in Nevada on
January 27, 1993.
The Company, through its wholly owned subsidiary, Riviera Black Hawk, Inc.,
owns and operates the Riviera Black Hawk Casino ("Riviera Black Hawk"), a
limited-stakes casino in Black Hawk, Colorado, which opened on February 4, 2000.
The Company determines segments based upon geographic gaming markets and
also reviews corporate expenses separately. The Company has two segments: the
Las Vegas, Nevada market and the Black Hawk, Colorado market. The segment
information can be found in Note 18 of the Notes to the Consolidated Financial
Statements included in this document.
The Company maintains an Internet website at www.rivierahotel.com and makes
available on the website, free of charge, the Company's Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any and
all amendments to such reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the United States Securities and Exchange
Commission (the "SEC"). The Company has included its website address in this
filing only as a textual reference. The information contained on that website is
not incorporated by reference into this Annual Report on Form 10-K.
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 and the
estimated $5.0 billion Echelon construction project on the site of the former
Stardust Hotel & Casino, and just south of the estimated $2.9 billion
Fontainebleau construction project. Riviera Las Vegas targets slot and low to
mid-level table game customers and various convention groups with a focus on
creating repeat customers and increasing our loyalty program membership. Key
elements of this strategy includes offering a value-oriented experience by
providing a variety of hotel rooms, restaurants and entertainment, with
traditional Las Vegas shows, all at reasonable prices.
Gaming
Riviera Las Vegas has approximately 100,000 square feet of casino space.
The casino currently has approximately 915 slot machines and 35 gaming tables,
including blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) Poker,
Three Card Poker, Let It Ride(R), 3-5-7 Poker, Texas Hold'em Bonus Poker and
mini-baccarat. The casino also includes a poker room and a race and sports book,
which is operated by Leroy's, a subsidiary of American Wagering, Inc.
We continually update gaming operations at Riviera Las Vegas 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 players club, through which members receive
special promotions and targeted mailings. New and innovative slot and table
games continue to be introduced and evaluated based on performance and customer
feedback. We devote substantial time and attention to the type, location and
player activity of all of our slot machines. We maintain a capital investment
program for the upgrade of our general casino area, slot machines and related
equipment.
4
Our current marketing programs are directed at mid-level gaming customers
as opposed to high-stakes bettors. Mid-level gaming customers tend to provide us
with a less volatile, more consistent gaming revenue stream. Consistent with our
focus on mid-level gaming customers is our tendency to offer lower table game
limits, stricter credit policies and more emphasis on slot machine play.
During 2007, we continued a number of initiatives at Riviera Las Vegas to
increase slot play, including the upgrade of our entire casino floor, the
completion of our ticket-in ticket-out ("TITO") upgrade to 100% of our slot
machines and the transformation, redevelopment and upgrade of our Penny Town
area into Crazy Leroy's Race and Sports Book, Bar & Cafe. Our slot hosts are
located in a visible and accessible area to improve service and convenience to
our customers. 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
(1) our ongoing slot upgrade program, (2) operation of our player tracking
system, (3) a multi-tiered players club, called Club Riviera, (4) sponsorship of
slot tournaments, and (5) creation of promotional programs.
Hotel
Riviera Las Vegas' hotel is comprised of five towers with 2,075 guest rooms,
including 177 suites, as follows:
Latest
Year Std. Remodel
Tower Description Built Rooms Suites Total Year
North Tower 1955 379 11 390 2004
South Tower 1967 132 30 162 2007
Monte Carlo 1974 216 81 297 2005
San Remo 1977 241 6 247 2007
Monaco 1988 930 49 979 2004
----- ---- -----
Total 1,898 177 2,075
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During 2007, we announced, as part of our $25 million capital improvement
plan, a complete remodel of all of our guest rooms at our Las Vegas property.
Our plan includes upgrades of between $2,500 and $14,500 per guest room and
upgrades to the hotel elevators and corridors, and is expected to be completed
by mid to late 2009.
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
consistent with other properties on the Las Vegas Strip. From 2004 to 2006, the
hotel occupancy rate on the Strip ranged from 91.8% to 93.2%, (based on
available rooms). The average hotel occupancy rate on the Strip through
December 2007, was 94.0% in 2007 according to the Las Vegas Convention and
Visitors Authority (the "LVCVA").
Restaurants
The quality, value and variety of food services are critical to attracting
Las Vegas visitors. Riviera Las Vegas offers six bars, four restaurants and
serves an average of approximately 4,500 meals per day, including banquets and
room service. Riviera Las Vegas last completely remodeled its buffet in 2001,
upgrading the ambiance and food quality, and featuring cuisine from various
countries as well as a carving station. In 2006, Kady's Coffee Shop was
remodeled with new carpet, chairs and flat panel tv's. The following outlines
for each restaurant, the type of service provided and total seating capacity:
5
Name Type Seating Capacity
---- ---- ----------------
Kady's Coffee Shop 290
Kristofer's Steak and Seafood 162
Ristorante Italiano Italian 126
World's Fare Buffet All-you-can-eat 366
---
Total 944
===
In addition, Riviera Las Vegas operates two snack bars and continental
breakfast, and has a fast-food "food court" operated by a third party. The food
court has 200 seats and several fast-food restaurants, including A&W/KFC
Express, Pizza Hut Express(R), Quiznos(R) and La Salsa(R). Riviera Las Vegas has
also contracted with a third party, who owns and operates The Banana Leaf, which
opened in the first quarter of 2007. Banana Leaf serves breakfast, lunch and
dinner, and features Asian cuisine.
Convention Center
Riviera Las Vegas features 160,000 square feet of convention, meeting and
banquet space. The convention center is one of the larger ones 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 322 conventions in 2007. The hotel
currently has over 750,000 convention-related advance bookings of rooms through
2012, consisting of over 386,000 definite bookings and over 371,000 tentative
bookings. In 2007 approximately 34% of the hotel's rooms were occupied for
conventions. Based on current bookings we estimate that 35% of the rooms will be
occupied for conventions in 2008.
The Royal Pavilion portion of the convention center, which opened in
February 1999 and comprises approximately 60,000 square feet of our convention
facility, features convention, meeting and banquet facilities, teleconferencing,
wireless Internet and satellite uplink capability, and 12 skyboxes. The
convention space at the Las Vegas, Venetian and Mandalay convention centers and
others has enabled Las Vegas to attract and book new conventions that may have
had date and exhibit space conflicts in the past. Our flexibility of meeting
space and proximity to the Las Vegas Convention Center continues to position us
to increase our mix of small meetings and conventions, as well as new
multi-hotel conventions booked into the Las Vegas Convention Center.
Entertainment
Riviera Las Vegas has one of the most extensive entertainment programs in
Las Vegas, offering a variety of regularly scheduled shows. We believe
entertainment provides an effective marketing tool to attract our customers.
Riviera Las Vegas' entertainment program includes such well received shows as An
Evening at La Cage(R) (a female impersonation show), Crazy Girls(R) (an adult
revue), and featured comedians at the Riviera Comedy Club as well as a variety
of regularly scheduled shows in our Le Bistro Theater. In addition, a new ice
show entitled "ICE/Direct From Moscow" opened in our Versailles Showroom in
April 2007. 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 following outlines for each entertainment center, the type of service
provided and total seating capacity:
Name Type Seating Capacity
---- ----- ----------------
ICE/Direct
From Moscow Variety 875
La Cage Female Impersonation 575
Crazy Girls Adult Revue 375
Comedy Club Comedy 350
Le Bistro Variety 190
----
2,365
======
6
A majority of our shows are owned and operated by third parties, which
gives us financial flexibility in utilizing our marketing dollars. In most cases
we receive rent, ticket sales commissions, and a number of comp seats for use by
our marketing department.
Future Expansion Possibilities
We continue to explore the possible development of an approximately 60,000
square-foot entertainment complex that would be constructed directly over the
casino, and could contain specialty-themed entertainment that would appeal to
Riviera Las Vegas' main target audience, adults aged 45 to 65. The exit from the
complex would deliver patrons to the casino.
Marketing Strategies-Las Vegas
Our tiered marketing program, Club Riviera, is intended to develop and
retain a loyal following of repeat slot and low to 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 and level of play of our targeted customers.
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 multi-tiered marketing program intended
to develop a loyal customer base which emphasizes (1) providing a high level of
service to our customers to ensure an enjoyable experience while at the Riviera
Las Vegas, (2) focusing marketing efforts and promotional programs on customers
with positive gaming profiles and (3) rewarding loyalty with increased
incentives to our higher-tiered members. We believe our player tracking system
helps us retain customers and use our player data to tailor promotional offers
to the specific tastes and level of play of our targeted customers. All slot and
table players are encouraged to join Club Riviera, which tracks their level of
play and provides us with helpful information and personal preferences. Members
of Club Riviera earn bonus points based upon their level of play, redeemable for
free gifts, complimentary services or bonus credits. We make promotional offers
to qualifying customers through direct mail, telemarketing and e-mail. 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. We use a proprietary database which is linked to our
player tracking system to help identify customers' requirements and preferences,
thereby allowing us 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 all
based on the customer's profile. We use a specialized multi-tiered marketing
approach to attract customers in each of our major markets. We design slot and
table game tournaments and special events for specific levels of play. Utilizing
our proprietary database, our marketing department targets and invites the most
appropriate customers for the customized events. In addition, we host an array
of special events, including slot and table game 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.
7
Provide Extensive Entertainment Options
We also focus on attracting guests through a range of entertainment
options. We have one of the most extensive entertainment programs in Las Vegas
with a variety of regularly scheduled shows and special limited engagement
shows. The shows attract additional gaming revenue as well as provide us rental
and commission revenue.
Attract Walk-In Traffic
We seek to maximize the number of people who patronize the Riviera Las
Vegas but who are not guests in the hotel by capitalizing on Riviera Las Vegas'
prime Las Vegas Strip location, convention center proximity and several popular
in-house productions. Riviera Las Vegas is well situated on the Las Vegas Strip
near Circus Circus, Sahara, Las Vegas Hilton, the Las Vegas Convention Center,
Wynn Las Vegas, the estimated $5.0 billion Echelon project on the site of the
former Stardust and the estimated $2.9 billion Fontainebleau project just to our
north, as well as numerous non-gaming condominium and time-share projects which
are either planned or under construction within walking distance of our casino.
However, recent closures and construction in our immediate area, has caused a
significant reduction in walk-in traffic and may continue to do so for the
foreseeable future. We continue to strive to attract customers from those
facilities that are currently open, as well as capitalize on the visitors in Las
Vegas in general, with the goal of increasing walk-in traffic by (1) the
addition of the 11,000 square foot Leroy's Race & Sports Book in our former
Penny Town area, which was opened in February, 2008 (2) providing a variety of
quality, value-priced entertainment and dining options, and (3) offering the
"$40 for $20" slot promotions.
Focus on Convention Customers
This market consists of two groups: (1) those trade organizations and
groups that hold their events in the banquet and meeting space provided by a
single hotel and (2) those attending city-wide events, usually held at the Las
Vegas Convention Center. We target convention business because it typically
provides patrons willing to pay higher room rates and we are able to provide
certain advance planning benefits, because 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 rates, banquet and function spending habits. We also benefit 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 2007
we derived 34% of our hotel occupancy and 41% of our room revenues from
convention customers and we consider them to be a critical component of our
customer base. We believe that the expansion of Riviera Las Vegas' convention
facility in February 1999, from 100,000 to 160,000 square feet, has accommodated
the growth in the size and number of groups that presently use the facility,
attracted new convention groups and increased the percentage of rooms occupied
by conventioneers.
We have found that our customers also use tour and travel "package" options
to reduce the cost of travel, lodging and entertainment. These packages are
produced by wholesale operators and travel agents and emphasize mid-week stays.
Tour and travel patrons often book at off-peak periods, enabling us to maintain
occupancy rates at the highest levels throughout the year. We have developed
specialized marketing programs and cultivated relationships with wholesale
operators, travel agents and major domestic air carriers to expand this market.
We make an effort to convert many tour and travel customers who meet our target
customer gaming profile into repeat slot customers. While we continue to pursue
the tour and travel market, we have allocated less room inventory to this market
due to the lower room rates. As a result, we are placing more emphasis and
dedicating more rooms to our rated slot customers, which we believe generates
greater revenue.
Internet
The Internet segment of our business increased during 2007. This segment
attracts customers in search of a bargain, those making last-minute travel
arrangements and those who have the confidence in and find it convenient to book
rooms over the Internet. In 2007, our Internet bookings accounted for
approximately 15% of total occupied rooms.
8
Riviera Black Hawk
Business
Riviera Black Hawk opened on February 4, 2000. Located in Black Hawk,
Colorado, approximately 40 miles west of Denver, our casino is the first casino
encountered by visitors arriving from Denver on Highway 119. Our casino features
the fourth largest number of gaming devices in the market with 885 slot machines
and 8 live gaming tables. For Colorado gaming and tax law purposes, each slot
machine or table game is considered one gaming device.
We also offer a variety of non-gaming amenities designed to help
differentiate our casino, including:
o parking spaces for 520 vehicles, of which 92% are covered, with convenient
and free self-park and valet options;
o a 252-seat casual buffet-styled restaurant;
o a delicatessen;
o one casino bar; and
o a ballroom with seating for approximately 300 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, 2007, there were 26 casinos in the Black
Hawk/Central City market, with 11 casinos each offering more than 400 gaming
devices. The Isle of Capri, located across the street from our casino, has 1,375
gaming machines, 18 gaming tables, 1,100 covered parking spaces and 238 hotel
rooms, and it owns and is connected by inside walkways to the Colorado Central
Station, which has 640 gaming machines, 18 gaming tables, 1,200 parking spaces
and 164 hotel rooms.
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 loyalty program that rewards casino play
and repeat visits to the casino with various privileges and amenities such as
free play, logo gift items and invitations to special events, such as parties,
concerts and complimentary accommodations at our Las Vegas property. We have
used the Player's Club promotion in Riviera Las Vegas and have tailored it for
the Black Hawk/Central City market to implement it at Riviera Black Hawk.
"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. We have and continue to
develop specific marketing programs designed to attract these walk-in customers.
We emphasize quality food and beverage amenities with 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.
We rely on database marketing in order to best identify target customer
segments of the population and to tailor our casino's promotions and amenities
to our core group of customers. We use the database to identify and stratify
slot players living primarily in Colorado for appropriate incentives.
Approximately 325,000 of these slot players have been identified as of December
31, 2007. In addition, we promote our casino by advertising in newspapers and on
the radio in the local areas.
9
Geographical Markets
The Las Vegas Market
Las Vegas is one of the largest and fastest growing entertainment markets
in the country. According to the LVCVA, the number of visitors who traveled to
Las Vegas increased to approximately 39.2 million in 2007. Approximately 37.4
million people visited Las Vegas in 2004, 38.6 million in 2005, and 38.9 million
in 2006. Clark County gaming continues to be a strong and growing business.
Clark County gaming revenues were $8.7 billion in 2004, $9.7 billion in 2005,
$10.6 billion in 2006, and $10.9 Billion in 2007. The terrorist attacks of
September 11, 2001 had an adverse effect on the number of visitors traveling to
Las Vegas. Similar events in the future could have an adverse effect on the
number of visitors traveling to Las Vegas
Gaming and tourism are the major attractions of Las Vegas, complemented by
warm weather and the availability of many year-round recreational activities.
Although Las Vegas' principal market is the western region of the United States,
most significantly southern California and Arizona, Las Vegas also serves as a
destination resort for visitors from all over the world. Significant percentages
of visitors to Las Vegas are international visitors.
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 98.4%
from approximately 67,000 at the end of 1989 to 132,947 at the end of 2007,
giving Las Vegas the most hotel and motel rooms of any metropolitan area in the
world. Despite this significant increase in the number of rooms, the Las Vegas
hotel occupancy rate equaled or exceeded 84% each year from 1993 through 2007,
with a hotel occupancy rate of 94.0% in 2007.
We believe that the growth in the Las Vegas market has been enhanced as a
result of: (1) a dedicated program by the LVCVA and major Las Vegas
casino/hotels to promote Las Vegas as a major convention site, (2) the increased
capacity of McCarran International Airport and (3) the introduction of large
themed "must see" destination resorts in Las Vegas. In 1988, approximately 1.7
million people attended conventions in Las Vegas and generated approximately
$1.2 billion of economic impact. The number of convention attendees was up to
approximately 6.2 million in 2007 with an economic impact of $8.4 billion.
During recent years, McCarran International Airport has expanded its
facilities to accommodate the increased number of airlines and passengers, which
it services. The number of passengers traveling through McCarran International
Airport has increased from approximately 22.5 million in 1993 to an estimated
47.7 million in 2007. Work continues on the nearly $4 billion capital additions
planned for McCarran International Airport.
The Black Hawk/Central City Market
Gaming was introduced to the Black Hawk/Central City market in October 1991
following a statewide referendum where Colorado voters approved limited stakes
gaming for three historic mining towns, namely Black Hawk, Central City and
Cripple Creek. Limited stakes gaming is defined as a maximum single bet of
$5.00. Black Hawk and Central City are contiguous cities located approximately
40 miles west of Denver and about 10 miles north of Interstate Highway 70, the
main east-west artery from Denver. Historically, these two gold mining
communities were popular tourist towns. However, since the inception of casino
gaming in October 1991, gaming establishments have displaced many of the former
tourist-related businesses.
The first casino in the Black Hawk/Central City market opened in October
1991, with 13 casinos open by the end of that year. The pace of expansion
increased in 1992 with the number of casinos in the market peaking at 42.
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 is 26 as of December 31, 2007.
The Black Hawk/Central City market primarily caters to "day-trip" customers
from Denver, Boulder, Fort Collins and Golden as well as Cheyenne, Wyoming. The
United States Census Bureau estimates that in 2006 the population of the
Denver-Aurora-Boulder Combined Statistical area was 1.4 million. Since 1992, the
number of gaming devices in the Black Hawk/Central City market has grown
approximately 64.5% from 7,252 in 1992 to 11,932 in 2007. Gaming revenues in the
Black Hawk/Central City market increased by approximately 4.8% in 2007 over
2006.
10
The City of Black Hawk has experienced more significant growth in gaming
revenues than Central City from 1992 through 2004. The popularity of Black Hawk
in comparison to Central City was due primarily to Black Hawk's superior access
to major highways, as patrons had to first pass through Black Hawk to access
Central City from Denver. However, a new road opened in November 2004, which
links Central City directly with Interstate 70, and allows customers to reach
Central City without driving through Black Hawk. As a result of this new access
road, Central City gaming revenues grew by 36% in 2005, 2.7% in 2006 and 7.4% in
2007, as compared to 2.6%, 4.3% and 4.4% growth for Black Hawk in 2005, 2006 and
2007, respectively. Despite the impressive growth experienced by Central City
casinos from 2005 to 2007, gaming revenues in Central City still represent only
12% of the total gaming revenues for the Central City/Black Hawk market.
Although the new road allows customers direct access to Central City, most
customers continue to frequent Black Hawk casinos because of the superior
amenities Black Hawk casinos offer. Due to this superior location, most of the
larger casino operators have focused on building in 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.
Competition
Las Vegas, Nevada
Intense competition exists among companies in the gaming industry, many of
which have significantly greater resources than we do. 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 Riviera Las Vegas.
Las Vegas gaming square footage and room capacity are continuing to grow
and are expected to continue to increase during the next several years.
As of December 31, 2007, there were approximately 48,000 Las Vegas rooms
slated for completion by 2012, including the development or expansion of
existing casino/hotels and timeshare facilities. Current and future expansions,
additions and enhancements to existing properties and construction of new
properties by our competitors could divert business from our facilities. There
can be no assurance that we will compete successfully in the Las Vegas market in
the future.
During 2007, room inventory in Las Vegas increased less than 1%, to
132,947. Room nights occupied increased 1.1%, to approximately 44.0 million. At
the Riviera Las Vegas, room occupancy increased slightly from 92.2% in 2006 to
92.9% in 2007. The average room rate increased by $4.40 or 5.6%, from $78.47 in
2006 to $82.87 in 2007. Revenue per available room ("Rev/Par") increased $4.68
or 6.5%, from $72.37 in 2006 to $77.05 in 2007.
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.
To a lesser extent we also compete with gaming on cruise ships and gaming in
other parts of the world. In addition, certain states have recently legalized or
are considering legalizing casino gaming in specific geographical areas within
those states and internationally. Any future development of casinos, lotteries
or other forms of gaming in other states and internationally, could have a
material adverse effect on our results of operations.
The number of casinos on Native American lands has increased since the
enactment of the Indian Gaming Regulatory Act of 1988. California voters
addressed this issue on March 7, 2000 when they voted in favor of an amendment
to the California Constitution that allows Las Vegas-style gambling on Native
American lands in that state. Additionally, California voters just recently
passed Propositions 94, 95, 96 and 97 which allow two tribes near San Diego to
each increase their slot machine volume from 2,000 slot machines to 7,500 slot
machines and two tribes near Palm Springs to each increase their slot machine
volume from 2,000 slot machines to 5,000 slot machines. While new gaming
jurisdictions generally have not materially impacted Las Vegas, the expansion of
gaming in California poses a more serious threat to the continued growth of Las
Vegas.
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Our current business is highly dependent on gaming in Las Vegas. Riviera
Las Vegas derives a substantial percentage of its business from tourists,
including customers from southern California and the southwestern United States.
Weakness in the economy of southern California has in the past, and could in the
future, adversely affect our financial results. The events of September 11, 2001
had the most serious effect on our financial results. Similar events in the
future could also have a material 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 parking,
hotel rooms and established reputations in the local market. As of December 31,
2007, there were 26 gaming facilities in the Black Hawk/Central City market with
11 casinos each offering more than 400 gaming positions. Additional construction
projects are in progress in 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 is
wholly owned by Isle of Capri and is connected via inside walkways to the Isle
of Capri, is located across the street from our casino and has 640 slot
machines, 18 gaming tables, approximately 1,200 parking spaces and 164 hotel
rooms. The Isle of Capri, one of the most successful casinos in Colorado, is
located directly across the street from our casino and features 1,375 slot
machines, 18 table games, 1,100 parking spaces, and 238 hotel rooms. An
expansion and renovation of Main Street was completed in the second quarter of
2006. As a result of the Main Street expansion, Riviera Black Hawk is the first
property on Main Street accessible to all customers traveling to Black Hawk from
the Denver Metro area via State Route 119. Our parking garage is the first and
most easily accessible parking garage directly from Main Street.
The number of hotel rooms currently in the Black Hawk/Central City market
is 596, with only 5 gaming facilities providing hotel accommodations. These
include Fortune Valley with 118 rooms, Century Casino with 26 rooms, the Lodge
at Black Hawk with 50 rooms, the Isle of Capri with 238 rooms and Colorado
Central Station with 164 rooms. Casinos offering hotel accommodations for
overnight stay have a competitive advantage over our casino. However, we believe
that self-parking is a more effective utilization of our available space
providing hotel accommodations is not a cost-effective use of our capital
resources at this time.
The Ameristar Black Hawk property was re-branded in the Ameristar name on
April 1, 2006, and received significant increased traffic to the property in the
second half of 2006. Ameristar is adding a hotel tower as part of its $260
million capital expansion, with the first phase completed in November 2005,
which included an expansion of the parking garage to 1,550 parking spaces.
Ameristar has approximately 1,600 gaming machines, 12 blackjack tables and 14
live poker tables. Hotel construction has commenced with 536 rooms slated to
open in the first quarter of 2009.
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.
However, there is a new road that opened in November 2004, which links Central
City directly with Interstate 70 and allows customers to reach Central City
without driving through Black Hawk. Although this road allows customers to
directly access Central City, we believe that most customers will continue to
frequent Black Hawk casinos because of the superior amenities Black Hawk casinos
offer. This new road provides additional access to the Black Hawk/Central City
market, which is especially important on weekends when the traditional road
system is overburdened. We believe the new access road is important for the
continued growth of the market. The new access road proved valuable between June
21st and September 13th of 2005 when a major rockslide closed Highway 6, the
major route customers from the Denver area take to the Black Hawk/Central City
market.
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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 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. Voters in the State of Colorado have in the past rejected a
proposal which would have authorized video lottery terminals in five racetracks
in Colorado. However, there is no guarantee that such a proposal or similar one
will not be approved now or in the future and we understand that proponents of
video lottery terminals and/or slot machines at racetrack are again seeking
approval to put a new initiative before the Colorado voters in 2008. If either
of these types of initiatives were to be pursued further in Colorado and gain
the necessary approvals, then our Colorado operations would likely be adversely
affected.
In addition, Colorado enacted a smoking ban in 2006, which at the time
excluded casinos. That smoking ban was subsequently amended to include casinos
effective January 1, 2008. Although we have constructed outdoor smoking areas to
permit smoking in those areas, the amended smoking ban could nonetheless have a
material adverse effect on our long term results of operations.
Pursuant to a license agreement, Riviera Las Vegas licenses the use at
Riviera Black Hawk of all of the trademarks, service marks and logos used by
Riviera Las Vegas. 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, 2007, Riviera Las Vegas had 1,248 full-time equivalent
employees and had collective bargaining contracts with eight unions covering
approximately 700 of such employees, including food and beverage employees,
rooms department employees, carpenters, engineers, stagehands, musicians,
electricians, painters and teamsters. Riviera Las Vegas' agreement with the
Painters Union expires on May 31, 2010. The Carpenters' Union agreement expired
on July 31, 2005, and an initial one-year and subsequent open-ended extensions
were agreed to by us and the Union and in 2007, we and the Carpenters' Union
entered into an agreement that expires on July 31, 2011. Agreements with the
Southern Nevada Culinary and Bartenders Union, covering the majority of our
unionized employees, were renewed in 2007 and expire in 2012. Our agreement with
the Stagehands Union expired in 2007. Negotiations with the Stagehands Union for
a new multiyear agreement commenced in 2007 and are ongoing. Our agreement with
the Teamsters Union expires in 2008 and the Operating Engineers Union and
Electrician Union agreements expire in 2009. Our collective bargaining agreement
with the Musicians Union expired in 1999 and we continue to operate under the
terms of that agreement. Although unions have been active in Las Vegas, Riviera
Las Vegas considers its employee relations to be satisfactory. There can be no
assurance, however, that new agreements will be reached without union action or
on terms satisfactory to Riviera Las Vegas.
Riviera Black Hawk
As of December 31, 2007, Riviera Black Hawk had 233 full-time equivalent
employees, none of whom are covered by collective bargaining agreements. 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.
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Although there are no collective bargaining agreements in Black Hawk
casinos, we became aware in 2006 of organization activity by Local 7 of the
United Food & Commercial Workers International Union. This activity is targeting
casino employees in Black Hawk and Central City. There can be no assurance that
the union will not succeed in its organization effort, and if successful, that
an agreement will be reached without union action or on terms satisfactory to
Riviera Black Hawk.
Regulation and Licensing
Nevada
Nevada Gaming Authorities
The ownership and operation of casino gaming facilities in Nevada are
subject to: (1) The Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act") and (2) 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 "Nevada Board"), the Clark County Business
Department and the Clark County liquor/gaming authorities (collectively, the
"Clark County Board"), all of which are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time and in any
capacity; (2) the establishment and maintenance of responsible accounting
practices and procedures; (3) 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; (4) the prevention of cheating and
fraudulent practices; and (5) 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 operations.
Riviera Operating Corporation is required to be and is licensed by the
Nevada Gaming Authorities (a "Corporate Licensee"). The gaming license held by
Riviera Operating Corporation requires the periodic payment of fees and taxes
and is not transferable. Riviera Operating Corporation is also licensed as a
manufacturer and distributor of gaming devices. Such licenses require the
periodic payment of fees and are not transferable. We are registered by the
Nevada Commission as a publicly traded corporation (a "Registered Corporation")
and have been found suitable to own the stock of Riviera Operating Corporation.
As a Registered Corporation, we are required periodically to submit detailed
financial and operating reports to the Nevada Commission and to furnish any
other information, which the Nevada Commission may require. No person may become
a stockholder of, or receive any percentage of profits from, Riviera Operating
Corporation without first obtaining licenses and approvals from the Nevada
Gaming Authorities. We and Riviera Operating Corporation have obtained, from the
Nevada Gaming Authorities, the various registrations, approvals, permits,
findings of suitability and licenses required in order to engage in gaming
activities and manufacturing and distribution activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us or Riviera Operating
Corporation in order to determine whether such individual is suitable or should
be licensed as a business associate of a gaming licensee. Officers, directors
and certain key employees of Riviera Operating Corporation must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Our officers,
directors and key employees who are actively and directly involved in the gaming
activities of Riviera Operating Corporation may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing for any cause, which they deem reasonable.
A finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all the costs of the investigation. Any change in a corporate position by a
licensed person must be reported to the Nevada Gaming Authorities. 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.
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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 Riviera Operating Corporation or us, we 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 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 violation of the
Nevada Act, at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate our 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
its suitability as a beneficial holder of our voting securities determined if
the Nevada Commission has reason to believe that such ownership would otherwise
be inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of our voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails the
written notice requiring such filing. 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 that has obtained a waiver may, in certain circumstances,
hold up to 19% of our voting securities and maintain its waiver for a limited
period of time. 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 consistent with holding our voting securities for
investment purposes only include: (1) voting on all matters voted on by
stockholders; (2) 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 management, policies or operations; and (3) 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 business entity 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 of stock if the record owner, after
request, fails to identify the beneficial owner. Any stockholder who is found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
stock beyond such period of time 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
15
other relationship with us or Riviera Operating Corporation, we (1) pay that
person any dividend or interest upon voting our securities, (2) allow that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (3) pay remuneration in any form to that person
for services rendered or otherwise, or (4) 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 any holder of our
debt securities to file applications, be investigated and be found suitable to
own such securities, if it has reason to believe that such ownership would be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then we
can be sanctioned (which may include the loss of our approvals) if, without the
prior approval of the Nevada Commission, we (1) pay to the unsuitable person any
dividend, interest, or any distribution whatsoever, (2) recognize any voting
right by such unsuitable person in connection with such securities, (3) pay the
unsuitable person remuneration in any form or (4) 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, 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. On
September 20, 2007, the Nevada Commission granted us prior approval to make
public offerings for a period of two years, subject to certain conditions (the
"Shelf Approval"). The Shelf Approval also applies to any affiliated company
wholly owned by us which is a publicly traded corporation or would thereby
become a publicly traded corporation pursuant to a public offering. The Shelf
Approval may be rescinded for good cause without prior notice upon the issuance
of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf
Approval does not constitute a finding, recommendation or approval by any of the
Nevada Gaming Authorities as to the accuracy or adequacy of the offering
memorandum or the investment merits of the securities. Any representation to the
contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must meet a variety of stringent standards
of the Nevada Board and Nevada Commission prior to assuming control. 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 defensive
tactics affecting Nevada corporate gaming licensees and Registered Corporations
that are affiliated with those operations may be injurious to stable and
productive corporate gaming. The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (1) assure the
financial stability of corporate gaming licensees and their affiliates; (2)
preserve the beneficial aspects of conducting business in the corporate form;
and (3) 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 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.
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License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
county in which Riviera Operating Corporation's operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable monthly, quarterly or annually and are based upon: (1) a percentage of
the gross revenues received; (2) the number of gaming devices operated; or (3)
the number of table games operated. A live entertainment tax is also paid by
casinos where live entertainment is furnished in connection with admission
charges, the serving or selling of food, refreshments or the selling of
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, or
required to be registered, or a person who is under common control with any of
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 such person's 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 such licenses
are revocable and none of them are 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 effect
on our operations.
Colorado
Colorado Gaming and Liquor Regulation
Summary
In general, Riviera Black Hawk, its principal executive officers and those
of Riviera Holdings Corporation, and any Riviera Black Hawk employees who are
involved in Colorado gaming operations are required to be found suitable for
licensure by the Colorado Gaming Commission (the "Colorado Commission").
Colorado also requires that persons owning, directly or indirectly, 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 Commission on
November 18, 1999, and has been renewed each subsequent year.
Background
Pursuant to an amendment to the Colorado Constitution (the "Colorado
Amendment"), limited stakes gaming became lawful in the cities of Central City,
Black Hawk and Cripple Creek on October 1, 1991. Limited stakes gaming means a
maximum single bet of five dollars on slot machines and in the card games of
blackjack and poker.
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Limited stakes gaming is confined to the commercial district of Black Hawk,
as defined by Black Hawk on May 4, 1978. 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 in establishments licensed to sell alcoholic beverages.
Further, the Colorado Limited Gaming Act of 1991 (the "Colorado Act")
provides that, in addition to any applicable license fees, a gaming tax shall be
imposed upon retail gaming licensees (casinos) up to a maximum of 40% of the
adjusted gross proceeds ("AGP") derived from limited stakes gaming. AGP is
generally defined as the total amounts wagered less payouts to players, except
for poker in which AGP means the monies retained by the casino as compensation
(the "rake"). The tax rates are set 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 Colorado
Commission approval has any right to a license or to the granting of the
approval sought. Any license issued or other Colorado Commission approval
granted pursuant to the provisions of the Colorado Act 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,
conduct and operation 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 the following licenses applicable to the
operation of Riviera Black Hawk:
o operator;
o retail gaming;
o support; and
o key employee.
The first two 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 of Gaming Director. The Colorado Commission has broad
discretion to condition, suspend for up to six months, revoke, limit or restrict
a license at any time and also has the authority to impose fines.
An applicant for a gaming license must complete comprehensive application
forms, pay required fees and provide all information required by the Colorado
Commission and the Division of Gaming. Prior to licensure, applicants must
satisfy the Colorado Commission that they are suitable for licensing. Applicants
have the burden of proving their qualifications and must pay the full cost of
any background investigations. There is no limit on the cost of, or the time it
takes to complete, such background investigations.
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Gaming employees must hold either a support or key employee license. Every
large retail gaming licensee, such as Riviera Black Hawk, must have a key
employee licensee on premises and 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. The definition of "ownership interest" for
purposes of the multiple license prohibition, however, has numerous exclusions
based on percentages of ownership interest or voting rights.
A slot machine manufacturer or distributor license is required for all
persons who manufacture, import and distribute slot machines in Colorado. No
manufacturer or distributor of slot machines or associated equipment may
knowingly, without notification being provided to the Colorado Division within
ten days, have any interest in any casino operator, allow any of its officers or
any other person with a substantial interest in such business to have such an
interest, employ any person employed by a casino operator, or allow any casino
operator or any person having a substantial interest therein, to have any
interest in such business.
The Colorado Act and regulations thereunder (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 a 5% or greater interest or
controlling interest in 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,
of any kind, 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 include, among others, those that would violate the
Colorado Act or the Colorado Regulations or that contravene the legislative
purpose of the Colorado Act.
Duties of Licensees
A licensee must keep the Division of Gaming advised of its business
operations including, but not limited to, gaming contracts and leases. All rules
for the conduct of gaming activity pursuant to the Colorado Act or the Colorado
Regulations must be strictly followed.
Licensees, such as Riviera Black Hawk, have a continuing duty to report
immediately to the Division of Gaming the name, date of birth and social
security number of each person who obtains an ownership, financial or equity
interest in the licensee of 5% or greater, who has the ability to control the
licensee, who has the ability to exercise significant influence over the
licensee or who loans any money or other thing of value to the licensee.
Licensees must report to the Division of Gaming all gaming licenses, and all
applications for gaming licenses, in foreign jurisdictions.
With limited exceptions applicable to licensees that are publicly traded
entities, no person may sell, lease, purchase, convey or acquire any interest in
a retail gaming or operator license or business without the prior approval of
the Colorado Commission.
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All agreements, contracts, leases, or arrangements in violation of the
Colorado Amendment, the Colorado Act or the Colorado Regulations are void and
unenforceable.
A licensee must comply with Colorado's Gambling Payment Intercept Act,
which governs the collection of unpaid child support costs on cash winnings from
limited gaming.
Taxes, Fees and Fines
The Colorado Amendment requires each retail gaming licensee to pay in
monthly increments an annual tax of up to 40% of its AGP derived from limited
stakes gaming. Annually during April, May, and June, the Colorado Commission, as
mandated by the Colorado Regulations, conducts rule-making hearings concerning
the gaming tax rate and device fee rate for the subsequent gaming year. The
gaming year begins on July 1st. However, during such hearings rigid adherence to
addressing only specific, designated subjects related to the gaming taxes is not
required, and there is not a limit to the time or practical restriction on the
subject matters which the Colorado Commission may consider in determining the
various tax rates. Currently, the gaming tax is:
o 0.25% 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 City of Black Hawk assesses an annual device fee of $750.00 per device
on all gaming 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 $6.41 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 retail gaming licensees, such as parking, alcoholic beverage licenses and
other municipal taxes and fees. Significant increases in these fees and taxes,
or the imposition of new taxes and fees, may occur.
Violation of the Colorado Act or the Colorado Regulations generally
constitutes a class 1 misdemeanor, except as may be specifically provided
otherwise in the Colorado Act, which may subject the violator to fines or
incarceration or both. A licensee who violates the Colorado Act or Colorado
Regulations or Gambling Payment Intercept Act is subject to suspension of the
license for a period of up to six months, fines or both, or to license
revocation.
Requirements for Publicly Traded Corporations
The Colorado Commission has enacted Rule 4.5, which imposes requirements on
publicly traded corporations holding gaming licenses in Colorado and on gaming
licenses owned directly or indirectly by a publicly traded corporation, whether
through a subsidiary or intermediary company. The term "publicly traded
corporation" includes corporations, firms, limited liability companies, trusts,
partnerships and other forms of business organizations. Such requirements
automatically apply to any ownership interest held by a publicly traded
corporation, holding company or intermediary company thereof, where the
ownership interest directly or indirectly is, or will be upon approval of the
Colorado Commission, 5% or more of the entire licensee. In any event, if the
Colorado Commission determines that a publicly traded corporation, or a
subsidiary, intermediary company or holding company, has the actual ability to
exercise influence over a licensee, regardless of the percentage of ownership
possessed by said entity, the Colorado Commission may require the entity to
comply with the disclosure regulations contained in Rule 4.5.
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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 SEC. Licensed, publicly traded corporations
are also required to send proxy statements to the Division of Gaming within five
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
Act and the Colorado Regulations; limit the rights of persons to transfer voting
interests or securities of licensees except in accordance with the Colorado Act
and the Colorado Regulations; and provide that holders of voting interests or
securities of licensees found unsuitable by the Colorado Commission may, within
60 days of such finding of unsuitability, be required to sell their interests or
securities back to the issuer at the lesser of the cash equivalent of the
holders' investment or the market price as of the date of the finding of
unsuitability. Alternatively, the holders may, within 60 days after the finding
of unsuitability, transfer the voting interests or securities to a suitable
person, as determined by the Colorado Commission. Until the voting interests or
securities are held by suitable persons, the issuer may not pay dividends or
interest, the securities may not be voted, they may not be included in the
voting or securities of the issuer, and the issuer may not pay any remuneration
in any form to the holders of the securities.
Pursuant to Rule 4.5, persons who acquire direct or indirect beneficial
ownership of either (1) 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 provisions, or (2) a 5% or greater 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
(collectively such persons are hereinafter referred to as the "qualifying
persons"), must notify the Division of Gaming within 10 days of such
acquisition, must 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.
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.
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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 one of the various classes of
retail liquor licenses, such gaming licensee, and persons affiliated with that
licensee, are subject to restrictions concerning what other types of liquor
licenses they may hold. An application for an alcoholic beverage license in
Colorado requires notice, posting and a public hearing before the local liquor
licensing authority (e.g., the City of Black Hawk) 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. Such license must be, and has been, renewed annually since
its issuance.
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 2007
have been made.
Item 1A. Risk Factors
An investment in our securities involves a high degree of risk. We operate
in a highly competitive, dynamic and rapidly changing industry that involves
numerous risks and uncertainties. Moreover, our debt instruments impose
restrictions on us that are for the benefit of certain of our creditors, but not
necessarily for our stockholders or us. Anyone who is making an investment
decision regarding our securities should carefully consider the following risk
factors, as well as the other information contained or incorporated by reference
in this report. The risks and uncertainties described below are those that we
currently believe may materially affect our company or your investment. Other
risks and uncertainties that we do not presently consider to be material, or of
which we are not presently aware, may become important factors that adversely
affect our security holders or us in the future. If any of the risks discussed
below actually materialize, then our business, financial condition, operating
results, cash flows and future prospects, or your investment in our securities,
could be materially and adversely affected, resulting in a loss of all or part
of your investment.
Risks Relating To Our Business And Our Capital Structure
We Face Intense Competition In The Two Markets Where We Operate
In Las Vegas, intense competition has resulted from, among other things,
significant increases in new hotel rooms, casino sizes and convention, trade
show and meeting facilities. Our success depends on the success of Riviera Las
Vegas and its ability to attract visitors and to continue operating
successfully. Riviera Las Vegas competes with high-end, middle market and other
casinos resort properties and hotels, including those located on or near the Las
Vegas Strip or in downtown Las Vegas, on the basis of overall atmosphere, range
of amenities, level of service, price, location, entertainment offered, shopping
and restaurant facilities, theme and size. Currently, there are approximately 30
major gaming properties located on or near the Las Vegas Strip, approximately
ten additional major gaming properties in the downtown area and many additional
gaming properties located in other areas of Las Vegas. Companies that have more
than one hotel/casino facility operate many of these properties, and many have
greater name recognition and financial and marketing resources than we do and
market to the same target demographic groups as we do. Furthermore, additional
major hotel/casino openings and significant expansion of existing properties,
containing a large number of hotel rooms and attractions, are expected to occur
in Las Vegas in the coming years, which will put even further pressure on us to
remain competitive.
In Black Hawk/Central City, the primary competitive factors 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, hotel, rooms and established reputations in the local market. Two of
the most successful casinos in Colorado are located across the street from, and
are considerably larger than, Riviera Black Hawk. Three other casinos in our
market offer hotel accommodations as well as gaming facilities, and thereby have
some competitive advantages over us. Also, a road which opened in November 2004
and which enables drivers to bypass Black Hawk on their way to Central City, has
led to significant recent growth in the Central City gaming market and may give
our Central City competitors an advantage over us.
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There have also been efforts in Colorado by Native American tribes to
acquire land to use for construction of a casino that would operate without the
limitations imposed on the Colorado casino industry, and efforts by other
parties to amend the Colorado Constitution to permit installation of slot
machines at five racetracks. Thus far, the Native American casino initiatives in
Colorado have either been rejected or have failed to win support from government
authorities, and in 2003 a race track/slot machine initiative was rejected by
Colorado voters. However, we understand that proponents of video lottery
terminals and/or slot machines at racetrack are again seeking approval to put a
new initiative before the Colorado voters in 2008. If either of these types of
initiatives were to be pursued further in Colorado and gain the necessary
approvals, then our Colorado operations could be adversely affected.
In addition to the competition that we face from our competitors in Las
Vegas and Colorado, we face substantial competition from other companies in the
gaming industry generally, such as land-based casinos, dockside casinos,
riverboat casinos, casinos located on Native American land in California and
elsewhere, and other forms of legalized gambling. If other casinos operate more
successfully, if other existing gaming properties continue to be enhanced or
expanded, or if additional hotels and casinos are established in or around the
locations where we conduct business, we may lose market share.
The number of casinos on Native American lands has increased since
enactment of the Indian Gaming Regulatory Act of 1988. In 2000 California voters
approved an amendment to the California Constitution that allows Las Vegas-style
gaming on Native America lands in that state. Additionally, California voters
just recently passed Propositions 94, 95, 96 and 97 which allow two tribes near
San Diego to each increase their slot machine volume from 2,000 slot machines to
7,500 slot machines and two tribes near Palm Springs to each increase their slot
machine volume from 2,000 slot machines to 5,000 slot machines. While new gaming
jurisdictions generally have not materially impacted Las Vegas, the continued
expansion of gaming in California poses a more serious threat to the continued
growth of Las Vegas.
We also compete, to some extent, with other forms of gaming on both a local
and national level, including state-sponsored lotteries, Internet gaming, on-
and off-track wagering and card parlors.
In particular, the legalization of gaming or the expansion of legalized
gaming in or near any geographic area from which we attract or expect to attract
a significant number of our customers could have a significant adverse effect on
our business, financial condition, results of operations and future prospects.
Increased competition may also require us to make substantial capital
expenditures to maintain or enhance the competitive positions of our two
properties. Because we are highly leveraged, after we satisfy our obligations
under our outstanding indebtedness we might not have sufficient financing to
make such expenditures. If we are unable to make such expenditures, our
competitive position, results of operations and future prospects could be
materially and adversely affected.
Our Company Operates In Only Two Markets, Las Vegas And Black Hawk, Which
Exposes Us To Greater Risks Than Gaming Companies
With More Operating Properties Or A Presence In More Markets
We do not have material assets or operations other than Riviera Las Vegas
and Riviera Black Hawk. Therefore, we are entirely dependent upon these two
properties for our cash flow. This makes us more sensitive to events and
conditions affecting the markets in which we operate, including the following:
o local economic and competitive conditions,
o inaccessibility due to weather conditions, road construction
or closure of primary access routes;
o decline in air passenger traffic due to higher ticket costs or
fears concerning air travel;
o a decline in automobile traffic due to higher gasoline prices;
o changes in state and local laws and regulations, including
those affecting gaming;
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o an increase in the cost of electrical power for Riviera Las
Vegas as a result of, among other things, power shortages
in California or other western states with which Nevada shares
a single regional power grid;
o a decline in the number of visitors to Las Vegas or the number
of Colorado residents who visit Black Hawk; and
o a potential increase in the gaming tax rate in any
jurisdiction in which we operate, specifically in Nevada,
where various initiatives are being pursued to place a
referendum on the November, 2008, ballot to increase gaming
taxes.
Our Significant Indebtedness Could Adversely Affect Our Financial Health And
Prevent Us From Fulfilling Our Obligations
Under Our Outstanding Indebtedness
We have a significant amount of debt, which could have important
consequences to our stockholders and significant effects on our business and our
ability to satisfy our debt obligations. For example, it could:
o increase our vulnerability to adverse economic or industry
conditions or a downturn in our business;
o limit our ability to repay the new credit facility entered
into on June 8, 2007, if we are required to do so as a
result of a change in control of our company or regulatory
requirements;
o result in an event of default if we fail to comply with the
restrictive covenants in our Credit Facility or our
senior secured credit facility, which could result in all
of our indebtedness becoming immediately due and payable
and would permit certain lenders to foreclose on our assets
securing that indebtedness;
o limit our ability to fund or obtain additional financing for
future working capital needs, capital expenditures and
other general financial requirements;
o require us to dedicate a substantial portion of our cash
flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund
working capital needs, capital expenditures, development
projects, acquisitions and other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes
in our business and industry; and
o place us at a disadvantage compared to our competitors that
have less debt.
We Are Dependent On Key Personnel Whom We Might Have Difficulty Replacing,
Due To A Shortage Of Management-Level Personnel In Our Industry And
Market Perceptions About Our Prospects
Our ability to operate successfully is dependent, in part, upon the
continued services of certain of our executive personnel. Our loss of any of
them or our inability to attract or retain key employees in the future could
have a material adverse effect on us. We have an employment agreement with
William L. Westerman, our Chairman of the Board, President and Chief Executive
Officer ("CEO") who has been with us or our predecessor company since 1991. Mr.
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Westerman is employed for calendar year periods which renew automatically unless
he provides 180 days written notice or we provide 90 days written notice of our
respective intention not to renew. Mr. Westerman's contract is also subject to
earlier termination upon the occurrence of certain events. We cannot assure you
that we would find a suitable replacement for Mr. Westerman if he retires or his
employment terminates for any other reason. There is a shortage of skilled
management-level employees in the gaming industry. This shortage, combined with
our relatively limited financial and marketing resources, competitive position
and market perceptions about our future prospects, together with (a) the
termination of our March 7, 2008 announcement, that we had (i) completed our
strategic review process that we commenced in May 2007 when we retained
Jefferies & Company, Inc. as our financial advisor to assist us in exploring a
range of potential strategic and financial alternatives in order to enhance
shareholder value, and (ii) that we would continue to review all opportunities
and consider all proposals that we receive, as well as other possible ways in
which we can maximize shareholder value; would likely add to our difficulties in
finding suitable replacements if we lose the services of our executives or other
key personnel, which in turn might make it more difficult for us to attract and
retain qualified personnel at that high level.
Regulations Issued By Gaming Or Other Governmental Authorities Could Adversely
Affect Our Operations
As owners and operators of gaming facilities, we are subject to extensive
governmental regulation. The ownership, management and operation of gaming
facilities are subject to extensive laws, regulations and ordinances, which are
administered by various federal, state and local government entities and
agencies. The gaming authorities in the jurisdictions in which we operate have
broad authority and discretion to require us and our officers, directors,
managers, employees and certain security holders to obtain various licenses,
registrations, permits, findings of suitability or other approvals. To enforce
applicable gaming regulations, gaming authorities may, among other things,
limit, suspend or revoke the licenses of any gaming entity or individual, and
may levy fines against us or individuals or may cause us to forfeit our assets
for violations of gaming laws or regulations. Any of these actions would have a
material adverse effect on us.
Nevada and Colorado state and local government authorities require us to
obtain gaming licenses and require our officers and key employees to demonstrate
suitability to be involved in gaming operations. Those authorities may limit,
condition, suspend or revoke a license for any cause they deem reasonable. Also,
if we violate any gaming laws or regulations, those authorities may levy
substantial fines against us or the individuals involved in the violations. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition, results of operations and future prospects.
We can not assure you that any new licenses, registrations, findings of
suitability, permits and approvals, including for any proposed expansion of our
properties or our entry into new markets, will be given or that our existing
ones will be renewed when they expire. Any failure to renew or maintain our
licenses or receive new licenses when necessary would have a material adverse
effect on us.
We are subject to a variety of other laws, rules and regulations, including
those pertaining to zoning, environmental matters, construction, land use and
the serving of alcoholic beverages. We also pay substantial taxes and fees in
connection with our operations as a gaming company, which taxes and fees are
subject to increase or other change at any time. Any changes to these laws could
have a material adverse effect on our business, financial condition, results of
operations and future prospects.
Our compliance costs associated with these laws, regulations and licenses
are significant. A change in the laws, regulations and licenses applicable to
our business or a violation of any of them could require us to make material
expenditures or could otherwise materially adversely affect our business,
financial condition, results of operations and future prospects.
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In Black Hawk and in other jurisdictions from which we attract customers,
gaming is subject to local referendum. If the results of a referendum held in a
jurisdiction in which we operate were to restrict gaming in whole or in part or
if the results of a referendum in a nearby non-gaming jurisdiction were to
permit gaming, especially video lottery terminals or slot machines in racetracks
in and around the Denver area, our results of operations could be negatively
impacted.
We Are Subject To Potential Exposure To Environmental Liabilities
Generally, we are subject to various federal, state and local governmental
laws and regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. Failure to comply could result in the
imposition of severe penalties or restrictions on our operations by governmental
agencies or courts. We are not aware of any such exposure at our properties.
Riviera Black Hawk is located within a 400-square mile area that in 1983 was
designated as the Clear Creek Central/City National Priorities List Site Study
Area under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended. Although Riviera Black Hawk is not within any of the
specific areas currently identified for investigation or remediation under that
statute, environmental problems may subsequently be discovered, including in
connection with any future construction on our property. Furthermore,
governmental authorities could broaden their investigations and identify areas
of concern within the site, we could be identified as a "potentially responsible
party" and any related liability could have a material adverse effect on us. We
do not have insurance to cover environmental liabilities, if we incur any.
Energy Price Increases May Adversely Affect Our Costs Of Operations And Our
Revenues
Our casino properties use significant amounts of electricity, natural gas
and other forms of energy. Recent substantial increases in the cost of
electricity in the United States have negatively affected our operating results
and are likely to continue to do so. The extent of the impact is subject to the
magnitude and duration of energy price increases, but this impact could be
material. In addition, energy price increases in cities that constitute a
significant source of customers for our properties could result in a decline in
disposable income of potential customers and a corresponding decrease in
visitation to our properties, which could negatively impact our revenues.
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Our Business, Financial Condition, Results Of Operations And Future Prospects
Are Dependent On Many Factors That Are Beyond Our Control
The economic health of our business is generally affected by a number of
factors that are beyond our control, including:
o decline in tourism and travel due to concerns about homeland security,
terrorism or other destabilizing events;
o decline in the Las Vegas convention business;
o intense competitive conditions in the gaming industry, especially
the possibility of the approval of video lottery terminals and/or
slot machines at racetracks in and around the Denver area, including
the effect of such conditions on the pricing of our games and
products;
o general economic conditions, specifically current credit issues
which have recently arisin, and economic conditions specific to our
primary markets;
o changes in the regulatory regimes affecting our business, including
changes to applicable gaming, employment, environmental or tax
regulations;
o inaccessibility to our property due to construction on adjoining or
nearby properties, streets or walkways;
o substantial increases in the cost of electricity, natural gas and
other forms of energy;
o local conditions in key gaming markets, including seasonal and
weather-related factors;
o increased transportation costs;
o levels of disposable income of casino customers;
o continued increases in health care costs;
o increases in gaming taxes or fees;
o the relative popularity of entertainment alternatives to casino
gaming that compete for the leisure dollar;
o an outbreak or suspicion of an outbreak of an infectious communicable
disease; and
o the smoking ban in Colorado on our Riviera Black Hawk property
which became effective January 1, 2008 and the
possible adoption of additional anti-smoking regulations.
Any of these factors could negatively impact our property or the casino
industry generally, and as a result, our business, financial condition and
results of operations.
We May Incur Losses That Are Not Adequately Covered By Insurance
Insurance may not be available in the future or adequate to cover all loss
or damage to which our business or our assets might be subjected. Since the
terrorist attacks of September 11, 2001, insurance coverage for certain types of
damages or occurrences has diminished substantially and is no longer available
at reasonable commercial rates. The lack of adequate insurance for certain types
or levels of risk could expose us to significant losses if a catastrophe or
lawsuit occurs for which we do not have insurance coverage. Any losses we incur
that are not adequately covered by insurance may decrease our future operating
income, require us to pay the costs of replacing or repairing destroyed property
and reduce the funds available for payment of our debt obligations.
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We Are Subject To Litigation, Which, If Adversely Determined, Could Cause Us
To Incur Substantial Losses
From time to time during the normal course of operating our business, we
are subject to various litigation claims and other legal disputes. Some of the
litigation claims may not be covered under our insurance policies or our
insurance carriers may seek to deny coverage. As a result, we might be required
to incur significant legal fees, which may have a material adverse effect on us.
In addition, because we cannot predict the outcome of any legal action, it is
possible that as a result of litigation, we will be subject to adverse judgments
or settlements that could significantly reduce our earnings or result in losses.
Homeland Security, Terrorism And War Concerns, As Well As Other Factors
Affecting Discretionary Consumer Spending, May Harm
Our Operating Results
The strength and profitability of our business depend on consumer demand
for hotel/casino resorts, gaming in general and the types of amenities we offer.
A general downturn in economic conditions and changes in consumer preferences or
discretionary consumer spending could harm our business. The terrorist attacks
of September 11, 2001, ongoing war activities and concerns about terrorism and
homeland security have had a negative impact on travel and leisure expenditures,
including lodging, gaming (in some jurisdictions) and tourism. We cannot predict
the extent to which those events may continue to affect us, directly or
indirectly, in the future. An extended period of reduced discretionary spending
or disruptions or declines in travel could significantly harm our operations.
In addition to concerns about war, homeland security and terrorism, other
factors affecting discretionary consumer spending, including general or regional
economic conditions, disposable consumer income, fears of recession and consumer
confidence in the economy, may negatively impact our business. Negative changes
in factors affecting discretionary spending could reduce customer demand for the
products and services we offer, thus imposing practical limits on our pricing
and harming our operations.
Risks Relating To Our Common Stock
Our Stock Price Has Been Volatile, Which Could Result In Substantial
Losses For Our Shareholders.
Our common stock is traded on the American Stock Exchange ("AMEX"). Our
stock's average daily trading volume for the 52-week period ended February 22,
2008 was 59,633 shares. The daily closing sale prices of our stock, as reported
by AMEX, have ranged from $16.76 to $39.12 for the 52-week period ended February
22, 2008. The volatility of the trading price of our stock could be due to many
factors including, but not limited to:
. the relatively low trading volume for our stock;
. the effect of our announcement that we had terminated our
strategic process to explore alternatives for maximizing
shareholder value and the effect that fluctuations in our stock
price will have on other parties' willingness to make
a proposal to acquire us;
. requirement in our Articles of Incorporation of an affirmative
vote of 60% of all of our shares entitled to vote in order for
a merger proposal succeed;
. ownership of 19.5% of our outstanding shares by a group which
previously attempted to acquire us, coupled with our 60%
affirmative vote requirement to effectuate a successful merger,
may inhibit other parties from engaging in merger
negotiations with us;
. fluctuations in Las Vegas real estate values, particularly as
they affect property on the Las Vegas Strip;
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. the current credit market;
. quarterly fluctuations in our financial results;
. changes in analysts' estimates of our financial performance or
future prospects;
. announcements of new services or programs;
. additions or departures of key personnel;
. general conditions in our industry and in the financial
markets; and
. a variety of other risk factors including the ones described
elsewhere in this report.
The Volatility Of The Las Vegas Real Estate Market Might Result In A
Substantial Decline In Our Stock Price
Over the past three years, the market value of real estate located on or
near the Las Vegas Strip has increased substantially. Over that same period,
there has been a substantial increase in the trading price of our stock. Our Las
Vegas property, which is located near the northern end of the Las Vegas Strip
and consists of approximately 26 acres, is valued on our balance sheet at its
1993 historical cost of $21 million. We believe that the increase in the value
of real estate on the Las Vegas Strip has been a significant factor in the
increase in our stock price over the past three years. Likewise, we believe that
any future downward trend in those real estate values could cause a significant
drop in the price of our stock.
There Are Limitations On Changes In Control Of Our Company That Could
Reduce Your Ability To Sell Our Shares In Excess Of Current Market Prices
Our current debt which consists of a seven year $225 million term loan
which matures on June 8, 2014 (the "Term Loan") and a $20 million five year
revolving credit facility (the "Revolving Credit Facility" together with the
"Term Loan" the, "New Credit Facility") restricts the ability of anyone to
effect a change in control of our company. If anyone acquires 35% or more of our
outstanding stock, or if other events occur that constitute a change in control
according to our New Credit Facility, then we would have to make a prompt offer
to repay the New Credit Facility. It is unlikely that we would have the funds to
repay the New Credit Facility within the required time frame unless we obtained
the necessary funding as part of the change in control transaction, which adds
significantly to the funding that a buyer would need to acquire our company. Our
New Credit Facility also would require us to obtain the consent of holders of a
majority of the outstanding principal amount of the New Credit Facility in order
for us to be a party to a merger or to sell all or substantially all of our
assets unless, after giving effect to the transaction, we meet certain net worth
or financial ratio tests, which might be difficult or impossible for us to meet.
We entered into a swap agreement "Swap Agreement", in conjunction with our
New Credit Facility, which could require a substantial payment if the New Credit
Facility were to be refinanced and interest rates were below the interest rate
in effect at the time we entered into the Swap Agreement.
Besides our New Credit Facility and Swap Agreement, our articles of
incorporation and bylaws contain provisions that could reduce the likelihood of
a change in control or acquisition of our company. These could limit your
ability to sell your shares at a premium or otherwise affect the price of our
common stock. These provisions:
. limit the voting power of persons who acquire more than 10% of
our outstanding stock without our prior approval.
. permit us to issue up to 60 million shares of common stock;
. permit us to increase the size of our board of directors
and fill the resulting vacancies without a vote by
shareholders; and
29
. limit the persons who may call special meetings of shareholders.
In addition, Nevada law contains provisions governing the acquisition of a
substantial or controlling interest in certain publicly-held Nevada
corporations, including our company. Those laws provide generally that any
person who acquires more than a specified percentage of our outstanding stock
must obtain certain approvals from us before the acquisition or they might be
denied voting rights or the ability to engage in various transactions with us,
unless our disinterested stockholders vote to restore those rights. The
ownership percentage that triggers some of these restrictions is 10%, and
further restrictions can be triggered at the 20%, 33-1/3% or 50.1% ownership
level.
Also, a person that seeks to acquire control must satisfy the licensing
requirements of the Nevada and Colorado gaming authorities. The gaming
authorities may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with a person
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.
Nevada law also provides that we may resist a change or potential change in
control if our board of directors determines that the change is not in the best
interest of our company.
We Have Never Paid Dividends, Do Not Intend To Pay Dividends In The
Foreseeable Future And Cannot Pay Dividends To Any Unsuitable Person
We have never paid dividends on our stock, nor do we anticipate paying
dividends in the foreseeable future. We intend to retain our cash flow or
earnings, if any, to use in our growth and ongoing operations. Also, due to
gaming law considerations, our articles of incorporation prohibit the payment of
dividends to anyone who is deemed an "unsuitable person" or is an affiliate of
an "unsuitable person."
Certain Owners Of Our Stock May Have To File An Application With, And
Be Investigated By, The Nevada And/Or Colorado Gaming Authorities. If
That Owner Is Deemed "Unsuitable," It Could Result In That Shareholder
Loosing Most Of The Attributes Of Being A Stockholder As Well As
Detrimental Effects On US.
Any person who acquires beneficial ownership of more than 10% of our voting
securities must apply to the Nevada Commission for a finding of suitability
within 30 days after the Chairman of the Nevada Board mails a written notice
requiring such application. Under certain circumstances, if an "institutional
investor" (as defined in Nevada gaming regulations) acquires beneficial
ownership of more than 10% but not more than 15% of our voting securities and
holds the securities only for investment purposes, it may apply for a waiver of
such finding of suitability requirement. In addition, any beneficial owner of
our voting securities, regardless of the number of shares owned, may be
required, at the discretion of the Nevada Commission, to apply for a finding of
suitability. A finding of suitability is comparable to licensing, and the
applicant must pay all costs of investigation incurred by the Nevada gaming
authorities in conducting the investigation.
Any such person who fails to apply for a finding of suitability within 30
days after being ordered to do so by the Nevada Commission may be found to be
unsuitable. Any person who is found by the Nevada Commission to be unsuitable to
be a beneficial owner of our voting securities but continues such beneficial
ownership beyond the period of time prescribed by the Nevada Commission may be
guilty of a criminal offense. We will be subject to disciplinary action if,
after we receive notice that a person is unsuitable to be a beneficial owner of
our voting securities or to have any other relationship with us, we:
. pay that person any dividend or interest on our voting securities;
. allow that person to exercise, directly or indirectly, any voting
right conferred through our voting securities held by that person;
. pay that person any remuneration in any form for services rendered or
otherwise; or
30
. fail to pursue all lawful efforts to require that person to relinquish
our voting securities for cash at fair market value.
Colorado requires that persons owning, directly or indirectly, 5% or more
of our stock be certified as suitable for licensure. Persons found unsuitable
by the Colorado Commission may be required immediately to terminate any direct
or indirect beneficial interest in our voting securities. A finding of
unsuitability with respect to any beneficial owner also may jeopardize our
license. The annual renewal of our license may be conditioned upon the
termination of any beneficial interest in our voting securities by unsuitable
persons.
We May Redeem Shares Due To Gaming Law Considerations, Either As
Required By Gaming Authorities Or In Our Discretion
Our articles of incorporation provide that if a gaming authority determines
that any stockholder or its affiliates are unsuitable, or if deemed necessary or
advisable by us for gaming law considerations, we may redeem shares of our stock
that the stockholder or the stockholder's affiliates own or control. The
redemption price will be the amount required by the gaming authority or, if the
gaming authority does not determine the price, the price deemed reasonable by
us. If we determine the redemption price, that price will be capped at the
market price of the shares on the date we give the redemption notice. We may pay
the redemption price in cash, by promissory note, or both, as required by the
applicable gaming authority and, if not so required, as we elect.
We Do Not Meet AMEX's Earnings Or Net Worth Listing Standards
Our common stock is listed on AMEX under the symbol RIV. We do not
currently meet the earnings or net worth standards of AMEX. We have been
informed, however, that according to AMEX policy, AMEX will not normally
consider suspending dealings in or delisting the securities of a company which
is below the earnings and net worth standards if the total market value of that
company's publicly held shares is at least $15 million. Based on the number of
our publicly held shares as of February 21, 2008, our shares must have a
per-share market value of at least $1.50 in order to meet that $15 million
level. However, we cannot be sure that AMEX will continue to follow that policy
or that the price of our shares will continue to enable us to stay at that level
in the future. If our shares were delisted from AMEX, the marketability and
liquidity of our stock could be significantly reduced.
Item 2. Properties
Riviera Las Vegas
Riviera Las Vegas 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 100,000
square feet of casino space, a 160,000 square-foot convention, meeting and
banquet facility, 2,075 hotel rooms (including 177 luxury suites) in five
towers, three restaurants, a buffet, four showrooms, a lounge and approximately
2,300 parking spaces. In addition, executive and other offices for Riviera Las
Vegas are located on the property.
There are approximately 35 food and retail concessions operated under
individual leases with third parties. The leases are for periods from one month
to, including option periods, up to twenty years.
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 spaces for
approximately 520 vehicles (substantially all of which are covered), a 252-seat
buffet, one bar, a banquet room with seating for approximately 300 people and
three outdoor patio areas where patrons can smoke.
The Riviera Las Vegas and Riviera Black Hawk properties are encumbered by
deeds of trust securing our $225 million Term Loan, which mature in June 2014.
Item 3. Legal Proceedings
We are party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
32
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
(a) Our common stock is traded on AMEX. As of February 29, 2008, we had
approximately 165 shareholders of record and individual participants in security
position listings. There are a significantly greater number of shareholders
whose shares are held in street name. Based on information we collected as of
February 29, 2008, we estimate that we have at least 1,400 beneficial holders in
total.
We have never paid dividends on our common stock and do not expect to pay
dividends (cash or otherwise) on our common stock for the foreseeable future.
Our ability to pay dividends is primarily dependent upon receipt of dividends
and distributions from our subsidiaries, which include the operations of Riviera
Las Vegas and Riviera Black Hawk.
We do not currently meet the earnings or net worth listing standards of
AMEX. We have been informed, however, that according to AMEX policy, AMEX will
not normally consider suspending dealings in or delisting the securities of a
company that does not meet the earnings or net worth standards if the company's
publicly held shares have a market value of at least $15 million. However, we
cannot give any assurance that AMEX will continue to follow that policy or that
our share price will continue to enable us to stay at that level in the future.
Based on the number of our publicly held shares as of February 23, 2008, our
share price would have to be at least $1.50 in order for us to reach the $15
million level. If our shares were delisted from AMEX, the marketability and
liquidity of our common stock could be significantly reduced.
The table below sets forth the high and low sale prices by quarter for the
years ended December 31, 2007 and 2006, based on AMEX reported prices by certain
brokers who have had transactions in our common stock during the year:
First Second Third Fourth
Quarter Quarter Quarter Quarter
2007
HIGH $28.29 $39.12 $36.66 $32.03
LOW 18.99 27.05 22.15 26.66
2006
HIGH $16.85 $25.11 $22.52 $ 24.16
LOW 13.95 17.11 19.25 19.23
32
Equity Compensation Plan Information (as of December 31, 2007)
A B C
Plan category Number of securities to Weighted-average exercise Number of securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and future issuance under equity
warrants and rights rights compensation plans (excluding
securities reflected in
column A)
Equity
compensation plans 276,000 $3.93 1,102,000
approved by security
holders
Equity compensation
plans not approved 112,500 N/A 167,472(1)
by security holders(2)
Total 388,500 $3.93 1,269,472
(1) Of the 167,472 shares referenced in column C of the above table,
121,452 are from our Restricted Stock Plan and 46,020 are from our Stock
Compensation Plan for Directors Serving on the Compensation Committee, which are
described in Note 14 of our consolidated financial statements included in this
report. We have a Stock Compensation Plan, under which directors who are members
of the Compensation Committee have the right to receive all or part of their
annual fees in the form of Common Stock having a fair market value equal to the
amount of their fees. Of the 50,000 shares that are allocated to this plan,
46,020 remain available for issuance.
(2) Restricted Stock for employees issued in 2005 which was not approved by
security holders.
33
Comparison of Five-Year Cumulative Total Returns
Performance Graph for
Riviera Holdings Corporation
Produced on 02/13/08 including data to 12/31/2007
The following graph compares the annual change in the cumulative total
return, assuming reinvestment of dividends, on the Company's Common Stock with
the annual change in the cumulative total returns of the NASDAQ Broad Market,
the American Stock Exchange Index (the "AMEX Index"), the New York Stock
Exchange (the "NYSE") and the NASDAQ Amusement and Recreation Services Index
(the "NASDAQ 79xx"), which the Company considers to be its peer industry group.
The graph assumes an investment of $100 on December 31, 2002, in each of the
Common Stock, the stocks comprising the NASDAQ Broad Market, the stocks
comprising the AMEX Index and the stocks comprising the NASDAQ 79xx.
The graph is a Comparison of Cumulative Total Return Among the Company, NYSE/
AMEX/Nasdaq Stock Market (US Companies) and Nasdaq stocks (SIC 7900 - 7999 US
Companies amusement and recreation services) (1).
Riviera NYSE/AMEX/Nasdaq Nasdaq
U.S. Companies (SIC 79xx)
US Amusement Companies
12/31/02 100.0 100.0 100.0
12/31/03 125.2 131.8 141.0
12/31/04 960.6 148.0 178.1
12/31/05 1138.2 157.1 170.3
12/31/06 1677.8 182.2 229.3
12/31/07 2138.9 191.7 222.4
(1) Comprised of companies whose stock is traded on the Nasdaq National Market
and whose standard industrial classification is within 7900-7999. The
company does not necessarily believe that this is an indication of the value
of the Company's stock.
(b) Not Applicable
(c) Not Applicable
34
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
Loss Per Diluted Common Share, and adjusted for three-for-one stock split in
2005):
---------------------- ---------- ----------- ------------ ----------- ----------
2007 2006 2005 2004 2003
---------------------- ---------- ----------- ------------ ----------- ----------
Net Revenue $205,495 $200,994 $202,227 $201,350 $190,159
Net Loss ($18,258) ($335) ($3,999) ($2,086) ($14,453)
Net Loss Per Diluted
Common Share ($1.48) ($0.03) ($0.34) ($0.20) ($1.39)
Total Assets $218,462 $213,682 $211,769 $217,536 $221,538
Total Debt $225,514 $215,004 $215,431 $216,467 $219,625
---------------------- ---------- ----------- ------------ ----------- ----------
The net loss for 2007 was mainly impacted by financing costs totaling
approximately $26.1 million or $2.12 per share, including the loss on the swap
fair value of $13.3 million and the loss on retirement of debt of $12.8 million.
We have entered into an interest rate swap agreement that substantially fixes
the interest rate we pay on $225 million of our Term Loan. We did not meet the
requirements for hedge accounting, and as such we record the change fair value
of the interest rate swap on our balance sheet. This provides the Company with a
stable fixed interest rate of approximately 7.5% for its current debt. However,
the loss on the change in fair value of the interest rate swap is a non-cash
charge, which reflects the amount of money the Company would have had to pay at
December 31, 2007, if the Company was to settle the swap agreements at that
time. The continued changes in fair value of this derivative will be recorded
over the life of our term loan and depending on interest rates will result in
significant swings in either non-cash income or non-cash losses for the Company
in any given quarter.
The net loss for 2007 was also impacted by costs totaling approximately
$2.1 million or $0.17 per share, including mergers, acquisitions and development
costs of $600,000, Sarbanes-Oxley related expenses of $540,000 and equity based
compensation expense of $1.0 million. The net loss for 2006 was impacted by
costs totaling approximately $3.0 million or $0.25 per share, including mergers,
acquisitions and development costs of $1.3 million, Sarbanes-Oxley related
expenses of $820,000 and equity based compensation expense of $813,000. The net
loss for 2005 was impacted by costs totaling approximately $3.6 million or $0.30
per share, including Sarbanes-Oxley Act related expenses of $1.2 million,
equity-based compensation expense of $1.6 million and asset impairment
write-down of $777,000.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overall Outlook and Recent Developments
We own and operate Riviera Las Vegas on the Las Vegas Strip in Las Vegas,
Nevada, and Riviera Black Hawk in Black Hawk, Colorado.
Our capital expenditures for Riviera Las Vegas are geared to upgrade the
hotel rooms, gaming product and amenities in sufficient condition to compete for
customers in the convention market and casino market. In November 2007, we began
a process of upgrading our rooms in Las Vegas by featuring new Euro beds and
flat screen TV's. Room rates and slot revenues are the primary factors driving
our operating margins. We use technology to maintain labor costs at a reasonable
level, including kiosks for hotel check-in, slot ticket redemption and slot club
redemptions. In Black Hawk, the $5 maximum bet restricts table games to a
minimum and the area is basically a "locals" slot customer market. Our capital
expenditures in Black Hawk are geared to maintain a competitive casino floor
compared to the market and to provide upgraded Food & Beverage amenities.
35
Our marketing focus in Las Vegas is on using direct marketing efforts to
customers in our database and providing complimentary rooms to our casino
customers based on the level of their play, while reducing the number of rooms
available for our Tour and Travel customers. We also seek to maximize the number
of people who patronize Las Vegas but who are not guests in our hotel by
capitalizing on our prime Las Vegas Strip location, convention center proximity
and several popular entertainment productions. We are well situated on the Las
Vegas Strip near Circus Circus, Las Vegas Hilton, the Las Vegas Convention
Center, Wynn Las Vegas, the planned estimated $5.0 billion Echelon project on
the site of the former Stardust and the estimated $2.9 billion Fontainebleau
project just to our north, as well as numerous non-gaming condominium and
time-share projects which are either planned or under construction within
walking distance of our casino. However, the recent closures of the Stardust,
Frontier and Westward Ho as well as construction in our immediate area, has
caused a significant reduction in walk-in traffic and may continue to do so for
the foreseeable future.
Our marketing focus in Black Hawk is on using direct marketing efforts to
customers in our database and providing exciting events and give-aways to our
loyalty program members.
We completed our formal strategic review process, which we commenced in May
2007 when we retained Jefferies & Company, Inc. as financial advisor to assist
us in exploring a range of potential strategic and financial alternatives in
order to enhance shareholder value. In the course of this process, our financial
advisor thoroughly explored a sale of the entire Company, contacting over
thirty-five potential bidders over several months, including Riv Acquisition
Holdings and its affiliates.
In deciding to terminate the strategic alternative process, we took into
account the uncertainty that would be faced by an potential buyer in attempting
to complete a potential transaction, the deterioration in the credit markets,
the potential costs of terminating the Company's swap agreement due to the
unpredictable drop in interest rates, the ability to obtain shareholder and
regulatory approval of a transaction, the possibility of increased competition
from slot machines at Colorado racetracks and the impact of weak economic
conditions on the Company's business. While the strategic review process did not
result in entering into a transaction to sell the entire Company at the present
time, we have and we will continue to review all opportunities and consider all
proposals that it receives, as well as other possible ways in which the Company
can maximize shareholder value.
We continue to have discussions with the Riv Acquisition Holdings group
regarding a possible sale of the Company, although no agreements have been
entered into related to such a transaction, nor can any assurance be given that
an agreement will be ultimately entered into, or if entered into, on what terms
or price.
Results of Operations
2007 Compared to 2006
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of cash rebates
and promotional allowances. EBITDA from properties is presented on the following
schedule:
(Dollars in thousands) 2007 2006 Incr/(Dec) Incr %
Net Revenues:
Riviera Las Vegas $151,505 $149,202 $2,303 1.5%
Riviera Black Hawk 53,990 51,742 2,248 4.3%
------- -------- ------
Total Net Revenues $205,495 $200,944 $4,551 2.3%
======= ======== =====
Property EBITDA
Riviera Las Vegas $30,166 $28,075 $2,091 7.4%
Riviera Black Hawk 19,133 16,825 2,308 13.7%
------- ------- ------
Property EBITDA $49,299 $44,900 $4,399 9.8%
------- ------- ------
36
Other costs and expenses:
Corporate expenses
Share-based compensation 966 813 153 18.8%
Other corporate expense 4,745 4,644 101 2.2%
Depreciation and amortization 13,116 12,691 425 3.3%
Mergers, acquisitions and development
costs, net 611 1,318 (707) -53.6%
Asset Impairments 72 18 54 300.0%
Loss on retirement of bonds 12,878 - 12,878 NM
Decrease in value of derivative
instruments 13,272 - 13,272 NM
Interest expense, net 21,897 25,751 (3,854) -15.0%
------ ------ ------
67,557 45,235 22,322 49.3%
------ ------ -------
Net loss $(18,258) $(335) $(17,923) -50.5%
======= ====== =======
Property EBITDA Margins (1)
Riviera Las Vegas 19.9% 18.8% 1.1%
Riviera Black Hawk 35.4% 32.5% 2.9%
(1) Property EBITDA consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is presented solely as a supplemental
disclosure because we believe that it is a widely used measure of operating
performance in the gaming industry and a principal basis for valuation of gaming
companies by certain investors. We use property-level EBITDA (EBITDA before
corporate expenses) as the primary measure of operating performance of our
properties, including the evaluation of operating personnel. EBITDA should not
be construed as an alternative to operating income, as an indicator of operating
performance, as an alternative to cash flow from operating activities, as a
measure of liquidity, or as any other measure determined in accordance with
accounting principles generally accepted in the United States of America. We
have significant uses of cash flows, including capital expenditures, interest
payments and debt principal repayments that are not reflected in EBITDA. Also,
other gaming companies that report EBITDA information may calculate EBITDA in a
different manner than we do. (See footnote 18 for reconciliation to net income).
Riviera Las Vegas
Revenues
Net revenues for Riviera Las Vegas increased by approximately $2.3 million,
or 1.5%, from $149.2 million in 2006 to $151.5 million in 2007 primarily due to
increased room revenue of $3.2 million and casino revenue of $475,000 offset by
decreased entertainment revenue of $1.0 million. Room revenues increased $3.2
million, as the average room rate increased $4.40 or 5.6% from $78.47 in 2006 to
$82.87 in 2007 and hotel occupancy increased slightly from 92.2% in 2006 to
92.9% in 2007. Revenue per available room (Rev Par) increased $4.68 from $72.37
to $77.05 or 6.5%. Casino revenue increased as a result of an increase in our
table game drop of $3 million and higher poker revenues.
Property EBITDA
Property EBITDA in Las Vegas increased $2.1 million or 7.4% from $28.1
million in 2006 to $30.2 million in 2007 due to increased hotel and gaming
revenues as described above and effects of decreased casino marketing costs of
$272,000 in our gaming departments.
Riviera Black Hawk
Revenues
Net revenues for Riviera Black Hawk, which are primarily gaming revenues,
increased $2.2 million, or 4.3% from $51.7 million in 2006 to $54.0 million in
2007. The increase is primarily due to an increase in slot revenues as a result
of the increase in hold percentage. The increase is a result of the entire
market's increase in hold percentage primarily from the popularity of lower
denomination slot machines in the market place, which were installed throughout
2006.
37
Property EBITDA
Property EBITDA at Riviera Black Hawk increased $2.3 million or 13.7% from
$16.8 million in 2006 to $19.1 million in 2007 due to increased slot revenues as
described above and holding costs constant for the year.
Consolidated Operations
Net loss increased $18.0 million in 2007 from a loss of $335,000 in 2006 to
a net loss of $18.3 million in 2007 due to an increase in other expenses as a
result of a loss on retirement of debt of $12.9 million and a loss on swap fair
value of $13.3 million (as discussed in item 6) offset by an increase in
operating income and a reduction in cash interest expense of $4.2 million as
a result of our debt refinancing in 2007.
Results of Operations
2006 Compared to 2005
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of cash rebates
and promotional allowances. EBITDA from properties is presented on the following
schedule:
(Dollars in thousands) 2006 2005 Incr/(Dec) Incr %
Net Revenues:
Riviera Las Vegas $149,202 $150.688 $(1,486) -1.0%
Riviera Black Hawk 51,742 51,539 203 0.4%
-------- -------- -------
Total Net Revenues $200,944 $202,227 $(1,283) -0.6%
======= ======== ========
Property EBITDA
Riviera Las Vegas $28,075 $26,789 $1,286 4.8%
Riviera Black Hawk 16,825 17,282 (457) -2.6%
Property EBITDA $44,900 $44,071 $ 829 1.9%
Other costs and expenses:
Corporate expenses
Share-based compensation 813 1,627 (814) -50.0%
Other corporate expense 4,644 5,278 (634) -12.0%
Depreciation and amortization 12,691 14,065 (1,374) -9.8%
Mergers, acquisitions and
development costs, net 1,318 (65) 1,253
Asset Impairments 18 777 (759)
Interest expense, net 25,751 26,388 (637) -2.4%
------- ------ -----
45,235 48,070 (2,835) -5.9%
------- ------- -----
Net loss $ (335) $(3,999) $ 3,664 91.6%
======== ======== ======
Property EBITDA Margins (1)
Riviera Las Vegas 18.8% 17.8% 1.0%
Riviera Black Hawk 32.5% 33.5% -1.0%
(1) Property EBITDA margins represent property EBITDA as a percentage of net
revenues by property.
38
Riviera Las Vegas
Revenues
Net revenues for Riviera Las Vegas decreased by approximately $1.5 million,
or 1.0%, from $150.7 million in 2005 to $149.2 million in 2006 primarily due to
decreased entertainment and other revenue. Poker was reestablished in 2005 and
continued to show growth in 2006. Entertainment revenues decreased by
approximately $3.7 million, or 21.2%, from $17.4 million during 2005 to $13.7
million during 2006 due to the closure of our Splash show in the main showroom
in September 2006 and reduced covers in our other shows. We are in negotiation
for a replacement show and the showroom should reopen sometime in mid 2007.
Other revenues decreased $1.8 million as a result of the outsourcing of our gift
shops to ABC Stores in February 2006. Slot revenues increased $2.4 million from
$45.0 million in 2005 to $47.4 million in 2006 as a result of increased volume
and the increase in hold percentage. Poker revenues increased from $652,000 in
2005 to $1.2 million in 2006 and offset the decrease in table games revenue,
resulting from lower volume and a lower hold percentage in 2006. Room revenues
increased $4.7 million, as the average room rate increased $6.63 or 9.2% from
$71.87 to $78.47 and hotel occupancy decreased slightly from 92.6% in 2005 to
92.2% in 2006. Revenue per available room (Rev Par) increased $5.86 from $66.51
to $72.37 or 8.8%. The increase was due to a 11.1% increase in convention room
revenue, which made up 41.4% of total room revenue.
Property EBITDA
Property EBITDA in Las Vegas increased $1.3 million or 4.9% from $26.8
million in 2005 to $28.1 million in 2007 due to increased hotel and gaming
revenues as described above and effects of increased spending of casino
marketing and other expenses in the gaming departments due to increased
promotional costs for our 50th anniversary celebration and the free slot play
program in 2005, which were not profitable when compared to current promotions.
Riviera Black Hawk
Revenues
Net revenues for Riviera Black Hawk, which are primarily gaming revenues,
increased $203,000, or 0.4% from $51.5 million in 2005 to $51.7 million in 2006.
Revenues in 2005 were negatively impacted by a rockslide that closed a major
access road to the market for three months and by other road projects throughout
the year. Revenues in 2006 were negatively impacted by weather conditions in
December 2006, including a large snowfall which caused the major roads to be
closed for approximately five days and by increased competition in the region
with expansions and new property openings during 2006.
Property EBITDA
Property EBITDA at Riviera Black Hawk decreased $457,000 from $17.3 million
in 2006 to $16.8 million in 2007 due mainly to higher payroll and benefits cost
in G&A expenses.
Consolidated Operations
Net loss was $335,000 in 2006 down $3.6 million from a net loss of $3.9
million in 2005 due to an increase in operating income and reduced interest
expense.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2007 increased $3.5 million from
December 31, 2006 to $28.8 million. Cash balances include amounts that may be
required to fund our CEO's pension obligation with five days notice (See Notes 8
and 13 to the financial statements). Although we are aware of no current
intention of our CEO to require this funding, under certain circumstances we
would have to disburse approximately $2.0 million in a short period, subject to
the provisions of our agreement with him. In addition we have cash of $2.8
million held as a certificate of deposit for the benefit of the State of Nevada
Workers Compensation Division as a requirement of our being self-insured for
Workers Compensation. The cash is held in a one-year certificate of deposit,
which matures in 2008. We do not believe this investment will be required after
it matures in 2008 and as such the investment is held as a current asset.
39
For 2007, our net cash provided by operating activities increased to $19.1
million compared to $14.4 million in 2006 due primarily to an increase in
operating income. Cash flows used in investing activities were $14.9 million in
2007 compared to $9.1 million in 2006 due to an increase in capital
expenditures. Net cash used in financing activities was $675,000 in 2007
compared to $587,000 in 2006. We believe that cash flow from operations,
combined with our $28.8 million of cash on hand and the $20 million available on
our term loan discussed below, will be sufficient to cover our annual debt
service and enable our investment in budgeted capital expenditures of $20.0
million for 2008 which we will use primarily for the room renovation program at
Rivera Las Vegas, the purchase of slot machines in Las Vegas and Black Hawk
and for other contingencies.
On June 8, 2007, we and our Subsidiaries entered into a New Credit
Facility. This New Credit Facility (the "New Credit Facility") includes a $225
million seven-year term loan (the "Term Loan"), and has no amortization for the
first three years, and a one percent amortization for years four through six,
and a full payoff in year seven, in addition to an annual mandatory pay down
during the term of 50% of excess cash flows, as defined. The New Credit Facility
also includes a $20 million five-year revolving credit facility (the "Revolving
Credit Facility") under which we can obtain extensions of credit in the form of
cash loans or standby letters of credit (the "Standby L/Cs"). We are permitted
to prepay the New Credit Facility without premium or penalties except for
payment of any funding losses resulting from prepayment of LIBOR rate loans. The
rate for the Term Loan and Revolving Credit Facility is LIBOR plus 2.0%.
Pursuant to a floating rate to fixed rate Swap Agreement that became effective
June 29, 2007 that we entered into under the New Credit Facility, substantially
the entire Term Loan portion of the New Credit facility, with quarterly
step-downs, bears interest at an effective fixed rate of 7.485% per annum (2.0%
above the LIBOR Rate in effect on the lock-in date of the swap agreement). The
New Credit Facility is guaranteed by the Subsidiaries and is secured by a first
priority lien on substantially all of our assets.
We used substantially all of the proceeds of the Term Loan to discharge our
obligations under the Indenture, dated June 26, 2002 (the "Indenture"), with The
Bank of New York as trustee (the "Trustee"), governing the 11% Notes. On June 8,
2007 we deposited these funds with the Trustee and issued to the Trustee a
notice of redemption of the 11% Notes, which was finalized on July 9, 2007.
We utilize derivative instruments for a substantial portion of our Term Loan to
manage certain interest rate risk.
The interest rate on loans under the Revolving Credit Facility will depend
on whether they are in the form of revolving loans or swingline loans. For each
revolving loan, the interest rate will depend on whether we elect to treat the
loan as an "Alternate Base Rate" loan ("ABR Loan") or a LIBOR Rate loan.
Swing line loans will bear interest at a per annum rate equal to the
Alternative Base Rate plus the Applicable Percentage for revolving loans that
are ABR Loans.
We will also pay fees under the Revolving Credit Facility as follows: (i) a
commitment fee in an amount equal to either .50% or 0.375% (depending on the
Consolidated Leverage Ratio) per annum on the average daily unused amount of the
Revolving Credit Facility; (ii) Standby L/C fees equal to between 2.00% and
1.50% (depending on the Consolidated Leverage Ratio) per annum on the average
daily maximum amount available to be drawn under each Standby L/C issued and
outstanding from the date of issuance to the date of expiration; and (iii) a
Standby L/C facing fee in the amount of 0.25% per annum on the average daily
maximum amount available to be drawn under each Standby L/C. In addition to the
Revolving Credit Facility fees, we will pay an annual administrative fee of
$35,000.
The New Credit Facility contains affirmative and negative covenants
customary for financings of this nature including, but not limited to,
restrictions on our incurrence of other indebtedness.
40
The New Credit Facility contains events of default customary for financings
of this nature including, but not limited to, nonpayment of principal, interest,
fees or other amounts when due; violation of covenants; failure of any
representation or warranty to be true in all material respects; cross-default
and cross-acceleration under our other indebtedness or certain other material
obligations; certain events under federal law governing employee benefit plans;
a "change of control"; dissolution; insolvency; bankruptcy events; material
judgments; uninsured losses; actual or asserted invalidity of the guarantees or
the security documents; and loss of any gaming licenses. Some of these events of
default provide for grace periods and materiality thresholds. For purposes of
these default provisions, a "change in control" includes: a person's acquisition
of beneficial ownership of 35% or more of our stock coupled with a gaming
license and/or approval to direct any of our gaming operations, a change in a
majority of the members of our board of directors other than as a result of
changes supported by our current board members or by successors who did not
stand for election in opposition to our current board, or our failure to
maintain 100% ownership of the Subsidiaries.
Contractual Obligations
The table under "Item 7A. Quantitative and Qualitative Disclosures about
Market Risk" summarizes our contractual obligations and commitments as of
December 31, 2007.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to
adopt accounting policies and to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses and provision for
income taxes. We periodically evaluate our policies, and our estimates and
assumptions related to these policies. We operate in a highly regulated
industry. For Riviera Las Vegas and Riviera Black Hawk we are subject to
regulations governing operating and internal control procedures. The majority of
our casino revenue is in the form of cash, personal checks or gaming chips,
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 might differ materially from these estimates.
We have determined that the following accounting policies and related
estimates are critical to the preparation of our consolidated financial
statements because such estimates are highly uncertain or susceptible to change
so as to present a significant risk of a material impact on our financial
condition or operating performance, and such policies and estimates were
selected from among available alternatives, or require the exercise of
significant management judgment to apply.
Long-lived Assets
We have a significant investment in long-lived property and equipment. We
estimate that the non-discounted future cash flows expected to result from the
use of these assets exceed the current carrying value of these assets. Any
adverse change to the estimate of these non-discounted future cash flows could
necessitate an impairment charge that would adversely affect our operating
results. We estimate useful lives for our assets based on historical experience,
estimates of such classes of assets' commercial lives generally, and the
likelihood of technological obsolescence. Should the actual useful life of a
class of assets differ from the estimated useful life, we would record an
impairment charge or adjust the period over which this asset is depreciated. We
review useful lives, and obsolescence, and we assess commercial viability of
these assets periodically.
41
Deferred Tax Assets
We utilize estimates related to estimated future taxable income in the
application of Statement of Financial Accounting Standards ("SFAS") No. 109 to
the realization of deferred tax assets. Our estimates are based upon operating
results and, to a lesser extent, our budgets for future operating results. The
valuation allowance has been recorded for our net operating loss carry forwards,
excluding our AMT credits, which have indefinite lives.
Allowance for Credit Losses
We maintain an allowance 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 our operating results.
Fair Value of Interest Rate Swap Liability
The fair value of long-term liabilities includes the approximate cost to
settle our interest rate swap instrument at the respective valuation dates, and
is reflected in fair value of interest rate swap liabilities on the balance
sheet. The fair value of the interest rate swap instrument is estimated based
upon current and predictions of future interest rate levels along a yield curve,
the remaining duration of the instrument and other market conditions and
therefore, is subject to significant estimation and a high degree of variability
of fluctuation between periods.
Litigation Cost
We assess our exposures to loss contingencies including legal matters, and
we provide for an exposure if it is judged to be probable and estimable.
However, any accruals made in relation thereto do not include the estimated
costs of defense for any legal services that we have not yet received. If the
actual loss from a contingency exceeds our estimate, our operating results could
be adversely impacted.
Self-insurance Provisions
We are self-insured for various levels of general liability, workers'
compensation, and, through 2007 we were also self-insured for non-union employee
medical insurance coverage. Effective January 1, 2008, we are no longer
self-insured for non-union medical insurance coverage. We maintain reinsurance
coverage for our 2007 self-insurance claims until those claims are resolved.
Insurance claims and provisions include accruals of estimated settlements for
known claims, as well as accrued estimates of incurred but not reported claims.
In estimating these costs, we consider our historical claims experience and make
judgments about the expected levels of costs per claim. Changes in health care
costs, accident frequency and severity and other factors can materially affect
the estimate for these liabilities.
Loyalty Club Program
We offer to our guests the opportunity to earn points redeemable for cash
and complimentary rooms and food and beverage based on their level of gaming
activities while at our properties and an accrual is recorded as points are
earned based upon expected redemption rates.
Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities". SFAS No. 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by SFAS No. 159 permits all
companies to choose to measure eligible items at fair value at specified
election dates. At each subsequent reporting date, a company shall report in
earnings any unrealized gains and losses on items for which the fair value
option has been elected. SFAS No. 159 is effective as of the beginning of a
company's first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the company also elects to apply the provisions of
SFAS No. 157, "Fair Value Measurements" (see below). We are currently evaluating
if we should adopt and what the impact that the adoption of SFAS No. 159 would
have on our consolidated financial statements.
42
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We are
currently evaluating whether to adopt the fair value option under SFAS No. 157
and evaluating what impact such adoption would have on our consolidated
financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and applies to all
tax positions accounted for in accordance with SFAS No. 109. See Note 15,
"Income Taxes," to the accompanying consolidated financial statements for
disclosure regarding the effect of FIN 48 on our consolidated financial
statements.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that term
is defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act. Forward-looking statements include the words "may,"
"would," "could," "likely," "estimate," "intend," "plan," "continue," "believe,"
"expect," "projections" or "anticipate" and similar words and include all
discussions about our ongoing or future plans, objectives or expectations. We do
not guarantee that any of the transactions or events described in this report
will happen as described or that any positive trends referred to in this report
will continue. These forward-looking statements generally relate to our plans,
objectives and expectations for future operations and results and are based upon
what we consider to be reasonable estimates. Although we believe that our
forward-looking statements are reasonable at the present time, we may not
achieve or we may modify our plans, objectives and expectations. You should read
this report completely and with the understanding that actual future results may
be materially different from what we expect. We do not plan to update
forward-looking statements even though our situation or plans may change in the
future, unless applicable law requires us to do so.
Specific factors that might cause our actual results to differ from our
expectations, might cause us to modify our plans or objectives, or might affect
our ability to meet our expectations include, but are not limited to:
o the effect of the termination of our previously announced strategic
process to explore alternatives for maximizing shareholder value and
the possible resulting fluctuations in our stock price that will
affect other parties' willingness to make a proposal to acquire us;
o fluctuations in the value of our real estate, particularly in Las Vegas;
o the availability and adequacy of our cash flow to meet our requirements,
including payment of amounts due under our debt instruments;
43
o our substantial indebtedness, debt service requirements and liquidity
constraints;
o the availability of additional capital to support capital improvements and
development;
o the smoking ban in Colorado on our Riviera Black Hawk property which became
effective on January 1, 2008;
o competition in the gaming industry, including the availability and
success of alternative gaming venues, and other entertainment attractions,
and the approval of an initiative that would allow slot machines in
Colorado race tracks;
o retirement or other loss of our senior officers;
o economic, competitive, demographic, business and other conditions in our
local and regional markets;
o changes or developments in laws, regulations or taxes in the gaming
industry, specifically in Nevada where initiatives have been proposed to
raise the gaming tax;
o actions taken or not taken by third parties, such as our customers,
suppliers and competitors, as well as legislative, regulatory, judicial
and other governmental authorities;
o changes in personnel or compensation, including federal minimum wage
requirements;
o our failure to obtain, delays in obtaining, or the loss of, any licenses,
permits or approvals, including gaming and liquor licenses, or the
limitation, conditioning, suspension or revocation of any such licenses,
permits or approvals, or our failure to obtain an unconditional renewal of
any of our licenses, permits or approvals on a timely basis;
o the loss of any of our casino facilities due to terrorist acts, casualty,
weather, mechanical failure or any extended or extraordinary maintenance
or inspection that may be required;
o other adverse conditions, such as economic downturns, changes in
general customer confidence or spending, increased transportation
costs, travel concerns or weather-related factors, that may adversely
affect the economy in general or the casino industry in particular;
o changes in our business strategy, capital improvements or development
plans;
o the consequences of the war in Iraq and other military conflicts in the
Middle East, concerns about homeland security and any future security
alerts or terrorist attacks such as the attacks that occurred on
September 11, 2001;
o other risk factors discussed elsewhere in this report; and
o a decline in the public acceptance of gaming.
All future written and oral forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these and other risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
44
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of December 31, 2007, we had $225.5 million in borrowings. The
borrowings include $225 million credit facility maturing in 2014, SID Bonds (as
defined below), and capital leases maturing at various dates through 2012. The
equipment lease has fixed interest rate of 5.5%. The $283,000 in a special
improvement district bond offering ("SID Bonds") with the City of Black Hawk
represents our share of the debt on the SID Bonds of $1.2 million is payable
over a ten-year period ending 2010. The SID Bonds bear interest at 5.5%. We are
not susceptible to interest rate risk because our outstanding debt is
substantially at fixed rates. We have one interest rate swap arrangement to
hedge the underlying interest rate risk on a total of $225 million of borrowings
under the Term Loan, which bears interest at LIBOR plus 2.0%. Under this
interest rate swap arrangement, we receive payments at a variable rate of LIBOR
and pay a fixed rate of 5.485% on the $225 million notional amount, which
expires on June 8, 2014. As of December 31, 2007, we had no borrowings
outstanding under our Revolving Credit Facility. As of December 31, 2007, we
have one interest rate swap arrangement with periodic step downs beginning in
2008 which expires on June 8, 2014. Although this interest swap agreement is
highly effective economically in fixing the interest rate on this borrowing
under the Term Loan at approximately 7.485%, changes in fair value of our
interest rate swap for each reporting period are, and will continue to be,
recorded as an increase/(decrease) in swap fair value as the swap does not
qualify for hedge accounting.
45
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Dollars in Thousands) Fair Value
2008 2009 2010 2011 2012 Thereafter Total At 12/31/07
Long -Term Debt All interest rates are fixed
Including Current Portions
Equipment loans and
capital leases-Las Vegas $89 $76 $23 $24 $19 $231 $231
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5%
$225 million Term Loan $1,125 $2,250 $2,250 $219,375 $225,000 $225,000
Average interest rate 7.5% 7.5% 7.5% 7.5%
SID Bonds-Black Hawk,
Colorado casino project $137 $146 $283 $283
Average interest rate 5.5% 5.5%
Total of all Long-Term Debt,
Including Current Portions $226 $222 $1,148 $2,274 $2,269 $219,375 $225,514 $225,514
Other Long - Term Liabilities Including Current Portion
CEO pension plan obligation $1,000 $1,000 $63 $2,063 $2,063
Average interest rate 9.0% 7.5% 7.5%
Interest rate derivatives
Derivative instrument
Pay fixed $222,500 $13,272
Average receivable rate 4.8%
Average payable rate 5.4%
Expected Interest payments $16,920 $16,980 $16,940 $16,800 $16,630
A hypothetical one percent change in interest rate would not have a material
effect on our financial statements, as the interest rate swap we currently have
effectively locks our debt at 7.485%, which is in excess of a one percent
increase of the corresponding amount we would receive under the swap agreement.
Fin 48 requires us to record future unrealized tax payments however, due to
uncertainties surrounding future taxable earnings and future audits related to
our income taxes and the potential utilization of our net operating losses,
we cannot establish a reasonably reliable estimate of the period of future
cash settlements, if any; therefore, we have excluded this amount from the
contractual obligations table above.
46
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the notes to all such
statements and other supplementary data are included in this report beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act
Rules 13a - 15(e) and 15d - 15(e)) that are designed to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our CEO and Chief Financial
Officer ("CFO"), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As of December 31, 2007 we carried out an evaluation, under the supervision
and with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our CEO and CFO concluded that our
disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
Internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) refers to the process designed by, or
under the supervision of, our CEO and CFO, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our management is responsible for establishing and
maintaining adequate internal control over our financial reporting.
We have evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2007. This evaluation was performed using the
internal control evaluation framework developed by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such evaluation, our
management has concluded that, as of such date, our internal control over
financial reporting was effective.
There has been no change in our internal control over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Riviera Holdings Corporation
Las Vegas, NV
We have audited the internal control over financial reporting of Riviera
Holdings Corporation and subsidiaries (the "Company") as of December 31, 2007,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2007, of the Company, and
our report dated March 10, 2008, expressed an unqualified opinion on those
financial statements and includes explanatory paragraphs regarding the Company's
adoption of Financial Accounting Standards Board No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, and
Financial Accounting Standards Board No. 123(R), Share-Based Payment.
/s/ Deloitte & Touche LLP
Las Vegas, NV
March 12, 2008
48
Item 9B. Other Information
Executive Officer Compensation
On March 4, 2008, we amended our employment agreement with Mr. Westerman.
This Third Amendment to Employment Agreement ("Third Amendment") provides, among
other things, that effective January 1, 2008, Mr. Westerman is eligible to
participate in our incentive compensation plan. The Third Amendment also
provides for the payment to Mr. Westerman of a discretionary bonus in the amount
of $300,000 prior to March 15, 2008, for Mr. Westerman's contribution to our
performance in 2007.
On March 4, we also awarded bonuses to our other Executive Officers,
payable prior to March 15, 2008, as follows: (i) Robert Vannucci was awarded a
2007 incentive bonus in the amount of $203, 434; and (ii) Mark Lefever and
Tullio Marchionne were each awarded a 2007 incentive bonus in the amount of
$114,761 and a discretionary bonus in the amount of $35,239.
In addition to the named Executive Officers, Incentive Bonuses totaling
approximately $900,000 were awarded to 113 Riviera Las Vegas and Riviera Black
Hawk participants.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The following table presents information as of February 23, 2008
regarding our directors and the directors of Riviera Operating Corporation
("ROC"), our wholly-owned subsidiary:
Name Age Position
William L. Westerman 76 Our Chairman of the Board, CEO and President;
Chairman of the Board and Chief Executive
Officer of ROC
Jeffrey A. Silver 62 Our and ROC's Director
Paul A. Harvey 70 Our and ROC's Director
Vincent L. DiVito 48 Our and ROC's Director
James N. Land, Jr. 78 Our and ROC's Director
William L. Westerman has been our Chairman of the Board and CEO since
February 1993. Mr. Westerman was a consultant to Riviera, Inc. (our predecessor
company) from July 1, 1991 until he was appointed Chairman of the Board and CEO
of Riviera, Inc. on January 1, 1992. From 1973 to June 30, 1991, Mr. Westerman
was President and CEO of Cellu-Craft Inc., a manufacturer of flexible packaging
primarily for food products, and then had several positions with Alusuisse, a
multi-national aluminum and chemical company, following its acquisition of
Cellu-Craft in 1989.
49
Jeffrey A. Silver has been one of our and ROC's Directors since February
26, 2001. Mr. Silver is a shareholder with the law firm of Gordon & Silver,
Ltd., in Las Vegas, Nevada. He has also been a member of the Audit and
Compliance Committees of Tropicana Resorts, Inc. since June, 2007. Mr. Silver
served as a Chief Deputy District Attorney, Clark County, Nevada from 1972 to
1975 and was a Board Member with the Nevada Gaming Control Board from 1975
through 1978 before engaging in the private practice of law from 1979 to 1981
and 1984 to the present. Mr. Silver was the Chief Operating Officer ("COO") and
General Counsel of the Landmark Hotel & Casino from 1981 to 1983, CEO of the
Riviera, Inc. from 1983 to 1984 and Senior Vice President at Caesars Palace in
1984. Mr. Silver served on the Board of the LVCVA from 1989 to 1992 as
Secretary/Treasurer and also served as trustee. He was a member of the Board of
Directors of the Greater Las Vegas Chamber of Commerce from 1988 to 1995 and in
1988 was its Chairman. Mr. Silver served for four years as a member of the
United States Travel and Tourism Advisory Board. He was President of the
International Association of Gaming Attorneys from 1992 to 1994 and Chairman of
the American Bar Association Section of Gaming Law from 1994 to 1996. Mr. Silver
has been selected as a Gaming and Administrative Law Practitioner by numerous
legal publications, including: "Best Lawyers in the United States,"
"Superlawyers," and "Chambers USA - Americas Leading Lawyers for Business." He
has also received the highest "AV" rating issued by Martindale-Hubbell," a
prominent legal rating service.
Major General Paul A. Harvey USAF (Ret) has been one of our and ROC's
Directors since May 18, 2001. General Harvey is President and Chief Executive
Officer of Pearl River Resort, which is the largest gaming and resort property
in the State of Mississippi. He also acts as a consultant to the gaming, hotel
and resort industry. General Harvey spent 32 years on active duty in the United
States Air Force where he held numerous command positions throughout the United
States, Europe, Africa and the Middle East. He flew 160 combat missions in
Vietnam and Southeast Asia before retiring in 1991 as a command pilot with over
5,000 flying hours. Following retirement, he was an Executive in Residence and
Assistant to the President of William Carey College and taught MBA studies in
management and leadership. General Harvey was the Executive Director of the
Mississippi Gaming Commission from 1993 through 1998 before becoming President
and CEO of Signature Works, Inc., the largest employer of blind and visually
impaired people in the world. In 2000 Signature Works, Inc. merged with LCI,
Inc. His present company, PDH Associates, Inc., provides consulting service to
the gaming, hotel and resort industry. From 1996 through 2002, General Harvey
served on the board of directors of the National Center for Responsible Gaming.
He also serves on the board of directors of Elixir Gaming Technologies, Inc.,
which is headquartered in Las Vegas, Nevada and is an AMEX-listed company, and
on the board of directors of Mikohn Gaming Corporation, d/b/a Progressive
International Corporation, also headquartered in Las Vegas, Nevada and a
publicly reporting company under the Exchange Act. General Harvey was a
Commissioner on the Mississippi Band of Choctaw Indians Athletic and Boxing
Commission from 2002 through 2007.
Vincent L. DiVito was appointed as one of our and ROC's Directors effective
June 14, 2002. Mr. DiVito is President and Chief Financial Officer ("CFO") of
Lonza America, Inc., a global life sciences chemical business headquartered in
Allendale, New Jersey. Lonza America, Inc. is part of Lonza Group, whose stock
is traded on the Swiss Stock Exchange. Prior to September 2000, Mr. DiVito was
the Vice President and CFO of Algroup Wheaton, a global pharmaceutical and
cosmetics packaging company, after having served as the Director of Business
Development. From 1984 to 1990 Mr. DiVito was the Vice President of Miracle
Adhesives Corp. (a division of Pratt & Lambert, an AMEX-listed manufacturer of
paints, coatings and adhesives). He also serves on the board of directors of
Elixir Gaming Technology, Inc., which is headquartered in Las Vegas, Nevada and
is an AMEX-listed company. Prior to 1984, Mr. DiVito spent two years on an audit
team at Ernst & Whinney (now Ernst & Young). Mr. DiVito is a certified public
accountant and certified management accountant.
James N. Land, Jr., is a corporate consultant and was appointed as one of
our and ROC's Directors on April 12, 2004. Mr. Land was first elected a Director
of the Company and ROC on January 21, 1999 and served in that position until May
31, 2002. From 1956 to 1976, Mr. Land was employed by The First Boston
Corporation in various capacities, including Director, Senior Vice President,
Co-Head of Corporate Finance, and head of International Operations. From 1971
through 1999, he served as Director of various companies, including Kaiser
Industries Corporation, Marathon Oil Company, Castle & Cooke, Inc., Manville
Corporation, NWA, Inc., Northwest Airlines, and Raytheon Company.
50
Executive Officers
The following table presents information as of February 23, 2008 regarding
our and ROC's executive officers:
Name Age Position
------------------------ ------ -----------------------------------------------
William L. Westerman 76 Our and ROC's Chairman of the Board and
CEO, and our President
Mark B. Lefever 43 Our and ROC's Treasurer and CFO, Executive
Vice President of Finance of ROC and
President of RBH
Tullio J. Marchionne 53 Our Secretary and General Counsel, and Secretary
and Executive Vice President of ROC
Robert A. Vannucci 60 President and Chief Operating Officer of ROC
For a description of the business experience of William L. Westerman, see
"Directors" above.
Mark Lefever became our and ROC's CFO and Treasurer and ROC's Executive
Vice President of Finance on May 22, 2006 and Riviera Black Hawk's President on
May 15, 2007. From May of 2004 to April 2006, Mr. Lefever was Senior Vice
President and CFO of Resorts International Hotel & Casino, Inc., located in
Atlantic City, New Jersey. From March of 2001 until December 2003, Mr. Lefever
was General Manager and Vice President of 29 Palms Enterprises & Operating
Company for Trump 29 Casino, a California Native American casino located in the
greater Palm Springs area. Prior to that, Mr. Lefever served initially as Vice
President and CFO and later as COO of the Desert Inn Resort & Casino from 1997
through 2000. Mr. Lefever's gaming career began in Tunica, Mississippi as the
Vice President and CFO of Sheraton Casino from 1996 through May of 1997. Prior
to his gaming positions, Mr. Lefever spent 10 years in the audit and business
advisory practice with Arthur Andersen LLC. He is a member of the New Jersey
Society of Certified Public Accountants, and holds a BS degree in Accounting
from Villanova University.
Tullio J. Marchionne became our General Counsel on January 10, 2000, was
appointed as our and ROC's Secretary on February 17, 2000 and was elected Vice
President of ROC on February 26, 2001 and Executive Vice President in June of
2005. Mr. Marchionne was initially employed by Riviera, Inc., in June 1986 as a
casino dealer and served in various capacities including Pit Manager, General
Counsel and Director of Gaming Administration until September 1996, when he was
transferred to the Four Queens Hotel and Casino as Director of Casino Operations
pursuant to the management agreement our subsidiary had with the Four Queens. He
served in that position until May 1997. Mr. Marchionne served as the General
Manager of the Regency Casino Thessaloniki, located in Thessaloniki, Greece,
from June 1997 until December 1997. Mr. Marchionne served as a Casino Supervisor
with Bally's Las Vegas from February 1998 until June 1998, Director of Casino
Operations at the Maxim Hotel and Casino in Las Vegas from June 1998 until
November 1998 and Director of Table Games at the Resort At Summerlin from
November 1998 until December 1999.
Robert A. Vannucci was elected Vice President of Marketing and
Entertainment of ROC on April 26, 1994, Executive Vice President of Marketing
and Entertainment on July 1, 1998 and President of ROC on October 1, 2000. Mr.
Vannucci had been Director of Marketing of ROC since July 19, 1993. Mr. Vannucci
was Senior Vice President of Marketing and Operations at the Sands Casino Hotel
in Las Vegas from April 1991 to February 1993. He was Vice President and General
Manager of Fitzgerald's Las Vegas (a casino/hotel) from 1988 to January 1991.
Our and ROC's officers serve at the discretion of our and ROC's respective
Boards of Directors, and they are also subject to the licensing requirements of
the Nevada Gaming Commission and Colorado Gaming Commission.
5
Audit Committee; Audit Committee Financial Expert
We have a separately-designated standing Audit Committee, established in
accordance with section 3(a)(58)(A) of the Exchange Act. The members of our
Audit Committee are Vincent L. DiVito, Paul A. Harvey and James N. Land, Jr.
We have determined that the Chairman of our Audit Committee, Vincent L.
DiVito, who meets the AMEX audit committee independence requirements, is an
"audit committee financial expert", as defined in Item 407(d)(5)(ii) of SEC
Regulation S-K. Mr. DiVito is a certified public accountant and certified
management accountant, spent two years on the audit team at Ernst & Whinney (now
Ernst & Young) and is currently the President, CFO and treasurer of a global
specialties chemical business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act (Section 16(a)) requires our directors
and executive officers and persons who own more than 10% of our common stock to
file with the SEC certain reports regarding ownership of our common stock. Such
persons are required to furnish us with copies of all Section 16(a) reports they
file. Based solely on our review of such reports that were furnished to us and
written representations made to us by those reporting persons in connection with
certain of those reporting requirements, we believe that all the reporting
persons met their Section 16(a) reporting obligations on a timely basis during
2007.
Code of Ethics
We have adopted certain ethical policies that apply to all of our employees
at the level of Supervisor or higher, including our principal executive officer,
principal financial officer and principal accounting officer. Those policies,
together with certain rules adopted by our Disclosure Committee, comprise what
we consider to be our code of ethics. Those policies and rules are posted on our
Internet web site at www.theriviera.com.
Audit Committee
We have a separately-designated standing Audit committee, established in
accordance with section 3(a)(58)(A) of the Exchange Act. Our Audit Committee is
composed of Messrs. DiVito, Harvey and Land. Our Audit Committee recommends to
our Board of Directors the selection of an auditor, reviews the plan and scope
of our audits, reviews the auditors' critique of management and internal
controls and management's response to such critique and reviews the results of
our audit. In 2006 our Audit Committee met eight times. We have determined that
the three members of our Audit Committee to be independent, based on AMEX's
standards that apply to us. Our Board of Directors has determined that Mr.
DiVito, Chairman of the Audit Committee, is an "audit committee financial
expert" as defined by the rules and regulations of the SEC.
Item 11. Executive Compensation
Information regarding this item is incorporated herein by reference to our
proxy statement to be filed on or about April 4, 2008, relating to the annual
meeting of our stockholders to be held on May 13, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding this item is incorporated herein by reference to our
proxy statement to be filed on or about April 4, 2008, relating to our annual
meeting of stockholders to be held on May 13, 2008.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Information regarding this item is incorporated herein by reference to our
proxy statement to be filed on or about April 4, 2008, relating to our annual
meeting of stockholders to be held on May 13, 2008.
52
Item 14. Principal Accountant Fees and Services
Information regarding this item is incorporated herein by reference to our
proxy statement to be filed on or about April 4, 2008, relating to our annual
meeting of stockholders of the Company to be held on May 13, 2008.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) List of Financial Statements
The following is the list of Registered Public Accounting Firm
Reports and the consolidated Financial Statements of the
Company:
. Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
. Report of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
. Consolidated Balance Sheets as of December 31, 2007 and 2006
. Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005
. Consolidated Statements of Stockholders' Deficiency for the
Years Ended December 31, 2007, 2006, and 2005
. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
. 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 herein by
reference, and such exhibits are filed herewith.
(b) The exhibits required by Item 601 of Regulation S-K are filed as
exhibits to this Form 10-K.
(c) Not applicable.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By: /s/ WILLIAM L. WESTERMAN
William L. Westerman
Chief Executive Officer and President
(Principal Executive Officer)
March 10, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM L. WESTERMAN Chairman of the Board, Chief March 10, 2008
William L. Westerman Executive Officer and President
/s/ MARK B. LEFEVER Treasurer (Principal Financial March 10, 2008
Mark B. Lefever and Accounting Officer)
/s/ JEFFREY A. SILVER Director March 10, 2008
Jeffrey A. Silver
/s/ PAUL A. HARVEY Director March 10, 2008
Paul A. Harvey
/s/ VINCENT L. DIVITO Director March 10, 2008
Vincent L. DiVito
/s/ JAMES N. LAND, JR. Director March 10, 2008
James N. Land, Jr.
54
EXHIBIT INDEX
Exhibit Description
Number
3.1* Articles of Incorporation of the Company (see Exhibit 3 to
Quarterly Report on Form 10-Q filed on November 10, 2003,
Commission File No. 0-21430)
3.2* Bylaws of the Company (see Exhibit 3.2 to Registration
Statement on Form S-4 filed on September 10, 1997, Commission
File No. 0-21430)
3.3* Amendment to the Company Bylaws (see Exhibit 3.1 to Form 8-K
filed on August 10, 2007, Commission File No. 0-21430)
3.4* Bylaws of the Company (see Exhibit 3.1 to Form 10-Q filed on
November 9, 2007, Commission File No. 0-21430)
3.5* Articles of Incorporation of Riviera Operating Corporation
(see Exhibit 3.3 to Registration Statement on Form S-4
filed on September 10, 1997, Commission File No. 0-21430)
3.6* Bylaws of Riviera Operating Corporation (see Exhibit 3.4 to
Registration Statement on Form S-4 filed on September 10,
1997, Commission File No. 0-21430)
3.7* Articles of Incorporation of Riviera Gaming Management, Inc.
(see Exhibit 3.5 to Registration Statement on Form S-4
filed on September 10, 1997, Commission File No. 0-21430)
3.8* Bylaws of Riviera Gaming Management, Inc. (see Exhibit
3.6 to Registration Statement on Form S-4 filed on
September 10, 1997, Commission File No. 0-21430)
3.9* Articles of Incorporation of Riviera Black Hawk, Inc. (see
Exhibits 3.01 and 3.02 to Amendment No. 1 to Registration
Statement on Form S-4 filed by Riviera Black Hawk, Inc. on
August 31, 1999, Commission File No. 333-81613)
3.10* Bylaws of Riviera Black Hawk, Inc. (see Exhibit 3.03 to
Amendment No. 1 to Registration Statement on Form S-4 filed by
Riviera Black Hawk, Inc. on August 31, 1999, Commission File No.
333-81613).
10.1* 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 on Form S-1 filed on August 11, 1993, Commission
File No. 33-67206)
10.2* 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
on August 11, 1993, Commission File No. 33-67206)
10.3* 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 on August 11, 1993,
Commission File No. 33-67206)
10.4* Adoption Agreement regarding Profit Sharing and 401(k)
Plans of the Company (see Exhibit 10.16 to Registration
Statement on Form S-1 filed on August 11, 1993, Commission File
No. 33-67206)
10.5* 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 on
August 19, 1993, Commission File No. 33-67206)
55
10.6* Tax Sharing Agreement between the Company and Riviera Black
Hawk, Inc. dated March 31, 1999 (see Exhibit 10.12 to
Registration Statement on Form S-4 filed on August 9, 2002,
Commission File No. 333-97907)
10.7*(A) 1993 Stock Option Plan (see Exhibit 4.4 to Registration
Statement on Form S-8 filed on May 13, 1996, Commission File
No. 333-03631)
10.8*(A) Stock Compensation Plan for Directors Serving on the
Compensation Committee (see Exhibit 10.14 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File
No. 333-97907)
10.9*(A) Employment Agreement dated as of November 21, 1996 among 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)
10.10*(A) 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, Commission File No.
0-21430)
10.11*(A) Deferred Compensation Plan dated November 1, 2000 (see
Exhibit 10.19 to Form 10-K filed March 25, 2005, Commission
File No. 0-21430)
10.12*(A) Restricted Stock Plan (see Exhibit 10.20 to Form 10-K filed
March 25, 2005, Commission File No. 0-21430)
10.13*(A) Non-Qualified Stock Option Plan for Non-Employee Directors
(see Exhibit 4.6 to Registration Statement on Form S-8
filed on May 13, 1996, Commission File No. 333-03631)
10.14*(A) Second Amendment to Employment Agreement between the Company
and William L. Westerman effective July 15, 2003 (see
Exhibit 10.46 to Form 10-K filed on March 16, 2004, Commission
File No. 0-21430)
10.15*(A) Amendment of 1993 Stock Option Plan (see Exhibit 10.47 to
Form 10-K filed on March 25, 2005, Commission File No.
0-21430)
10.16* Purchase and License Agreement, dated September 25, 2003,
between Bally Gaming, Inc. and Riviera Operating Corporation
(see Exhibit 10.49 filed on March 25, 2005, Commission File No.
0-21430)
10.17*(A) 2005 Incentive Stock Option Plan (see Exhibit A To Schedule 14A
filed on April 22, 2005, Commission File No. 0-21430)
10.18*(A) 2005 Non-Qualified Stock Option Plan for Non-Employee
Directors (see Exhibit B to Schedule 14A filed on April 22,
2005, Commission File No. 0-21430)
10.19*(A) Incentive Compensation Program as amended August 3, 1995 (see
Exhibit 10.51 to Form 10-K filed on March 15, 2006,
Commission File No. 0-21430.
10.20* (A) Form of Restricted Stock Agreement under the Company's
Restricted Stock Plan (see Exhibit 10.52 to Form 10-K filed on
March 15, 2006, Commission File No. 0-21430)
10.21* Agreement and Plan of Merger, dated April 5, 2006, among Riv
Acquisition Holdings Inc., Riv Acquisition Inc. and the
Company (see Appendix A to revised definitive proxy materials
on Schedule 14A filed on July 3, 2006, Commission File
No. 0-21430)
10.22* (A) Employment Agreement between the Company and Mark B. Lefever
(see Exhibit 10.3 to Form 10-Q filed on August 9, 2006,
Commission File No. 0-21430)
56
10.23* (A) Employment Agreement among Riviera Holdings Corporation,
Riviera Operating Corporation and Robert A. Vannucci (see
Exhibit 10.1 to Form 10-Q filed on November 6, 2006, Commission
File No. 0-21430
10.24* (A) Forms of Salary Continuation Agreements with Riviera Operating
Corporation and Riviera Black Hawk, Inc. dated May 15, 2007 (see
Exhibit 10.1 to Form 10-Q filed on August 3, 2007, Commission
File No. 0-21430)
10.25* Credit Agreement, dated June 8, 2007, among the Company, the
Company's restricted subsidiaries, Wachovia Bank, National
Association and the Lenders that are parties thereto (see
Exhibit 10.2 to Form 10-Q filed on August 3, 2007,
Commission File No. 0-21430)
10.26* Commitment letter agreement dated April 27, 2007 between the
Company and Wachovia Bank, National Association and
Wachovia Capital Markets, LLC. (see Exhibit 10.3 to Form 10-Q
filed on August 3, 2007, Commission File No. 0-21430)
10.27* Deed of Trust, Assignment of Leases, Rents, Security Agreement,
and Fixture Filing dated June 8, 2007, executed by the
Company in favor of First American Title Insurance Company
as Trustee (see Exhibit 10.4 to Form 10-Q filed on August
3, 2007, Commission File No. 0-21430)
10.28* Deed of Trust, Assignment of Leases, Rents, Security
Agreement, and Fixture Filing dated June 8, 2007, executed by
Riviera Black Hawk, Inc. in favor of The Public Trustee For
Gilpin County, Colorado and Wachovia Bank, National
Association (see Exhibit 10.5 to Form 10-Q filed on August 3,
2007, Commission File No. 0-21430)
10.29* Environmental Indemnity dated as of June 8, 2007 between the
Company and Wachovia Bank, National Association (see
Exhibit 10.6 to Form 10-Q filed on August 3, 2007, Commission
File No. 0-21430)
10.30* Environmental Indemnity dated as of June 8, 2007, among the
Company, Riviera Black Hawk, Inc. and Wachovia Bank,
National Association (see Exhibit 10.7 to Form 10-Q filed on
August 3, 2007, Commission File No. 0-21430)
10.31* Credit Party Pledge Agreement, dated June 8, 2007, among the
Company, the Company's restricted subsidiaries, Riviera
Gaming Management, Inc. and Wachovia Bank, National
Association (see Exhibit 10.8 to Form 10-Q filed on August 3,
2007, Commission File No. 0-21430)
10.32* Gaming Pledge Agreement dated June 8, 2007, between the Company
and Wachovia Bank, National Association (see Exhibit
10.9 to Form 10-Q filed on August 3, 2007, Commission File No.
0-21430)
10.33* Security Agreement, dated June 8, 2007, among the Company,
the Company's restricted subsidiaries, Wachovia Bank,
National Association and the Lenders that are parties thereto
(see Exhibit 10.10 to Form 10-Q filed on August 3, 2007,
Commission File No. 0-21430)
10.34 Third Amendment to Employment Agreement between the Company and
William L. Westerman effective March 4, 2008
21.1* Subsidiaries of the Company (see Exhibit 21.1 to Registration
Statement on Form S-4 filed with the Commission on
August 9, 2002, Commission File No. 333-97907)
57
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
31.1 Certification of the Principal Executive Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(a)
31.2 Certification of the Principal Financial Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(a)
32.1 Certification of the Principal Executive Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(b) and 18
U.S.C. 1350
32.2 Certification of the Principal Financial Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(b) and 18
U.S.C. 1350
* These are incorporated herein by reference as exhibits hereto. Following
the description of each such exhibit is a reference to it as it appeared in a
specified document previously filed with the Securities and Exchange Commission,
to which there have been no amendments or changes, unless otherwise indicated.
(A) Management contract or compensatory plan or arrangement
58
Exhibit 31.1
Certification of the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, William L. Westerman, certify that:
1. I have reviewed this annual report on Form 10-K of Riviera
Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the
registrant and have:
a. Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's fourth fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
59
Date: March 10, 2008
William L. Westerman
William L. Westerman
Chief Executive Officer
60
Exhibit 31.2
Certification of the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mark Lefever, certify that:
1. I have reviewed this annual report on Form 10-K of
Riviera Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the
registrant and have:
a. Designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's fourth fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in
the registrant's internal control over financial reporting.
61
Date: March 10, 2008
Mark Lefever
Mark Lefever
Chief Financial Officer
62
Exhibit 32.1
Certification Pursuant to Section 906
of the Sarbanes-Oxley At of 2002
In connection with the annual report of Riviera Holdings Corporation (the
"Company") on Form 10-K for the period ended December 31, 2007 as filed with the
Securities and Exchange Commission (the "Report"), I, William L. Westerman,
hereby certify as of the date hereof, solely for the purposes of Title 18,
Chapter 63, section 1350 of the United States Code, that to the best of my
knowledge:
1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company at the dates and for the periods indicated.
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
Date: March 10, 2008
/s/ William L. Westerman
----------------------------
Chief Executive Officer
63
Exhibit 32.2
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Riviera Holdings Corporation (the
"Company") on Form 10-K for the period ended December 31, 2007 as filed with the
Securities and Exchange Commission (the "Report"), I, Mark Lefever, hereby
certify as of the date hereof, solely for the purposes of Title 18, Chapter 63,
section 1350 of the United States Code, that to the best of my knowledge:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company at the dates and for the periods indicated.
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
Date: March 10, 2008
/s/ Mark Lefever
-------------------------------
Treasurer and Chief Financial Officer
64
RIVIERA HOLDINGS CORPORATION
TABLE OF CONTENTS
------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS..........................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 2007 and 2006........................F-2
Statements of Operations for the Years Ended December 31, 2007,
2006 and 2005.................................................... F-3
Statements of Stockholders' Deficiency for the Years Ended
December 31, 2007, 2006 and 2005...................................F-4
Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005...................................F-5
Notes to Consolidated Financial Statements.............................F-7
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Riviera Holdings Corporation
Las Vegas, NV
We have audited the accompanying consolidated balance sheets of Riviera
Holdings Corporation and subsidiaries (the "Company") as of December 31, 2007
and 2006, and the related consolidated statements of operations, changes in
stockholders' deficiency, and cash flows for each of the three years in the
period ended December 31, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Riviera Holdings Corporation
and its subsidiaries at December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 11 to the consolidated financial statements, in 2007,
the Company changed its method of accounting for income taxes to conform to
Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.
As discussed in Note 14 to the consolidated financial statements, in 2006,
the Company changed its method of accounting for share-based compensation to
conform to Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2007,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2008, expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Las Vegas, NV
March 12, 2008
F-1
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
(Dollars In Thousands)
--------------------------------------------------------------------------------
ASSETS 2007 2006
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 28,819 $ 25,285
Restricted cash and investments 2,772 -
Accounts receivable net of allowance of $436 and $163 3,563 3,063
Inventories 1,455 1,792
Prepaid expenses 3,602 4,002
------ ------
Total current assets 40,211 34,142
PROPERTY AND EQUIPMENT net 172,865 171,320
OTHER ASSETS 2,940 5,774
DEFERRED INCOME TAXES-net 2,446 2,446
------- --------
Total assets $ 218,462 $ 213,682
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 226 $ 879
Current portion of obligation to officers 1,000 1,000
Accounts payable 10,972 9,126
Accrued interest 188 1,063
Accrued expenses 14,279 13,167
------ ------
Total current liabilities 26,665 25,235
LONG-TERM DEBT - Net of current portion 225,288 214,124
FAIR VALUE OF INTEREST RATE SWAP LIABILITIES 13,272 -
OTHER LONG-TERM DEBT - 2,763
OBLIGATION TO OFFICERS - Net of current portion 1,063 2,094
------- ------
Total liabilities 266,288 244,216
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' DEFICIENCY:
Common stock, $.001 par value 60,000,000 shares
authorized; 17,124,624 and 17,131,824 shares
issued at December 31, 2007 and 2006, respectively, 17 17
12,456,555 and 12,369,431 shares outstanding
Additional paid-in capital 18,925 18,165
Treasury stock, 4,668,069 and 4,762,393
shares at December 31, 2007 and
2006, respectively (9,635) (9,841)
Acumulated Deficit (57,133) (38,875)
-------- -------
Total stockholders' deficiency (47,826) (30,534)
-------- --------
Total liabilities and stockholders' deficiency $ 218,462 $ 213,682
======= =======
See notes to consolidated financial statements.
F-2
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
2007 2006 2005
REVENUES ----- ---- -----
Casino $ 114,340 $ 111,459 $ 108,130
Rooms 59,890 56,700 52,021
Food and beverage 32,353 33,125 34,132
Entertainment 13,498 13,672 17,371
Other 6,632 6,431 8,312
------- ------- -------
Total revenues 226,713 221,387 219,966
Less - promotional allowances (21,218) (20,443) (17,739)
------- ------- --------
Net revenues 205,495 200,944 202,227
------- ------- -------
COSTS AND EXPENSES
Direct costs and expenses of operating
departments:
Casino 56,197 57,311 56,092
Rooms 28,121 27,100 27,133
Food and beverage 23,848 24,144 24,645
Entertainment 8,687 9,377 13,214
Other 1,360 1,437 2,906
Other operating expenses
General and administrative
Stock-based compensation 966 813 1,627
Other general and administrative 42,728 41,318 39,444
Mergers, acquisitions and development
costs, net of $1,000
unrefundable deposit in 2005 611 1,318 (65)
Asset impairments 72 19 777
Depreciation and amortization 13,116 12,691 14,065
------- ------- -------
Total costs and expenses 175,706 175,528 179,838
INCOME FROM OPERATIONS 29,789 25,416 22,389
------- ------ ------
Loss on early retirement of bonds (12,878) - -
Decrease in value of derivative instruments (13,272) - -
Interest expense, net, including related
party interest of $281 $400 and $518
in 2007, 2006 and 2005, respectively (21,897) (25,751) (26,388)
-------- -------- --------
Total interest expense, net (48,047) (25,751) (26,388)
-------- -------- --------
NET LOSS $ (18,258) $ (335) $ (3,999)
======= ======== ========
EARNINGS PER SHARE DATA Loss per share,
basic and diluted $ (1.48) $ (0.03) $ (0.34)
======== ======== ========
Weighted-average common and common
equivalent shares 12,309 12,134 11,833
======== ======== ========
See notes to consolidated financial statements.
F-3
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Dollars In Thousands)
--------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock
---------------------- Paid-In Retained -----------------------------------
Shares Amount Capital Deficit Shares Amount Total
----------------------------------------------------------------------------------------------
BALANCE January 1, 2005 16,548,324 $ 16 $ 15,692 $ (34,541) (5,047,074) $ (10,459) $ (29,292))
Stock issued under
executive option plan 166,500 1 395 - - - 396
Stock-based compensation -
stock options - - 60 - - - 60
Distribution of treasury stock
deferred compensation trust - - (412) - 187,983 412 -
Stock-based compensation -
restricted stock - - 1,566 - - - 1,566
Issuance of deferred compensation
-restricted stock 367,500 - - - - - -
Net loss - - - (3,999) - - (3,999)
---------- --- ------ -------- ----------- -------- --------
BALANCE December 31, 2005 17,082,324 17 17,301 (38,540) (4,859,091) (10,047) (31,269)
Stock-based compensation
- stock options - - 72 - - - 72
Stock issued under executive
option plan 97,500 - 257 - - - 257
Restricted stock - Forfeited (48,000) - - - - - -
Stock-based compensation -
restricted stock - - 741 - - - 741
Distribution of treasury stock
- deferred compensation - - (206) - 96,698 206 -
Net loss - - - (335) - - (335)
---------- ---- ------ ------- ---------- ------ --------
BALANCE December 31, 2006 17,131,824 17 18,165 (38,875) (4,762,393) (9,841) (30,534)
Stock-based compensation -
stock options - - 223 - - - 223
Restricted stock - forfeited (7,200) - - - - - -
Stock-based compensation -
restricted stock - - 743 - - - 743
Distribution of treasury stock
- deferred compensation - - (206) - 94,324 206 -
Net loss - - - (18,258) - - (18,258)
---------- ---- ------- ---------- ---------- --------- ---------
BALANCE December 31, 2007 17,124,624 $ 17 $ 18,925 $ (57,133) (4,668,069) $ (9,635) $(47,826)
See notes to consolidated financial statements.
F-4
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In Thousands)
--------------------------------------------------------------------------------
2007 2006 2005
OPERATING ACTIVITIES:
Net loss $(18,258) $ (335) $(3,999)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 13,116 12,691 14,065
Stock-based compensation - restricted stock 743 741 1,566
Stock-based compensation - stock options 223 72 60
Provision for bad debts 377 146 243
Asset impairment 72 18 -
Loss on early retirement of debt 12,878 - -
Amortization of deferred loan fees 956 1,999 2,000
Decrease in value of derivative instruments 13,272 - -
Change in operating assets and liabilities:
Accounts receivable net (877) 335 111
Inventories 337 693 (438)
Prepaid expenses 400 195 (96)
Accounts payable (794) (1,979) 1,261
Accrued expenses (2,526) 906 (2,936)
Other assets 185 (3) 219
Deferred compensation plan obligation (31) (32) (48)
Obligation to officers (1,000) (1,000) (1,000)
------- ------ -------
Net cash provided by operating activities 19,073 14,447 11,008
------- ------ -------
INVESTING ACTIVITIES:
Capital expenditures for property and
equipment Las Vegas (8,993) (5,651) (5,240)
Capital expenditures for property
and equipment Black Hawk (3,099) (3,495) (3,038)
Restricted cash and investments (2,772) - -
-------- ------ --------
Net cash used in investing activities (14,864) (9,146) (8,278)
-------- ------- -------
F-5
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In Thousands)
--------------------------------------------------------------------------------
2007 2006 2005
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 225,112 - -
Repayments on long-term borrowings (223,885) (844) (1,440)
Cash paid for deferred loan fees (1,902) - -
Exercise of employee stock options - 257 395
------- ------ --------
Net cash used in financing activities (675) (587) (1,045)
------ ------ -------
INCREASE IN CASH AND CASH EQUIVALENTS 3,534 4,714 1,685
CASH AND CASH EQUIVALENTS Beginning of year 25,285 20,571 18,886
-------- ------ -------
CASH AND CASH EQUIVALENTS End of year $ 28,819 $ 25,285 $ 20,571
======= ====== ======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property acquired with accounts
payable Las Vegas, Nevada $ 1,800 $ 812 $ 406
======= ====== ======
Property acquired with accounts
payable Black Hawk, Colorado $ 841 $ 619 $ 53
======= ====== ======
Non-cash item Main Street expansion
Black Hawk - $ 2,763 -
======== ======= ======
Cash interest paid $ 22,494 $ 24,329 $ 24,608
======== ======= =======
Distribution of deferred compensation
treasury shares $ 206 $ 206 $ 412
======== ======= ======
See notes to consolidated financial statements.
F-6
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Riviera Holdings Corporation ("RHC") and its
wholly-owned subsidiaries (together, the "Company") own and operate the Riviera
Hotel & Casino ("Riviera Las Vegas") on the Strip in Las Vegas, Nevada and the
Riviera Black Hawk Casino ("Riviera Black Hawk") in Black Hawk, Colorado.
The Company's 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 Riviera Holdings Corporation and its wholly-owned
subsidiaries. All material inter-company accounts and transactions have been
eliminated.
Cash Equivalents -- All highly liquid investment securities with maturity
of three months or less when acquired are considered to be cash equivalents.
Amounts classified as cash equivalents consist of cash held in our
concentration account and money market accounts (all with original maturities of
90 days or less) and had a value of $15,724,000 and $10,809,000 at December 31,
2007 and 2006, respectively.
Restricted Cash -- This cash is held as a certificate of deposit for the
benefit of the State of Nevada Workers Compensation Division as a requirement of
our being self-insured for Workers Compensation. The cash is held in a one-year
certificate of deposit, which matures in 2008. We do not believe this investment
will be required after it maures in 2008 and as such the investment is held as a
current asset.
Inventories -- Inventories consist primarily of food, beverage, and
promotional items 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. 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 lives range from:
Buildings and improvements 7 to 40 years
Land improvements 15 to 20 years
Furniture, fixtures and equipment 3 to 7 years
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. Included in income from operations in the fourth quarter of 2007 was
$72,000 in asset impairment costs compared to $3,000 in 2006. The 2007
impairment costs related to the write down and subsquent disposal of costs
associated with certain slot machines in Black Hawk, which are no longer
compliant with local gaming laws.
F-7
Other Assets -- Other assets include deferred loan offering costs, which
are amortized over the life of the debt. Such amortized costs are included in
interest expense.
Stock-Based Compensation -- As of December 31, 2007, the Company has five
active stock-based compensation plans and two expired stock-based compensation
plans. Under the Company's active stock compensation plans, the Company shall at
the discretion of the Company's Compensation Committee, issue option grants of
Company common stock to those directors in lieu of cash compensation. The option
grants issued under this plan are valued at the market value of the shares at
the date of issuance on each regularly scheduled date for paying directors'
fees.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the date of grant for awards consistent with the provisions
of SFAS No.123 (using the grant date fair value method value method), 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):
2005
-----
Net loss-as reported $ (3,999)
Stock -based employee compenstion expense 60
Deduct: Total stock-based employee compensation
expense determined under fair value-based methods
for awards net of related tax effects (44)
Net loss-pro forma $ (3,983)
Basic loss per common share-as reported $ (0.34)
Basic loss per common share-pro forma $ (0.34)
Diluted loss per common and common
share equivalent-as reported $ (0.34)
Diluted loss per common and common share
equivalent-pro forma $ (0.34)
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 due to their short term nature.
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 at December 31, 2007 and 2006 is approximately
$225,514,000 and $227,105,000, respectively. In addition we have interest rate
swap instrument, which has an approximate liability value of $13,300,000 as
of December 31, 2007. The fair value of the interest rate swap instrument is
estimated based upon current interest rate levels along a yield curve, the
remaining duration of the instrument and other market conditions and
therefore, is subject to significant estimation and a high degree of variability
of fluctuation between periods. Under our interest rate swap agreement, which
has a fixed rate of 5.48% compared to the three month LIBOR rate 4.85% as of
December 31, 2007, whcih we would receive.
F-8
Treasury Stock
Treasury shares are stated at cost. The Company's Deferred Compensation
Plan distributed the remaining shares to plan participants in 2007 and at
December 31, 2007 no shares were remaining in the Plan. The Plan distributed to
participants, 94,324, 96,698 and 187,983 shares under the Deferred Compensation
Plan during the years ended December 31, 2007, 2006 and 2005.
Revenue Recognition
Casino Revenue -- Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses less slot club cash
points, cash vouchers, free play and other related customer cash incentives.
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.
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 in thousands:
Year Ended December 31
-------------------------------
2007 2006 2005
Food and beverage $ 8,882 $ 9,147 $ 8,510
Rooms 2,763 2,693 1,333
Entertainment 918 629 632
-------- -------- -------
Total costs allocated to casino departments $12,563 $12,469 $10,475
======= ======= =======
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 recoverability of and estimated useful lives for depreciable
and amortizable assets, certain accrued liabilities (including self-insurance
reserves and customer loyalty programs), realizability of deferred tax assets,
fair value of interest rate swap liabilities, valuation of stock based
compensation and collection allowances for receivables. Actual results may
differ materially from estimates.
Self-Insurance Reserves -- The Company is self-insured for various levels
of general liability, workers' compensation, and non-union employee medical
insurance coverage. Insurance claims and reserves include accruals of estimated
settlements for known claims, as well as accrued estimates of incurred but not
reported claims. In estimating these costs, the Company considers its historical
claims experience and makes judgments about the expected levels of costs per
claim. Changes in health care costs, accident frequency and severity and other
factors can materially affect the estimate for these liabilities. As of January
1, 2008 we are no longer self-insured for non-union medical insurance coverage
however, 2007 claims will continue to be paid during the first quarter of 2008.
Loyalty Club Program -- We offer to our guests the opportunity to earn
points redeemable for cash based on their level of gaming and non-gaming
activities while at our properties. An accrual is recorded as points are earned
based upon expected redemption rates.
F-9
Advertising -- The costs of advertising are expensed as incurred and are
allocated to each revenue department based upon content. Advertising expense was
$2,782,000, $2,814,000 and $2,472,000 in 2007, 2006, and 2005, respectively.
Recently Issued Accounting Standards -- In February 2007, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 permits companies
to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing companies
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The fair value option established by SFAS
No. 159 permits all companies to choose to measure eligible items at fair value
at specified election dates. At each subsequent reporting date, a company shall
report in earnings any unrealized gains and losses on items for which the fair
value option has been elected. SFAS No. 159 is effective as of the beginning of
a company's first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the company also elects to apply the
provisions of SFAS No. 157, "Fair Value Measurements". We are currently
evaluating if we will adopt and the impact of that the adoption of SFAS No. 159
will have on our consolidated financial statements and will adopt SFAS 159 as of
January 1, 2008.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We are
currently evaluating whether to adopt the fair value option under SFAS No. 157
and evaluating what impact such adoption would have on our consolidated
financial statements.
F-9
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and applies to all
tax positions accounted for in accordance with SFAS No. 109. See Note 15,
"Income Taxes," to the accompanying consolidated financial statements for
disclosure regarding the effect of FIN 48 on our consolidated financial
statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31 (in thousands):
2007 2006
---- ------
Casino $ 353 $ 335
Hotel 3,646 2,891
----- -------
Total 3,999 3,226
Less - Collection allowances (436) (163)
----- --------
Accounts receivable - net $3,563 $3,063
====== =======
Changes in the collection allowances consist of the following for the years
ended December 31 (in thousands):
2007 2006
---- ----
Beginning balance $ 163 $1,244
Write-offs (114) (1,257)
Recoveries 10 30
Provision for doubtful collection 377 146
----- ------
Ending balance $ 436 $ 163
===== ======
The Company manages its credit risk by evaluating customers' credit
worthiness before extending credit. The maximum credit losses that might be
sustained are limited to the recorded receivables less any amounts reserved.
F-10
3. PREPAID EXPENSES
Prepaid expenses consist of the following at December 31 (in thousands):
2007 2006
Prepaid gaming taxes $ 1,110 $ 1,527
Prepaid insurance 806 891
Vendor deposits 542 268
Prepaid equipment maintenance 254 242
Other 890 1,074
-------- -------
Total $ 3,602 $ 4,002
======= ========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in thousands):
F-11
2007 2006
------- --------
Land and improvements $ 40,752 $ 40,904
Buildings and improvements 144,795 143,417
Equipment, furniture, and fixtures 155,818 150,576
Construction in progress 280 -
------- --------
Total cost 341,645 334,897
Less - Accumulated depreciation and amortization (168,780) (163,577)
-------- ---------
Property and equipment-net $ 172,865 $ 171,320
======== =========
Substantially all of the Company's property and equipment are pledged as
collateral to secure debt (see Note 9).
5. OTHER ASSETS
Other assets consist of the following at December 31 (in thousands):
2007 2006
Deposits $ 69 $ 58
Bond offering costs, net of accumulated amortization
of $194 and $7,149 1,708 4,559
Base Stock 1,163 1,157
----- -------
Total $ 2,940 $ 5,774
===== ======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consist of the following at December 31 (in thousands):
2007 2006
----- ------
Accounts payable vendors $ 6,898 $ 5,015
Customer deposits, non-gaming 1,289 1,544
Other 500 446
----- -----
Sub total 8,687 7,005
Outstanding chip and token liability 517 569
Customer loyality liabilities 677 742
Progressive jackpot liabilities 745 515
Customer deposits and other 346 295
---- -----
Total gaming customer-related payables 2,285 2,121
------- -------
Total $ 10,972 $ 9,126
======= ======
Accrued expenses consist of the following at December 31 (in thousands):
F-12
2007 2006
----- ----
Payroll and related taxes and benefits $ 7,805 $ 8,227
Property and gaming taxes 2,948 3,036
Incentive and ESOP 2,166 659
Professional fees 574 340
Deferred revenues and deposits 786 905
------- -------
Total $14,279 $13,167
======= ========
7. FAIR VALUE OF INTEREST RATE SWAP LIABILITIES
We utilize derivative instruments for a substantial portion of our Term
Loan to manage certain interest rate risk. Our interest rate swap agreement has
a rate of 5.48% compared to the three month LIBOR rate of 4.85% as of December
31, 2007. The Fair Value of our interest rate swap was $13.3 million as of
December 31, 2007, and is recorded as a long-term liability which represents the
amount we would be required to pay to settle the swap agreement.
8. OBLIGATION TO OFFICERS
Obligation to officers consists of the nonqualified pension plan obligation
to our Chief Executive Officer ("CEO"), including accrued interest and deferred
compensation plan liabilities, payable upon expiration of his employment
contract or a change of control of the Company. See Note 13 for a description of
this plan. Obligation to officers consists of the following at December 31 (in
thousands).
2007 2006
---- -----
Accrued interest on pension CEO, unfunded $ 2,063 $ 3,093
Deferred compensation funded - 1
------- ------
2,063 3,094
------- -------
Less-current portion (1,000) (1,000)
------- --------
Obligation to officers - net of current portion $ 1,063 $ 2,094
====== ======
F-13
9. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
2007 2006
$225 million Term Loan maturing on June 8, 2014 $ 225,000 -
11% Senior Secured Notes maturing on June 15, 2010, net - $ 213,601
5.5% to 5.9% notes collateralized by equipment,
payable monthly, including interest - 802
Capitalized lease obligations (Note 10) 231 189
5.5% Special Improvement District Bonds - issued
by the City of Black Hawk, Colorado, interest
and principal payable monthly
over 10 years beginning in 2000 283 411
------- --------
Total long-term debt 225,514 215,003
Less-Current maturities by terms of debt (226) (879)
--------- --------
Total $ 225,288 $ 214,124
======== =======
Maturities of long-term debt for the years ending December 31 are as follows
(in thousands):
2008 $ 226
2009 222
2010 1,148
2011 2,274
2012 2,269
Thereafter 219,375
-------
Total $ 225,514
=======
On June 8, 2007, we and our Subsidiaries entered into the New Credit Facility.
The New Credit Facility includes a $225 million seven-year term loan ("Term
Loan"), and has no amortization for the first three years, and a one percent
amortization for years four through six, and a full payoff in year seven, in
addition to an annual mandatory pay down during the term of 50% of excess cash
flows, as defined. The New Credit Facility also includes a $20 million five-year
revolving credit facility ("Revolving Credit Facility") under which we can
obtain extensions of credit in the form of cash loans or standby letters of
credit ("Standby L/Cs"). We are permitted to prepay the New Credit Facility
without premium or penalties except for payment of any funding losses resulting
from prepayment of LIBOR rate loans. The rate for the Term Loan and revolving
Credit Facility is LIBOR plus 2.0%. Pursuant to a floating rate to fixed rate
swap agreement that became effective June 29, 2007 that we entered into under
the New Credit Facility, substantially the entire Term Loan portion of the New
Credit facility, with quarterly step-downs, bears interest at an effective fixed
rate of 7.485% per annum (2.0% above the LIBOR Rate in effect on the lock-in
date of the swap agreement). The New Credit Facility is guaranteed by the
Subsidiaries and is secured by a first priority lien on substantially all of our
assets.
F-14
We used substantially all of the proceeds of the Term Loan to discharge our
obligations under the Indenture, dated June 26, 2002 (the "Indenture"), with The
Bank of New York as trustee (the "Trustee"), governing the 11% Notes. On June 8,
2007 we deposited these funds with the Trustee and issued to the Trustee a
notice of redemption of the 11% Notes, which was finalized on July 9, 2007.
We utilize derivative instruments for a substantial portion of our Term
Loan to manage certain interest rate risk. Our interest rate swap agreement has
a rate of 5.48% compared to the three month LIBOR rate of 4.85% as of December
31, 2007.
The interest rate on loans under the Revolving Credit Facility will depend
on whether they are in the form of revolving loans or swingline loans. For each
revolving loan, the interest rate will depend on whether we elect to treat the
loan as an "Alternate Base Rate" loan ("ABR Loan") or a LIBOR Rate loan.
Swing line loans will bear interest at a per annum rate equal to the
Alternative Base Rate plus the Applicable Percentage for revolving loans that
are ABR Loans.
We will also pay fees under the Revolving Credit Facility as follows: (i) a
commitment fee in an amount equal to either .50% or 0.375% (depending on the
Consolidated Leverage Ratio) per annum on the average daily unused amount of the
Revolving Credit Facility; (ii) Standby L/C fees equal to between 2.00% and
1.50% (depending on the Consolidated Leverage Ratio) per annum on the average
daily maximum amount available to be drawn under each Standby L/C issued and
outstanding from the date of issuance to the date of expiration; and (iii) a
Standby L/C facing fee in the amount of 0.25% per annum on the average daily
maximum amount available to be drawn under each Standby L/C. In addition to the
Revolving Credit Facility fees, we will pay an annual administrative fee of
$35,000.
The New Credit Facility contains non-financial affirmative and negative
covenants customary for financings of this nature including, but not limited to,
restrictions on our incurrence of other indebtedness.
We believe we are in compliance with all covenants as of December 31, 2007.
The New Credit Facility contains events of default customary for financings
of this nature including, but not limited to, nonpayment of principal, interest,
fees or other amounts when due; violation of covenants; failure of any
representation or warranty to be true in all material respects; cross-default
and cross-acceleration under our other indebtedness or certain other material
obligations; certain events under federal law governing employee benefit plans;
a "change of control"; dissolution; insolvency; bankruptcy events; material
judgments; uninsured losses; actual or asserted invalidity of the guarantees or
the security documents; and loss of any gaming licenses. Some of these events of
default provide for grace periods and materiality thresholds. For purposes of
these default provisions, a "change in control" includes: a person's acquisition
of beneficial ownership of 35% or more of our stock coupled with a gaming
license and/or approval to direct any of our gaming operations, a change in a
majority of the members of our board of directors other than as a result of
changes supported by our current board members or by successors who did not
stand for election in opposition to our current board, or our failure to
maintain 100% ownership of the Subsidiaries.
The New Credit Facility is guaranteed by the Subsidiaries, which are all of
our restricted subsidiaries. These guaranties are full, unconditional, and joint
and several. RHC's unrestricted subsidiaries, which have no operations and do
not significantly contribute to our financial position or results of operations,
are not guarantors of the New Credit Facility.
The 5.5% Special Improvement District Bonds were issued by the City of
Black Hawk, Colorado. The proceeds were used for road improvements and other
infrastructure projects benefiting Riviera Black Hawk and a nearby casino. Our
share of the debt was $1.2 million payable over a ten-year period that began in
2000.
F-15
10. LEASING ACTIVITIES
The Company leases certain office 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.
The interest rate on the equipment leases is 5.5%. We estimate 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, 2007 (in thousands):
2008 $ 111
2009 90
2010 29
2011 29
2012 21
Thereafter -
----
Total minimum lease payments 280
Less-Taxes, maintenance, and insurance (28)
Less-Interest portion of payments (21)
----
Present value of net minimum lease payments $ 231
====
Property and equipment under capital lease as of December 31, 2007 and 2006
were $437,000 and $325,000 with accumulated amortization of $207,000 and
$135,000, respectively.
Rental expense for equipment under operating leases for the years ended
December 31, 2007, 2006 and 2005 was approximately $1,230,000, $503,000 and
$1,096,000, respectively. All are cancelable within a year. In addition, the
Company leases retail space to third parties (primarily retail shops and fast
food vendors) under terms of noncancelable operating leases that expire in
various years through 2011, and have options to extent at the tenant's option.
Rental income, which is included in other revenue, for the years ended December
31, 2007, 2006 and 2005 was approximately $2,448,000, $2,069,000 and $2,205,000
respectively.
At December 31, 2007, the Company had future minimum annual rental income
due under noncancelable operating leases as follows (in thousands):
2008 $ 2,599
2009 2,280
2010 2,034
2011 1,064
2012 48
------
Total $ 8,025
======
Certain lease arrangements at the Riviera Las Vegas contain a
buyout/liquidated damages provision. This provision provides that in the event
of a major renovation or certain other events, the Company has the right,
according to an agreed-upon formula, to buy out any remaining term of the lease
by providing the tenant twelve months written notice.
F-16
11. INCOME TAXES
The effective income tax rate of zero differs from the statutory Federal
income tax rates for the years ended December 31 as follows (dollars in
thousands):
2007 2006 2005
------------------ ---------------- ------------------
Amount Rate Amount Rate Amount Rate
------------------ ---------------- -------------------
Income taxes benefit
at Federal statutory rate $ (6,390) (35.0)% $ (117) (35.0)% $ (1,400) (35.0)%
Income taxes benefit
at State statutory rate $ (119) (0.6)%
Employee benefits 639 3.5 % 633 189.0 % 695 17.4 %
FICA credit (217) (0.2)% (222) (66.3)% (239) (6.0)%
Other 132 0.7 % - - (232) (5.8)%
Rate change impact 84 0.5 % - - - -
Valuation allowance 5,871 31.1 % (294) (87.7)% 1,176 29.4 %
Benefit for income taxes $ - 0.0 % $ - 0.0 % $ - 0.0 %
Comparative analysis of the provision for income taxes is as follows:
2007 2006 2005
----- ------ ----
Current $ - $ - $ -
Deferred - - -
----- ----- ----
Total $ - $ - $ -
===== ===== ====
The tax effects of the items composing the Company's net deferred tax asset
consist of the following at December 31 (in thousands):
F-17
2007 2006
===== =====
Deferred tax liabilities
Reserve differential for hospitality and gaming activities $ 1,309 $ 1,582
Difference between book and tax-depreciable property 5,852 5,955
------ -------
Total Deferred Tax Liabilities 7,161 7,537
------ ------
Deferred tax assets
Net operating loss carryforwards $23,116 $ 21,985
Reserves not currently deductible 7,030 2,480
Bad debt reserves 155 57
AMT and other credits 3,531 3,315
------ ------
Total Deferred Tax Assets 33,832 27,837
------ ------
Less - Valuation allowance (24,225) (17,854)
------ ------
Net deferred tax asset $ 2,446 $ 2,446
====== ======
The Company has $3,531,000 of alternative minimum tax ("AMT") credit and
general business credit available to offset future income tax liabilities. The
AMT credits have no expiration date. The general business credit will not begin
to expire until 2010. The Company has approximately $65,000,000 in federal gross
net operating loss carryforwards and $11,000,000 in state gross net operating
loss carryforwards. The net operating loss carryforwards will expire between
2013 and 2028. Currently, the Company does not believe that it is more likely
than not that it can utilize the deferred tax assets and accordingly, a
valuation allowance has been provided for substantially all deferred tax assets.
The realizability of the net deferred tax asset related to Rivera Las Vegas
is dependent upon future earnings. The Company's net deferred tax asset
approximates its AMT credit carryforwards, which do not expire. For this
reason there is no valuation allowance against the AMT Credit.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting and disclosure for uncertainty in tax positions, as defined. FIN 48
seeks to reduce the diversity in practice associated with certain aspects of the
recognition and measurement related to accounting for income taxes. The Company
is subject to the provisions of FIN 48 as of January 1, 2007. The Company
believes that its income tax filing positions and deductions will be sustained
on audit and does not anticipate any adjustments that will result in a material
adverse effect on the Company's financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to FIN 48. In addition, the Company did not record a
cumulative effect adjustment related to the adoption of FIN 48.
12. COMMITMENTS AND CONTINGENCIES
The Company is party to routine lawsuits arising from the normal operations
of a casino or hotel. We do 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.
F-18
13. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS
William L. Westerman serves as our Chairman of the Board, President and
CEO, and as Chairman of the Board and CEO of our wholly-owned subsidiary,
Riviera Operating Corporation ("ROC"), and CEO of Riviera Black Hawk Inc.
Under Mr. Westerman's employment agreement, which was last amended by the
Third Amendment to the employment agreement on March 4, 2008, he is employed for
one-year (calendar year) terms, which automatically renew for successive
one-year terms unless written notice is provided by Mr. Westerman at least 180
days, or by us at least 90 days, prior to termination of the current term. Mr.
Westerman's base annual compensation is $1,000,000. The Third Amendment provides
that, effective January 1, 2008, Mr. Westerman is eligible to participate in our
senior management incentive compensation plan. The Third Amendment also provides
for the payment to Mr. Westerman of a discretionary bonus in the amount of
$300,000 prior to March 15, 2008, for Mr. Westerman's contribution to our
performance in 2007.
On February 5, 1998, Stockholders approved a merger agreement that
constituted a change of control under Mr. Westerman's employment agreement.
(That merger agreement was terminated without consummation of the merger.) On
March 5, 1998, Mr. Westerman exercised his right to require us to establish and
fund a Rabbi Trust for his benefit. On March 20, 1998, Mr. Westerman waived his
right to have us fund the Rabbi Trust in exchange for our agreement to fund it
within five business days after notice from him.
Mr. Westerman's employment agreement required us to fund a retirement
account for him. We no longer make principal contributions to the retirement
account, but the account continues to accrue interest. The retirement account
had a balance, including accrued interest, of $2,063,000 as of December 31,
2007.
We credit Mr. Westerman's retirement account quarterly with interest on the
first day of each succeeding calendar quarter in an amount equal to the product
of (i) our average borrowing rate for the immediately preceding fiscal year, as
determined by the our Chief Financial Officer, and (ii) the average outstanding
balance in the retirement account during the preceding calendar quarter. At the
recommendation of the Committee, in order to reduce the amount that would be
payable immediately upon Mr. Westerman's separation from employment with us, Mr.
Westerman and we agreed that commencing April 1, 2003, and continuing the first
day of each quarter thereafter, he be paid the following in cash: (i) a
distribution of $250,000 from the principal balance of his retirement account;
and (ii) the quarterly interest credited to his retirement account one quarter
in arrears.
We retain beneficial ownership of Mr. Westerman's retirement account, which
is earmarked to pay his retirement benefits. However, upon (1) the vote of a
majority of the outstanding shares of common stock approving a "change of
control" (as discussed in the next paragraph), (2) the occurrence of a change of
control without Mr. Westerman's consent, (3) a breach by us of a material term
of the employment agreement or (4) the expiration or earlier termination of the
employment agreement for any reason other than cause, Mr. Westerman has the
right to require us to establish a "Rabbi Trust" for his benefit and to require
us to fund it with cash equal to the amount then credited to his retirement
account, including any amount to be credited to his retirement account upon a
change of control.
In the event that Mr. Westerman ceases to be employed by us (except for
termination for cause, in which case Mr. Westerman would forfeit all rights to
monies in the retirement account), he will be entitled to receive the amount in
the retirement account (principal and interest) in 20 equal quarterly
installments commencing as of the date he ceases to be employed. 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 or termination (except for cause) or upon a change
of control.
F-19
Mr. Westerman's agreement also provides that for a period of 24 months
following termination for any reason except cause, he shall not engage in any
activity, which is in competition with us within a 75-mile radius from the
location of any hotel or casino then operated by us. As consideration for not
competing, we will pay to Mr. Westerman a total of $500,000 in two equal annual
installments of $250,000. The first installment is payable within five business
days of termination of employment with the second installment payable on the
first anniversary of termination.
In addition to Mr. Westerman, one other executive, Robert Vannucci, has an
employment agreement with us.
Mr. Vannucci serves as President and COO of ROC. We entered into an
employment agreement with Mr. Vannucci effective September 1, 2006. The
agreement is for a one-year term and automatically renews for successive
one-year terms. Mr. Vannucci's base compensation is $400,000. His employment
agreement also provides for an annual base award of $200,000 and plus an amount
for a stretch bonus under our Incentive Compensation Program if we fully achieve
our financial targets at Riviera Las Vegas in 2008 (or a prorated award, if we
partially achieve those targets). For 2007 Mr. Vannucci received an Incentive
Compensation Program award of $203,458. For 2006, Mr. Vannucci received an
Incentive Compensation Program award of $92,500. Mr. Vannucci did not receive an
Incentive Compensation Program award for 2005. Mr. Vannucci or we may
terminate the employment agreement at any time upon 30 days prior written
notice, but if we terminate it without cause, then Mr. Vannucci will be
entitled to one year's salary, a prorated award under our Incentive
Compensation Program, two years of health insurance benefits and a one-year
automobile allowance of $6,000, plus reimbursement of all reasonable
automobile expenses (excluding lease or loan payments).
Incentive Compensation Program -- We have an Incentive Compensation Program
covering employees who, in the opinion of our Chairman of the Board, either
serve in key executive, administrative, professional, or technical capacities
with us, or who have made a significant contribution to the successful and
profitable operation of the Company. The amount of each bonus is based upon a
sliding targeted scale of earnings established annually. During the years ended
December 31, 2007, 2006 and 2005, the Company recorded accrued bonuses of
$1,716,000, $581,000 and $555,000 respectively, under this program.
Pension Plan Contributions -- We contribute to multi-employer pension plans
under various union agreements in Las Vegas to which we are a party.
Contributions, based on wages paid to covered employees, were approximately
$1,989,000, $1,952,000 and $1,760,000 for the years ended December 31, 2007,
2006 and 2005, respectively. Our share of any unfunded liability related to
multi-employer plans, if any, is not determinable.
Profit Sharing and 401(k) Plans -- We have profit sharing and 401(k) plans
(the "Profit Sharing and 401(k) Plans") for employees of Riviera Las Vegas and
Riviera Black Hawk who are at least 21 years of age and who are not covered by a
collective bargaining agreement and are eligible after ninety days of service.
Effective January 1, 2008 we amended our 401(k) Plans to an amount not to
exceed 50% of the first 6% of each participant's compensation. Prior to January
1, 2008 the Company match was 25% of the first 8%. We made contributions of
$279,000, $276,000 and $290,000 for the years ended December 31, 2007, 2006 and
2005. We also pay administrative costs of the Profit Sharing and 401(k) Plans,
which are not significant.
F-20
Prior to 2003, we suspended contributions to the profit sharing component
of the Profit Sharing and 401(k) Plans and we have substituted contributions to
an Employee Stock Ownership Plan ("ESOP"), (see "Employee Stock Ownership Plan,"
directly below).
Employee Stock Ownership Plan -- The ESOP was established prior to 2003 to
replace 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 who were employed on and
completed a minimum of 1,000 hours of service by, 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 we
will make a contribution to the ESOP's participants at Riviera Las Vegas and
Riviera Black Hawk relative to the economic performance of each property and for
the corporate participants relative to the economic performance of the entire
Company. We 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 are
exceeded, up to a maximum of 4% for 2007. Under the ESOP, our contributions are
made in cash, which may be used to buy our common stock and pay participants
upon separation of service. We contributed $316,000 in 2007, $0 in 2006 and
$126,000 in 2005, respectively to the ESOP.
Deferred Compensation Plan -- Prior to 2003, we adopted a Deferred
Compensation Plan (the "DCP"). The purpose of the DCP is to provide eligible
employees with the opportunity to defer the receipt of cash compensation.
Participation in the DCP is limited to employees who receive annual compensation
of at least $100,000. The deferred funds other than the common stock component,
are maintained on the Company books as funded liabilities under Rabbi Trusts for
the benefit of the participants. All elections to defer the receipt of
compensation must be made no later than December 1st preceding the plan year to
which the election relates and are irrevocable for the duration of that plan
year. No deferrals have been made since 2004. The plan distributed the remaining
common stock to participants during 2007 and as of December 31, 2007 the plan
does not have any participants.
Restricted Stock Plan -- Prior to 2003, we adopted a Restricted Stock Plan
to provide incentives, to attract and retain highly competent persons as
officers and key employees. Participants consist of such officers and key
employees as our Compensation Committee determines to be significantly
responsible for our success and future growth and profitability. Awards of
restricted stock are subject to such terms and conditions as we determine to be
appropriate at the time of the grant, including restrictions on the sale or
other disposition of such shares and provisions for the forfeiture of unvested
shares for no consideration upon termination of the participant's employment
within specified periods or under certain conditions. Please see Note 13.
Salary Continuation Agreements -- Approximately 60 executive officers and
certain other employees (excluding Mr. Westerman and Mr. Vannucci) of ROC and
RBH have salary continuation agreements effective through December 2008,
pursuant to which they will be entitled to receive (1) six months salary if
their employment with the Company is terminated, without cause, within 12 months
of a change of control of the Company; and (2) group health insurance for a
period of 6 months. 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. In addition, two officers and three significant
employees have salary continuation agreements effective through December 31,
2008, pursuant to which each of them will be entitled to receive one year's base
salary and certain benefits for two years, if their employment is terminated
without cause within 24 months of a change of control of the Company. These five
salary continuation agreements are not subject to a duty to mitigate. The
estimated total amount payable under all such agreements was approximately $3.5
million, which includes $690,000 in benefits, as of December 31, 2007.
F-21
14. STOCK OPTION PLANS
Stock Compensation Plans -- On January 1, 2006, we adopted SFAS No. 123(R),
using the modified prospective application. Accordingly, prior amounts have not
been restated. In the first quarter of 2006 our adoption of SFAS No. 123(R)
resulted in no incremental stock-based compensation expense, as we had no
non-vested options outstanding at January 1, 2006. At December 31, 2007, we had
two active stock option plans and two expired stock option plans, which are
described below. Under the 1993 Employee Stock Option Plan (the "1993 Option
Plan"), we were authorized to grant options to employees for up to one million
shares of our common stock. Under the Non-Qualified Stock Option Plan for
Non-Employee Directors (the "1996 Option Plan"), we were authorized to grant
options to non-employee directors for up to 150,000 shares of common stock.
Under these plans, the exercise price of each option equaled the market price of
our stock on the date of grant. All options have become vested under the 1996
Option Plan. Although the 1993 Option Plan and 1996 Option Plan have expired,
some options granted under these plans are still outstanding.
Effective May 17, 2005, we implemented two new stock option plans and
reserved a total of 1,150,000 shares for options issuable under the plans. We
allocated 150,000 shares to a new option plan for non-employee directors. We
will grant options for 6,000 shares to each non-employee director on each
anniversary of the effective date of the plan. Also, we will grant options for
6,000 shares to each person who becomes a non-employee director after May 17,
2005. The option exercise price will be the closing market price of our stock on
the date of the option grant. The options will vest over five years at 20% per
year, commencing on the first anniversary of the grant.
In 2005, we allocated one million shares to a new incentive stock option
plan for our officers and key employees. Our Stock Option Committee will have
discretion as to whom those options will be granted and the number of shares to
be allocated to each option grant. The option exercise price will be the closing
market price of our stock on the date of the option grant. The options will vest
over four years, with 20% vesting on the date of grant, and an additional 20% on
each anniversary of the grant.
In March of 2005 we granted 385,500 restricted shares to 21 executives
under our Restricted Stock Plan. On December 31, 2007, 137,700 restricted shares
remained outstanding. As of December 31, 2007, $1,370,000 remained to be
realized as expense related to these shares. This amount will be recognized
straight line over the remaining 3 years. On the 2007 anniversary of the grant,
48,300 shares vested and the restrictions were lifted.
One executive left the company in 2007 and forfeited 7,200 restricted
shares. Except for accelerated vesting in the event of an executive's death or
disability, retirement at or after age 62, termination of employment by us other
than for cause, or certain events of hardship, or in the event of a change in
control of the Company, the vesting schedule for the shares is as follows.
March 10, 2006............20%
March 10, 2007............40%
March 10, 2008............60%
March 10, 2009............80%
March 10, 2010...........100%
On May 27, 2005, we granted a total of 30,000 shares of stock to our
non-employee directors. Those shares are subject to restrictions on resales,
assignments, pledges, encumbrances or other transfers prior to vesting. The
shares vest at the rate of 20% per year on each anniversary of the grant date.
However, accelerated vesting will occur upon death, disability, a change of
control of the Company or under any other termination of directorship status,
except resignation prior to reaching age 62 or declining to stand for reelection
prior to reaching age 62 (which would result in forfeiture of the non-vested
shares).
F-22
The activity of the 1993 Option Plan and the two director option plans (the
1996 Option Plan and the 2005 Stock Option Plan for Non-employee Directors) is
as follows:
Weighted-
Average
Per Share
Exercise
Stock Options Shares Price
Outstanding, January 1, 2005 477,000 $ 2.42
Exercised (166,500) $ 2.38
--------
Outstanding, December 31, 2005 310,500 $ 2.45
Automatic grant to directors 24,000 $ 21.60
Exercised (97,500) $ 2.63
Forfeited (3,000) $ 2.45
--------
Outstanding, December 31, 2006 234,000 $ 4.33
Automatic grant to directors 24,000 $ 36.56
-------
Outstanding, December 31, 2007 258,000 $ 7.33
=======
Outstanding Average Weighted-
at Remaining Average
Range of December 31, Contractual Exercise
Exercise Prices 2007 Life Price
------------------------------------------------------------------------
$1.33 to $2.00 36,000 4.88 years $ 1.91
$2.18 to $20.00 174,000 3.28 years $ 2.45
$20.00 to $36.56 48,000 8.92 years $ 29.08
Exercise Weighted Average Aggregate Intrinsic
Shares Price Remaining Life Value
Shares exercisable 12/31/07 224,800 $3.59 4.58 years $6,106,000
The total intrinsic value of options exercised during 2006 and 2005 was
$1,614,000 and $2,053,000 respectively. No options were exercised in 2007.
Option expense recorded in 2007, 2006 and 2005 was $223,000, $72,000 and
$60,000, respectively. Restricted stock expense recorded in 2007, 2006 and 2005
was $744,000, $741,000 and $1,600,000, respectively. As of December 31, 2007,
$177,000 remains to be recorded as expense for outstanding options.
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 2007, respectively: dividend yield of 0%; average
expected volatility 41% based on the history of the stock price; risk-free
interest rates of 5.01%; and average expected life of 2.7 years. The average
weighted fair value of options granted in 2007 and 2006 was $11.06 and $14.30
per share, respectively. No options were granted in 2005.
F-23
15. GUARANTOR INFORMATION
The New Credit Facility is guaranteed by the Subsidiaries, which are all of
our restricted subsidiaries. These guaranties are full, unconditional, and joint
and several. RHC's unrestricted subsidiaries, which have no operations and do
not significantly contribute to our financial position or results of operations,
are not guarantors of the New Credit Facility.
16. LOSS PER SHARE
Basic loss per share is computed by dividing net loss per share by the
weighted-average number of common shares outstanding for the period. Diluted
loss per share 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 loss
per share as their effect would have been anti-delutive. Such antidilutive
options excluded from the calculation of diluted loss per share for the years
ended December 31, 2007, 2006 and 2005 were 265,486; 171,353; and 276,196,
respectively based on the treasury method.
17. RELATED PARTY TRANSACTIONS
Jeffrey A. Silver, a member of our board of directors, is a shareholder in
the law firm of Gordon & Silver, Ltd. ("Gordon & Silver"). We have engaged
Gordon & Silver for various securities issues and other legal matters since
1993. We continue to utilize the services of Gordon & Silver and we believe that
the fee arrangement is substantially equivalent to the arrangements that would
have been made with a comparable law firm where a relationship of this nature
did not exist. We incurred legal expenses to the firm which are included in
mergers, acquisitions and development cost of $174,000, $495,000 and $137,000 in
2007, 2006 and 2005, respectively. We incurred legal expenses to the firm which
are included in other general and administrative costs of $67,000, $56,000 and
$297,000 in 2007, 2006 and 2005, respectively.
We incurred legal expenses to the firm, which are included in our
refinancing costs of $124,000 for 2007.
18. SEGMENT DISCLOSURES
We review our operations by our geographic gaming market segments: Riviera
Las Vegas and Riviera Black Hawk. All inter-segment revenues have been
eliminated.
F-24
(in thousands) 2007 2006 2005
Net revenues:
Riviera Las Vegas $151,505 $ 149,202 $ 150,688
Riviera Black Hawk 53,990 51,742 51,539
-------- --------- ----------
Total net revenues $205,495 $ 200,944 $ 202,227
======== ========= ========
Property EBITDA(1)
Riviera Las Vegas 30,166 28,075 26,789
Riviera Black Hawk 19,133 16,825 17,282
Other costs and expenses:
Corporate expense
Share-based compensation 966 813 1,627
Other corporate expenses 4,745 4,644 5,278
Depreciation and amortization 13,116 12,691 14,065
Mergers, acquisitions and development
costs, net 611 1,318 (65)
Asset impairments 72 18 777
Loss on retirement of bonds 12,878
Decrease in value of derivative
instruments 1 3,272
Interest expense 23,756 26,366 26,608
Interest income (1,859) (615) (220)
------- ------ -------
67,557 45,235 48,070
------- ------ --------
Net loss $ (18,258) $ (335) $ (3,999)
======== ======== =========
Interest expense:
Riviera Las Vegas $ 16,851 $ 18,643 $ 18,857
Riviera Black Hawk 6,905 7,723 7,751
------- ------- --------
$ 23,756 $ 26,366 $ 26,608
======= ======== =========
Depreciation Expense
Riviera Las Vegas $ 9,143 $ 9,032 $ 9,712
Riviera Black Hawk 3,973 3,659 4,353
------- ------ ------
$ 13,116 $ 12,691 $ 14,065
====== ======= ======
Asset Impairment:
Riviera Las Vegas $ - $ 18 $ 310
Riviera Black Hawk 72 - 467
----- ----- -----
$ 72 $ 18 $ 777
===== ===== =====
December 31
Property and equipment (2): 2007 2006
-------- ------
Riviera Las Vegas $109,885 $ 108,234
Riviera Black Hawk 62,980 63,086
-------- --------
$172,865 $ 171,320
======== ========
F-25
(1) Property EBITDA consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is presented solely as a supplemental
disclosure because we believe that it is a widely used measure of operating
performance in the gaming industry and a principal basis for valuation of gaming
companies by certain investors. We use property-level EBITDA (EBITDA before
corporate expenses) as the primary measure of operating performance of our
properties, including the evaluation of operating personnel. EBITDA should not
be construed as an alternative to operating income, as an indicator of operating
performance, as an alternative to cash flow from operating activities, as a
measure of liquidity, or as any other measure determined in accordance with
accounting principles generally accepted in the United States of America. We
have significant uses of cash flows, including capital expenditures, interest
payments and debt principal repayments that are not reflected in EBITDA. Also,
other gaming companies that report EBITDA information may calculate EBITDA in a
different manner than we do.
(2) Property and equipment represent property and equipment net of
accumulated depreciation and amortization.
19. UNAUDITED QUARTERLY FINANCIAL DATA
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, 2007
Net revenues $ 52,027 $ 53,665 $ 52,380 $ 47,423
Operating income 8,961 9,439 6,664 4,725
Income (loss) before tax benefit 2,562 3,574 (18,254) (6,140)
Net Income (loss) 2,562 3,574 (18,254) (6,140)
Income (loss) per share basic $ 0.21 $ 0.29 $ (1.48) $ (0.50)
Income (loss) per share diluted $ 0.20 $ 0.28 $ (1.47) $ (0.49)
Year ended December 31, 2006
Net revenues $ 51,689 $ 52,437 $ 50,349 $ 46,469
Operating income 7,789 6,895 5,988 4,744
Income (loss) before tax benefit 1,280 418 (432) (1,601)
Net Income (loss) 1,280 418 (432) (1,601)
Income (loss) per share basic &
diluted $ 0.11 $ 0.03 $ (0.04) $ (0.13)
F-26