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This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration Numbers 333-35291,
333-35291-01, 333-35291-02,
333-35291-03 and 333-35291-04
PROSPECTUS
OFFER TO EXCHANGE
10% FIRST MORTGAGE NOTES DUE 2004
FOR ALL OUTSTANDING
10% FIRST MORTGAGE NOTES DUE 2004
OF
RIVIERA HOLDINGS CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON THURSDAY, JANUARY 8, 1998, UNLESS EXTENDED
------------------------
Riviera Holdings Corporation, a Nevada corporation (the "Company"), hereby
offers to exchange an aggregate principal amount of up to $175,000,000 of its
10% First Mortgage Notes due 2004 (the "New Notes") for a like principal amount
of its 10% First Mortgage Notes due 2004 (the "Existing Notes") outstanding on
the date hereof upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"). The New
Notes and the Existing Notes are hereinafter collectively referred to as the
"Notes." The terms of the New Notes are identical in all material respects to
those of the Existing Notes, except that (i) the exchange will have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and hence the New Notes will not bear legends restricting the transfer thereof,
and (ii) holders of the New Notes will not be entitled to certain rights of
holders of the Existing Notes under the Registration Rights Agreement (as
defined), which rights will terminate upon the consummation of the Exchange
Offer. The New Notes will be issued pursuant to, and will be entitled to the
benefits of, the Indenture (as defined) governing the Existing Notes.
The New Notes will bear interest from and including the date of consummation
of the Exchange Offer. Interest on the New Notes will be payable semi-annually
on February 15 and August 15 of each year, commencing February 15, 1998.
Additionally, interest on the New Notes will accrue from the last interest
payment date on which interest was paid on the Existing Notes surrendered in
exchange therefor or, if no interest has been paid on the Existing Notes, from
the date of original issue of the Existing Notes. Holders whose Existing Notes
are accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Existing Notes.
The New Notes will mature on August 15, 2004. The New Notes will be
redeemable at the option of the Company, in whole or in part, on or after August
15, 2001, at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. Upon a Change of Control (as
defined), subject to certain exceptions relating to the Merger (as defined), the
Company will be required to offer to repurchase all of the outstanding New Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase.
The New Notes will be senior secured obligations of the Company and will
rank pari passu in right of payment with all senior indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
The New Notes will be unconditionally guaranteed by existing and future
Restricted Subsidiaries (as defined) of the Company (the "Subsidiary
Guarantees"). The Subsidiary Guarantees will be senior secured obligations of
each Restricted Subsidiary and will rank pari passu in right of payment with all
senior indebtedness of such Restricted Subsidiary. The obligations under the New
Notes and the Subsidiary Guarantees will be secured by a first priority security
interest, subject to Permitted Liens (as defined) and certain exclusions, in the
land and improvements comprising the Riviera Hotel & Casino, furniture, fixtures
and equipment (excluding Gaming Equipment (as defined)), contract rights,
trademarks and certain other personal property (excluding inventory and accounts
receivable) and a pledge of all of the capital stock of the Restricted
Subsidiaries. See "Capitalization."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors (as defined) contained in the
Registration Rights Agreement, dated as of August 13, 1997 (the "Registration
Rights Agreement") by and between the Company, the Guarantors, and Jefferies &
Company, Inc. and Ladenberg Thalmann & Co. Inc. (the "Initial Purchasers") with
respect to the initial sale of the Existing Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Existing Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date (as defined) for the Exchange Offer. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Existing Notes with respect to the Exchange Offer, the Company will promptly
return such Existing Notes to the holders thereof. See "The Exchange Offer."
(Continued on following page)
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SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY HOLDERS OF EXISTING NOTES IN CONNECTION WITH THE
EXCHANGE OFFER.
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NONE OF THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD OR
ANY OTHER GAMING AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR OR THE INVESTMENT MERITS OF THE NOTES OFFERED HEREBY. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 10, 1997
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The Company is offering the New Notes in reliance on certain interpretive
letters issued by the staff of the Securities and Exchange Commission (the
"Commission") to third parties in unrelated transactions. Based on such
interpretive letters, the Company is of the view that the New Notes issued
pursuant to this Exchange Offer in exchange for Existing Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than (i)
a broker-dealer who purchases such New Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
or (ii) a person that is an affiliate of the Company within the meaning of Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the New Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders of Existing Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives the New Notes for its own account in exchange for
the Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Company believes that none of the
registered holders of the Existing Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. If a market for the New Notes should develop, such New Notes
could trade at a discount from their principal amount. The Company currently
does not intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system, and no active
public market for the New Notes is currently anticipated. There can be no
assurance that an active public market for the New Notes will develop. See "Risk
Factors -- Absence of Public Market for the Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Existing Notes where such Existing Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has indicated its intention to make this Prospectus (as
it may be amended or supplemented) available to any broker-dealer for use in
connection with any such resale for a period of one year following the Effective
Date (as defined). See "Plan of Distribution."
The Exchange Offer is not conditioned upon any minimum principal amount of
Existing Notes being tendered for exchange pursuant to the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF EXISTING NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Notes offered hereby (the
"Registration Statement"). As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information with respect to
the Company and the New Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. The Company is subject
to the information requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith files periodic
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549,
and at the Commission's Regional Offices at 7 World Trade Center, New York, New
York 10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained upon written request
addressed to the Commission, Public Reference Section, 450 Fifth Street, NW,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site at http://www.sec.gov that contains reports and other information regarding
registrants that file electronically with the Commission. In addition, material
filed by the Company may be inspected at the offices of the American Stock
Exchange at 86 Trinity Place, New York, New York 10006. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference.
In the event that the Company ceases to be subject to the informational
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes remain outstanding, it will file with the Commission (but only if the
Commission at such time is accepting such voluntary filings) and distribute to
holders of the Notes, copies of the financial information that would have been
contained in such annual reports and quarterly reports, including management's
discussion and analysis of financial condition and results of operations, that
would have been required to be filed with the Commission pursuant to the
Exchange Act. The Company will also furnish such other reports as it may
determine or as may be required by law.
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This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, the statements under "Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and located elsewhere herein regarding industry
prospects and the Company's financial position are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed in the Prospectus, including, without limitation, in
conjunction with the forward-looking statements in this Prospectus under "Risk
Factors."
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including notes thereto) included elsewhere in this Prospectus. Unless
otherwise indicated or the context otherwise requires, references to the
"Company" are to Riviera Holdings Corporation and its subsidiaries including
Riviera Operating Corporation, a Nevada corporation ("ROC"). This Prospectus
contains forward-looking information that involves risks and uncertainties, and
such information is subject to the assumptions set forth in connection therewith
and the information contained or incorporated by reference herein. Holders of
Existing Notes should carefully consider the information set forth under the
heading "Risk Factors."
THE COMPANY
The Company owns and operates the Riviera Hotel & Casino (the "Riviera")
located on Las Vegas Boulevard (the "Strip") in Las Vegas, Nevada. Opened in
1955, the Riviera has developed a long-standing reputation for delivering high
quality, traditional Las Vegas-style gaming and entertainment. The Riviera is
situated on a 26-acre site located across the Strip from Circus Circus and
across Paradise Road from the Las Vegas Hilton and the Las Vegas Convention
Center. The property features approximately 2,100 hotel rooms, including 169
suites, 105,000 square feet of casino space, one of the largest convention,
meeting and banquet facilities in Las Vegas, four full-service restaurants, a
large buffet, four showrooms, an entertainment lounge, 43 food and retail
concessions and approximately 2,900 parking spaces. The casino contains
approximately 1,300 slot machines, 50 gaming tables, a keno lounge and a
200-seat race and sports book. The Riviera offers one of the most extensive
entertainment programs in Las Vegas, including the award winning show,
Splash(R). The Company, through its gaming management subsidiary, also manages
the Four Queens Hotel and Casino ("Four Queens") on Fremont Street in downtown
Las Vegas.
From 1992 to the end of 1996, the Riviera's management team achieved
consistent growth in EBITDA (as defined) and profit margins. EBITDA has
increased over 44% from $21.8 million in 1992 to $31.5 million in 1996 and
EBITDA margins have improved from 15.1% to 19.2% over the same period. The
Company achieved this growth through the implementation of a number of strategic
initiatives that included (i) refocusing its marketing strategy from
"high-rollers" to adult midlevel gaming customers, a niche that management
believes has been underserved, (ii) focusing on conventioneers who pay higher
room rates, causing Riviera's average daily room rate ("ADR") to increase from
$47 in 1992 to $57 in 1996, (iii) aggressively marketing its hotel facilities
resulting in occupancy rates growing from 90.6% in 1992 to 98.2% in 1996, (iv)
emphasizing higher margin slot play which increased slot revenue by 33.0% from
1992 to 1996 and (v) investing approximately $47 million in capital improvements
since 1992. Management believes that it has also improved the stability of
EBITDA by providing a broad entertainment experience (1996 non-gaming revenues:
55% vs. 47% for other casinos on the Strip), focusing on conventioneers
(approximately 30% of mid-week room nights pre-sold through June 1999) and
developing a repeat and loyal customer base through proprietary database
marketing.
GROWTH OPPORTUNITIES
The Company seeks to continue its growth in EBITDA and profits by
maximizing the potential of the Riviera's prime Strip frontage and capitalizing
on the proven strength of its management team by leveraging its talents across
multiple properties. To achieve this goal, the Company is pursuing the following
opportunities:
Riviera Expansion. By the end of 1997, management expects to have completed
the upgrade of the slot machines and refurbished substantially all of the hotel
rooms at the Riviera. To continue capitalizing on the Riviera's prime Strip
frontage, the Company is developing the Nickel Plaza, a new 10,000 square-foot
gaming area fronting the Strip complete with 350 slot machines, a bar, snack bar
and souvenir shop, which is expected to be completed by December 1997. Nickel
Plaza will be ideally positioned to attract the additional walk-in traffic from
the 1,000 newly built rooms directly across the Strip at Circus Circus and the
expansions of the Las Vegas Hilton and the Las Vegas Convention Center.
Management expects Nickel Plaza will be developed for an estimated cost of $5
million. To maintain and enhance its core conventioneer customer base, the
Company also plans to expand its convention center from 100,000 square feet to
158,000 square feet by
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constructing new state-of-the-art, multi-level, convention, meeting and banquet
facilities. Construction commenced in November 1997 and is expected to be
completed by the end of the third quarter of 1998. Management believes this
expansion, which is estimated to cost approximately $15 million, will further
solidify the Riviera as one of the premier convention sites in Las Vegas. In
addition, the Company owns approximately six acres of contiguous property which
is available for future expansion.
The Black Hawk Project. As part of the Company's strategy to diversify its
revenue base and leverage both the Riviera name and its management team, the
Company pursues development opportunities in both established and emerging
gaming markets. The Company has acquired a certain parcel of real property in
Black Hawk, Colorado (the "Black Hawk Land"), which management believes to be
the premier gaming site in Colorado. The Company intends to use this site to
construct one of the largest gaming facilities in the adjacent gaming cities of
Black Hawk and Central City, Colorado (the "Black Hawk Project"). The Black Hawk
Project is expected to feature approximately 1,000 slot machines, 14 table
games, an approximately 520 space covered parking garage and entertainment and
food service amenities. Management believes this market has attractive
fundamentals, including (i) gaming currently limited to Black Hawk/Central City
and Cripple Creek in Colorado, (ii) consistent gaming revenue growth since 1992
to over $300 million in 1996, (iii) slot machine dominated market due to
statutory limited stakes, (iv) one hour drive from central Denver and (v)
approximately 2.3 million adults residing within 100 miles of Black Hawk.
Management believes that the proposed Riviera facility will be highly successful
due to the following attributes: (i) premier location: it will be the first
gaming site encountered when arriving from Denver, (ii) size and quality: it
will be one of the largest casinos in the market complete with restaurant and
entertainment options and (iii) superior parking: it will have onsite, covered
self-parking, which is critical in this market where parking is currently
extremely limited. The Black Hawk Project is an attractive investment
opportunity that allows the Company to create a multi-jurisdictional gaming
company. The Company currently estimates that total costs for completion of the
Black Hawk Project will be approximately $60 million, a $5 million increase over
previous estimates resulting from the announcement of additional projects by
competitors. The Company purchased the Black Hawk Land in August 1997 for $15
million, which was financed by the net proceeds from the sale of the Existing
Notes, and expects to finance the remainder of the Black Hawk Project from a
combination of third party financing and additional investment by the Company,
including up to an additional $15 million of the net proceeds from the sale of
the Existing Notes. The Company expects to receive the necessary excavation and
other permits in the near future, with construction of the casino commencing
shortly thereafter. The casino is scheduled to open during mid-1999.
Casino/Hotel Management Contracts. The Company believes that there is
increasing demand for the services of skilled gaming and hospitality
professionals. In order to capitalize on management's reputation and experience
as successful casino operators, the Company formed Riviera Gaming Management,
Inc. ("RGM") for the primary purpose of obtaining casino management contracts
with casinos/hotels in Nevada and other jurisdictions. Since August 1996, RGM's
subsidiary, Riviera Gaming Management -- Elsinore ("RGME"), has managed the Four
Queens located adjacent to the Golden Nugget on Fremont Street in downtown Las
Vegas. Under the Four Queens management contract, RGME receives a guaranteed
minimum management fee plus additional compensation based on EBITDA improvement
of the Four Queens, and warrants to purchase 18.4% (on a fully diluted basis) of
the common stock of the Four Queens' parent, Elsinore Corporation ("Elsinore").
Such management contract provides significant revenues and upside equity
potential with minimal additional overhead and capital expenditure. Under RGME,
Four Queens' EBITDA improved by approximately 12% in the twelve months ended
September 30, 1997, compared to the same period in 1996 and generated
approximately $1.0 million in management fees for the Company. Management is
continually evaluating opportunities to manage other casinos/hotels.
The Company's principal executive offices are located at 2901 Las Vegas
Boulevard South, Las Vegas, Nevada 89109, and its telephone number is (702)
734-5110.
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THE PROPOSED MERGER
The Company has entered into an Agreement and Plan of Merger (the "Merger
Agreement") among the Company and certain entities controlled by Allen E.
Paulson, a California businessman, pursuant to which one of such entities would
be merged with and into the Company (the "Merger"). The closing of the Merger is
subject to a number of conditions, including (i) approval by the affirmative
vote of the holders of at least 60% of all issued and outstanding shares of
Common Stock, par value $.001 per share (the "Common Stock"), of the Company
(excluding the shares of Common Stock owned by Mr. Paulson or his affiliates) at
a meeting scheduled to be held this winter, (ii) Mr. Paulson's licensure by the
Nevada Gaming Authorities (as defined), (iii) the absence of any regulation,
judgment or other law that prohibits the consummation of the Merger or would
prohibit or limit the Company's ownership or control of a material portion of
the Company's business or assets following the Merger, and (iv) the absence of
any material adverse change in the Company's cumulative EBITDA for the period
commencing on April 1, 1997 through and including the most recent month prior to
such closing for which the Company's financial statements are available. The
holders of approximately 59% of the Company's Common Stock have entered into an
option and voting agreement in which they have agreed to vote for the Merger.
However, there can be no assurance that the conditions to the Merger will be
satisfied or waived or that the Merger will be consummated.
THE TRANSACTIONS
The Existing Notes were issued on August 13, 1997. The net proceeds from
the sale of the Existing Notes were approximately $165.8 million, a portion of
which were used as follows: (i) $109.8 million was used to defease the Company's
11% First Mortgage Notes due 2002 (the "11% First Mortgage Notes"), (ii) $4.5
million was used to retire the Company's Class 13/14 Unsecured Promissory Note
(the "Unsecured Note") and (iii) $7.0 million was used to pay fees and expenses
relating to the foregoing as well as the sale of the Existing Notes. In
addition, the Company has used $15 million of the net proceeds to acquire the
Black Hawk Land. The Company also intends to use the remaining net proceeds from
the sale of the Existing Notes to fund the development of Nickel Plaza and the
expansion of the convention center, and, if necessary, to provide additional
financing for the Black Hawk Project. To the extent that the additional proceeds
are not used for the development of the Black Hawk Project, the unused proceeds
will be used for the Company's general business purposes. The issuance and sale
of the Existing Notes and the application of the net proceeds therefrom,
including the payment of related transaction fees and expenses and the
defeasance of the 11% First Mortgage Notes are collectively referred to herein
as the "Transactions."
THE EXCHANGE OFFER
Securities Offered......... Up to $175.0 million aggregate principal amount of
10% First Mortgage Notes due 2004. The terms of the
New Notes and Existing Notes are identical in all
material respects, except for certain transfer
restrictions and registration rights relating to
the Existing Notes.
The Exchange Offer......... The New Notes are being offered in exchange for a
like principal amount of Existing Notes. Existing
Notes may be exchanged only in integral multiples
of $1,000. The issuance of the New Notes is
intended to satisfy obligations of the Company
contained in the Registration Rights Agreement.
Expiration Date; Withdrawal
Tender..................... The Exchange Offer will expire at 5:00 p.m., New
York City time, on Thursday, January 8, 1998, or
such later date and time to which it may be
extended by the Company. The tender of Existing
Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
Any Existing Notes not accepted for exchange for
any reason will be returned without expense to the
tendering holder thereof as
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promptly as practicable after the expiration or
termination of the Exchange Offer.
Accrued Interest on the New
Notes and the Existing
Notes...................... The New Notes will bear interest from and including
the date of consummation of the Exchange Offer.
Additionally, interest on the New Notes will accrue
from the last interest payment date on which
interest was paid on the Existing Notes surrendered
in exchange therefor or, if no interest has been
paid on the Existing Notes, from the date of
original issue of the Existing Notes. Holders whose
Existing Notes are accepted for exchange will be
deemed to have waived the right to receive any
interest accrued on the Existing Notes.
Certain Conditions to the
Exchange Offer............. The Company's obligation to accept for exchange, or
to issue New Notes in exchange for, any Existing
Notes is subject to certain customary conditions
relating to compliance with any applicable law or
any applicable interpretation by the staff of the
Commission, the receipt of any applicable
governmental approvals and the absence of any
actions or proceedings of any governmental agency
or court which could materially impair the
Company's ability to consummate the Exchange Offer.
The Company currently expects that each of the
conditions will be satisfied and that no waivers
will be necessary. See "The Exchange Offer --
Certain Conditions to the Exchange Offer."
Procedures for Tendering
Existing Notes............. Each holder of Existing Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Existing Notes and any other required
documentation, to the Exchange Agent (as defined)
at the address set forth herein. Subject to the
satisfaction or waiver of the conditions to the
Exchange Offer, the Company will accept for
exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to
the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering Existing Notes."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Existing Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Existing Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. See
"The Exchange Offer -- Procedures for Tendering
Existing Notes." If such beneficial owner wishes to
tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Existing
Notes, either make appropriate arrangements to
register ownership of the Existing Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time and
may not be able to be completed prior to the
Expiration Date.
Guaranteed Delivery
Procedures................. Holders of Existing Notes who wish to tender their
Existing Notes and whose Existing Notes are not
immediately available or who cannot
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<PAGE> 8
deliver their Existing Notes, the Letter of
Transmittal or any other document required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, must tender their Existing
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Existing Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
Certain Federal Income Tax
Considerations............. For a discussion of certain federal income tax
considerations relating to the exchange of the
Notes, see "Certain Federal Income Tax
Considerations."
Use of Proceeds............ The Company will not receive any proceeds from the
Exchange Offer.
Exchange Agent............. Norwest Bank Minnesota, N.A. (the "Exchange Agent")
is serving as the Exchange Agent in connection with
Exchange Offer.
CONSEQUENCES OF EXCHANGING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that the
New Notes issued pursuant to this Exchange Offer in exchange for Existing Notes
may be offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a brokerdealer who purchases such New Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an affiliate of the Company within
the meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the New Notes in the ordinary course of its
business and is not participating, and had no arrangement or understanding with
any person to participate, in the distribution of the New Notes. Holders of
Existing Notes wishing to accept the Exchange Offer must represent to the
Company, as required by the Registration Rights Agreement, that such conditions
have been met. Each broker-dealer that receives the New Notes for its own
account in exchange for the Existing Notes, where such Existing Notes were
acquired by such broker-dealer as a result of marketmaking activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Existing Notes where such Existing Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has indicated its intention to make this Prospectus (as
it may be amended or supplemented) available to any broker-dealer for use in
connection with any such resale for a period of one year following the date the
Registration Statement is declared effective by the Commission (the "Effective
Date"). See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or in compliance with an
available exemption from registration or qualification. The Company has agreed,
pursuant to the Registration Rights Agreement and subject to certain specified
limitations therein, to register or qualify the New Notes for offer or sale
under the securities or blue sky laws of such jurisdictions as are necessary to
permit consummation of the Exchange Offer. If a holder of Existing Notes does
not exchange such Existing Notes for New Notes pursuant to the Exchange Offer,
such Existing Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Existing Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of Existing Notes do not have any
5
<PAGE> 9
appraisal or dissenters' rights under Nevada Corporation Law in connection with
the Exchange Offer. See "The Exchange Offer -- Consequences of Failure to
Exchange; Resales of New Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
Following commencement of the Exchange Offer but prior to its consummation, the
Existing Notes may continue to be traded in the PORTAL market. Following
consummation of the Exchange Offer, the New Notes will not be eligible for
PORTAL trading.
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the
Existing Notes, except for certain transfer restrictions and registration rights
relating to the Existing Notes.
Securities Offered......... Up to $175.0 million in aggregate principal amount
of 10% First Mortgage Notes due 2004.
Maturity Date.............. August 15, 2004.
Interest................... The New Notes will bear interest at a rate of 10%
per annum, payable semi-annually on February 15 and
August 15 of each year, commencing February 15,
1998.
Ranking.................... The New Notes will be senior secured obligations of
the Company and will rank pari passu in right of
payment with any existing and future senior
indebtedness of the Company and senior in right of
payment to any existing and future subordinated
indebtedness of the Company. At September 30, 1997,
after giving effect to the redemption of the 11%
First Mortgage Notes, the Company and its
subsidiaries would have had outstanding senior
indebtedness (including the Notes) of approximately
$173.8 million.
Guarantees................. The New Notes will be unconditionally guaranteed by
all existing and future Restricted Subsidiaries (as
defined) of the Company, which will not initially
include Riviera Black Hawk, Inc., a Colorado
corporation that owns the Black Hawk Land and is
expected to hold any required Colorado gaming
licenses ("Black Hawk Operating Company"). See
"Description of Notes -- Security." The Subsidiary
Guarantees will be senior secured obligations of
the respective Restricted Subsidiaries and will
rank pari passu in right of payment to all senior
indebtedness of the Restricted Subsidiaries. At
September 30, 1997, Black Hawk Operating Company
had assets of approximately $15.5 million, which
represents the cost of the Black Hawk Land (as
defined), and no liabilities or operations.
Therefore, separate financial statements of the
Guarantors have therefore not been included in this
Prospectus.
Security................... The New Notes and the Subsidiary Guarantees will be
secured by a first priority security interest,
subject to Permitted Liens, in the land and
improvements comprising the Riviera (provided that
up to six undeveloped acres of the land may be
released from the mortgage for purpose of future
developments), furnitures, fixtures and equipment
(excluding Gaming Equipment), contract rights,
trademarks, and certain other personal property
(excluding inventory and accounts receivable) and,
subject to required approvals, a pledge of all of
the capital stock of the Restricted Subsidiaries.
See "Description of Notes -- Security."
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, on or after
August 15, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the date of
6
<PAGE> 10
redemption. The Company will have the option to
redeem the New Notes at any time to maintain or
obtain any Gaming License (as defined) under any
applicable Gaming Law (as defined). Notwithstanding
the foregoing, at any time or from time to time
prior to August 15, 2000, the Company may redeem up
to one-third of the aggregate principal amount of
the New Notes originally issued at a redemption
price equal to 110% of the principal amount thereof
plus accrued and unpaid interest, if any, to the
date of redemption with the net proceeds of an
offering of common stock of the Company, provided
that at least $116.7 million of the aggregate
principal amount of the New Notes remain
outstanding immediately thereafter. See
"Description of Notes -- Optional Redemption."
Mandatory Redemption....... None.
Change of Control.......... Upon the occurrence of a Change of Control (except
as a result of the Merger), the Company will be
required to offer to repurchase all of the
outstanding New Notes at 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. See
"Description of Notes -- Repurchase at the Option
of Holders."
Certain Covenants.......... The Indenture relating to the New Notes contains
certain covenants, including covenants which limit
the ability of the Company and its Restricted
Subsidiaries, subject to certain exceptions, to:
(i) incur additional indebtedness and issue
preferred stock; (ii) pay dividends or other
distributions, repurchase capital stock or other
equity interests or subordinated indebtedness;
(iii) enter into certain transactions with
affiliates; (iv) create certain liens; (v) sell
certain assets; and (vi) enter into certain mergers
and consolidations. See "Description of Notes --
Certain Covenants."
For a more detailed discussion of the terms of the New Notes, see
"Description of Notes."
RISK FACTORS
Holders of Existing Notes should carefully consider all of the information
set forth in this Prospectus and, in particular, should evaluate the specific
factors under "Risk Factors" beginning on page 9 in connection with the Exchange
Offer.
7
<PAGE> 11
SUMMARY FINANCIAL AND OPERATING DATA
The summary historical financial data set forth below have been derived
from the audited financial statements of the Company and, prior to the Company's
emergence from bankruptcy in June 1993, the Hotel and Casino Division of
Riviera, Inc., the Company's predecessor, for the fiscal year ended December 31,
1992, each of the three fiscal years in the period ended December 31, 1996 and
the fiscal years ended June 30, 1993 and December 31, 1993. The results for the
three months and nine months ended September 30, 1996 and 1997 and as of
September 30, 1997 are derived from the unaudited financial statements and notes
thereto of the Company and, in the opinion of management, reflect all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly information set forth therein. The results for the three months
and nine months ended September 30, 1996 and 1997 are not necessarily indicative
of the results expected for any other interim period or for the full year. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
YEAR ENDED -------------------------- DEC. 31, YEARS ENDED DECEMBER 31,
DEC. 31, JUNE 30, DEC. 31, 1993 --------------------------------
1992 1993 1993 COMBINED 1994 1995 1996
------------- ------------- ----------- ---------- -------- -------- --------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................... $ 144,502 $72,702 $76,221 $148,923 $153,921 $151,145 $164,409
Income(loss) from operations.... (76,608)(1) 8,260 8,767 17,027 19,919 20,980 23,281
Net income (loss)............... (80,905)(1) 5,628 2,607 8,235 4,790 6,344 8,440
OTHER DATA:
EBITDA(2)....................... $ 21,843 $10,882 $11,166 $ 22,048 $ 25,593 $ 27,791 $ 31,493
EBITDA margin................... 15.1% 15.0% 14.6% 14.8% 16.6% 18.4% 19.2%
Cash flows from operating
activities.................... $ 13,130 $ 8,517 $ 766 $ 9,283 $ 16,372 $ 16,740 $ 18,290
Cash flows used in investing
activities.................... (2,073) (1,478) (4,307) (5,785) (10,439) (8,218) (13,017)
Cash flows provided by (used in)
financing activities.......... (729) (2,311) (4,658) (6,969) (2,696) (2,983) (1,488)
Depreciation & amortization..... 13,230 2,622 2,399 5,021 5,674 6,811 8,212
Ratio of earnings to fixed
charges....................... --(3) 2.99x(3) 1.41x 1.89x 1.60x 1.78x 2.06x
Capital expenditures............ $ 2,477 $ 1,478 $ 4,307 $ 5,785 $ 8,933 $ 7,836 $ 14,923
OPERATING DATA:
Average occupancy rate(4)....... 90.6% 92.4% 95.0% 93.7% 97.5% 97.0% 98.2%
Average daily room rate(ADR).... $ 47.00 $ 51.63 $ 49.33 $ 50.42 $ 47.51 $ 54.69 $ 57.09
Number of slot machines(5)...... 1,218 1,218 1,207 1,207 1,203 1,226 1,312
Number of gaming tables(5)...... 74 70 70 70 56 56 55
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1996 1997 1996 1997
-------- -------- ------- -------
<S> <C<C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................... $124,205 $116,485 $40,931 $36,383
Income(loss) from operations.... 17,364 13,515 4,838 2,660
Net income (loss)............... 6,034 2,016 1,417 (988)
OTHER DATA:
EBITDA(2)....................... $ 23,323 $ 21,215 $ 6,935 $ 5,349
EBITDA margin................... 18.8% 18.2% 16.9% 14.7%
Cash flows from operating
activities.................... $ 15,453 $ 14,224 $ 7,419 $ 5,789
Cash flows used in investing
activities.................... (6,811) (34,752) (4,250) (26,767)
Cash flows provided by (used in)
financing activities.......... (1,618) 57,188 (267) (57,670)
Depreciation & amortization..... 5,959 7,700 2,097 2,690
Ratio of earnings to fixed
charges....................... 1.99x 1.27x 1.69x 0.71x
Capital expenditures............ $ 9,502 $ 11,379 $ 4,242 $ 4,494
OPERATING DATA:
Average occupancy rate(4)....... 99.0% 98.3% 99.0% 98.4%
Average daily room rate(ADR).... $ 55.73 $ 56.19 $ 49.14 $ 49.95
Number of slot machines(5)...... 1,312 1,308 1,312 1,308
Number of gaming tables(5)...... 55 52 55 52
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------------- ----------- -------- -------- -------- --------------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 16,659 $ 13,188 $ 16,423 $ 21,962 $ 25,747 $ 62,407(6)
Total assets.................................... 145,631 143,704 151,925 157,931 167,665 341,895
Long term debt, including current portion....... 133,255 112,677 110,489 107,822 105,878 273,809(7)
Stockholders' equity............................ (114,358) 15,148 19,938 26,282 35,251 37,599
</TABLE>
- ---------------
(1) Includes a recognized loss on the permanent impairment of assets during the
bankruptcy in the amount of $85,200 to record the fair market value of the
property and equipment.
(2) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles("GAAP"), it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. Although EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs, management believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt.
(3) The ratio for fiscal 1992 has been omitted because earnings were not
sufficient to cover fixed charges. The coverage deficiency was $80,905
($101,882 if interest was not stayed). If interest would have been accrued
on the pre-bankruptcy or other unsecured debt for the six months ended June
30, 1993 earnings would have been inadequate to cover fixed charges by
$1,937. For the purpose of computing the ratio of earnings to fixed charges,
"earnings" consist of income before fixed charges and income taxes, adjusted
to exclude interest capitalized, and "fixed charges" consist of interest
cost, amortizations of debt expense, amortization of bond discount and
capitalized interest.
(4) Based on available rooms.
(5) Number of licensed slot machines and gaming tables at period end.
(6) Includes $20,000 designated for the development of Nickel Plaza and the
expansion of the convention center. See "Use of Proceeds."
(7) Includes the 11% First Mortgage Notes to be retired by U.S. treasury bills
as of September 30, 1997.
8
<PAGE> 12
RISK FACTORS
Holders of Existing Notes should give careful consideration to the specific
factors set forth below and the other information set forth herein in connection
with the Exchange Offer. The Risk Factors set forth below are generally
applicable to the New Notes as well as the Existing Notes.
SIGNIFICANT LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged. At September 30, 1997, after giving effect
to the redemption of the 11% First Mortgage Notes, the Company's debt would have
been $173.8 million. See "Description of Certain Indebtedness."
The Company's high degree of leverage could have important consequences to
the Holders, including, without limitation: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to servicing its debt;
(ii) the covenants contained in the Company's debt documents impose certain
restrictions on the Company which, among other things, will limit its ability to
borrow additional funds; (iii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; and (iv) the
Company's level of debt may limit the Company's flexibility in reacting to
changes in its business environment.
The Company is a holding company and its ability to make interest and
principal payments on its obligations, including the Notes, will depend on the
future operating performance of its subsidiaries, which will be affected by
general economic conditions and financial, business and other factors, many of
which are beyond their control. The ability of the Company's subsidiaries to
make distributions to the Company is also subject to the gaming laws of Nevada
(which place limits on the amount of funds that may be transferred to the
Company and may require prior or subsequent approval for any such payments) and
other restrictions that may be imposed by gaming authorities on licensed
enterprises. Furthermore, it is expected that third party financing for the
Black Hawk Project will restrict the ability of such project to make
distributions to the Company. See "-- The Black Hawk Project." There can be no
assurance that the subsidiaries will be able to, or will be permitted to, pay to
the Company amounts necessary to enable the Company to make required principal
and interest payments on the Notes. If the Company cannot generate sufficient
cash flow from operations in the future to service its debt, it may be required
to refinance all or a portion of such debt (including the Notes), sell assets or
obtain additional financing. There can be no assurance that any of these
financing strategies could be effected on terms satisfactory to the Company.
FAILURE TO EXCHANGE EXISTING NOTES
The New Notes will be issued in exchange for Existing Notes only after
timely receipt by the Exchange Agent of such Existing Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Existing Notes desiring to tender such Existing
Notes in exchange for New Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Existing
Notes for exchange. Existing Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Existing Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Existing Notes, where such Existing
Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. See "Plan
of Distribution." To the extent that Existing Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Existing Notes could be adversely affected. See "The Exchange Offer."
9
<PAGE> 13
COMPETITION
Intense competition exists among companies in the gaming industry, many of
which have significantly greater resources than the Company. The Riviera faces
competition from all other casinos and hotels in the Las Vegas area. Management
believes that the Riviera's most direct competition comes from certain large
casino/hotels located on or near the Strip which offer amenities and marketing
programs similar to those offered by the Riviera.
Las Vegas gaming square footage and room capacity are continuing to grow
and are expected to continue to increase significantly during the next several
years. Since January 1, 1996 approximately 4,700 new hotel rooms opened. As of
December 31, 1996 there were over 9,200 hotel rooms under construction (which
combined constitutes a 14.7% increase in the number of hotel and motel rooms in
Las Vegas) and the Las Vegas Convention and Visitors Authority estimates that
approximately 60,000 additional hotel rooms are proposed for construction.
Existing and future expansions, additions and enhancements to existing
properties and construction of new properties by the Company's competitors could
divert additional business from the Company's facilities. There can be no
assurance that the Company will compete successfully in the Las Vegas market in
the future.
Compared to the first eight months ended August 31, 1996, during the first
eight months of 1997, available rooms in the Las Vegas market increased by
11.2%, while total room nights occupied increased by only 6.8%. This has had the
effect of intensifying competition, resulting in declining occupancy and average
room rates throughout the Las Vegas market. Although the Company was able to
increase its room rates nominally which offset a less than 1% decline in
occupancy, there is no certainty that the Company can continue to maintain its
present level of room revenue considering the competitive situation.
Intense competition also characterizes the Black Hawk/Central City,
Colorado market. There are approximately 31 casinos currently operating in this
market in addition to casinos located in Cripple Creek. Several new development
projects and expansion plans have been announced, including construction of a
casino by a joint venture between Jacobs Entertainment, Ltd. and the
owner/operator of Gilpin Hotel Casino and a casino on property adjacent to the
Black Hawk Land (as defined) by a joint venture between Casino America and
Nevada Gold. Colorado does not limit the total number of gaming licenses
available for issuance in Colorado and there are no minimum facility size
requirements. The Company believes that many Colorado casinos may not be
operating profitably. A number of Colorado casinos have ceased operations, and
others have either filed for bankruptcy protection, closed temporarily or
reduced the number of their employees.
In May 1997, the Colorado Legislature passed a bill mandating the
installation of a minimum of 500 video lottery terminals at each licensed horse
and greyhound racetrack then located in Colorado Springs, Pueblo, Byers,
Loveland, Commerce City and Arapahoe County. The Governor of Colorado vetoed the
bill on June 4, 1997 labeling it as a "back-door expansion of gambling." There
is no reason, however, to believe that there will not be renewed efforts to pass
similar legislation during the 1998 or subsequent legislative sessions.
The Company also competes, to some extent, with casinos in other states,
riverboat and Native American gaming ventures, state-sponsored lotteries, on-
and off-track wagering, card parlors and other forms of legalized gaming in the
United States, as well as with gaming on cruise ships and international gaming
operations. In addition, certain states have recently legalized or are
considering legalizing casino gaming in specific geographical areas within those
states. Any future development of casinos, lotteries or other forms of gaming in
other states, particularly areas close to Nevada, such as California, could have
a material adverse effect on the Company's results of operations. For a
discussion of competitive factors affecting the Company's operations, see
"Business -- Competition."
The current business of the Company is entirely dependent on gaming in Las
Vegas. The Riviera derives a substantial percentage of its business from
tourists, principally from Southern California and the southwestern United
States. Weakness in the economy of Southern California has in the past and could
in the future adversely affect the financial results of the Company. Until the
Black Hawk Casino opens, the Company's operations will be primarily dependent
upon the results of operations achieved by the Riviera on the Las Vegas
10
<PAGE> 14
Strip. Any significant disruption in operations at the Riviera would have a
material adverse effect on the Company.
UNCERTAINTIES OF FUTURE DEVELOPMENTS
While the Company intends to expand its business by managing additional
gaming properties and acquiring and developing new gaming properties, there is
no assurance that it will be able to do so or that such projects will become
operational within the time frames and budgets contemplated by management.
Construction projects, such as the proposed Nickel Plaza project and convention
center expansion at the Riviera and the Black Hawk Project, entail significant
development and construction risks, including, but not limited to, cost
overruns, delay in receipt of governmental approvals, shortages of materials or
skilled labor, unforeseen engineering or environmental problems, work stoppages,
weather interference, unanticipated cost increases and regulatory problems, any
of which, if they occurred, could delay construction or result in substantial
cost increases to the Company. Budget overruns and delays with respect to
expansion and development projects could have a material adverse impact on the
Company's results of operations. In addition, with respect to the convention
center project, the Company does not have final construction contracts. Further,
to the extent that the Company is successful in its expansion strategy, it will
face the inherent risks associated with managing an increased number of
properties. The necessity of key employees to focus their attention on various
planned expansion projects may reduce the amount of time they can devote to core
operations of the Company.
THE BLACK HAWK PROJECT
Limitation on Distribution. The Company currently estimates that total
costs for completion of the Black Hawk Project will be approximately $60
million, a $5 million increase over previous estimates resulting from the
announcement of additional projects by competitors. The Company purchased the
Black Hawk Land in August 1997 for $15 million, which was financed by the net
proceeds from the sale of the Existing Notes, and expects to finance the
remainder of the Black Hawk Project from a combination of third party financing
and additional investment by the Company, including up to an additional $15
million of the net proceeds from the sale of the Existing Notes. There is no
assurance that such third party financing will be obtained on terms satisfactory
to the Company. In addition, such financing, if and when obtained, will likely
be subject to various conditions, including restrictions on Black Hawk Operating
Company's ability to make distributions to the Company out of cash flow from the
operations at Black Hawk (which are expected to commence in mid-1999), other
covenant restrictions, and approval by relevant gaming authorities. The Company
expects that the amount of cash flow available for distributions to it from its
operations in Black Hawk, which are expected to commence in mid-1999, will be
limited until any project financing is repaid in its entirety.
Completion of the Black Hawk Project. Completion of the Black Hawk Project
is subject to obtaining bonded fixed price construction and completion
contracts, obtaining regulatory approvals for the Black Hawk Project and
obtaining adequate third party financing for the Black Hawk Project. The Company
expects to receive the necessary excavation and other permits in the near
future, with construction of the casino commencing shortly thereafter. However,
There can be no assurance that these conditions to the Black Hawk Project can be
met or satisfied on terms satisfactory to the Company.
Licensing Requirements. The Black Hawk Project will be contingent upon,
among other things, the Company's Colorado subsidiary's receipt of all required
licenses, permits and authorizations under Colorado law. The scope of the
approvals required for a project of this nature is extensive, including, without
limitation, state and local land-use permits, building and zoning permits,
health and safety permits and gaming and liquor licenses. There can be no
assurance that the Company's Colorado subsidiary will receive the necessary
permits, licenses and approvals for the Black Hawk Project, or that such
permits, licenses and approvals will be obtained within the anticipated time
frame. Unexpected changes or concessions required by local, state or federal
regulatory authorities could involve significant additional costs and delay or
prevent the scheduled openings of the facilities.
11
<PAGE> 15
Access to Black Hawk/Central City. The cities of Black Hawk and Central
City (adjacent to each other) are located in the Colorado Rocky Mountains and
are serviced by winding mountain roads that require extremely cautious driving,
particularly in bad weather. These roads have tunnels that are subject to
closure. Congestion on the roads leading to Black Hawk and Central City is not
uncommon during the peak summer season, holidays and other times of year and may
discourage potential customers from traveling to the casinos. In addition,
concerns about the overall availability of convenient parking in Black Hawk and
Central City may discourage some potential customers. Further, Black Hawk and
Central City have experienced unanticipated demands for their municipal systems,
including water and sewage treatment facilities. Increased levels of activity in
the area may exacerbate old or pose new municipal and environmental problems,
the costs of which could be borne by the gaming industry generally and in part
by the Company specifically.
Environmental Considerations. The Black Hawk Project site is located in a
400-square mile area that was designated in 1983 by the United States
Environmental Protection Agency (the "EPA") as a National Priorities List area
under the Comprehensive Environmental Response, Compensation and Liability Act,
as a result of hazardous substance contamination in the soil, groundwater and
surface water caused by historical mining activity in the area. Within this
broad area, EPA has identified several areas of contamination from historical
mining activity, including draining mines and mine dumps, as the Clear
Creek/Central City Superfund Site. The EPA can require owners or operators of
property to remediate hazardous substance contamination or to reimburse costs
incurred by the government in connection with such remediation. Although several
remedial actions have occurred on property in the vicinity of the parcels on
which the Black Hawk Project will be built, EPA has not identified contamination
on or from the Black Hawk Project site which requires remediation, and does not
consider the Black Hawk Project to be part of the Clear Creek/Central City
Superfund Site. Nevertheless, there can be no assurance that EPA or the State of
Colorado might not require remediation for contaminated soil uncovered during
excavation or construction, or for contaminated groundwater on the property or
elsewhere in the area, which sampling has disclosed. In addition, the handling
of contaminated soil and groundwater can increase construction costs
significantly.
DEPENDENCE ON KEY PERSONNEL
The ability of the Company to operate successfully is dependent, in part,
upon the continued services of certain of its executive personnel. The loss of
one or more of such executive officers, the inability to attract or retain key
employees in the future could have a material adverse effect on the Company. In
addition, the necessity of key employees to focus their attention on various
planned expansion projects may reduce the amount of time they can devote to core
operations of the Company. The Company has an employment agreement only with Mr.
William L. Westerman, the Chairman of the Board, President, and Chief Executive
Officer of the Company. The term of Mr. Westerman's employment agreement with
the Company is scheduled to expire on December 31, 1998. However, it will
automatically be extended unless the Company gives three months notice or Mr.
Westerman gives six months notice to terminate. Mr. Westerman's contract is also
subject to earlier termination upon occurrence of certain events. See
"Management -- Employment Agreements." There can be no assurance that a suitable
replacement for Mr. Westerman could be found in the event of a termination of
his employment. A shortage of skilled management-level employees currently
exists in the gaming industry which may make it difficult and expensive to
attract and retain qualified employees.
REGULATION
The Company's business is subject to comprehensive and stringent government
regulation. In addition, there have been in the past and are currently a number
of regulatory and tax proposals which could adversely affect the gaming industry
and the Company. See "Business -- Regulation and Licensing."
The Company's gaming operations, and the ownership of securities in the
Company, are subject to extensive regulation by the Nevada Gaming Authorities
(as defined). The Nevada Gaming Authorities have broad authority with respect to
licensing and registration of entities and individuals involved in gaming
operations, including certain holders of the Company's outstanding voting
securities. The Nevada Gaming Authorities may, among other things, revoke the
license of any entity licensed as a gaming corporation or the
12
<PAGE> 16
registration of any entity registered as a holding company of a gaming
corporation, and they may also revoke the license of any individual licensed as
an officer, director, control person or stockholder of a licensed or registered
entity. If the gaming licenses of the Company were revoked for any reason, the
Nevada Gaming Authorities could require the closing of the Riviera which would
result in a material adverse effect on the business of the Company.
In addition, any future public offering of debt or equity securities by the
Company, including the Exchange Offer and any offering the securities or
proceeds of which are intended to be used to pay for construction of, or to
acquire an interest in, any gaming facilities in Nevada, to finance the gaming
operations of an affiliated company or to retire or extend obligations incurred
for any such purposes, requires the prior approval of the Nevada Gaming
Commission (the "Nevada Commission") upon the recommendation of the Nevada State
Gaming Control Board (the "Nevada Board"). The Nevada Commission approved the
Exchange Offer on November 20, 1997.
Each holder of the Notes shall be deemed to have agreed (to the extent
permitted by law) that if a relevant gaming authority determines that a holder
or beneficial owner of Notes must be found suitable under applicable law
(whether as a result of a foreclosure of the Company's casino or for any other
reason), and if such holder or beneficial owner is not found suitable, such
holder shall, upon the request of the Company, dispose of such holder's Notes
within 30 days after receipt of such request or such earlier date as may be
ordered by the relevant gaming authority. The Company also will have the right
to call for the redemption of Notes held by any holder who is not found suitable
at a price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of
redemption or such earlier date as may be required by the relevant gaming
authority or applicable law. Although the Existing Notes are currently listed
for trading on the PORTAL markets, the New Notes will be new securities for
which there will be no established market and the price at which a holder of New
Notes may be required to dispose of such holder's New Notes cannot be predicted.
See " -- Absence of Public Trading Market," "Business -- Regulation and
Licensing" and "Description of Notes -- Optional Redemption."
On August 3, 1996, President Clinton signed a bill creating a nine-member
National Gambling Impact Study Commission to study the economic and social
impact of gaming and report its findings to Congress and the President within
two years after the first meeting of the commission. The commission could
recommend changes in state or federal gaming policies. The President, House
Speaker and Senate Majority Leader have each selected three of the commission's
members and the commission held its first meeting in June 1997. Additional
federal regulation of the gaming industry could occur as a result of
investigations or hearings by the committee, which could have a material adverse
effect on the Company.
The Company's plan to manage additional gaming properties and to acquire
and develop new gaming properties, including the Black Hawk Project, will
require many permits, licenses and approvals. These could include, without
limitation, gaming approvals, liquor licenses, state and local land-use permits,
governmental easement and flood plain requirements, building and zoning permits,
set back, access and building height waivers or approvals, and architectural
(historic district) restrictions. Unexpected changes or concessions required by
local, state or federal regulatory authorities could involve significant
additional costs and delay or prevent the scheduled openings of the facilities.
ABILITY TO REALIZE ON COLLATERAL
The New Notes are secured by a first priority security interest, subject to
Permitted Liens and certain exclusions, in the land and improvements comprising
the Riviera, furniture, fixtures and equipment (excluding Gaming Equipment),
contract rights, trademarks and certain other personal property (excluding
inventory and accounts receivable) and a pledge of all of the capital stock of
the Restricted Subsidiaries. There can be no assurance that, if an Event of
Default (as defined) occurs with respect to the Notes and the indebtedness
evidenced by the Notes is accelerated and the Company fails to make the required
payments, the liquidation of the collateral will produce proceeds in an amount
sufficient to pay the principal of or accrued and unpaid interest, if any, or
any other sums due and payable, on the New Notes.
13
<PAGE> 17
The pledge of the stock of a corporation which holds a gaming license
issued by the Nevada Commission (a "Corporate Licensee"), such as ROC or RGME,
or of a corporation which is registered as an intermediary company (an
"Intermediary Company"), such as ROC or RGM, is void without the prior approval
of the Nevada Commission. The Nevada Commission approved the pledge of stock of
ROC, RGM and RGME on November 20, 1997. An approval to pledge the stock of a
Corporate Licensee or Intermediary Company does not constitute approval to
foreclose on such pledge. Separate approval is required to foreclose on a pledge
of stock of a Corporate Licensee or Intermediary Company and such approval
requires the licensing of the indenture trustee unless such requirement is
waived upon the application of the indenture trustee. In addition, restrictions
on the transfer of equity securities issued by a Corporate Licensee or
Intermediary Company, and agreements not to encumber such securities, are
ineffective unless approved in advance by the Nevada Commission upon the
recommendation of the Nevada Board. Such restrictions and agreements in respect
of the Notes were approved by the Nevada Commission on November 20, 1997.
In the event of a foreclosure of the mortgage on the land located at the
Riviera, the purchaser or operator of the facility would be required to be
licensed to operate the facility under Nevada gaming laws and regulations
promulgated thereunder, and if the Trustee purchases the Riviera at a
foreclosure sale and thereafter is unable or chooses not to sell that part of
Riviera constituting the casino, the Trustee would be required to retain an
entity licensed under the Nevada gaming laws in order to conduct gaming
operations in the facility and the holders of the Notes may be required to be
investigated and licensed or found suitable. Because potential bidders who wish
to operate the facility as a casino must satisfy such requirements, the number
of potential bidders in a foreclosure sale could be less than in foreclosure of
other types of facilities, and such requirements may delay the sale of, and may
adversely affect the sales price obtained for, the casinos. The ability to take
possession and dispose of the collateral securing the Notes upon acceleration is
likely to be significantly impaired or delayed by applicable bankruptcy law if a
bankruptcy were to be commenced by or against the entity which owns such
collateral prior to the Trustee's taking of possession or disposition of the
collateral securing the Notes. See "Regulation."
SUBSIDIARY GUARANTEES
The New Notes are guaranteed on a senior secured basis by the Guarantors
(as defined). Enforcement of the Subsidiary Guarantees against any existing or
future Guarantors would be subject to certain defenses available to guarantors
generally, and would also be subject to certain defenses available to the
Company regarding enforcement of the Notes, including, without limitation, the
right to force the Trustee to exercise its remedies under the Collateral
Documents prior to commencement of any action on the Subsidiary Guarantees. The
Guarantors have waived all such defenses to the extent they may legally do so.
Black Hawk Operating Company will not initially be a Guarantor of the Notes. See
"Description of Notes -- Security." At September 30, 1997 Black Hawk Operating
Company had assets of approximately $15.5 million, which represents the cost of
the Black Hawk Land, and no liabilities or operations. Therefore, separate
financial statements of the Guarantors have not been included in this
Prospectus.
FRAUDULENT TRANSFER CONSIDERATIONS
The ability of the holders of the New Notes or the Trustee to enforce the
Subsidiary Guarantees or realize on the collateral may be limited by certain
fraudulent conveyance laws. Various fraudulent conveyance and avoidance laws
have been enacted for the protection of creditors and may be utilized by a court
of competent jurisdiction to avoid the security interest in the collateral
granted to the Trustee by the Company or any Guarantor (as defined herein), or
to subordinate the obligations of the Company under the Notes or the Subsidiary
Guarantees of any Guarantor. The requirements for establishing a fraudulent
conveyance or avoidance transfer vary depending on the law of the jurisdiction
which is being applied. Generally, if under federal and certain state statutes
in a bankruptcy, reorganization, rehabilitation or similar proceeding in respect
of the Company or a Guarantor, or in a lawsuit by or on behalf of creditors
against the Company or a Guarantor, a court were to find that (i) the Company or
a Guarantor, as the case may be, incurred indebtedness in connection with the
Notes (including the Subsidiary Guarantees) or granted security interests in the
collateral with the intent of hindering, delaying or defrauding current or
future creditors of the Company or the Guarantor, as the case may be, or (ii)
the Company or a Guarantor, as the case may be, received less than reasonably
equivalent value or fair consideration for incurring the indebtedness in
connection with the
14
<PAGE> 18
Notes (including the Subsidiary Guarantees) or for granting security interests
in the collateral and the Company or such Guarantor, as the case may be, (a) was
insolvent at the time of the incurrence of the indebtedness in connection with
the Notes (including the Subsidiary Guarantees) or the granting of security
interests in the collateral, (b) was rendered insolvent by reason of incurring
the indebtedness in connection with the Notes (including the Subsidiary
Guarantees) or the granting of security interests in the collateral, (c) was
engaged or about to engage in a business or transaction for which its assets
constituted unreasonably small capital or (d) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured
(as all of the foregoing terms are defined in or interpreted under the
applicable fraudulent conveyance or revocatory statutes), such court could,
subject to applicable statutes of limitation, with respect to the Company, or
the Guarantor, as the case may be, avoid in whole or in part the obligations of
the Company or such Guarantor in connection with the Notes (including the
Subsidiary Guarantees) or the security interests granted in the collateral
and/or subordinate claims with respect to the Notes (including Subsidiary
Guarantees) to some or all other debts of the Company or the Guarantors, as
applicable. There can be no assurance that there would be sufficient amounts to
pay the New Notes and the Subsidiary Guarantees together with all other debts of
the Company or such Guarantors, as applicable, if such security interests in the
collateral were avoided. Similarly, if the obligations of the Company or the
Guarantors or the security interests securing them were subordinated, there can
be no assurance that after payment of the other debts of the Company or the
Guarantors, there would be sufficient assets to pay such subordinated claims
with respect to the Notes and the Subsidiary Guarantees.
The measures of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction which is being applied in any such
proceeding. Generally, however, an entity will be considered insolvent if the
sum of its respective debts was greater than the fair saleable value of all of
its property at a fair valuation or if the present fair saleable value of its
assets is less than the amount that will be required to pay its probable
liability on its existing debts, as they become absolute and matured.
If certain bankruptcy or insolvency proceedings were initiated by or
against the Company or any Guarantor within 90 days (or, possibly, one year)
after any payment by the Company or such Guarantor with respect to the Notes or
a Subsidiary Guarantee, respectively, or if the Company or such Guarantor
anticipated becoming insolvent, all or a portion of such payment could be
avoided as a preferential transfer under federal bankruptcy or applicable state
insolvency law, and the recipient of such payment could be required to return
such payment. In addition, the timing of any pledges of the capital stock of
certain of the Company's future subsidiaries may result in treatment of such
pledges as preferential transfers under applicable bankruptcy or state
insolvency law and, if so treated, could be set aside by a court.
ABSENCE OF PUBLIC TRADING MARKET
The Existing Notes are currently eligible for trading in the PORTAL market.
The New Notes are a new issue of securities for which there is currently no
established trading market. The Company does not intend to list the New Notes on
any national securities exchange or to seek the admission thereof to trading in
the National Association of Securities Dealer Automated Quotation System. The
Initial Purchasers have advised the Company that they currently intend to make a
market in the New Notes. However, the Initial Purchasers are not obligated to do
so and any market making may be discontinued at any time without notice. There
can be no assurance as to the development of any market or the liquidity of any
market that may develop for the New Notes.
CONTROL BY A SINGLE STOCKHOLDER
If the Merger occurs, Mr. Allen E. Paulson will indirectly own all of the
outstanding capital stock of the Company. As the beneficial owner of 100% of the
outstanding shares of Common Stock, Mr. Paulson would control all of the voting
power of the Company and would be able to exercise significant influence over
the affairs of the Company. There can be no assurance that the Merger will be
consummated. See "The Proposed Merger."
15
<PAGE> 19
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
proceeds to the Company from the sale of the Existing Notes, after deducting
selling commissions and net related fees and expenses, were approximately $172.8
million, of which the Company has used approximately $109.8 million to defease
the 11% First Mortgage Notes, approximately $4.5 million to repay the Unsecured
Note and approximately $7.0 million to pay fees and expenses relating to the
foregoing and the sale of the Existing Notes. In addition, the Company has used
$15 million of the net proceeds to acquire the Black Hawk Land. The Company
intends to use the remaining net proceeds to fund the development of the Nickel
Plaza and the expansion of the convention center, and, if necessary, to provide
additional financing for the Black Hawk Project. To the extent that the
additional proceeds are not used for the development of the Black Hawk Project,
the unused proceeds will be used for the Company's general business purposes.
Pending use in the Company's business, the net proceeds from the sale of the
Existing Notes have been invested in investment grade, short-term interest
bearing securities or money market funds, and the New Notes will have a security
interest in such proceeds. See "Business -- Growth Opportunities -- The Black
Hawk Project."
16
<PAGE> 20
CAPITALIZATION
The following table sets forth at September 30, 1997 (i) the capitalization
of the Company and (ii) the capitalization of the Company as adjusted to give
effect to the redemption of the 11% First Mortgage Notes. This table should be
read in conjunction with the consolidated financial statements of the Company
and the related notes thereto, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
HISTORICAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 62,407 $ 62,407(1)
======== =========
Short term debt, including current portion of long term
debt(4).................................................. $ 356 $ 356
======== =========
Long term debt, less current portion:
Revolving Credit Facility(2)............................. $ -- $ --
11% First Mortgage Notes(3).............................. 100,000 --
10% First Mortgage Notes due 2004........................ 172,848 172,848
Capitalized lease obligations and other indebtedness..... 605 605
-------- ---------
Total long term debt, less current portion....... 273,453 173,453
Stockholders' equity(4).................................... 37,599 34,796
-------- ---------
Total capitalization............................. $311,052 $ 208,249
======== =========
</TABLE>
- ---------------
(1) Includes $20.0 million designated for the development of Nickel Plaza and
expansion of the convention center. See "Business -- Growth Opportunities."
(2) The Company maintains a $15.0 million unsecured Revolving Credit Facility.
See "Description of Certain Indebtedness." The Revolving Credit Facility
bears interest at prime plus 0.5% or LIBOR plus 2.9%. No amounts were
outstanding under the Revolving Credit Facility at September 30, 1997. As a
result of the sale of the Existing Notes, the Company does not meet the
conditions for borrowing availability and will not be able to borrow under
the facility unless its terms are renegotiated.
(3) On August 13, 1997, the Company defeased the 11% First Mortgage Notes. The
funds required to defease the 11% First Mortgage Notes were deposited into
an account with the trustee for the 11% First Mortgage Notes and will be
held until June 1, 1998 upon which date the 11% First Mortgage Notes will be
redeemed by the trustee at 104.3125% of the outstanding principal amount.
(4) Stockholders' equity is adjusted to reflect the extraordinary charges that
will be recorded by the Company upon the redemption of the 11% First
Mortgage Notes.
17
<PAGE> 21
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The selected income statement data and balance sheet data as of December
31, 1992, 1993, 1994, 1995 and 1996 and for the year ended December 31, 1992,
the nine months ended September 30, 1993 and December 31, 1993 and the years
ended December 31, 1994, 1995 and 1996 have been derived from the audited
financial statements of the Company and, prior to the Company's emergence from
bankruptcy in June 1993, the Hotel and Casino Division of Riviera, Inc., the
Company's predecessor. The results for and as of the three months and nine
months ended September 30, 1996 and 1997 are derived from the unaudited
financial statements and notes thereto of the Company and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly information set forth therein. The
results for the three months and nine months ended September 30, 1996 and 1997
are not necessarily indicative of the results expected for any other interim
period or for the full year. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ----------------------------- YEARS ENDED DECEMBER 31,
DEC. 31, JUNE 30, DEC. 31, COMBINED --------------------------------
1992 1993 1993 1993(1) 1994 1995 1996
------------- ------------- ------------- -------- -------- -------- --------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Casino......................... $ 75,975 $ 38,073 $ 41,158 $79,231 $ 82,060 $ 77,337 $ 80,384
Rooms.......................... 33,474 17,614 17,808 35,422 35,422 39,848 41,835
Food and beverage.............. 22,557 11,656 11,760 23,416 22,961 21,895 22,641
Entertainment.................. 19,046 8,059 8,422 16,481 16,945 14,423 20,883
Other.......................... 8,369 4,116 4,230 8,346 9,390 9,515 11,293
--------- --------- --------- -------- -------- -------- --------
159,421 79,518 83,378 162,896 166,778 163,018 177,036
Less promotional allowances.... 14,919 6,816 7,157 13,973 12,857 11,873 12,627
--------- --------- --------- -------- -------- -------- --------
Net revenues................... 144,502 72,702 76,221 148,923 153,921 151,145 164,409
--------- --------- --------- -------- -------- -------- --------
COSTS AND EXPENSES:
Casino......................... 46,892 24,559 25,533 50,092 48,826 45,325 47,509
Rooms.......................... 16,233 8,339 8,456 16,795 17,594 18,787 18,834
Food and beverage.............. 15,592 7,427 7,796 15,223 15,588 15,768 15,916
Entertainment.................. 15,152 7,051 7,897 14,948 13,982 10,329 15,290
Other.......................... 3,256 1,737 1,839 3,576 3,516 3,527 3,913
Selling, general and
administrative............... 25,534 12,707 13,534 26,241 28,822 29,618 31,454
Depreciation and
amortization................. 13,230 2,622 2,399 5,021 5,674 6,811 8,212
Loss on permanent impairment of
assets(2).................... 85,221 -- -- -- -- -- --
--------- --------- --------- -------- -------- -------- --------
Total costs and expenses....... 221,110 64,442 67,454 131,896 134,002 130,165 141,128
--------- --------- --------- -------- -------- -------- --------
Income (loss) from operations.... (76,608) 8,260 8,767 17,027 19,919 20,980 23,281
Interest expense, net(3)......... 434 2,632 6,160 8,792 12,254 11,304 10,918
Other (income) expense, net...... -- -- -- -- -- -- (505)
Reorganization items(4).......... (3,863) -- -- -- -- -- --
Provision for income taxes....... -- -- -- -- 2,875 3,332 4,428
--------- --------- --------- -------- -------- -------- --------
Net income (loss)................ $ (80,905) $ 5,628 $ 2,607 $ 8,235 $ 4,790 $ 6,344 $ 8,440
========= ========= ========= ======== ======== ======== ========
OTHER DATA:
EBITDA(5)........................ $ 21,843 $ 10,882 $ 11,166 $22,048 $ 25,593 $ 27,791 $ 31,493
EBITDA margin.................... 15.1% 15.0% 14.6% 14.8 % 16.6% 18.4% 19.2%
Cash flows from operating
activities................... 13,130 8,517 766 9,283 16,372 16,740 18,290
Cash flows used in investing
activities..................... (2,073) (1,478) (4,307) (5,785) (10,439) (8,218) (13,017)
Cash flows used in financing
activities..................... (729) (2,311) (4,658) (6,969) (2,696) (2,983) (1,488)
Ratio of earnings to fixed
charges(6)..................... --(6) 2.99x(6) 1.41x 1.89 x 1.60x 1.78x 2.06x
Capital expenditures............. $ 2,477 $ 1,478 $ 4,307 $ 5,785 $ 8,933 $ 7,836 $ 14,923
OPERATING DATA:
Average occupancy rate(7)........ 90.6% 92.4% 95.0% 93.7 % 97.5% 97.0% 98.2%
Average daily room rate (ADR).... $ 47.00 $ 51.63 $ 49.33 $ 50.42 $ 47.51 $ 54.69 $ 57.09
Number of slot machines(8)....... 1,218 1,218 1,207 1,207 1,203 1,226 1,312
Number of gaming tables(8)....... 74 70 70 70 56 56 55
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ----------- -------- -------- --------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 16,659 $ 13,188 $ 16,423 $ 21,962 $ 25,747
Total assets............................................. 145,631 143,704 151,925 157,931 167,665
Long term debt, including current portion................ 133,255 112,677 110,489 107,822 105,878
Stockholders' equity..................................... (114,358) 15,148 19,938 26,282 35,251
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Casino.................................................................. $ 61,378 $ 55,123 $ 20,996 $ 16,989
Rooms................................................................... 30,869 30,635 9,098 9,211
Food and beverage....................................................... 17,228 16,260 5,185 5,012
Entertainment........................................................... 16,961 16,233 5,714 5,475
Other................................................................... 7,636 7,904 2,884 2,663
-------- -------- -------- -------
134,072 126,155 43,877 39,350
Less promotional allowances............................................. 9,867 9,670 2,946 2,967
-------- -------- -------- -------
Net revenues............................................................ 124,205 116,485 40,931 36,383
-------- -------- -------- -------
COSTS AND EXPENSES:
Casino.................................................................. 36,592 32,809 12,116 10,604
Rooms................................................................... 14,155 13,685 4,787 4,516
Food and beverage....................................................... 11,924 11,801 3,837 3,798
Entertainment........................................................... 12,262 11,752 4,361 4,203
Other................................................................... 2,194 2,300 742 827
Selling, general and administrative..................................... 23,755 22,923 8,153 7,085
Depreciation and amortization........................................... 5,959 7,700 2,097 2,690
-------- -------- -------- -------
Total costs and expenses................................................ 106,841 102,970 36,093 33,723
-------- -------- -------- -------
Income from operations.................................................... 17,364 13,515 4,838 2,660
Interest expense, net(3).................................................. 8,258 9,367 -- 3,948
Other (income) expense, net............................................... -- 1,070 2,751 (220)
Provision (benefit) for income taxes...................................... 3,072 1,062 670 (520)
-------- -------- -------- -------
Net income (loss)......................................................... $ 6,034 $ 2,016 $ 1,417 $ (988)
======== ======== ======== =======
OTHER DATA:
EBITDA(5)................................................................. $ 23,323 $ 21,215 $ 6,935 $ 5,349
EBITDA margin............................................................. 18.8% 18.2% 16.9% 14.7%
Cash flow from operating activities....................................... $ 15,453 $ 14,224 $ 7,419 $ 5,789
Cash flows used in investing activities................................... (6,811) (34,752) (4,250) (26,767)
Cash flows provided by (used in) financing activities..................... (1,618) 57,188 (267) (57,760)
Ratio of earnings to fixed charges(6)..................................... 1.99x 1.27x 1.69x 0.71x
Capital expenditures...................................................... $ 9,502 $ 11,379 $ 4,242 $ 4,494
OPERATING DATA:
Average occupancy rate(7)................................................. 99.0% 98.3% 99.0% 98.4%
Average daily room rate (ADR) ............................................ $ 55.73 $ 56.19 $ 49.14 $ 49.95
Number of slot machines(8)................................................ 1,312 1,308 1,312 1,308
Number of gaming tables(8)................................................ 55 52 55 52
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------
1996 1997
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 28,986 $ 62,407
Total assets.......................................................................................... 166,374 341,895
Long term debt, including current portion(9).......................................................... 108,912 273,809
Stockholders' equity.................................................................................. 32,676 37,599
</TABLE>
- ---------------
(1) As the Company emerged from bankruptcy in June 1993, operating results
presented for 1993 reflect the combined operating results of the Company and
its predecessor.
(2) Includes a recognized loss on the permanent impairment of assets during the
bankruptcy of the Company's predecessor to record the fair market value of
the property and equipment.
(3) Interest expense is presented net of interest income. 1993 results reflect
no accrual of interest on debt through June 1993. If accrued, interest
expense on these obligations would have totaled $21,400 and $10,400 for the
year ended December 31, 1992 and the six months ended June 30, 1993,
respectively.
(4) Represents costs incurred in connection with the bankruptcy of the Company's
predecessor.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with GAAP, it is
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital expenditure
and working capital requirements. Although EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs, management believes
that certain investors find EBITDA to be a useful tool for measuring the
ability of the Company to service its debt.
(6) The ratio for fiscal 1992 has been omitted because earnings were not
sufficient to cover fixed charges. The coverage deficiency was $80,905
($101,882 if interest was not stayed). If interest would have been accrued
on the pre-bankruptcy or other unsecured debt for the six months ended June
30, 1993 earnings would have been inadequate to cover fixed charges by
$1,937. For the purpose of computing the ratio of earnings to fixed charges,
"earnings" consist of income before fixed charges and income taxes, adjusted
to exclude interest capitalized, and "fixed charges" consist of interest
cost, amortizations of debt expense, amortization of bond discount and
capitalized interest.
(7) Based on available rooms.
(8) Number of licensed slot machines and gaming tables at period end.
(9) Includes the 11% First Mortgage Notes to be retired by U.S. treasury bills
as of September 30, 1997.
19
<PAGE> 23
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ----------------- -----------------
1993(1) 1994 1995 1996 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income (loss).................. $ 8,235 $ 7,665 $ 9,676 $12,868 $ 9,016 $ 3,078 $ 2,087 $(1,508)
Fixed charges(2)....................... 9,214 12,764 12,453 12,085 9,115 11,315 3,015 5,272(3)
Less capitalized interest.............. 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Earnings available for fixed charges... 17,449 20,429 22,129 24,953 18,131 14,393 5,012 3,764
------- ------- ------- ------- ------- ------- ------- -------
Ratio of earnings to fixed charges..... 1.89x 1.60x 1.78x 2.06x 1.99x 1.27x 1.69x 0.71x
</TABLE>
- ---------------
(1) As the Company emerged from bankruptcy in June 1993, operating results
presented for 1993 reflect the combined operating results of the Company and
its predecessor.
(2) Includes interest expense, amortization of debt expense, amortization of
bond discount and capitalized interest.
(3) Includes interest expense on the 11% First Mortgage Notes to be retired June
1, 1998 by U.S. treasury bills included in assets.
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The current management team successfully guided the Company through its
emergence from bankruptcy in June 1993. Since 1992, the Riviera's management
team has achieved consistent growth in EBITDA and profit margins. EBITDA
increased over 44% from $21.8 million in 1992 to $31.5 million in 1996 and
EBITDA margins improved from 15.1% to 19.2% over the same period. The Company
achieved this growth through the implementation of a number of strategic
initiatives that included (i) refocusing its marketing strategy from
"high-rollers" to adult mid-level gaming customers, a niche that management
believes has been underserved, (ii) focusing on conventioneers who pay higher
room rates, causing Riviera's ADR to increase from $47 in 1992 to $57 in 1996,
(iii) aggressively marketing its hotel facilities resulting in occupancy rates
growing from 90.6% in 1992 to 98.2% in 1996, (iv) emphasizing higher margin slot
play which increased slot revenue by 33.0% from 1992 to 1996 and (v) investing
approximately $47 million in capital improvements since 1992. Management
believes that it has also improved the stability of EBITDA by providing a broad
entertainment experience (1996 non-gaming revenues: 55% vs. 47% for other
casinos on the Strip), focusing on conventioneers (approximately 30% of mid-week
room nights pre-sold through June 1999) and developing a repeat and loyal
customer base through proprietary database marketing.
RESULTS OF OPERATIONS
The following table sets forth certain of the Company's operating
information for the years ended December 31, 1994, 1995, and 1996 and for the
three months and nine months ended September 30, 1996 and 1997. Revenues and
promotional allowances are shown as a percentage of net revenues. Departmental
costs are shown as a percentage of departmental revenues. All other percentages
are based on net revenues.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEARS ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------- ---------------
1994 1995 1996 1996 1997 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Casino................................................. 53.3% 51.2% 48.9% 49.4% 47.3% 51.3% 46.7%
Rooms.................................................. 23.0 26.4 25.4 24.9 26.3 22.2 25.3
Food and beverage...................................... 14.9 14.5 13.8 13.9 14.0 12.7 13.8
Entertainment.......................................... 11.0 9.5 12.7 13.7 13.9 14.0 15.0
Other.................................................. 6.1 6.3 6.9 6.1 6.8 7.0 7.3
Less promotional allowances............................ (8.3) (7.9) (7.7) (8.0) (8.4) (7.2) (8.1)
----- ----- ----- ----- ----- ----- -----
Net revenues..................................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Casino(1).............................................. 59.5 58.6 59.1 59.6 59.5 57.7 62.4
Rooms(1)............................................... 49.7 47.1 45.0 45.9 44.7 52.6 49.0
Food and beverage(1)................................... 67.9 72.0 70.3 69.2 72.6 74.0 75.8
Entertainment(1)....................................... 82.5 71.6 73.2 72.3 72.4 76.3 76.8
Other(1)............................................... 37.4 37.1 34.6 28.7 29.1 25.7 31.1
Selling, general and administrative.................... 18.7 19.6 19.1 19.1 19.7 19.9 19.5
Depreciation and amortization.......................... 3.7 4.5 5.0 4.8 6.6 5.1 7.4
----- ----- ----- ----- ----- ----- -----
Total costs and expenses......................... 87.1 86.1 85.8 86.0 88.4 88.2 92.7
----- ----- ----- ----- ----- ----- -----
Income from operations................................... 12.9 13.9 14.2 14.0 11.6 11.8 7.3
Interest expense, net.................................... 8.0 7.5 6.7 -- 9.4 -- 3.9
Other (income) expense, net.............................. 0.0 0.0 (0.3) 1.1 -- .2
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision (benefit) for income
taxes.................................................. 4.9 6.4 7.8 7.3 2.6 5.1 (4.1)
Provision (benefit) for income taxes..................... 1.9 2.2 2.7 (2.5) (0.9) (1.6) 1.4
----- ----- ----- ----- ----- ----- -----
Net income (loss)........................................ 3.0 4.2 5.1 4.9 1.7 3.5 (2.7)
----- ----- ----- ----- ----- ----- -----
EBITDA margin............................................ 16.6% 18.4% 19.2% 18.8% 18.2% 16.9% 14.7%
</TABLE>
- ---------------
(1) Shown as a percentage of corresponding departmental revenue.
21
<PAGE> 25
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes thereto appearing
elsewhere in this Prospectus.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Net revenues decreased by approximately $4.5 million, or 11.1%
from $40.9 million for the three months ended September 30, 1996 to $36.4
million for the three months ended September 30, 1997 due to the general
softness of the Las Vegas market.
Casino revenues decreased by approximately $4.0 million, or 19.1%, from
$21.0 million during 1996 to $17.0 million during 1997. Slot revenues decreased
$1.8 million or 12.7% from $14.5 million in 1996 to $12.7 million in 1997 due to
a decrease in coin-in of $12.2 million, or 6.0% and a decrease in the hold
percentage from 6.4% to 6.0%. These decreases were primarily in the $1 and $5
slot machines due to competition from neighboring casinos. Table games win
decreased $1.7 million or 33.0% from $5.2 million in 1996 to $3.5 million in
1997 due to the competitive environment on the Las Vegas Strip. Table games drop
decreased $5.5 million, 21.0%, from $25.7 million in 1996 to $20.2 million in
1997. Table games win percentage decreased 3.1%, from an unusually high 20.5% in
1996 to a normal 17.5% in 1997. The decrease in drop accounted for $1.1 in lower
revenues and the decrease in hold percentage accounted for $600,000 in lower
revenues. Race book revenues decreased $390,000 due to the elimination of
rebates (to selected high volume customers) under revised agreements between the
casinos and the Nevada Pari Mutuel Association.
Room revenues increased by approximately $113,000, or 1.2%. from $9.1
million during 1996 to $9.2 million during 1997 as a result of an increase of
$0.81 in average room rate from $49.14 in 1996 to $49.95 in 1997. Hotel
occupancy remained stable at 99.0% for 1996 and 98.4% in 1997.
Food and beverage revenues decreased approximately $170,000, or 3.3%, from
$5.2 million during 1996 to $5.0 million during 1997 due primarily to reduced
complimentary beverage in the casino and a 6.0% reduction in covers in the
restaurants.
Entertainment revenues decreased by approximately $240,000, or 4.2%, from
$5.7 million during 1996 to $5.5 million during 1997 due to a 10% decrease in
covers which was partially offset by a 7% increase in the average ticket price.
Other revenues decreased by approximately $220,000, or 7.6%, from $2.9
million during 1996 to $2.7 million during 1997 due primarily to the $570,000
rebate received in 1996 from a union health and welfare trust fund for reduced
premiums for prior periods. Fees earned for the Four Queens management contract
totaled $250,000 in 1997 compared to $142,000 in 1996.
Promotional allowances were unchanged at $2.9 million during 1996 and 1997.
Lower food and beverage complimentaries were offset by increased room
complimentaries
Direct Costs and Expenses of Operating Departments. Total direct costs and
expenses of operating departments decreased by approximately $1.9 million, or
7.3%, from $25.8 million for the three months ended September 30, 1996 to $23.9
million for the three months ended September 30, 1997.
Casino expenses decreased by approximately $1.5 million, or 12.5%, from
$12.1 million during 1996 to $10.6 million during 1997 due to a corresponding
decrease in casino revenues. Casino expenses as a percent of casino revenue
increased from 57.7% to 62.4%, in spite of a 17.0% decrease in marketing
expenses in 1997. Management is reviewing the competition and may increase
marketing expenditures somewhat to stimulate additional revenues. However, the
Company does not intend to significantly discount its gaming product or
substantially increase its promotional allowances.
Room costs decreased by approximately $270,000, or 5.7%, from $4.8 million
during the 1996 period to $4.5 million during the 1997 period and room costs as
a percentage of room revenue decreased from 52.6% in 1996 to 49.0% in 1997 due
to decreased payroll and direct operating costs.
Food and beverage costs decreased by approximately $40,000, or 1.0%, from
$3.8 million in 1996 to $3.8 million in 1997. However, food and beverage costs
as a percentage of revenues increased from 74.0% in
22
<PAGE> 26
1996 to 75.8% in 1997 because the costs transferred to the casino department for
promotional allowances decreased from 1996.
Entertainment costs decreased by approximately $200,000, or 3.6%, from $4.4
million in 1996 to $4.2 million in 1997 as a direct result of the lower revenues
in all shows. Entertainment expense as a percentage of entertainment revenues
increased slightly from 76.3% in 1996 to 76.8% in 1997.
Other expenses as a percentage of revenues increased from 25.7% in 1996 to
31.1% in 1997 because of the one time union premium refund recorded in revenues
in 1996 with no associated costs.
Other Operating Expenses. Selling, general and administrative expenses
decreased by approximately $1.1 million, or 13.1%, from $8.2 million for the
three months ended September 30, 1996 to $7.1 million for the three months ended
September 30, 1997 due to reduced management incentives and company profit
sharing plan contributions. Selling, general and administrative expenses
decreased from 19.9% of total net revenues during the 1996 period to 19.5% in
1997.
Depreciation and amortization increased by approximately $600,000, or
28.0%, from $2.1 million in 1996 to $2.7 million in 1997 and from 5.1% to 7.4%
of net revenues due to the significant capital expenditures in the twelve months
ended September 30, 1997 totaling $16.8 million.
Other Income (Expense). Interest income on Treasury Bills held to retire
the 11% Notes was $773,000 in 1997. Interest income, other increased $300,000 in
the Third Quarter 1997 because of the increased cash balances from the proceeds
of the Notes.
Net Income (Loss). As a result of the factors discussed above, net income
decreased by approximately $2.4 million, from $1.4 million during the three
months ended September 30, 1996, to a loss of $988,000 during the three months
ended September 30, 1997.
EBITDA. EBITDA decreased by approximately $1.6 million, or 22.9%, from $6.9
million during the three months ended September 30, 1996 to $5.3 million during
the three months ended September 30, 1997. During the same periods, EBITDA
margin decreased from 16.9% to 14.7% of net revenues. Although management
reduced direct costs and operating expenses by 7.3%, such reduction was not
sufficient to offset the $4 million decrease in casino revenues in 1997 and the
$570,000 union health and welfare premium rebate received in September 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Net revenues decreased by approximately $7.7 million, or 6.2%,
from $124.2 million for the nine months ended September 30, 1996 to $116.5
million for the nine months ended September 30, 1997.
Casino revenues decreased by approximately $6.3 million, or 10.2%, from
$61.4 million during 1996 to $55.1 million during 1997 due to a general softness
in the gaming market in Las Vegas. Slot revenues decreased approximately $3.0
million primarily in the dollar denomination due to competition from casinos at
the north end of the Las Vegas Strip. This effected both coin in and revenue as
the hold percent was reduced in response to the competitive pressure. Although
the table games drop was down approximately $15.7 million or 17.4%, the win
percentage increased 1.5%, which resulted in a net decrease in table games
revenues of approximately $1.4 million. Elimination of three times odds on craps
and single deck blackjack games were major factors contributing to the increase
in win percentage. Race book revenues decreased approximately $1.2 million due
to the elimination of rebates (to selected high volume customers) under revised
agreements between the casinos and the Nevada Pari Mutuel Association.
Room revenues decreased by approximately $300,000, or 0.8%. from $30.9
million during 1996 to $30.6 million during 1997 due primarily to 4,600 more
rooms being out of order for refurbishing. Hotel occupancy remained relatively
constant at 98.3% in 1997 as compared to 99.0% in 1996 (based on available
rooms). The average room rate increased $0.46, or 0.9%, from $55.73 to $56.19
recovering from first quarter 1997 when the average room rate had fallen $2.15
because of the shift of a major convention from the first quarter of 1997 to the
second quarter.
23
<PAGE> 27
Food and beverage revenues decreased approximately $900,000, or 5.6%, from
$17.2 million during 1996 to $16.3 million during 1997 primarily due to reduced
complimentary beverage in the casino as well as lower food covers in the
restaurants.
Entertainment revenues decreased by approximately $800,000, or 4.3%, from
$17.0 million during 1996 to $16.2 million during 1997 due to a 7.2% decrease in
covers with only Crazy Girls showing an increase in covers and revenues in 1997.
Splash(R) revenues decreased approximately $600,000.
Other revenues increased by approximately $270,000, or 3.5%, from $7.6
million during 1996 to $7.9 million during 1997 due to the management fees of
$745,000 for operating the Four Queens Hotel/ Casino in downtown Las Vegas which
began in August 1996. These revenues were offset by a $570,000 union premium
refund which was recognized in September 1996.
Promotional allowances decreased by approximately $200,000, or 2.0%, from
$9.9 million during 1996 to $9.7 million during 1997 due to lower food and
beverage complimentaries of $600,000 which were partially offset by increased
room complimentaries of $400,000.
Direct Costs and Expenses of Operating Departments. Total direct costs and
expenses of operating departments decreased by approximately $4.8 million, or
6.2%, from $77.1 million for the nine months ended September 30, 1996 to $72.3
million for the nine months ended September 30, 1997.
Casino expenses decreased by approximately $3.8 million, or 10.3%, from
$36.6 million during 1996 to $32.8 million during 1997 due to a corresponding
decrease in casino revenues. Casino expenses as a percent of casino revenue
decreased from 59.6% to 59.5%, primarily due to a 15.2% decrease in marketing
expenses in 1997. Management has reviewed the competition and has increased
marketing expenditures somewhat to drive additional revenues. However, the
Company does not intend to significantly discount its gaming product or
substantially increase its promotional allowances.
Room costs decreased by approximately $470,000, or 3.3%, from $14.2 million
during the 1996 period to $13.7 million during the 1997 period and room costs as
a percentage of room revenue decreased from 45.9% in 1996 to 44.7% in 1997
because of increased costs transferred to the casino department for promotional
allowances.
Food and beverage costs were relatively flat for 1997 compared to 1996,
however, food and beverage costs as a percentage of revenues increased from
69.2% in 1996 to 72.6% in 1997 because the costs transferred to the casino
department for promotional allowances decreased.
Entertainment costs decreased by approximately $500,000, or 4.2%, from
$12.3 million in 1996 to $11.8 million in 1997 due to fewer concerts and special
events in 1997 and the lower payments to the Splash(R) producer. Entertainment
expense as a percentage of entertainment revenues remained flat at 72.3% for
1996 and 1997.
Other expenses as a percentage of revenues increased from 28.7% in 1996 to
29.1% in 1997 because of the union premium refund of $570,000 recognized in
September 1996 other revenues.
Other Operating Expenses. Selling, general and administrative expenses
decreased by approximately $800,000, or 3.5%, from $23.8 million for the nine
months ended September 30, 1996 to $22.9 million for the nine months ended
September 30, 1997 due to reductions in management incentives and profit sharing
contributions. As a percentage of total net revenues, selling, general and
administrative expenses increased from 19.1% during the 1996 period to 19.7%
during the 1997 period as a result of spreading of fixed costs over a lower
revenue base in the 1997 period.
Depreciation and amortization increased by approximately $1.7 million, or
29.2%, from $6.0 million in 1996 to $7.7 million in 1997 and from 4.8.6% to 6.6%
of net revenues due to the significant capital expenditures in the twelve months
ended September 30, 1997, totaling $16.8 million.
Other Income (Expense). Interest income on Treasury Bills held to retire
the 11% Notes was $773,000 in 1997. Interest income, other increased $300,000
because of the increased cash balances from the proceeds of the Notes.
24
<PAGE> 28
Net Income. As a result of the factors discussed above, net income
decreased by approximately $4.0 million, or 66.5%, from $6.0 million during the
nine months ended September 30, 1996 to $2.0 million during the nine months
ended September 30, 1997.
EBITDA. EBITDA decreased by approximately $2.1 million, or 9.0%, from $23.3
million during the nine months ended September 30, 1996 to $21.2 million during
the nine months ended September 30, 1997. Moreover, during the same periods,
EBITDA margin decreased from 18.8% to 18.2% of net revenues.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Net revenues increased by approximately $13.3 million, or 8.8%,
from $151.1 million in 1995 to $164.4 million in 1996. Casino revenues increased
by approximately $3.0 million, or 3.9%, from $77.3 million in 1995 to $80.4
million in 1996 due primarily to a $2.9 million, or 5.4%, increase in slot
revenues as a result of an increase in promotional activities directed at slot
players. Room revenues increased by approximately $2.0 million, or 5.0%, from
$39.8 million in 1995 to $41.8 million in 1996 as a result of an increase in
hotel occupancy from 97.0% to 98.2% (based on available rooms) and an increase
in average room rate of $2.40, or 4.4%. Food and beverage revenues increased
approximately $700,000, or 3.4%, from $21.9 million in 1995 to $22.6 million in
1996 due to additional covers in the bars and restaurants. Entertainment
revenues increased by approximately $6.5 million, or 44.8%, from $14.4 million
in 1995 to $20.9 million in 1996. This was principally due to the reopening of
Splash(R), a variety show which had been closed during the first half of 1995
for show revisions and theater remodeling. Other revenues increased by
approximately $1.8 million, or 18.7%, from $9.5 million in 1995 to $11.3 million
in 1996 due primarily to a refund of $576,000 from a union health and welfare
trust fund for reduced premiums and general increases in other revenues such as
telephone, gift shops and box office commissions. In addition, the Company
received management fees of approximately $400,000 for operating the Four Queens
in downtown Las Vegas beginning in August 1996. Promotional allowances increased
by approximately $700,000, or 6.4%, from $11.9 million in 1995 to $12.6 million
in 1996 due to additional complimentary show tickets for Splash(R) and an
increase in complimentaries associated with casino and slot marketing programs.
Direct Costs and Expenses of Operating Departments. Total direct costs and
expenses of operating departments increased by approximately $7.7 million, or
8.2%, from $93.7 million in 1995 to $101.5 million in 1996. Casino expenses
increased by approximately $2.2 million, or 4.8%, from $45.3 million in 1995 to
$47.5 million in 1996 due to a corresponding increase in casino revenues and
casino expenses as a percent of casino revenues increased from 58.6% to 59.1%,
primarily due to increased entertainment promotional allowances upon the
reopening of Splash(R) on June 23, 1995. Room costs were mostly flat for 1996
compared to 1995, however, room costs as a percentage of room revenues decreased
from 47.1% in 1995 to 45.0% in 1996 as room revenues increased while room costs
remained relatively constant. Food and beverage costs increased by approximately
$150,000, or 0.9%, from $15.8 million in 1995 to $15.9 million in 1996 resulting
from a corresponding increase in revenues. Food and beverage costs as a
percentage of food and beverage revenues decreased from 72.0% in 1995 to 70.3%
in 1996 because food and beverage revenue increased while payroll and other
costs remained relatively constant. Entertainment costs increased by
approximately $5.0 million, or 48.0%, from $10.3 million in 1995 to $15.3
million in 1996, due to the additional expenses associated with operating
Splash(R) for a full year in 1996. Entertainment expenses as a percentage of
entertainment revenues increased from 71.6% in 1995 to 73.2% in 1996 due to a
revision in the Splash(R) producer's agreement. Other expenses increased by
approximately $400,000, or 10.9%, from $3.5 million to $3.9 million due to a
corresponding increase in other revenues.
Other Operating Expenses. Selling, general and administrative expenses
increased by approximately $1.8 million, or 6.2%, from $29.6 million in 1995 to
$31.5 million in 1996 due to increased incentive plan costs required to retain
personnel in the competitive gaming environment. As a percentage of total net
revenues, selling, general and administrative expenses decreased from 19.6% in
1995 to 19.1% in 1996 as a result of lower general marketing expenses and the
spreading of fixed costs over a larger revenue base in 1996. Depreciation and
amortization increased by approximately $1.4 million, or 20.6%, from $6.8
million in 1995 to $8.2 million in 1996.
25
<PAGE> 29
Other Income (Expense). Interest expense decreased by approximately
$400,000, or 3.0%, from $12.5 million in 1995 to $12.1 million in 1996 while
interest income remained constant at $1.1 million in 1995 and 1996. This was due
to a reduction in average debt outstanding, an increase in average cash balances
and a decrease in the investment yield in 1996. Other income increased by
$505,000 due to a gain on the final payment of certain unsecured notes in the
fourth quarter of 1996 offset by a loss due to the change in terms of one of the
Company's notes.
Net Income. As a result of the factors discussed above, net income
increased by approximately $2.1 million, or 33.0%, from $6.3 million in 1995 to
$8.4 million in 1996. The effective income tax rate was 34.4% for 1995 and 1996.
EBITDA. EBITDA increased by approximately $3.7 million, or 13.3%, from
$27.8 million in 1995 to $31.5 million in 1996. During the same periods, EBITDA
margin increased from 18.4% to 19.2% of net revenues.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues. Net revenues decreased by approximately $2.8 million, or 1.8%,
from $153.9 million in 1994 to $151.1 million in 1995. Casino revenues decreased
by approximately $4.7 million, or 5.8%, from $82.1 million in 1994 to $77.3
million in 1995 which was largely due to an approximately $5.9 million, or
22.9%, decrease in table game revenues as a result of reduced "high-roller" play
and the elimination of unprofitable marketing programs offset by an
approximately $1.3 million, or 2.8%, increase in slot machine revenues. Room
revenues increased by approximately $4.4 million, or 12.5%, from $35.4 million
in 1994 to $39.8 million in 1995 due to a slight decrease in occupancy offset by
an increase of $7.18 in the average room rate. Food and beverage revenues
decreased approximately $1.1 million, or 4.6%, from $23.0 million in 1994 to
$21.9 million in 1995, principally due to reduced covers resulting from the
decline in customer traffic as a result of Splash(R) being closed for six months
in 1995 compared to one month in 1994. Entertainment revenues decreased by
approximately $2.5 million, or 14.9%, from $16.9 million in 1994 to $14.4
million in 1995 due primarily to the closure of Splash(R) from December 1994 to
June 1995. Other revenues increased by approximately $125,000, or 1.3%, from
$9.4 million in 1994 to $9.5 million in 1995. Promotional allowances decreased
by approximately $1.0 million, or 7.7%, from $12.9 million in 1994 to $11.9
million in 1995, primarily due to the elimination of certain marketing programs.
Direct Costs and Expenses of Operating Departments. Total direct costs and
expenses of operating departments decreased by approximately $5.8 million, or
5.8%, from $99.5 million in 1994 to $93.7 million in 1995. Casino expenses
decreased by approximately $3.5 million, or 7.2%, from $48.8 million in 1994 to
$45.3 million in 1995 due to a corresponding decrease in casino revenues. Casino
expenses as a percentage of casino revenues decreased from 59.5% in 1994 to
58.6% in 1995 due to reduced complimentaries. Room costs increased by
approximately $1.2 million, or 6.8%, from $17.6 million in 1994 to $18.8 million
in 1995, principally due to the payment of higher credit card and travel agent
commissions associated with the increase in room revenues. Room costs as a
percentage of room revenues decreased from 49.7% in 1994 to 47.1% in 1995 as a
result of certain fixed costs being allocated over a larger revenue base. Food
and beverage costs increased by approximately $180,000, or 1.2%, from $15.6
million in 1994 to $15.8 million in 1995. As a percentage of food and beverage
revenues, costs increased from 67.9% in 1994 to 72.0% in 1995 because certain
fixed costs could not be reduced commensurate with the reduction of revenue.
Entertainment costs decreased by approximately $3.7 million, or 26.1%, from
$14.0 million in 1994 to $10.3 million in 1995 due to Splash(R) being closed
during the first half of 1995. Entertainment costs as a percentage of
entertainment revenues decreased from 82.5% in 1994 to 71.6% in 1995 due to
better contract terms with the producer of Splash(R). Other expenses remained
constant at $3.5 million in 1995.
Other Operating Expenses. Selling, general and administrative expenses
increased by approximately $800,000, or 2.8%, from $28.8 million in 1994 to
$29.6 million in 1995. As a percentage of total net revenues, selling, general
and administrative expenses increased from 18.7% in 1994 to 19.6% in 1995 due to
increases in payroll and maintenance offset by a decrease in workers'
compensation insurance expense resulting from the Company becoming self-insured
and a decrease in the provision for bad debts as a result of stricter credit
26
<PAGE> 30
policies during 1995. Depreciation and amortization increased by approximately
$1.1 million, or 20.0%, from $5.7 million in 1994 to $6.8 million in 1995.
Other Income (Expense). Interest expense decreased by approximately
$311,000, or 2.4%, from $12.8 million in 1994 to $12.5 million in 1995, while
interest income more than doubled from approximately $510,000 to $1.1 million.
This was due to a reduction in average debt outstanding and an increase in
average cash balances, respectively, during 1995 compared to 1994.
Net Income. As a result of the factors discussed above, net income
increased by approximately $1.6 million, or 32.4%, from $4.8 million in 1994 to
$6.3 million in 1995. The effective income tax rate for 1995 was 34.4% compared
to 37.5% for 1994.
EBITDA. EBITDA increased by approximately $2.2 million, or 8.6%, from $25.6
million in 1994 to $27.8 million in 1995. During the same periods, EBITDA margin
increased from 16.6% to 18.4% of net revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $62.4 million at September 30,
1997, which was $37.0 million greater than balances at December 31, 1996.
The Company's net cash provided by operating activities was approximately
$5.8 million and $14.2 million for the quarter and nine months ended September
30, 1997, and approximately $7.4 million and $15.5 million for the comparable
prior year periods, respectively. EBITDA for the first nine months of 1996 and
1997 was $23.3 million and $21.2 million, respectively, which was adequate to
cover the Company's debt service and capital expenditures. Management believes
that cash flow from operations, combined with the $62.4 million cash on hand,
will be sufficient to cover the Company's debt service and enable investment in
budgeted capital expenditures for the next twelve months.
Scheduled interest payments on the 11% Notes is provided by the
"contractual defeasance" whereby a portion of the proceeds from the Existing
Notes was used to acquire U.S. Treasury Securities sufficient to pay the
interest on the 11% First Mortgage Notes in December 1997 and the interest,
principal and premium due June 1, 1998 when the final defeasance will be
accomplished through redemption of the 11% First Mortgage Notes. Substantially
all of the covenants on the 11% First Mortgage Notes were released as a result
of the "contractual defeasance."
Cash flow from operations is not expected to be sufficient to pay 100% of
the principal of the Notes at maturity on August 15, 2004. Accordingly, the
ability of the Company to repay the Notes at maturity will be dependent upon its
ability to refinance those Notes. There can be no assurance that the Company
will be able to refinance the principal amount of the Notes at maturity. The
Notes are not redeemable at the option of the Company until August 15, 2001, and
thereafter are redeemable at premiums beginning at 105.0% and declining each
subsequent year to par in 2003.
The Indenture provides that, in certain circumstances, the Company must
offer to repurchase the Notes upon the occurrence of a change of control or
certain other events. In the event of such mandatory redemption or repurchase
prior to maturity, the Company would be unable to pay the principal amount of
the Notes without a refinancing. The Merger is specifically excluded from the
defined transactions which would be considered a change in control.
The Indenture contains certain covenants which limit the ability of the
Company and its restricted subsidiaries, subject to certain exceptions, to: (i)
incur additional indebtedness; (ii) pay dividends or other distributions,
repurchase capital stock or other equity interests or subordinated indebtedness;
(iii) enter into certain transactions with affiliates; (iv) create certain
liens; sell certain assets; and (vi) enter into certain mergers and
consolidations. As a result of these restrictions, the ability of the Company
and ROC to incur additional indebtedness to fund operations or to make capital
expenditures is limited. In the event that cash flow from operations is
insufficient to cover cash requirements, the Company and ROC would be required
to curtail or defer certain of their capital expenditure programs under these
circumstances, which could have an
27
<PAGE> 31
adverse effect on the Company's operations. Management believes the Company is
in compliance with the covenants of the Indentures.
In February 1997, the Company entered into a $15.0 million, five year
reducing revolving line of credit (the "Revolving Credit Facility"). The
Revolving Credit Facility bears interest at prime plus 0.5% or LIBOR plus 2.9%.
The Company has not utilized this line of credit. The Revolving Credit Facility
was modified as a result of the sale of the Existing Notes and the proposed
Merger. The modifications included an increase in the allowable funded debt to
EBITDA ratio to 4.75 to one. The Company is not currently meeting this
requirement and, therefore, cannot draw down on the Revolving Credit Facility at
this time. The Revolving Credit Facility is callable upon a change in control
other than the Merger.
Management considers it important to the competitive position of the
Riviera that expenditures be made to upgrade the property. Capital expenditures
totaled approximately $8.9 million in 1994, $7.8 million in 1995, $14.9 million
in 1996, and $11.4 million for the nine months ended September 30, 1997.
Management has budgeted approximately $21.0 million for capital expenditures in
1997. The Company expects to finance such capital expenditures from cash flow
and the remaining proceeds from the Notes.
The Company currently estimates that total costs for completion of the
Black Hawk Project will be approximately $60 million, a $5 million increase over
previous estimates resulting from the announcement of additional projects by
competitors. The Company purchased the Black Hawk Land in August 1997 for $15
million, which was financed by the net proceeds from the sale of the Existing
Notes, and expects to finance the remainder of the Black Hawk Project from a
combination of third party financing and additional investment by the Company,
including up to an additional $15 million of the net proceeds from the sale of
the Existing Notes. The Company expects to receive the necessary excavation and
other permits in the near future, with construction of the casino commencing
shortly thereafter. The casino is scheduled to open during mid-1999.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
During recent years, there has been significant global awareness raised
regarding the potential disruption to business operations worldwide resulting
from the inability of current technology to process properly the change from the
year 1999 to 2000. Although, based on a review of its data processing, operating
and other computer-based systems, the Company does not currently believe that it
will experience any significant adverse effects or material unbudgeted costs
resulting therefrom, the Company cannot provide any assurance in this regard,
and any such costs or effect could materially and adversely effect the
operations of the Company and thereby its ability to satisfy its obligations
under the Notes.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain matters discussed in
this filing could be characterized as forward-looking statements such as
statements relating to plans for future expansion, as well as other capital
spending, financing sources and effects of regulation and competition. Such
forward-looking statements involve important risks and uncertainties that could
cause actual results to differ materially from those expressed in such
forward-looking statements.
RECENTLY ADOPTED ACCOUNTING STANDARDS
During 1996 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 ("SFAS 121") Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had
no impact on the financial statements of the Company.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards No. 123 ("SFAS 123") Accounting
for Stock-Based Compensation which
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establishes financial accounting and reporting standards for stock-based
employee compensation plans and for transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees. The Company
continues to account for stock-based compensation arrangements in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" and therefore the adoption of SFAS 123 had no effect on the financial
position or results of operations of the Company. The Company has provided the
pro forma and other additional disclosures about stock-based employee
compensation plans in its 1996 consolidated financial statements as required by
SFAS 123.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB recently issued Statement of Accounting Standards No. 128,
Earnings Per Share. This statement establishes standards for computing and
presenting earnings per share and is effective for financial statements issued
for periods ending after December 15, 1997. Earlier application of this
statement is not permitted and upon adoption requires restatement (as
applicable) of all prior-period earnings per share data presented. Management
believes that the implementation of this standard will not have a material
impact on earnings per share.
In addition, the FASB issued Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure in February 1997.
This statement establishes standards for disclosing information about an
entity's capital structure. Management intends to comply with the disclosure
requirements of this statement which are effective for periods ending after
December 15, 1997.
On June 30, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This statement requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position, and is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
Management does not believe this new FASB will have a material impact on their
financial statements.
On June 30, 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosure About Segments of an Enterprise and Related
Information. This Statement establishes additional standards for segment
reporting in the financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company believes the segment information
required to be disclosed under SFAS No. 131 will be more comprehensive than
previously provided, including expanded disclosure of income statement and
balance sheet items for each of its reportable segments under SFAS No. 131.
However, the Company has not yet completed its analysis of which operating
segments it will report on.
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<PAGE> 33
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Existing Notes were sold by the Company on August 13, 1997 (the
"Closing Date") to the Initial Purchasers pursuant to the Purchase Agreement.
The Initial Purchasers subsequently resold the Existing Notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act and a
limited number of institutional accredited investors within the meaning of Rule
501(a)(1), (2), (3) or (7) under the Securities Act. As a condition to the sale
of the Existing Notes, the Company and the Restricted Subsidiaries were required
to enter into the Registration Rights Agreement. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to the
New Notes within 60 days after the Closing Date, (ii) use its best efforts to
cause such Registration Statement to become effective under the Securities Act
within 120 days after the Closing Date and (iii) upon effectiveness of the
Registration Statement, to commence the Exchange Offer, maintain the
effectiveness of the Registration Statement for at least 20 business days (or a
longer period if required by law) and deliver to the Exchange Agent New Notes in
the same aggregate principal amount as the Existing Notes that were tendered by
holders thereof pursuant to the Exchange Offer. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Exchange Offer is intended to satisfy
certain of the Company's and the Restricted Subsidiaries' obligations under the
Registration Rights Agreement and the Purchase Agreement.
The terms of the New Notes are identical in all material respects to those
of the Existing Notes, except that (i) the exchange will have been registered
under the Securities Act and hence the New Notes will not bear legends
restricting the transfer thereof, and (ii) holders of the New Notes will not be
entitled to certain rights of holders of the Existing Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The New Notes will be issued pursuant to, and will be
entitled to the benefits of, the Indenture governing the Existing Notes.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Existing Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on Thursday, January 8, 1998; provided, however, that if the
Company has extended the period of time for which the Exchange Offer is open,
term "Expiration Date" means the latest time and date to which the Exchange
Offer is extended.
As of the date of this Prospectus, $169.7 million aggregate principal
amount of the Existing Notes are outstanding and registered in the name of Cede
& Co., as nominee for the Depository Trust Company (the "Depositary") and $5.3
million aggregate principal amount of the Existing Notes are registered in the
names of certain accredited institutional investors who hold such notes in
certificated form. Only a registered holder of the Existing Notes (or such
holder's legal representative or attorney-in-fact) as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer. There
will be no fixed record date for determining registered holders of the Existing
Notes entitled to participate in the Exchange Offer. The Existing Notes may be
tendered only in integral multiples of $1,000. This Prospectus, together with
the Letter of Transmittal, is first being sent on or about December 11, 1997 to
all holders of Existing Notes known to the Company. The Company's obligation to
accept Existing Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions as set forth under "-- Certain Conditions to the Exchange
Offer" below.
The Company shall be deemed to have accepted validly tendered Existing
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Existing Notes for the purposes of receiving the New Notes from the
Company.
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<PAGE> 34
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for any exchange of any Existing Notes, by giving
notice of such extension to the Exchange Agent and the holders thereof. During
any such extension, all Existing Notes previously tendered will remain subject
to the Exchange Offer and may be accepted for exchange by the Company. Any
Existing Notes not accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Existing Notes, (ii) to extend the Exchange Offer, or (iii) if any
conditions set forth below under "The Exchange Offer -- Certain Conditions to
the Exchange Offer" shall not have been satisfied, to terminate the Exchange
Offer by giving oral or written notice of such delay, extension or termination
to the Exchange Agent. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to 10
business day period.
Holders of Existing Notes do not have any appraisal or dissenters' rights
under the Nevada Corporation Law in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the provisions
of the Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act and the rules and regulations of the Commission
thereunder.
PROCEDURES FOR TENDERING EXISTING NOTES
Only a registered holder of Existing Notes may tender such Existing Notes
in the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "The Exchange
Offer -- Exchange Agent" for receipt prior to the Expiration Date. In addition,
either (i) certificates for such Existing Notes must be received by the Exchange
Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes, if
such procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the holder
must comply with the guaranteed delivery procedures described below.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Existing Notes whose Existing Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If
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<PAGE> 35
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Existing Notes, either make appropriate arrangements to register
ownership of the Existing Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "The Exchange Offer -- Withdrawal of Tenders"), as the case may be,
must be guaranteed by an Eligible Institution (as defined below) unless the
Existing Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution. In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc. a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is
a member of one of the recognized signature guarantee programs identified in the
Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Existing Notes listed therein, such Existing Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Existing
Notes.
If the Letter of Transmittal or any Existing Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Existing Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Existing Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Existing Notes not properly tendered or any Existing Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Existing Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Existing Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Existing Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived.
While the Company has no present plan to acquire any Existing Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Existing Notes which are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Existing Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "-- Certain
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Existing Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes to be acquired by the holder of the Existing Notes in
connection with the Exchange Offer are being acquired by the holder in the
ordinary course of business of the holder, (ii) the holder has no arrangement or
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<PAGE> 36
understanding with any person to participate in the distribution of New Notes,
(iii) the holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) the holder understands that a secondary resale
transaction described in clause (iii) above and any resales of New Notes
obtained by such holder in exchange for Existing Notes acquired by such holder
directly from the Company should be covered by an effective registration
statement containing the selling securityholder information required by Item 507
or Item 508, as applicable, of Regulation S-K of the Commission, and (v) the
holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of
the Company. If the holder is a broker-dealer that will receive New Notes for
its own account in exchange for Existing Notes that were acquired as a result of
market-making activities or other trading activities, the holder is required to
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
RETURN OF EXISTING NOTES
If any tendered Existing Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Existing Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Existing Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Existing Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depositary pursuant to the book-entry transfer procedures
described below, such Existing Notes will be credited to an account maintained
with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Existing Notes by causing the Depositary to transfer such
Existing Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Existing Notes may be effected through book-entry transfer at the Depositary,
the Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under "The
Exchange Offer -- Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Existing Notes and (i) whose Existing
Notes are not immediately available or (ii) who cannot deliver their Existing
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Existing Notes and
the principal amount of Existing Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof) together with the certificate(s) representing the
Existing Notes in proper form for transfer or a Book-
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<PAGE> 37
Entry Confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Existing
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Existing Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Existing Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Existing Notes to be withdrawn (the "Depositor"), (ii) identify the Existing
Notes to be withdrawn (including the certificate number or numbers and aggregate
principal amount of such Existing Notes), and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by which
such Existing Notes were tendered (including any required signature guarantees).
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Existing Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Existing Notes so withdrawn are validly retendered. Properly
withdrawn Existing Notes may be retendered by following one of the procedures
described above under "The Exchange Offer -- Procedures for Tendering" at any
time prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Existing Notes and may terminate or amend the Exchange Offer if at any
time before the acceptance of such Existing Notes for exchange or the exchange
of New Notes for such Existing Notes, the Company determines that the Exchange
Offer violates applicable law, rule or regulation, any applicable interpretation
of the staff of the Commission or any order of any governmental agency or court
of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Existing Notes
tendered, and no New Notes will be issued in exchange for any such Existing
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). In any such event, the Company is
required to use every reasonable effort to obtain the withdrawal of any stop
order at the earliest possible time.
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EXCHANGE AGENT
Norwest Bank Minnesota, N.A. has been appointed as the Exchange Agent for
the Exchange Offer. All executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Registered or Certified
By Hand: Mail: By Overnight Courier:
Northwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
</TABLE>
By Facsimile:
(612) 667-4927
For General Questions or to
Confirm by Telephone:
(612) 667-9764
Delivery other than as set forth above will not constitute a valid
delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$150,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Existing Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Existing
Notes, which is the principal amount as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The debt issuance costs will be capitalized for
accounting purposes and will be amortized over the term of the debt.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Participation in the Exchange Offer is voluntary. Holders of the Existing
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Existing Notes which are not exchanged for the New Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i) to a person whom the
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<PAGE> 39
seller reasonably believes is a qualified institutional buyer (as defined in
Rule 144A under the Securities Act) in a transaction meeting the requirements of
Rule 144A, (ii) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (iii) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act or
(iv) in accordance with another exemption from the registration requirements of
the Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
With respect to the New Notes, based upon an interpretation by the staff of
the Commission set forth in certain no-action letters issued to third parties,
the Company believes that a holder (other than (i) a broker-dealer who purchases
such New Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who exchanges the Existing Notes for the New Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires the New Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the New Notes or is a broker-dealer, such
holder cannot rely on the position of the staff of the Commission enumerated in
certain no-action letters issued to third parties and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Each broker-dealer that receives New Notes for its own
account in exchange for Existing Notes, where such Existing Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a brokerdealer in connection with resales of New Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
broker-dealer as a result of market-making or other trading activities. Pursuant
to the Registration Rights Agreement, the Company has agreed to make this
Prospectus, as it may be amended or supplemented from time to time, available to
broker-dealers for use in connection with any resale for a period of one year
following the Effective Date. See "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of Existing Notes that
is an individual citizen or resident of the United States or a United States
corporation that purchased the Existing Notes pursuant to their original issue
(a "U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended
to the date hereof (the "Code"), existing and proposed Treasury regulations, and
judicial and administrative determinations, all of which are subject to change
at any time, possibly on a retroactive basis. The following relates only to the
Existing Notes, and the New Notes received therefor, that are held as "capital
assets" within the meaning of Section 1221 of the Code by U.S. Holders. It does
not discuss state, local, or foreign tax consequences, nor does it discuss tax
consequences to subsequent purchasers (persons who did not purchase the Existing
Notes pursuant to their original issue ), or to categories of holders that are
subject to special rules, such as foreign persons, tax-exempt organizations,
insurance companies, banks, and dealers in stocks and securities. Tax
consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service with respect to the
federal income tax consequences of the Exchange Offer.
In the opinion of Dechert Price & Rhoads, counsel to the Company, (a) the
exchange of Notes pursuant to the Exchange Offer should not be a taxable event
for a U.S. Holder as set forth below under the caption "-- The Exchange Offer",
and (b) the summary of the United States federal income tax consequences to a
36
<PAGE> 40
U.S. Holder that appears below under the captions "-- Stated Interest",
"-- Sale, Exchange or Retirement of the Notes" and "-- Backup Withholding" is
accurate in all material respects.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE EXISTING
NOTES FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR
CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO
ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE EXISTING NOTES
FOR NEW NOTES.
THE EXCHANGE OFFER
In the opinion of Dechert Price & Rhoads, counsel to the Company, the
exchange of Existing Notes pursuant to the Exchange Offer should be treated as a
continuation of the corresponding Existing Notes because the terms of the New
Notes are not materially different from the terms of the Existing Notes, and
accordingly (i) such exchange should not constitute a taxable event to a U.S.
Holder, (ii) no gain or loss should be realized by a U.S. Holder upon receipt of
a New Note, (iii) the holding period of the New Note should include the holding
period of the Existing Note exchanged therefor and (iv) the adjusted tax basis
of the New Note should be the same as the adjusted tax basis of the Existing
Note exchanged therefor immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will be its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange or retirement
of a Note in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note (excluding amounts
received in respect of accrued interest, which will be taxable as ordinary
interest income) generally will be capital gain or loss. A U.S. Holder who is an
individual or other person not taxable as a corporation for federal income tax
purposes who has held a Note for more than 18 months is subject to a maximum
rate of tax of 20% on any capital gain recognized upon its disposition. A
noncorporate U.S. Holder who has held a Note for more than 12 months but not
more than 18 months is subject to a maximum rate of tax of 28% on any capital
gain recognized upon its disposition. Gain recognized by a noncorporate U.S.
Holder who has held a Note for 12 months or less may be taxed at ordinary income
rates. Capital losses of noncorporate U.S. Holders in excess of capital gains
may be offset against ordinary income up to $3000; excess capital losses may be
carried forward to subsequent years. Capital gains of a U.S. Holder taxable as a
corporation for federal income tax purposes is classified as long or short term
depending upon whether the Note has been held for more than 12 months.
BACKUP WITHHOLDING
Under certain circumstances, a U.S. Holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest thereon
or the gross proceeds from the disposition thereof. This withholding generally
applies if the U.S. Holder fails to furnish his or her social security number or
other taxpayer identification number in the specified manner and in certain
other circumstances. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit against such U.S. Holder's
federal income tax liability provided that the required information is furnished
to the IRS. Corporations and certain other entities described in the Code and
Treasury regulations are exempt from backup withholding if their exempt status
is properly established.
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<PAGE> 41
BUSINESS
GENERAL
The Company owns and operates the Riviera located on the Strip in Las
Vegas, Nevada. Opened in 1955, the Riviera has developed a long-standing
reputation for delivering high quality, traditional Las Vegas-style gaming and
entertainment. The Riviera is situated on a 26-acre site, located across the
Strip from Circus Circus and across Paradise Road from the Las Vegas Hilton and
the Las Vegas Convention Center. The property features approximately 2,100 hotel
rooms, including 169 suites, 105,000 square feet of casino space, one of the
largest convention, meeting and banquet facilities in Las Vegas, four
full-service restaurants, a large buffet, four showrooms, an entertainment
lounge, 43 food and retail concessions and approximately 2,900 parking spaces.
The casino contains approximately 1,300 slot machines, 50 gaming tables, a keno
lounge and a 200-seat race and sports book. The Riviera offers one of the most
extensive entertainment programs in Las Vegas, including the award winning show,
Splash(R). The Company, through its gaming management subsidiary, also manages
the Four Queens on Fremont Street in downtown Las Vegas.
From 1992 to the end of 1996, the Riviera's management team achieved
consistent growth in EBITDA and profit margins. EBITDA has increased over 44%
from $21.8 million in 1992 to $31.5 million in 1996 and EBITDA margins have
improved from 15.1% to 19.2% over the same period. The Company achieved this
growth through the implementation of a number of strategic initiatives that
included (i) refocusing its marketing strategy from "high-rollers" to adult
mid-level gaming customers, a niche that management believes has been
underserved, (ii) focusing on conventioneers who pay higher room rates, causing
Riviera's ADR to increase from $47 in 1992 to $57 in 1996, (iii) aggressively
marketing its hotel facilities resulting in occupancy rates growing from 90.6%
in 1992 to 98.2% in 1996, (iv) emphasizing higher margin slot play which
increased slot revenue by 33.0% from 1992 to 1996 and (v) investing
approximately $47 million in capital improvements since 1992. Management
believes that it has also improved the stability of EBITDA by providing a broad
entertainment experience (1996 non-gaming revenues: 55% vs. 47% for other
casinos on the Strip), focusing on conventioneers (approximately 30% of midweek
room nights pre-sold through June 1999) and developing a repeat and loyal
customer base through proprietary database marketing.
GROWTH OPPORTUNITIES
The Company seeks to continue its growth in EBITDA and profits by
maximizing the potential of the Riviera's prime Strip frontage and capitalizing
on the proven strength of its management team by leveraging its talents across
multiple properties. To achieve this goal, the Company is pursuing the following
opportunities:
Riviera Expansion. By the end of 1997, management expects to have completed
the upgrade of the slot machines and refurbished substantially all of the hotel
rooms at the Riviera. To continue capitalizing on the Riviera's prime Strip
frontage, the Company is developing the Nickel Plaza, a new 10,000 square-foot
gaming area fronting the Strip complete with 350 slot machines, a bar, snack bar
and souvenir shop, which is expected to be completed by the end of December
1997. Nickel Plaza will be ideally positioned to attract the additional walk-in
traffic from the newly built 1,000 rooms directly across the Strip at Circus
Circus and the expansions of the Las Vegas Hilton and the Las Vegas Convention
Center. Management expects Nickel Plaza will be developed for an estimated cost
of $5 million. To maintain and enhance its core conventioneer customer base, the
Company also plans to expand its convention center from 100,000 square feet to
158,000 square feet by constructing new state-of-the-art, multi-level,
convention, meeting and banquet facilities. Construction commenced in November
1997 and is expected to be completed by the end of the third quarter of 1998.
Management believes this expansion, which is estimated to cost approximately $15
million, will further solidify the Riviera as one of the premier convention
sites in Las Vegas. In addition, the Company owns approximately six acres of
contiguous property which is available for future expansion.
The Black Hawk Project. As part of the Company's strategy to diversify its
revenue base and leverage both the Riviera name and its management team, the
Company pursues development opportunities in both established and emerging
gaming markets. The Company has acquired for $15 million a certain parcel of
real property in Black Hawk, Colorado (the "Black Hawk Land"), which management
believes to be the premier
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<PAGE> 42
gaming site in Colorado. The Company intends to use this site to construct one
of the largest gaming facilities in the adjacent gaming cities of Black Hawk and
Central City, Colorado (the "Black Hawk Project"). The Black Hawk Project is
expected to feature approximately 1,000 slot machines, 14 table games, an
approximately 520 space covered parking garage and entertainment and food
service amenities. Management believes this market has attractive fundamentals,
including (i) gaming limited to Black Hawk/Central City and Cripple Creek in
Colorado, (ii) consistent gaming revenue growth since 1992 to over $300 million
in 1996, (iii) slot machine dominated market due to statutory limited stakes,
(iv) one hour drive from central Denver and (v) approximately 2.3 million adults
residing within 100 miles of Black Hawk. Management believes that the proposed
Riviera facility will be highly successful due to the following attributes: (i)
premier location: it will be the first gaming site encountered when arriving
from Denver, (ii) size and quality: it will be one of the largest casinos in the
market complete with restaurant and entertainment options and (iii) superior
parking: it will have on-site, covered self-parking, which is critical in this
market where parking is currently extremely limited. The Black Hawk Project is
an attractive investment opportunity that allows the Company to create a
multi-jurisdictional gaming company. The Company currently estimates that total
costs for completion of the Black Hawk Project will be approximately $60
million, a $5 million increase over previous estimates resulting from the
announcement of additional projects by competitors. The Company purchased the
Black Hawk Land in August 1997 for $15 million, which was financed by the net
proceeds from the sale of the Notes, and expects to finance the remainder of the
Black Hawk Project from a combination of third party financing and additional
investment by the Company, including up to an additional $15 million of the net
proceeds from the sale of the Notes. The Company expects to receive the
necessary excavation and other permits in the near future, with construction of
the casino commencing shortly thereafter. The casino is scheduled to open during
mid-1999.
Casino/Hotel Management Contracts. The Company believes that there is
increasing demand for the services of skilled gaming and hospitality
professionals. In order to capitalize on management's reputation and experience
as successful casino operators, the Company formed Riviera Gaming Management,
Inc. ("RGM") for the primary purpose of obtaining casino management contracts
with casinos/hotels in Nevada and other jurisdictions. Since August 1996, RGME,
as subsidiary of RGM, has managed the Four Queens located adjacent to the Golden
Nugget on Fremont Street in downtown Las Vegas. Under the Four Queens management
contract, RGME receives a guaranteed minimum management fee plus additional
compensation based on EBITDA improvement of the Four Queens, and Warrants to
purchase 1,125,000 shares of Elsinore common stock (equal to 18.4% of the equity
of Elsinore on a fully diluted basis) at $1.00 per share. Such management
contract provides significant revenues and upside equity potential with minimal
additional overhead and capital expenditure. Under RGME, Four Queens' EBITDA
improved by approximately 12% in the twelve months ended September 30, 1997,
compared to the same period in 1996 and generated approximately $1.0 million in
management fees for the Company. Management is continually evaluating
opportunities to manage other casinos/hotels.
THE RIVIERA
The Riviera is located on the corner of the Strip and Riviera Drive, across
from Circus Circus. The back of the 26-acre property fronts Paradise Road across
from the Las Vegas Hilton and the Las Vegas Convention Center. The Riviera is
strategically located to take advantage of the high tourist traffic along the
Strip as well as the increasing number of convention customers that use the Las
Vegas Convention Center.
The Company is continuing an extensive capital investment program,
including completion of the upgrade of its slot machines and refurbishment of
substantially all of its hotel rooms by the end of 1997. When the Company
acquired the Riviera on June 30, 1993, it embarked on a refurbishing and
upgrading program and will have invested approximately $50 million in such
efforts by the end of 1997. Between July 1, 1993 and December 31, 1997, the
Company will have spent $21.6 million refurbishing its 2,100 rooms, including
installation of a card key entry system and new telephone computer switch
equipment and other similar upgrades; $8.7 million upgrading its slot machines
so that they can be competitive with slot machines of other Las Vegas Strip
casinos and reducing the average age of the equipment to less than three years;
$2.6 million remodeling bars, restaurants and convention banquet areas; $1.3
million remodeling the show rooms and
39
<PAGE> 43
upgrading light and sound equipment; $10.7 million upgrading the life safety,
heating and cooling and other back of the house support systems; and $4.6
million upgrading its computer systems, including casino rating software, slot
tracking systems and payroll management systems, all with the objective of
controlling costs and enhancing customer service.
Gaming. The Riviera has 105,000 square feet of casino space. The casino
currently has approximately 1,300 slot machines and 50 gaming tables, including
blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) poker, baccarat,
Let It Ride(R) and poker. The casino also includes a keno lounge and a 200-seat
race and sports book.
Gaming operations at the Riviera are continually updated to respond to both
changing market conditions and customer demand in an effort to attract new
customers and encourage repeat customer business through player tracking and
database management. The Company maintains a slot players club, through which
members receive special promotions and targeted mailings. New and innovative
slot and table games have been introduced based on customer feedback. Management
devotes substantial time and attention to the type, location and player activity
of all its slot machines. The Company is continuing an extensive capital
investment program for the upgrade of its slot machines which is expected to be
completed by the end of 1997.
The current management team has made an effort to redirect its business
away from high-stakes wagerers in favor of focusing on highly profitable, less
volatile mid-level gaming customers consistent with its focused marketing
efforts. In order to effectively pursue this strategy, management has made
several strategic changes including reconfiguring the casino space to improve
the flow of customer traffic, installing new slot machines and bill acceptors,
reducing the number of gaming tables and de-emphasizing baccarat. In addition,
management implemented stricter credit policies and reduced baccarat table
limits. As a result, the percentage of table game dollar volume represented by
credit play declined from approximately 24% in 1993 to 15% in 1996. Also, in
1996, revenues from slots and tables were approximately 70% and 30%,
respectively, as compared to 55% and 45%, respectively, in 1992. Because the
extension of credit is not necessary for success with mid-level gaming
customers, losses on uncollectible and discounted receivables have declined
significantly. Receivables from casino operations declined from approximately
$2.9 million at December 31, 1993 to approximately $2.3 million at December 31,
1996 and the allowance for bad debts and discounts from casino operations
declined from approximately $800,000 to $400,000 during the same period. These
reductions have resulted primarily from the imposition of stricter credit
standards.
The Company currently has detailed plans to further capitalize on the
Riviera's prime Strip frontage and proximity to the Las Vegas Convention Center
through additional development and expansion on the existing 26-acre site. To
attract walk-in traffic from the nearby hotel casinos and motels (Circus Circus,
Westward Ho, Stardust, Sahara, El Rancho) which have more than 10,000 rooms, the
Company is in the process of developing a 10,000 square-foot "Nickel Plaza" on
the corner of Las Vegas Boulevard and Riviera Boulevard at the crosswalk from
Circus Circus and the local Strip bus stop at an estimated cost of about $5
million. The facility will contain 350 slot machines, a bar, snack bar and
souvenir shop. Food and beverage items will be priced very attractively and
promoted extensively. Dramatic signage and lighting effects compatible with the
property's existing facade facing Las Vegas Boulevard will create a "must see"
effect for passersby on both sides of Las Vegas Boulevard. The Company believes
that the nickel player represents the most rapidly growing segment of the Las
Vegas gaming market and is frequently neglected by the Company's major
competitors who focus their slot products on higher denominations. Two-thirds of
the devices in Nickel Plaza will be nickel machines. The Company has commenced
construction, with a completion date scheduled for December 31, 1997.
Hotel. The Riviera's hotel is comprised of five hotel towers with
approximately 2,100 rooms, including 169 suites. Built in 1955 as part of the
original casino/hotel, the nine-story North Tower features 391 rooms and 11
suites. In 1967, the 12-story South Tower was built with 147 rooms and 31
suites. Another 220 rooms and 72 suites, including penthouse suites, were added
to the property through the construction of the 17-story Monte Carlo Tower in
1974. In 1977, the six-story San Remo Tower added 243 rooms and six suites to
the south side of the resort. The most recent phase of hotel expansion was
completed in 1988 upon the opening of the 930 room, 49 suite, 24-story Monaco
Tower. The Company is currently refurbishing all of its rooms, with
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<PAGE> 44
approximately 2,000 completed through September 1997 and substantially all of
the balance expected to be completed by the end of 1997 for an additional $2.5
million. Despite the significant increase in rooms on the Strip in the last
three years, management believes that the Riviera has attained room occupancy
rates that are among the highest on the Strip with 97.5% for 1994, 97.0% for
1995, and 98.2% for 1996 (based on available rooms). The average occupancy rate
for the Strip was 91.4% in 1996. Room revenue has increased from $35.4 million
in 1993 to $41.8 million in 1996, an increase of 18.1%. Management believes that
this performance can be attributed to its targeted and coordinated marketing
strategy, particularly its focus on conventioneers.
Restaurants. The quality, value and variety of food services are critical
to attracting Las Vegas visitors. The Riviera offers four bars and five
restaurants and serves an average of approximately 5,000 meals per day,
including banquets and room service. The following table outlines, for each
restaurant, the type of service provided and total seating capacity:
<TABLE>
<CAPTION>
NAME TYPE CAPACITY SEATING
----------------------------------------------------- ------------------- ----------------
<S> <C> <C>
Kady's............................................... Coffee Shop 290
Kristofer's.......................................... Steak and Seafood 162
Rik' Shaw............................................ Chinese 124
Ristorante Italian................................... Italian 126
World's Fare Buffet.................................. All-you-can-eat 432
-----
Total........................................... 1,134
=====
</TABLE>
In addition, the Riviera has a food court operated by a third party under a
long-term lease with 200 seats and several branded, popular fast-food
restaurants, including Burger King(R), Panda Express(R), Pizza Hut(R) and
"TCBY"(R).
Convention Center. The Riviera features 100,000 square feet of convention,
meeting and banquet space. The convention center is one of the largest in Las
Vegas and is an important feature that attracts customers. The facility can be
reconfigured for multiple meetings of small groups or large gatherings of up to
5,000 people. The Riviera hosts approximately 150 conventions per year. As of
June 30, 1997, convention related advance bookings of rooms totaled
approximately 446,000 for 1998 and 1999, which includes 331,000 definite
bookings and 115,000 tentative bookings. On average, approximately 25% of the
rooms are occupied for conventions.
The Company intends to increase its emphasis on the convention segment of
its business and the Clark County Planning Commission has recently approved the
expansion of the Company's convention facility. In 1998, the Company plans to
expand its convention center from 100,000 to 158,000 square feet by constructing
new state-of-the-art, multi-level, convention, meeting and banquet facilities.
The new facility will feature 46,000 square feet of exhibit space, 10 breakout
meeting rooms totaling 7,200 square feet and 20 sky box/ hospitality suites
totaling 17,200 square feet. Overlooking the exhibit floor, the sky
box/hospitality suites will range from 540 to 1,300 square feet and can be
interconnected to accommodate larger groups. All units will have two tiers of 12
theater seats and the 1,300 square-foot boxes will be equipped with wet bars and
private restrooms. The new convention/entertainment facility will have a total
concert seating capacity of 5,700 and will be able to accommodate up to 2,500
for sit-down banquets. Other features will include a portable stage, ceiling
tech booth, entertainer dressing rooms with full baths and an approximately 200
space underground parking facility with elevator access to all floors. The new
addition will connect to the existing convention facility and the main hotel
buildings by a covered walkway.
Combined with the existing convention facility, the Riviera will offer
convention and meeting planners 90,640 square feet of exhibit space, 19 breakout
rooms with a total of 21,000 square feet, an additional 17,200 square feet in
the 20 interconnecting sky box/hospitality suites and a 15,000 square-foot foyer
with two registration desks, a business center and connecting offices, and a
full-service banquet kitchen. In addition to the new 192 space underground
parking facility, the convention facility will have direct access to a 1,600
space covered parking garage. The Company expects the expanded convention center
to be one of the premier convention facilities in Las Vegas, ideally positioned
to take advantage of the growing convention business.
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<PAGE> 45
The new facility will generate increased banquet, rental and entertainment
revenue. In addition, the Company believes that with the expanded
state-of-the-art facilities, hotel room nights occupied by conventioneers will
increase as a percentage of total room nights. This will increase ADR since
convention rates are considerably more than those for all other occupancy
segments. The Company's architect is currently finalizing drawings for
permitting and bidding. Construction commenced in November 1997 and is expected
to be completed in the third quarter of 1998.
Entertainment and Other. The Riviera has one of the most extensive
entertainment programs in Las Vegas, offering four different regularly scheduled
shows and special appearances by headline entertainers in concert. The four
in-house productions are regularly updated. In December 1994, the award winning
Splash(R) production was closed in order to revise the show and remodel the
showroom for the new Splash(R), which opened on June 23, 1995. The readers of
the Las Vegas Review Journal recently voted The Riviera Comedy Club(SM) the
number one comedy club in Las Vegas and Crazy Girls cast the most beautiful
showgirls in Las Vegas. A summary of the shows and times is outlined below:
<TABLE>
<CAPTION>
CAPACITY
SHOW TYPE PERFORMANCE TIMES SEATING
- ----------------------------- --------------------------- ----------------------------- --------
<S> <C> <C> <C>
Splash(R).................... Variety show Twice a night, seven nights 950
per week
An Evening at La Cage(R)..... Female impersonation Twice a night, five nights 575
per week; three times on
Wednesday
Crazy Girls.................. Adult-oriented production Twice a night, five nights 410
per week; three times a night
on Saturday
The Riviera Comedy
Club(SM)................... Stand-up comedy Twice a night, five nights 350
per week; three times a night
on Friday & Saturday
</TABLE>
Other entertainment includes the 200-seat Le Bistro entertainment lounge
located in the casino which offers live performances six times per night. In
addition, the Riviera sponsors special events, such as the Las Vegas Bowl
football game, and presents major concerts such as the Beach Boys, the Pointer
Sisters, Drew Carey and the Doobie Brothers.
Entertainment revenues have increased from $16.5 million in 1993 to $20.9
million in 1996, a 26.7% increase. Management believes that this increase is
attributable to the increasing popularity of the in-house productions.
FUTURE EXPANSIONS
Future plans for the development of the Riviera include development of an
approximately 60,000 square-foot domed shopping center and entertainment complex
to be constructed directly over the casino and containing stores and
entertainment that will appeal to the Riviera's main target audience, adults
aged 45 to 65. The exit from the complex will be by an escalator which will
deliver patrons to the casino. The Company expects to find partners to finance,
develop and operate the entertainment attraction and retail stores.
The Company also has approximately six acres of its existing 26-acre site
available for additional development. The Company is exploring a number of
options in order to make the best use of this valuable land, including a joint
venture for the development of a time-share condominium tower. The Company
expects it would contribute up to 6 acres of land to such a joint venture and a
third party would construct and sell time-share units and arrange financing.
Management believes that additional rooms adjacent to the Las Vegas Convention
Center would be particularly attractive to business customers and would provide
a base for additional casinos customers. The development of a time-share tower
or parking facility would require additional financing and, in the case of the
time-share tower, a joint venture partner, none of which the Company has in
place at the time.
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<PAGE> 46
MARKETING STRATEGY
Since 1992, the Riviera's management team implemented numerous programs,
aimed at repositioning the Riviera and refocusing its marketing efforts. Such
initiatives included targeting California and the southwestern United States and
emphasizing mid-level gaming customers, particularly slot players, as opposed to
"high rollers." Management believes that adult mid-level gaming customers are
underserved. Management reconfigured the casino space to improve the flow of
customer traffic, installed new slot machines and bill acceptors, reduced the
number of gaming tables and de-emphasized baccarat. In addition, management
reduced credit limits, outsourced the Company's sports book and shifted to
parimutuel horse wagering, thereby decreasing the volatility of gaming revenues.
Also, improved hotel marketing efforts resulted in one of the highest room
occupancy rates on the Strip.
The Riviera will continue to emphasize marketing programs that appeal to
slot and mid-level table game customers with a focus on creating repeat
customers and increasing walk-in traffic. In addition, a key marketing focus is
maintaining and expanding Riviera's core conventioneer customer base. In
developing its overall marketing programs, the Company conducts extensive,
ongoing research of its target customers' preferences through written surveys,
one-on-one interviews and focus groups.
Emphasize Slot Play. Management instituted a number of initiatives at the
Riviera to increase slot play, including the replacement of old slot machines,
the installation of bill acceptors and the addition of slot hosts. The Company's
strategy is to continue to increase slot play through marketing programs and
other improvements, including (i) completion of the Company's slot upgrade
program by December 31, 1997, (ii) addition of new signage, (iii) promotion of
the Riviera Player's Club, (iv) sponsorship of slot tournaments, (v) creation of
promotional programs and (vi) marketing of the "World's Loosest Corner of Slots"
and "$40 for $20" slot promotions.
One of the Company's most successful permanent promotions is its "$40 for
$20" slot promotion which attracts slot players to the casino. The promotion
offers $40 of slot play on certain promotional machines for $20 cash. If the
customer does not win a jackpot of at least $40, a prize with a retail value of
at least $20 is awarded. While the Riviera's competitors' promotions normally
result in a cost (loss) to the casino department, this innovative program has a
positive EBITDA (exclusive of ancillary slot play) which is used to offset other
marketing costs, including "free pulls," drawings, advertising and general
marketing. The sign-up counter and the promotion machines are located near an
entrance to the casino and often draw long lines of patrons. The Company has
introduced this promotion at the Four Queens and has been approached to license
this promotion to other casinos as well, which it may do in the future. Another
successful promotion is the "World's Loosest Corner of Slots" which is an area
of the casino that contains banks of slot machines with the guaranteed highest
payback percentages of any similar machines in Las Vegas. Like the "$40 for $20"
slot promotion, the "World's Loosest Corner of Slots" is located near an
entrance to the casino to attract walk-in traffic. These promotions have
produced significant income from both repeat and walk-in customers within the
Riviera's targeted market segments.
Create Repeat Customers. Generating customer loyalty is a critical
component of management's business strategy as retaining customers is less
expensive than attracting new ones. The Company has developed a focused and
coordinated marketing program intended to develop a loyal customer base which
emphasizes (i) providing a high level of service to its customers to ensure an
enjoyable experience while at the Riviera, (ii) responding to customer surveys
and (iii) focusing marketing efforts and promotional programs on customers with
positive gaming profiles. The Company uses its research data to tailor
promotional offers to the specific tastes of targeted customers. All slot and
table players are encouraged to join the Riviera Player's Club and to fill out
surveys that provide the Riviera with personal information and preferences and
tracks their level of play. Members of the Riviera Player's Club earn bonus
points based upon their level of play, redeemable for free gifts, complimentary
services or cash rebates. Promotional offers are made to qualifying customers
through direct mail and telemarketing. The Company designs promotional offers
targeted at certain mid-level gaming patrons that are expected to provide
significant revenues based upon their historical gaming patterns. The Company
contacts these customers through a combination of direct mail and telemarketing
by an in-house marketing staff and independent representatives located in major
cities. The Riviera uses a
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proprietary database which is linked to its player tracking system to help
identify customers' requirements and preferences; thereby allowing the Riviera
to customize promotions to attract repeat visitors. The Company offers customers
personalized service, credit availability and access to a variety of
complimentary or reduced-rate room, dinner and entertainment reservations.
Management uses a specialized multi-tiered marketing approach to attract
customers in each of its major market segments. Slot and table game tournaments
and special events are designed for specific levels of play. Utilizing its
proprietary database the Company's marketing department then targets and invites
the customers most appropriate for the customized events. In addition, the
Company hosts an array of special events, including slot and table tournaments,
designed to attract customers for an extended stay. Management has found that
this individualized marketing approach has provided significant revenues and
profitable repeat business.
Provide Extensive Entertainment Options. The Company focuses on attracting
its guests through a range of entertainment opportunities. The Riviera has one
of the most extensive entertainment programs in Las Vegas with four different
regularly scheduled shows and special appearances by headline entertainers. In
addition to providing a positive impact on the Company's profitability, the
shows attract additional gaming revenue. Surveys indicate that approximately 80%
of the show patrons come from outside the hotel and approximately 66% of these
individuals gamble at the Riviera before or after the shows. In addition, the
Riviera offers a variety of quality dining options, a range of accommodations
from deluxe rooms to penthouse suites, a 75,000 square-foot pool area with an
olympic-size swimming pool, tennis courts, fitness center, spa and 43 retail
outlets located throughout the property. The Company believes that it offers a
value-oriented experience by providing a variety of hotel rooms, restaurants and
entertainment, with some of Las Vegas' most popular shows, all at reasonable
prices.
Attract Walk-In Traffic. The Company seeks to maximize the number of people
who patronize the Riviera that are not guests in the hotel by capitalizing on
Riviera's prime Strip location, convention center proximity and the Riviera's
several popular in-house productions. The Riviera is well situated on the Las
Vegas Strip near Circus Circus, The Stardust Hotel & Casino, the Westward Ho
Casino & Hotel, the Las Vegas Hilton and the Las Vegas Convention Center.
Management strives to attract customers from those facilities, as well as
capitalize on the growth in Las Vegas visitors in general, with the goal of
increasing walk-in traffic by (i) providing a variety of quality, value-priced
entertainment and dining options, (ii) promoting the "World's Loosest Corner of
Slots" and "$40 for $20" slot promotions, and placing them near the entrances to
the casino, (iii) upgrading the exterior of the Riviera including painting,
lighting and landscaping and (iv) developing the Nickel Plaza.
Focus on Convention Customers. This market segment consists of two groups:
(i) those trade organizations and groups that hold their events in the banquet
and meeting space provided by a single hotel and (ii) those attending citywide
events, usually held at the Las Vegas Convention Center. The Riviera targets
convention business because it typically provides patrons willing to pay higher
room rates and provides certain advance planning benefits, since conventions are
usually booked two years in advance of the event date. The Riviera has 100,000
square feet of exhibit, meeting and banquet space (one of the largest convention
facilities provided by a casino/hotel in Las Vegas), making it attractive to
large groups. Management focuses its marketing efforts on conventions whose
participants have the most active gaming profile and higher room rate, banquet
and function spending habits. The Riviera also benefits from its proximity to
the Las Vegas Convention Center which makes it attractive to city-wide
conventioneers looking to avoid the congestion that occurs during a major
convention, particularly at the south end of the Strip. The Riviera currently
has 251 conventions scheduled through June 1999 to use the Riviera's convention
facilities. Management believes that its plans to further develop the Riviera's
convention center will attract significant additional convention business. After
completion of its expanded convention center to 158,000 square feet at the end
of the third quarter of 1998, the Company believes its competitive position in
the market for convention space and the corresponding hotel room occupancy by
convention attendees will be significantly increased.
The Company focuses its marketing efforts in the southwestern United States
during the spring and summer months and in the midwestern United States during
the fall and winter months to effectively capitalize on the vacation patterns of
the Riviera's target customers in those markets. Marketing efforts in California
are consistent throughout the year reflecting the constant flow of California
residents to Las Vegas.
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Management has found that many of its customers use tour and travel "package"
options to reduce the cost of travel, lodging and entertainment. These packages
are produced by wholesale operators and travel agents and emphasize mid-week
stays. Tour and travel patrons often book at off-peak periods enabling the
Company to maintain occupancy rates at the highest levels throughout the year.
Management has developed specialized marketing programs and cultivated
relationships with wholesale operators, travel agents and major domestic air
carriers to expand this market. The Company's four largest tour and travel
operators, including America West Vacations, currently account for approximately
524 room bookings per night. The Company has successfully converted many tour
and travel customers who meet the Company's target customer profile into repeat
customers.
RIVIERA GAMING MANAGEMENT
In order to capitalize on management's expertise and reputation as
successful operators of casino properties, the Company formed RGM, a wholly
owned subsidiary of the Company, for the primary purpose of obtaining casino
management contracts in Nevada and other jurisdictions. RGM provides services
such as assisting new venue licensee applicants in designing and planning their
gaming operations and managing the start-up of new gaming operations. These
services include casino design, equipment selection, employee recruitment and
training, control and accounting systems and marketing programs. Management
believes that management contracts provide high margin income with limited
additional overhead and little or no capital expenditure requirements.
Management is continually evaluating opportunities to manage other casinos/
hotels. The Company's objective is to obtain the right to a substantial equity
position in projects it would manage as part of the compensation for its
services.
Four Queens Management Agreement. Since August 1996, RGM has been operating
the Four Queens located adjacent to the Golden Nugget on Fremont Street in
downtown Las Vegas under an interim management agreement for a fee of $83,333
per month. A long-term management agreement with Elsinore, the owner of the Four
Queens, went into effect on February 28, 1997, the effective date of the Chapter
11 plan of reorganization of Elsinore.
The term of the management agreement is approximately 40 months, subject to
earlier termination or extension. Either party may terminate if the Four Queens'
cumulative EBITDA for the first two fiscal years is less than $12.8 million. The
term can be extended by an additional 24 months at RGM's option, if the Four
Queens' cumulative EBITDA for the three fiscal years of the term is at least
$19.2 million. RGM will be paid a fee of 25% of any increase in the Four Queens'
annual EBITDA over $4.0 million, subject to a $1.0 million minimum fee, payable
in equal monthly installments. RGM has received warrants to purchase 1,125,000
shares of common stock of Elsinore, exercisable during the term or extended term
of the management agreement at an exercise price of $1.00 per share. If the
proposed acquisition of Elsinore by an affiliate of Mr. Allen E. Paulson is
consummated (see "The Proposed Merger -- The Elsinore Transaction"), the Company
would receive $2,430,000 (i.e., the spread between the per share warrant price
and the per share merger price multiplied by 1,125,000).
Either party can terminate the management agreement if (i) substantially
all the Four Queens' assets are sold, (ii) the Four Queens is merged or (iii) a
majority of the Four Queens' or Elsinore's shares are sold. Upon such
termination, RGM will receive a $2.0 million termination bonus minus any amount
realized or realizable upon exercise of the warrants.
LAS VEGAS MARKET
Las Vegas is one of the largest and fastest growing entertainment markets
in the country. According to the Las Vegas Convention and Visitors Authority
(the "LVCVA"), the number of visitors traveling to Las Vegas has increased at a
steady and significant rate for the last eleven years from 15.2 million in 1986
to 29.6 million in 1996, a compound annual growth rate of 6.9%. Clark County
gaming has continued to be a strong and growing business with Clark County
gaming revenues increasing at a compound annual growth rate of 9.2% from $2.4
billion in 1986 to $5.8 billion in 1996.
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The Riviera targets the large and expanding Las Vegas tourist and gaming
market. Las Vegas is the largest city in Nevada, with a local population in
excess of one million, and is Nevada's principal tourist center. Gaming and
tourism are the major attractions, complemented by warm weather and the
availability of many year-round recreational activities. Although Las Vegas'
principal markets are the western region of the United States, most
significantly Southern California and Arizona, Las Vegas also serves as a
destination resort for visitors from all over the world. A significant
percentage of visitors originate from Latin America and Pacific Rim countries
such as Japan, Taiwan, Hong Kong and Singapore.
Historically, Las Vegas has had one of the strongest hotel markets in the
country. The number of hotel and motel rooms in Las Vegas has increased by over
40% from approximately 67,000 at the end of 1989 to 95,000 at the end of 1996,
giving Las Vegas the most hotel and motel rooms of any metropolitan area in the
country. Despite this significant increase in the supply of rooms, the Las Vegas
hotel occupancy rate exceeded 91% for each of 1993, 1994, 1995 and 1996. Since
January 1, 1996, approximately 4,700 new hotel rooms opened and as of December
31, 1996, there were over 9,200 hotel rooms under construction (which combined
constitutes a 14.7% increase in the number of hotel and motel rooms in Las
Vegas) and the LVCVA estimated that approximately 60,000 additional hotel rooms
were proposed for construction. However, the Company believes that many of these
projects will not materialize. The new rooms under construction are primarily
being designed to attract the high end gaming and convention customers, and
based on construction costs will be priced at rates well above those which have
been or can be charged by the Riviera based on the investment in its facility.
The Company believes that the growth in the Las Vegas market has been
enhanced as a result of (i) a dedicated program by the LVCVA and major Las Vegas
casino/hotels to promote Las Vegas as a major convention site, (ii) the
increased capacity of McCarran Airport and (iii) the introduction of large
themed "must see" destination resorts in Las Vegas. In 1987, approximately 1.7
million people attended conventions in Las Vegas and generated approximately
$1.2 billion of non-gaming economic impact. In 1996, the number of convention
delegates had increased to 3.3 million with approximately $3.9 billion of
non-gaming economic impact. According to the LVCVA, Las Vegas was the largest
convention market in the country in 1996.
During the past five years, McCarran Airport has expanded its facilities to
accommodate the increased number of airlines and passengers which it services.
The number of passengers traveling through McCarran Airport has increased from
approximately 15.6 million in 1987 to 30.5 million in 1996. Construction is
currently underway on numerous roadway enhancements to improve access to the
airport. The airport has additional long-term expansion plans underway which
will provide additional runways, three new satellite concourses, 60 additional
gates and other facilities.
COMPETITION
Intense competition exists among companies in the gaming industry, many of
which have significantly greater resources than the Company. The Riviera faces
competition from all other casinos and hotels in the Las Vegas area. Management
believes that the Riviera's most direct competition comes from certain large
casino/hotels located on or near the Strip which offer amenities and marketing
programs similar to those offered by the Riviera.
Las Vegas gaming square footage and room capacity are continuing to grow
and are expected to continue to increase significantly during the next several
years. Since January 1, 1996 approximately 4,700 new hotel rooms opened. As of
December 31, 1996 there were over 9,200 hotel rooms under construction (which
combined constitutes a 14.7% increase in the number of hotel and motel rooms in
Las Vegas) and the Las Vegas Convention and Visitors Authority estimates that
approximately 60,000 additional hotel rooms are proposed for construction.
Existing and future expansions, additions and enhancements to existing
properties and construction of new properties by the Company's competitors could
divert additional business from the Company's facilities. There can be no
assurance that the Company will compete successfully in the Las Vegas market in
the future.
Compared to the first eight months ended August 31, 1996, during the first
eight months of 1997, available rooms in the Las Vegas market increased by
11.2%, while total room nights occupied increased by
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only 6.8%. This has had the effect of intensifying competition, resulting in
declining occupancy and average room rates throughout the Las Vegas market.
Although the Company was able to increase its room rates nominally which offset
a less than 1% decline in occupancy, there is no certainty that the Company can
continue to maintain its present level of room revenue considering the
competitive situation.
Intense competition also characterizes the Black Hawk/Central City,
Colorado market. There are approximately 31 casinos currently operating in this
market in addition to casinos located in Cripple Creek. Several new development
projects and expansion plans have been announced, including construction of a
casino by a joint venture between Jacobs Entertainment, Ltd. and the
owner/operator of Gilpin Hotel Casino and a casino on property adjacent to the
Black Hawk Land (as defined) by a joint venture between Casino America and
Nevada Gold. Colorado does not limit the total number of gaming licenses
available for issuance in Colorado and there are no minimum facility size
requirements. The Company believes that many Colorado casinos may not be
operating profitably. A number of Colorado casinos have ceased operations, and
others have either filed for bankruptcy protection, closed temporarily or
reduced the number of their employees.
In May 1997, the Colorado Legislature passed a bill mandating the
installation of a minimum of 500 video lottery terminals at each licensed horse
and greyhound racetrack then located in Colorado Springs, Pueblo, Byers,
Loveland, Commerce City and Arapahoe County. The Governor of Colorado vetoed the
bill on June 4, 1997 labeling it as a "back-door expansion of gambling." There
is no reason, however, to believe that there will not be renewed efforts to pass
similar legislation during the 1998 or subsequent legislative sessions.
The Company also competes, to some extent, with casinos in other states,
riverboat and Native American gaming ventures, state-sponsored lotteries, on-
and off-track wagering, card parlors and other forms of legalized gaming in the
United States, as well as with gaming on cruise ships and international gaming
operations. In addition, certain states have recently legalized or are
considering legalizing casino gaming in specific geographical areas within those
states. Any future development of casinos, lotteries or other forms of gaming in
other states, particularly areas close to Nevada, such as California, could have
a material adverse effect on the Company's results of operations.
The current business of the Company is entirely dependent on gaming in Las
Vegas. The Riviera derives a substantial percentage of its business from
tourists, principally from Southern California and the southwestern United
States. Weakness in the economy of Southern California has in the past and could
in the future adversely affect the financial results of the Company. Until the
Black Hawk Casino opens, the Company's operations will be primarily dependent
upon the results of operations achieved by the Riviera on the Las Vegas Strip.
Any significant disruption in operations at the Riviera would have a material
adverse effect on the Company.
THE BLACK HAWK PROJECT
In August 1997, the Company acquired the Black Hawk Land, which management
believes to be the premier gaming site in Black Hawk, Colorado. See "Risk
Factors -- The Black Hawk Project." The property is currently the closest gaming
site to Denver and is the first site encountered when traveling from Denver to
Black Hawk/Central City. The Black Hawk/Central City market primarily serves the
metropolitan Denver area and is approximately an hour drive and 40 miles west of
central Denver.
Located on South Main Street, the property is directly across from the
Colorado Central Station, owned by Anchor Gaming, which management believes is
the most successful casino in Colorado due to its location, size and
availability of parking. Unlike many other sites, the Riviera development site
is level and has a relatively broad footprint, which is expected to provide
significant cost and time savings in construction relative to other projects in
the market and can accommodate a large Las Vegas-style casino on one floor.
The development site comprises 71,000 square feet, zoned for gaming. The
casino building is expected to be approximately 62,000 square feet and include
approximately 1,000 slot machines and 14 table games. In addition, the facility
will provide entertainment, food and beverage service and will incorporate an
attached covered parking facility for approximately 520 vehicles. The Company
believes that the Black Hawk Project
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could be expanded beyond its currently permitted scope based on zoning waivers
or variances similar to those granted to other casino developers.
The Company currently estimates that total costs for completion of the
Black Hawk Project will be approximately $60 million, a $5 million increase over
previous estimates resulting from the announcement of additional projects by
competitors. The Company purchased the Black Hawk Land in August 1997 for $15
million, which was financed by the net proceeds from the sale of the Existing
Notes, and expects to finance the remainder of the Black Hawk Project from a
combination of third party financing and additional investment by the Company,
including up to an additional $15 million of the net proceeds from the sale of
the Existing Notes. The Company expects to receive the necessary excavation and
other permits in the near future, with construction of the casino commencing
shortly thereafter. The casino is scheduled to open during mid-1999. See "Risk
Factors -- Competition" and "Risk Factors -- The Black Hawk Project" for a
discussion of the risk factors involved in investing in the Black Hawk Project.
Black Hawk Operating Company will not initially be a Guarantor of the
Notes. See "Description of Notes -- Security." At September 30, 1997, Black Hawk
Operating Company had assets of approximately $15.5 million, which represents
the cost of the Black Hawk Land, and no liabilities or operations. Therefore,
separate financial statements have not been included in this Prospectus.
COLORADO MARKET
In November 1990, Colorado voters approved limited stakes gaming ($5.00 or
less per wager) in two historic gold mining areas, Black Hawk/Central City and
Cripple Creek. Because of the $5.00 maximum bet, the casinos in Colorado
emphasize gaming machine play. Black Hawk and Central City are contiguous, with
Black Hawk being closer to Denver, and are located approximately 40 miles west
of Denver and 10 miles north of Interstate 70, the main highway connecting
Denver to many of Colorado's major ski resorts. Cripple Creek is located
approximately 45 miles from Colorado Springs and 75 miles from Pueblo. Casinos
located in the Black Hawk/Central City area serve primarily the residents of
Denver and Boulder, Colorado and surrounding communities. Approximately three
million people live within a 100-mile radius of the Black Hawk/Central City
area.
The following table sets forth statistical information relating to the
growth of the Black Hawk/Central City market compiled from data published by the
Colorado Department of Revenue:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Aggregate Gaming Revenues (Dollars in millions)....... $ 182 $ 243 $ 291 $ 309
Revenue Per Slot Machine Per Day...................... 70 80 85 93
Average Number of Slot Machines....................... 6,922 7,705 8,636 8,446
Average Number of Casinos in Operation................ 36 34 32 33
</TABLE>
See "Risk Factors -- Competition" for a discussion of competition in the
Colorado gaming market.
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1997, the Riviera employed approximately 2,100 persons
and had collective bargaining contracts with eight unions covering approximately
1,300 of such employees including food and beverage employees, rooms department
employees, carpenters, engineers, stage hands, musicians, electricians, painters
and teamsters. The Company's agreements with the Southern Nevada Culinary and
Bartenders Union and Stage Hands Union, which cover the majority of the
Company's unionized employees, were renegotiated in 1994 and expired on May 31,
1997 and June 1, 1997, respectively. The Riviera, along with the other Las Vegas
hotels are currently negotiating with these unions and anticipate that new
contracts will be agreed upon during the first quarter of 1998. The Culinary and
Bartenders Union is currently concentrating on its negotiations with the larger
gaming companies and is expected to intensify its negotiations with the Riviera
after preliminary agreements have been reached with the larger gaming companies.
The Stage Hands Union's negotiations are proceeding at a steady pace and
agreement on details of the contract is anticipated during the
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first quarter of 1998. The Teamsters, Operating Engineers, Carpenters, Painters
and Electricians Unions' collective bargaining agreements were renewed in 1995
and generally expire in or after 1998. The Musicians Union's collective
bargaining agreement expires on September 21, 1999. Although unions have been
active in Las Vegas, management considers its employee relations to be
satisfactory. There can be no assurance, however, that new agreements will be
reached without union action or will be on terms satisfactory to the Company.
REGULATION AND LICENSING
Nevada Gaming Regulations. The ownership and operation of casino gaming
facilities in Nevada are subject to: (i) The Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively the "Nevada Act") and (ii)
various local ordinances and regulations. The Company's gaming operations are
subject to the licensing and regulatory control of the Nevada Commission, the
Nevada Board, the Clark County Liquor and Gaming Licensing Board (the "Clark
County Board") and the City of Las Vegas. The Nevada Commission, the Nevada
Board, the Clark County Board and the City of Las Vegas are collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time and in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
ROC is required to be licensed by the Nevada Gaming Authorities. The gaming
license held by ROC requires the periodic payment of fees and taxes and is not
transferable. ROC is also licensed as a manufacturer and distributor of gaming
devices. Such licenses also require the periodic payment of fees and are not
transferable. The Company is registered by the Nevada Commission as a publicly
traded corporation (a "Registered Corporation") and has been found suitable to
own the stock of ROC. ROC is also registered by the Nevada commission as an
Intermediary Company and has been found suitable to own the stock of RGM which
has been registered by the Nevada Commission as an Intermediary Company and has
been found suitable to own the stock of RGME. RGME has been licensed as the
manager of the Four Queens and such license is not transferable. ROC and RGME
are each a Corporate Licensee (collectively, the "Corporate Licensees") under
the terms of the Nevada Act. As a Registered Corporation, the Company is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and to furnish any other information which the Nevada
Commission may require. No person may become a stockholder of, or receive any
percentage of profits from, the Corporate Licensees without first obtaining
licenses and approvals from the Nevada Gaming Authorities. The Company, ROC, RGM
and RGME have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, findings of suitability and licenses required
in order to engage in gaming activities and manufacturing and distribution
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers, distributed or sold by licensed distributors and
approved by the Nevada Commission. The approval process includes rigorous
testing by the Nevada Board, a field trial and a determination as to whether the
gaming device meets strict technical standards that are set forth in the
regulations of the Nevada Gaming Authorities. Associated equipment must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company, ROC, RGM or
RGME in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
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certain key employees of ROC and RGME must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors and key employees of the Company
and RGM who are actively and directly involved in the gaming activities of ROC
or RGME may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing or
a finding of suitability must pay all the costs of the investigation. Any change
in a corporate position by a licensed person must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, ROC, RGM or RGME the companies involved would
have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company, ROC, RGM or RGME to terminate the employment
of any person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
The Company, ROC and RGME are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by ROC must be
reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by ROC or RGME, the
gaming licenses they hold could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, the Company, ROC, RGM and RGME and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the casino and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for reasonable rental value of the casino) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of the gaming licenses of ROC or
RGME or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the corporate charter, bylaws,
management, policies or operations of the Registered Corporation, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are deemed to be consistent with
holding voting securities for investment purposes only include: (i) voting on
all matters voted on by stockholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or
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operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, ROC, RGM or RGME, the Company (i)
pays that person any dividend or interest upon voting securities of the Company,
(ii) allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming licensee.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation such as the 11% First Mortgage Notes,
the Existing Notes or the New Notes to file applications, be investigated and be
found suitable to own the debt security of a Registered Corporation, if it has
reason to believe that such ownership would be inconsistent with the declared
policies of the State of Nevada. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the Nevada Act, the
Registered Corporation can be sanctioned, including the loss of its approvals,
if without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest, or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. The
Exchange Offer constitutes a public offering (as defined in the Nevada Act) and
requires the prior approval of the Nevada Commission upon the recommendation of
the Nevada Board. Such approval was granted on November 20, 1997. In addition,
(i) a Corporate Licensee may not guarantee a security issued by a Registered
Corporation pursuant to a public offering, or hypothecate its assets to secure
the payment or performance of the obligations evidenced by such a security,
without the prior approval of the Nevada Commission, (ii) the pledge of the
stock of a Corporate Licensee or Intermediary Company ("Stock Pledge"), such as
ROC, RGM and RGME, is void without the prior approval of the Nevada Commission,
and (iii) restrictions upon the transfer of an equity security issued by a
Corporate Licensee, or Intermediary Company and agreements not to encumber such
securities (collectively, "Stock Restrictions") are ineffective without the
prior approval of the Nevada Commission. The Stock Pledge and the Stock
Restrictions in respect of the Notes require the prior approval of the Nevada
Commission to be effective. In connection with the approval of the Exchange
Offer, the Subsidiary Guaranty of ROC, RGM & RGME, the hypothecation of the
assets of ROC and RGME, the
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Stock Pledge and the Stock Restrictions also require the prior approval of the
Nevada Commission. All such approvals were granted on November 20, 1997. The
approval of the Stock Pledge does not constitute approval to foreclose on the
Stock Pledge. Separate approval will be required to foreclose on the Stock
Pledge and such approval will require the licensing of the Trustee unless such
requirement is waived upon the application of the Trustee. Approval of a public
offering such as the Exchange Offer does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming Licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming Licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
County in which the ROC's and RGME's operations are conducted. Depending upon
the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenues received; (ii) the number of gaming devices operated; or
(iii) the number of table games operated. A casino entertainment tax is also
paid by casino operations where entertainment is furnished in connection with
the selling of food, refreshments or merchandise. Nevada Licensees that hold a
license to manufacture and distribute slot machines and gaming devices, such as
ROC, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
Other Nevada Regulation. The sale of alcoholic beverages at the Riviera is
subject to licensing, control and regulation by the Clark County Board. All
licenses are revocable and are not transferable. The Clark
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County Board has full power to limit, condition, suspend or revoke any such
license, and any such disciplinary action could (and revocation would) have a
material adverse affect upon the operations of ROC.
Colorado Gaming Regulation. Pursuant to an amendment to the Colorado
Constitution (the "Colorado Amendment"), limited stakes gaming became lawful in
the cities of Central City, Black Hawk and Cripple Creek on October 1, 1991. The
Colorado Amendment defines limited stakes gaming as the use of slot machines and
the card games of blackjack and poker, with a maximum single bet of five
dollars.
Limited stakes gaming is confined to the commercial districts of these
cities as defined by Central City on October 7, 1981, by Black Hawk on May 4,
1978, and by Cripple Creek on December 3, 1973. In addition, the Colorado
Amendment restricts limited stakes gaming to structures that conform to the
architectural styles and designs that were common to the areas prior to World
War I, and which conform to the requirements of applicable city ordinances
regardless of the age of the structures. The Colorado Amendment provides that no
more than 35% of the square footage of any building and no more than 50% of any
one floor of any building may be used for limited stakes gaming. The Colorado
Amendment prohibits limited stakes gaming between the hours of 2:00 a.m. and
8:00 a.m., and allows limited stakes gaming to occur in establishments licensed
to sell alcoholic beverages.
Further, the Colorado Amendment provides that, in addition to any other
applicable license fees, up to a maximum of 40% of the Adjusted Gross Proceeds
("AGP") of limited stakes gaming operations may be payable by a licensee for
conducting limited stakes gaming. Such percentage is to be established by the
Colorado Limited Gaming Control Commission (the "Colorado Commission") per the
Colorado Limited Gaming Act of 1991 (the "Colorado Act").
The Colorado legislature promulgated the Colorado Act to implement the
provisions of the Colorado Amendment. The Colorado Act became effective on June
4, 1991 and has been amended subsequently.
The Colorado Act declares public policy on limited stakes gaming to be
that: (i) the success of limited stakes gaming is dependent upon public
confidence and trust that licensed limited stakes gaming is conducted honestly
and competitively; the rights of the creditors of licensees are protected;
gaming is free from criminal and corruptive elements; (ii) public confidence and
trust can be maintained only by strict regulation of all persons, locations,
practices, associations and activities related to the operation of licensed
gaming establishments and the manufacture or distribution of gaming devices and
equipment; (iii) all establishments where limited stakes gaming is conducted and
where gambling devices are operated and all manufacturers, sellers and
distributors of certain gambling devices and equipment must be licensed,
controlled and assisted to protect the inhabitants of the state to foster the
stability and success of limited stakes gaming and to preserve the economy and
free competition in Colorado; and (iv) no applicant for a license or other
approval has any right to a license or to the granting of the approval sought.
The Colorado Act subjects the ownership and operation of limited stakes
gaming facilities in Colorado to extensive regulation by the Colorado Commission
and prohibits persons under the age of 21 from participating in limited stakes
gaming. No limited stakes gaming may be conducted in Colorado unless all
appropriate gaming licenses are approved by and obtained from the Colorado
Commission. The Colorado Commission has full and exclusive authority to
promulgate, and has promulgated, rules and regulations governing the licensing,
conducting and operating of limited stakes gaming (the "Colorado Regulations").
Such authority does not require any approval by or delegation of authority from
the Colorado Department of Revenue (the "Colorado Revenue Department"). The
Colorado Act also created the Division of Gaming within the Colorado Revenue
Department to license, implement, regulate and supervise the conduct of limited
stakes gaming in Colorado, supervised and administered by the Director of the
Division of Gaming ("Division Director").
The Colorado Commission may issue: (i) slot machine manufacturer or
distributor, (ii) operator, (iii) retail gaming, (iv) support and (v) key
employee gaming licenses. The first three licenses require annual renewal by the
Colorado Commission. Support and key employee licenses are issued for two year
periods and are renewable by the Division Director. The Colorado Commission has
broad discretion to condition, suspend for up to six months, revoke, limit or
restrict a license at any time and also has the authority to impose fines.
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An applicant for a gaming license must complete comprehensive application
forms, pay required fees and provide all information required by the Colorado
Commission and the Division of Gaming. Prior to licensure, applicants must
satisfy the Colorado Commission that they are suitable for licensing. Applicants
have the burden of proving their qualifications and must pay the full cost of
any background investigations. There is no limit on the cost of such background
investigations.
Gaming employees must hold either a support or key employee license. Every
retail gaming licensee must have a key employee licensee in charge of all
limited stakes gaming activities when limited stakes gaming is being conducted.
The Colorado Commission may determine that a gaming employee is a key employee
and, require that such person apply for a key employee license.
A retail gaming license is required for all persons conducting limited
stakes gaming on their premises. In addition, an operator license is required
for all persons who engage in the business of placing and operating slot
machines on the premises of a retailer. However, a retailer is not required to
hold an operator license. No person may have an ownership interest in more than
three retail licenses. A slot machine manufacturer or distributor license is
required for all persons who manufacture, import or distribute slot machines in
Colorado.
The Colorado Act requires that every officer, director, and stockholder of
private corporations or equivalent office or ownership holders for non-corporate
applicants, and every officer, director or stockholder holding either a 5% or
greater interest or controlling interest of a publicly traded corporation or
owners of an applicant or licensee shall be a person of good moral character and
submit to a full background investigation conducted by the Division of Gaming
and the Colorado Commission. The Colorado Commission may require any person
having an interest in a license to undergo a full background investigation and
pay such costs 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.
An applicant or licensee must report to the Division of Gaming or Colorado
Commission all leases not later than 30 days after the effective date of the
lease. Also, an applicant or a licensee, upon the request of the Colorado
Commission or the Division Director, must submit copies of all written gaming
contracts and summaries of all oral gaming contracts to which it is or intends
to become a party. The Division Director or the Colorado Commission may require
changes in the lease or gaming contract before an application is approved or
participation in such agreement is allowed or may require termination of the
lease or gaming contract.
The Colorado Act and the Colorado Regulations require licensees to maintain
detailed records that account for all business transactions. Records must be
furnished upon demand to the Colorado Commission, the Division of Gaming and
other law enforcement authorities. The Colorado Regulations also establish
extensive playing procedures and rules of play for poker, blackjack and slot
machines. Retail gaming licensees must adopt comprehensive internal control
procedures. Such procedures must be approved in advance by the Division of
Gaming and include the areas of accounting, surveillance, security, cashier
operations, key control and fill and drop procedures, among others. No gaming
devices may be used in limited stakes gaming without the approval of the
Division Director or the Colorado Commission.
Licensees have a continuing duty to immediately report to the Division of
Gaming the name, date of birth and social security number of all persons who
obtain an ownership, financial or equity interest in the licensee of five (5)
percent or greater, or who have the ability to control the licensee, or who have
the ability to exercise significant influence over the licensee, or who loan any
money or other thing of value to the licensee. Licensees must report to the
Division of Gaming all licenses, and all applications for licenses, in foreign
jurisdictions.
With limited exceptions applicable to licensees that are publicly traded
entities, no person may sell, lease, purchase, convey or acquire any interest in
a retail gaming or operator license or business without the prior approval of
the Colorado Commission.
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All agreements, contracts, leases, or arrangements in violation of the
Colorado Act or the Colorado Regulations are void and unenforceable.
The Colorado Amendment requires an annual tax of as much as 40% on the AGP
from limited stakes gaming. Effective October 1 of each year, the Colorado
Commission establishes the gaming tax for the following 12 months. Currently,
the gaming tax on AGP is: 2% on the first $2 million of AGP; 4% on AGP from $2
million to $4 million; 14% on AGP from $4 million to $5 million; 18% on AGP from
$5 million to $10 million; and 20% on AGP over $10 million.
The Colorado Commission requires all gaming licensees to pay an annual
device fee for each slot machine, blackjack table and poker table of $75. The
municipality of Black Hawk assesses an annual device fee of $750 per device.
There is no statutory limit on state or city device fees, which may be increased
at the discretion of the Colorado Commission or the city. In addition, a
business improvement fee of as much as $102 per device and a transportation
authority device fee of $77 per device also may apply depending upon the
location of the licensed premises in Black Hawk. The current annual business
improvement fee is $89.04.
Black Hawk also imposes taxes and fees on other aspects of the businesses
of gaming licensees, such as parking, alcoholic beverage licenses and other
municipal taxes and fees. Significant increases in these fees and taxes, or the
imposition of new taxes and fees, may occur.
Violation of the Colorado Act or any of the Colorado Regulations is a
criminal offense. Gaming licensees violating the Colorado Act or the Colorado
Regulations may, in addition to being subject to fines, suspension for as long
as six months or revocation of the gaming license, commit a class 1 misdemeanor
which may result in incarceration or fines or both.
The sale of alcoholic beverages in gaming establishments is subject to
strict licensing, control and regulation by state and local authorities and
requires a liquor license. Alcoholic beverage licenses are revocable and
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 or fines or both.
There are various classes of retail liquor licenses under the Colorado
Liquor Code. A gaming licensee may sell malt, vinous or spirituous liquors only
by the individual drink for consumption on the premises. Even though a retail
gaming licensee may be issued various classes of retail liquor licenses such
gaming licensee may only hold liquor licenses of the same class. An application
for an alcoholic beverage license in Colorado requires notice, posting and a
public hearing before the local liquor licensing authority prior to approval of
the same. The Colorado Department of Revenue's Liquor Enforcement Division must
also approve the application.
The Colorado Commission has enacted Rule 4.5, which imposes requirements on
publicly traded corporations holding gaming licenses in Colorado and on gaming
licensees owned directly or indirectly by a publicly traded corporation whether
through a subsidiary or intermediary company. The term "publicly traded
corporation" includes corporations, firms, limited liability companies, trusts,
partnerships and other forms of business organizations even if created under the
laws of a foreign country. Such requirements shall automatically apply to any
ownership interest held by a publicly traded corporation, holding company or
intermediary company thereof, where such ownership interest directly or
indirectly is, or will be upon approval of the Colorado Commission, 5% or more
of the entire licensee. In any event, if the Colorado Commission determines that
a publicly traded corporation, or a subsidiary, intermediary company or holding
company has the actual ability to exercise influence over a licensee, regardless
of the percentage of ownership possessed by said entity, the Colorado Commission
may require that entity to comply with the disclosure regulations contained in
Rule 4.5.
Under Rule 4.5, gaming licensees, affiliated companies and controlling
persons commencing a public offering of voting securities must notify the
Colorado Commission within 10 days of the initial filing of a registration
statement with the Securities and Exchange Commission. Licensed publicly traded
corporations are also required to send proxy statements to the Division of
Gaming within 5 days after distribution of such statement. Licensees to whom
Rule 4.5 applies must include in their articles of organization or similar
charter
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documents provisions that: restrict the rights of the licensees to issue voting
interests or securities except in accordance with the Colorado Act and the
Colorado Regulations; limit the rights of persons to transfer voting interests
or securities of licensees except in accordance with the Colorado Act and the
Colorado Regulations; and provide that holders of voting interests or securities
of licensees found unsuitable by the Colorado Commission may, within 60 days of
such finding of unsuitability, be required to sell their interests or securities
back to the issuer at the lesser of the cash equivalent of the holders'
investment or the market price as of the date of the finding of unsuitability.
Alternatively, the holders may, within 60 days after the finding of
unsuitability, transfer the voting interests or securities to a suitable person
(as determined by the Colorado Commission). Until the voting interests or
securities are held by suitable persons, the issuer may not pay dividends or
interest, the securities may not be voted, they may not be included in the
voting or securities of the issuer, and the issuer may not pay any remuneration
in any form to the holders of the securities.
Pursuant to Rule 4.5, persons who acquire direct or indirect beneficial
ownership of (i) 5% or more of any class of voting securities of a publicly
traded corporation required to include in its articles of organization the Rule
4.5 charter language provisions, or (ii) 5% or more of the beneficial interest
in a gaming licensee directly or indirectly through any class of voting
securities of any holding company or intermediary company of a licensee (all
such persons hereinafter referred to as "qualifying persons"), shall notify the
Division of Gaming within 10 days of such acquisition, are required to submit
all requested information and are subject to a finding of suitability as
required by the Division of Gaming or the Colorado Commission. Licensees also
must notify any qualifying persons of these requirements. A qualifying person
whose interests equal 10% or more must apply to the Colorado Commission for a
finding of suitability within 45 days after acquiring such securities. Licensees
must also notify any qualifying persons of these requirements. Whether or not
notified, qualifying persons are responsible for complying with these
requirements.
A qualifying person who is an institutional investor under Rule 4.5 and who
individually or in association with others, acquires, directly or indirectly,
the beneficial ownership of 15% or more of any class of voting securities must
apply to the Colorado Commission for a finding of suitability within 45 days
after acquiring such interests. A qualifying person who is an institutional
investor and whose interests equal 10%, but less than 15%, may not be required
to apply for suitability, provided such person fulfills reporting requirements
required by the Colorado Regulations.
Pursuant to Rule 4.5, persons found unsuitable by the Colorado Commission
must be removed from any position as an officer, director, or employee of a
licensee, or from a holding or intermediary company. Such unsuitable persons
also are prohibited from any beneficial ownership of the voting securities of
any such entities. Licensees, or affiliated entities of licensees, are subject
to sanctions for paying dividends or distributions to persons found unsuitable
by the Colorado Commission, or for recognizing voting rights of, or paying a
salary or any remuneration for services to, unsuitable persons. Licensees or
their affiliated entities also may be sanctioned for failing to pursue efforts
to require unsuitable persons to relinquish their interests. The Colorado
Commission may determine that anyone with a material relationship to, or
material involvement with, a licensee or an affiliated company must apply for a
finding of suitability or must apply for a key employee license.
Currently, no gaming or liquor licenses in Colorado have been granted in
connection with the Black Hawk Project. Applications have been made for a retail
gaming license and for a hotel and restaurant liquor license. Applications for
key employee gaming licenses have also been made. Additional gaming and support
license applications will have to be made and approved prior to the opening of
the casino.
FEDERAL REGISTRATION
ROC is required to annually file with the Attorney General of the United
States in connection with the sales, distribution, or operations of slot
machines. All requisite filings for the present year have been made.
LEGAL PROCEEDINGS
The Company is a party to several routine lawsuits both as plaintiff and as
defendant arising from the normal operations of a hotel. Management does not
believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on the financial position or results of operations of
the Company.
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THE PROPOSED MERGER
AGREEMENT AND PLAN OF MERGER
Pursuant to the terms and subject to the conditions of the Merger
Agreement, the Company would become a wholly owned subsidiary of R&E Gaming
Corp., a Delaware corporation controlled by Mr. Paulson ("Gaming"), and ROC
would continue its existence as a wholly owned subsidiary of the Company.
Also, pursuant to the Merger Agreement, each share of Common Stock that is
issued and outstanding immediately prior to the Effective Time (as defined in
the Merger Agreement) (other than shares of Common Stock owned by Gaming or its
subsidiary or which are held in the treasury of the Company or any of its
subsidiaries, which shares shall be canceled without payment) will be converted
into the right to receive the Merger Consideration (as defined below).
The Merger Agreement defines "Merger Consideration" as $15.00 in cash per
share of Common Stock, plus an amount of additional consideration (the
"Additional Consideration") equal to the daily portion on the accrual on $15.00
at 7% compounded annually, accruing from June 1, 1997 to the Effective Time;
provided that the Merger Consideration to be paid to each Option Seller (as
defined in the Merger Agreement) will be reduced by an amount of Additional
Consideration paid to such Option Seller pursuant to the terms and subject to
the conditions of the Option Agreement (as defined below).
The obligations of the Company, Gaming, and its subsidiary to consummate
the Merger are subject to, among other things, satisfaction or waiver on or
prior to the Effective Time of the following conditions: (i) any waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, shall have expired or been
terminated, and no action shall have been instituted by the Department of
Justice or Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger, (ii) the Merger Agreement shall have been approved
and adopted by the affirmative vote of the holders of at least sixty percent of
all of the issued and outstanding shares of Common Stock (excluding the shares
of Common Stock owned by Gaming, its subsidiary and Mr. Paulson), (iii) there
shall not have been any statute, rule, regulation, judgment, order or injunction
promulgated, entered, enforced, enacted or issued applicable to the Merger by
any governmental entity which, including without limitation, prohibits the
consummation of the Merger, and (iv) other than the filing of the articles of
merger in accordance with the Nevada Corporation Law, all licenses, permits,
registrations, authorizations, consents, waivers, orders or other approvals
required to be obtained, and all filings, notices or declarations required to be
made by Gaming, its subsidiary, Mr. Paulson and the Company in order to
consummate the Merger and continue the Company's business as conducted prior to
the Effective Time shall have been obtained or made.
The obligations of Gaming and its subsidiary to consummate the Merger are
subject to, among other things, satisfaction on or prior to the Effective Time
of, the following additional conditions: (i) the Company shall have performed in
all material respects all of its obligations under the Merger Agreement required
to be performed by it and, subject to certain exceptions, the representations
and warranties of the Company contained in the Merger Agreement shall be true
and correct in all material respects as of the date of the Merger Agreement and
at and as of the Effective Time as if made at and as of such time, (ii) the
actual Consolidated EBITDA (as defined in the Merger Agreement) as reflected in
the consolidated statement of operations of the Company for the period from
April 1, 1997 to the month for which the Company's financial statements are then
available shall not have declined by 7.5% or more when compared to the Projected
Results (as defined in the Merger Agreement) for such period, (iii) the Option
Agreement shall have been entered into concurrently with the execution of the
Merger Agreement, and the Option Agreement shall be in full force and effect and
the Option Sellers shall have complied in all respects with the terms thereof,
(iv) Mr. Paulson shall not have become deceased or Disabled (as defined in the
Merger Agreement), and (v) Gaming shall have received certain documents as
Gaming may reasonably request.
The obligations of the Company to consummate the Merger are subject to,
among other things, the satisfaction on or prior to the Effective Time of the
following additional conditions: (i) each of Gaming and its subsidiary shall
have performed in all material respects all of its obligations under the Merger
Agreement and, subject to certain exceptions, the representations and warranties
of Gaming and its subsidiary contained in the Merger Agreement shall be true and
correct in all respects as of the date of the Merger Agreement and at and as of
the Effective Time, (ii) Gaming shall have in cash, or immediately available
funds, an amount equal to
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the aggregate Merger Consideration, and (iii) the Company shall have received
certain documents as the Company may reasonably request.
It is anticipated that the owner of Gaming will offer key employees of the
Company the opportunity to participate in the continued growth of the
corporation which survives the Merger. Although no definitive plan has yet been
formulated, it is possible that certain key employees might receive a type of
equity participation in lieu of receiving the amount contemplated to be paid to
them under the Merger Agreement on their present options in cash at the
Effective Time.
If the Merger does not occur by April 1, 1998, subject to extension until
June 1, 1998, under certain circumstances, the Merger Agreement will terminate.
There can be no assurance that the conditions to the Merger will be satisfied or
waived or that the Merger will be consummated. The Merger requires the prior
approval of the Nevada Gaming Authorities and there can be no assurance that
such approval will be obtained.
OPTION AND VOTING AGREEMENT
Contemporaneously with the execution and delivery of the Merger Agreement,
Gaming, Morgens, Waterfall, Vintiadis & Company, Inc. ("Morgens Waterfall"), on
behalf of certain investment accounts, Stein Roe & Farnham, Incorporated ("Stein
Roe"), on behalf of certain investment accounts, and Sun Life Insurance Company,
a Nevada corporation ("Sun Life," and together with Morgens Waterfall and Stein
Roe, the "Sellers") entered into an option and voting agreement (the "Option
Agreement"). Pursuant to the terms and subject to the conditions of the Option
Agreement, each Seller has granted to Gaming an irrevocable option to purchase
(the "Purchase Option") all the shares of Common Stock owned by such Seller.
Upon exercise of the Purchase Option, Gaming would pay to each of the Sellers an
aggregate amount equal to $15 per share, subject to certain adjustments under
the Option Agreement. An aggregate amount of $43,374,600 would be payable as
follows: (i) $19,088,400 to Morgens Waterfall, (ii) $12,857,400 to Stein Roe and
(iii) $11,428,800 to Sun Life, in addition to any accrued but unpaid interest
payments required under the Option Agreement.
In addition, each Seller has agreed and covenanted with Gaming that at any
meeting of stockholders of the Company called to vote upon the Merger and the
Merger Agreement or in any other circumstances upon which a vote, consent or
other approval with respect to the Merger and the Merger Agreement is sought,
such Seller will cause its shares of Common Stock to be present for quorum
purposes and to vote (or caused to be voted) its shares of Common Stock in favor
of the terms thereof and each of the other transactions contemplated by the
Merger Agreement.
The obligations of each of the Sellers under the Option Agreement are
subject to, among other things, satisfaction or, in certain cases, waiver, on
the Closing Date (as defined in the Option Agreement) of the following
conditions: (i) no temporary restraining order or preliminary or permanent
injunction of any court or administrative agency of competent jurisdiction
prohibiting the transactions contemplated by the Option Agreement shall be in
effect, (ii) all approvals shall have been obtained and shall not have expired
or been rescinded, (iii) subject to certain exceptions, the representations and
warranties of Gaming in the Option Agreement shall be true and correct in all
material respects on and as of the Closing Date, as though made on and as of the
Closing Date, and (iv) Gaming shall have performed all obligations required to
be performed by it under the Option Agreement on or prior to the Closing Date.
THE ELSINORE TRANSACTION
On September 16, 1997, affiliates of Gaming and its subsidiary executed an
agreement to purchase the outstanding common stock of Elsinore, the primary
asset of which is the Four Queens. Based upon reports filed pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of November
10, 1997, Morgens Waterfall, one of the majority stockholders, beneficially
owned approximately 94% of the common stock of Elsinore. The Company believes it
is the intention of the parties to the Elsinore merger agreement to consummate
the Elsinore merger at approximately the same time as the Merger. There can be
no assurance, however, that the conditions to the Elsinore merger will be
satisfied or waived or that the Elsinore merger will occur. The Elsinore merger
requires the prior approval of the Nevada Gaming Authorities and there can be no
assurance that such approval will be obtained.
58
<PAGE> 62
MANAGEMENT
EXECUTIVE OFFICERS & DIRECTORS
The executive officers and directors of the Company and ROC are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -------------------------------------------------------
<S> <C> <C>
William L. Westerman 66 Chairman of the Board and Chief Executive Officer of
the Company and ROC, and President of the Company
Duane R. Krohn 51 Treasurer of the Company and Vice President of Finance
and Treasurer of ROC
John A. Wishon, Esq. 52 Vice President and General Counsel of ROC, Secretary of
the Company and ROC
Michael L. Falba 55 Vice President of Casino Operations of ROC
Jerome P. Grippe 55 Vice President of Operations of ROC
Martin R. Gross 40 Vice President of Hotel Marketing of ROC
Ronald P. Johnson 49 Vice President of Gaming Operations of ROC
Robert E. Nickels, Sr. 67 Vice President of Administration of ROC
Robert A. Vannucci 50 Vice President of Marketing and Entertainment of ROC
Robert R. Barengo 55 Director of the Company and ROC
William Friedman 55 Director of the Company and ROC
Philip P. Hannifin 62 Director of the Company and ROC
</TABLE>
William L. Westerman assumed the positions referred to above in February,
1993. Mr. Westerman was a consultant to Riviera, Inc. from July 1, 1991 until he
was appointed Chairman of the Board and Chief Executive Officer of Riviera, Inc.
on January 1, 1992. From 1973 to June 30, 1991, Mr. Westerman was President and
Chief Executive Officer of Cellu-Craft Inc., a manufacturer of flexible
packaging primarily for food products. Alusuisse, a multi-national aluminum and
chemical company, acquired Cellu-Craft on June 30, 1989. On January 1, 1990, Mr.
Westerman was appointed President of Alusuisse Flexible Packaging (Alusuisse's
wholly-owned U.S. subsidiary engaged in the manufacture of flexible packaging
for food and pharmaceutical products). Additionally, Mr. Westerman was named a
member of the team responsible for all of Alusuisse multi-national packaging
operations with annual sales volume in excess of $1 billion. Mr. Westerman
resigned from all his positions with Alusuisse on June 30, 1991.
Duane R. Krohn, CPA, assumed the position of Treasurer of the Company and
ROC on June 30, 1993 and was elected Vice President of Finance of ROC on April
26, 1994. Mr. Krohn was initially employed by Riviera, Inc. in April 1990, as
Director of Corporate Finance and served as Vice President -- Finance from March
1992 to June 30, 1993. Mr. Krohn served as Chief Financial Officer of Imperial
Palace, Inc. (a casino/hotel operator in Las Vegas) from February 1987 to March
1990. Prior to 1987, Mr. Krohn was Chief Financial Officer of the Mint and the
Dunes in Las Vegas, Nevada, and Bally's Park Place in Atlantic City, New Jersey.
John A. Wishon, Esq. was elected Secretary of the Company and ROC, and
General Counsel of ROC in September 1994, and was elected Vice President of ROC
in November 1996. Mr. Wishon was initially employed by ROC as a Marketing
Analyst in February 1994. From January 1992 to February 1994, Mr. Wishon was a
legal and management consultant to Gold River Gambling Hall & Resort, the
Bicycle Club Casino, and Tierra del Sol Casino Resort. From October 1990 to
January 1992, Mr. Wishon served as Vice President of Hotel Operations and later
as Vice President of Administration and Legal Affairs at the Sands Hotel Casino
in Las Vegas. Prior to December, 1988, Mr. Wishon served as General Manager of
the Airtel Plaza and Westwood Plaza Hotels in Los Angeles, California. From 1976
until 1988, Mr. Wishon was Senior Vice President of the Hotel del Coronado
Corporation and held the positions of Resident Manager and General Counsel. Mr.
Wishon is a member of the Nevada and California Bars, has practiced law with
emphasis on real estate and contract law and has been employed in law
enforcement.
59
<PAGE> 63
Michael L. Falba was elected Vice President of Casino Operations of ROC on
April 26, 1994. Mr. Falba became Director of Casino Operations of ROC on June
30, 1993. Mr. Falba was employed by the Riviera, Inc. from March 1989 until
November 1991 as Assistant Casino Manager, and from November 1991 to June 30,
1993 as Vice President of Casino Operations.
Jerome P. Grippe was elected Vice President of Operations of ROC on April
26, 1994. Mr. Grippe became Director of Operations of ROC on June 30, 1993. Mr.
Grippe was Assistant to the Chairman of the Board of Riviera, Inc. from July
1990 until May 1993. Mr. Grippe had served in the United States Army from 1964
until his retirement as a Colonel in July 1990.
Martin R. Gross was elected Vice President of Hotel Marketing of ROC on
April 26, 1994. Mr. Gross became Director of Hotel Marketing of ROC on June 30,
1993. Mr. Gross was Vice President -- Hotel Marketing of Riviera, Inc. from
April 1992 until June 30, 1993. Mr. Gross was Vice President -- Marketing and
Sales for Alexis Park Resort Hotel (a 500-suite non-gaming resort) in Las Vegas
from August 1988 until April 1992. From 1980 to 1988, Mr. Gross held key
marketing positions with the Mirage and MGM Grand hotels. On August 12, 1996,
concurrent with RGM taking over the management of the Four Queens, Mr. Gross
assumed the responsibilities of Acting General Manager of the Four Queens and in
February of 1997, Mr. Gross became General Manager of the Four Queens. Mr. Gross
remains an officer and employee of ROC.
Ronald P. Johnson became Vice President of Gaming Operations of ROC in
September 1994. Mr. Johnson became Director of Slots of ROC on June 30, 1993 and
was elected Vice President of Slot Operations and Marketing on April 26, 1994.
Mr. Johnson was Vice President -- Slot Operations and Marketing of Riviera, Inc.
from April 1991 until June 30, 1993. Mr. Johnson was Vice President -- Slot
Operations for Sands Hotel and Casino Inc. from September 1989 until he joined
Riviera, Inc. From September 1986 until September 1989, Mr. Johnson was
Assistant Slot Manager at Bally's Grand Las Vegas.
Robert E. Nickels, Sr. was elected Vice President of Administration of ROC
on June 30, 1993. From March 1992 until June 30, 1993 Mr. Nickels was Vice
President -- Administration of Riviera, Inc. From November 1991 to February 1992
Mr. Nickels was a self-employed business consultant. From March 1979 to April
1986, Mr. Nickels was Director of Internal Audit for MGM-Reno. From April 1986
to November 1991, Mr. Nickels served as Vice President of Administration at
Bally's Reno and Las Vegas.
Robert A. Vannucci was elected Vice President of Marketing and
Entertainment of ROC on April 26, 1994. 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. Mr. Vannucci was Vice President and General Manager of
Fitzgerald's Las Vegas (a casino/hotel operator) from 1988 to January 1991. In
July 1993, Robert Vannucci filed for personal bankruptcy protection under
Chapter 13 of the Bankruptcy Code. Pursuant to his bankruptcy plan, Mr. Vannucci
has made 100% repayment to all creditors.
Robert R. Barengo has been a Director of the Company and ROC since
February, 1993. Mr. Barengo was a consultant to Riviera, Inc. from January 1993
until June 30, 1993. Since 1972, Mr. Barengo has been engaged in the private
practice of law in Reno, Nevada. From 1978 to 1983, Mr. Barengo was Speaker Pro
Tempore and Speaker of the Nevada Assembly. From October 1992 to May 1996, Mr.
Barengo was a director and 10% stockholder of Leroy's Horse & Sports Place, Inc.
("Leroy's"). In May 1996, Leroy's became a wholly owned subsidiary of American
Wagering, Inc. ("AWI"), a publicly held corporation listed on NASDAQ. Since May
1996, Mr. Barengo has been a director of AWI and currently owns 7% of the
outstanding stock of AWI. Since 1993, Mr. Barengo has been the President and the
sole stockholder of Silver State Disseminators Company, a company licensed by
Nevada gaming authorities to disseminate racing information in the State of
Nevada and Chairman of the Nevada Dairy Commission.
William Friedman has been a Director of the Company and ROC since February
1993. Mr. Friedman was a consultant to Riviera, Inc. from January 1993 until
June 30, 1993. During 1989 and 1990, Mr. Friedman was President and General
Manager of the Las Vegas Casino Division of United Gaming Inc., the largest slot
route operator in Nevada. In 1988 and 1989, Mr. Friedman was Chief Executive
Officer and Executive Vice
60
<PAGE> 64
President of Rio Suite Hotel & Casino, Inc. (formerly MarCor Resorts. Inc.) and
President and General Manager of Rio Suite Hotel & Casino in Las Vegas.
Philip P. Hannifin has been a Director of the Company and ROC since
February 1993. Mr. Hannifin was a consultant to Riviera, Inc. from January 1993
until June 30, 1993. Mr. Hannifin was a Director from 1986 to 1995 and an
Executive Vice President of Fitzgerald's Reno, Inc. (a casino/hotel operator)
since 1991. From 1987 to 1990, Mr. Hannifin was a Director and Executive Vice
President of MGM Grand Inc. (a casino/hotel operator). From January 1971 to
September 1977, Mr. Hannifin was Chairman of the Nevada Gaming Control Board.
Officers of each of the Company and ROC serve at the discretion of their
respective Boards of Directors and are also subject to the licensing
requirements of the Gaming Commission.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Each of Messrs. Barengo, Friedman and Hannifin is paid an annual fee of
$50,000 for services as a director of the Company and ROC. Each director is also
reimbursed for expenses incurred in connection with attendance at meetings of
the Board of Directors. Mr. Hannifin was granted options to purchase 24,000
shares in 1993, 12,000 shares in 1994 and none in 1995 and 1996. On March 5,
1996 the Board of Directors adopted a Nonqualified Stock Option Plan for
Non-Employee Directors (the "Directors' Option Plan"), which was approved by the
stockholders on May 10, 1996. Under the Directors' Option Plan, each individual
elected, re-elected or continuing as a non-employee director will automatically
receive a non-qualified stock option for 2,000 shares of Common Stock, with an
option exercise price equal to the fair market value of the Common Stock on the
date of grant. 50,000 shares have been reserved for issuance under the
Directors' Option Plan. Options to purchase 2,000 shares at an exercise price of
$13.25 were granted to each of Messrs. Barengo and Friedman on May 10, 1996
under the Directors' Option Plan. In addition, options to purchase 2,000 shares
at an exercise price of $13.50 were granted to each of Messrs. Barengo, Friedman
and Hannifin on May 27, 1997 under the Director's Option Plan. Directors who are
also officers or employees of the Company or ROC do not receive any additional
compensation for services as a director. Currently, Mr. Westerman is the only
such director. The Board of Directors has granted the members of the
Compensation Committee the right to elect to receive all or part of their annual
fees in the form of the Company's Common Stock in a number of shares having a
fair market value equal to the cash compensation subject to such election
pursuant to the Company's Compensation Plan for Directors serving on the
Compensation Committee. Of the 50,000 shares reserved for issuance under this
plan, 3,103 shares have been issued to Mr. Barengo for his director's fees in
1996.
61
<PAGE> 65
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth a summary of the compensation paid by the
Company in the years ended December 31, 1994, 1995 and 1996, to the Chief
Executive Officer of the Company and ROC, and to the Company's four most highly
compensated executive officers who received over $100,000 in compensation during
1996 from the Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ALL
NAME AND ANNUAL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
- ---------------------------- ---- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
William L. Westerman........ 1996 $400,000 $1,213,969(2) $441,375(3) $ 1,566
Chairman of the Board and 1995 375,000 855,961 431,315(3) 1,630
Chief Executive Officer of 1994 350,000 592,379 389,040(3) 1,630
the Company and ROC
Ronald P. Johnson........... 1996 170,961 100,000 6,875 791
Vice President of Gaming 1995 155,840 70,000 8,529 772
Operations of ROC 1994 131,813 50,000 5,446 497
Martin R. Gross............. 1996 148,653 100,000 6,875 536
Vice President of Hotel 1995 140,049 70,000 8,079 541
Marketing of ROC 1994 125,302 50,000 5,316 442
Robert Vannucci............. 1996 145,961 100,000 6,875 536
Vice President of 1995 130,569 70,000 6,879 541
Marketing and 1994 110,852 50,000 2,717 365
Entertainment of ROC
Jerome P. Grippe............ 1996 118,653 100,000 6,873 408
Vice President of 1995 108,950 70,000 7,115 442
Operations of ROC 1994 103,654 50,000 4,646 398
</TABLE>
- ---------------
(1) Includes premiums paid by the Company for excess life insurance.
(2) Includes $614,000 of Mr. Westerman's 1996 Incentive Bonus which was credited
to his retirement account pursuant to his employment agreement.
(3) Includes contributions to Mr. Westerman's retirement account of $425,000 in
1996, $400,000 in 1995 and $375,000 in 1994 (See "-- Employment
Agreements").
62
<PAGE> 66
OPTION GRANTS
The number of shares available for purchase under the Company's 1993
Employee Stock Option Plan, as amended (the "Stock Option Plan") is 1,000,000
(as adjusted pursuant to antidilution provisions). Options for an aggregate of
774,000 shares have been granted under the Stock Option Plan. During the
Company's 1996 fiscal year, options covering a total of 410,000 shares of Common
Stock were granted under the Stock Option Plan.
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTIONS TERM(1)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION -------------------------
GRANTED IN FISCAL YEAR SHARE DATE 5% 10%
---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William L. Westerman... 320,000 78.05% $ 13.625 11/20/06 $2,741,981 $6,948,717
Ronald P. Johnson...... 7,000 1.71 13.625 11/20/06 59,981 152,003
Martin R. Gross........ 7,000 1.71 13.625 11/20/06 59,981 152,003
Robert Vannucci........ 7,000 1.71 13.625 11/20/06 59,981 152,003
Jerome P. Grippe....... 7,000 1.71 13.625 11/20/06 59,981 152,003
</TABLE>
- ---------------
(1) "Potential Realizable Value" is based on the difference between the
potential market value of shares issuable (based upon assumed 5% and 10%
appreciation rates) upon exercise of such options and the exercise price of
such options. The values disclosed are not intended to be, and should not be
interpreted as, representations or projections of future value of the
Company's stock or of the stock price.
OPTION EXERCISES AND YEAR-END OPTIONS VALUES
The following table presents at June 30, 1997 the value of unexercised
in-the-money options held by the Named Executive Officers. No options have ever
been exercised.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED,
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
---------------------- ---------------------------
NAME VESTED NOT VESTED VESTED NOT VESTED
- --------------------------------------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
William L. Westerman......................... 245,000 255,000 $1,679,376 $148,125
Ronald P. Johnson............................ 18,250 6,750 167,938 14,813
Martin R. Gross ............................. 18,250 6,750 167,938 14,813
Robert Vannucci ............................. 18,250 6,750 167,938 14,813
Jerome P. Grippe............................. 18,250 6,750 167,938 14,813
</TABLE>
EMPLOYMENT AGREEMENTS
William L. Westerman serves as Chairman of the Board, President and Chief
Executive Officer of the Company, and as Chairman of the Board and Chief
Executive Officer of ROC.
Under Mr. Westerman's existing employment agreement with the Company which
was last amended on November 21, 1996 and approved by the stockholders of the
Company on May 8, 1997, the term of Mr. Westerman's employment will expire on
December 31, 1998 and Mr. Westerman's employment will be automatically renewed
for successive one-year terms unless the Company gives Mr. Westerman 90 days
written notice or Mr. Westerman gives the Company 180 days notice. Mr.
Westerman's base compensation is $600,000.
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<PAGE> 67
Under the employment agreement, Mr. Westerman is entitled to participate in
the Company's Senior Management Compensation Plan or such other executive bonus
plan as shall be established by the Company's Board of Directors (collectively
the "Plan"). If at least 80% of targeted net income, as defined by the Plan, is
met, Mr. Westerman shall be entitled to receive a bonus under the Plan expressed
as a percentage of his $600,000 base salary depending on the percentage of
targeted net income realized by the Company in a particular year, with a maximum
bonus of $900,000.
The employment agreement provides that the Company fund a retirement
account for Mr. Westerman. Pursuant to the employment agreement, an aggregate of
$2,924,000 had been credited to the retirement account from its inception
through January 1, 1997. Under the employment agreement, each year that Mr.
Westerman continues to be employed, an amount equal to Mr. Westerman's base
salary for that year will be credited to the account on January 1 of that year
and in the event that Mr. Westerman is no longer employed by the Company (except
for termination for cause, in which case Mr. Westerman would forfeit all rights
to monies in the retirement account), Mr. Westerman will be entitled to receive
the amount in the retirement account as of the date he ceases to be employed by
the Company in 20 quarterly installments. Pursuant to the employment agreement,
the retirement account was credited with $79,027 on April 1, 1997, $85,672 on
July 1, 1997, and $90,757 on October 1, 1997 and shall be credited with
additional amounts on the first day of each succeeding calendar quarter equal to
the product of (i) the Company's average borrowing cost for the immediately
preceding fiscal year, as determined by the Company's chief financial officer
and (ii) the average outstanding balance in the retirement account during the
preceding calendar quarter. In the event of Mr. Westerman's death, an amount
equal to the applicable federal estate tax (now 60%) on the retirement account
will be pre-paid prior to the date or dates such taxes are due.
The Company retains beneficial ownership of all monies in the retirement
account, which monies are earmarked to pay Mr. Westerman's retirement benefits.
However, upon (i) the vote of a majority of the outstanding shares of Common
Stock approving a "Change of Control" (as defined below), (ii) the occurrence of
a Change of Control without Mr. Westerman's consent, (iii) a breach by the
Company of a material term of the employment Agreement or (iv) the expiration or
earlier termination of the term of the employment agreement for any reason other
than cause, Mr. Westerman may require the Company to establish a "Rabbi Trust"
for the benefit of Mr. Westerman and to fund such trust with an amount of cash
equal to the amount then credited to the retirement account, including any
amount to be credited to the retirement account upon a Change of Control
discussed below.
The employment agreement provides that Mr. Westerman will receive the same
life, health and disability benefits offered to other key executives of the
Company and ROC, will be reimbursed for all business expenses and will be
entitled to four weeks vacation per year.
Under the employment agreement, Mr. Westerman will be entitled to rights
exercisable upon a "Change of Control." A "Change of Control" is defined
generally as transactions involving (i) a sale of substantially all of the
assets of the Company, (ii) a merger, sale or other transaction resulting in
holders of Common Stock immediately prior to such transaction holding less than
a majority in voting interest to elect the directors of the Company or any other
surviving entity, (iii) any person that held less than 10% of the Common Stock
acquiring a majority in voting interest to elect the directors of the Company or
(iv) any person acquiring 50% or more of voting power to elect directors of the
Company or any surviving entity or acquiror of substantially all of the assets
of the Company. Under the employment agreement, a Change of Control without Mr.
Westerman's consent is a special event of default entitling Mr. Westerman, upon
at least 90 days prior notice to the Company, to terminate his employment with
the Company and to (i) have an amount equal to one year of base salary credited
to his retirement account and (ii) 100% vesting of stock options held by him.
With respect to the Merger, Mr. Westerman and Mr. Paulson are negotiating Mr.
Westerman's waiver of his rights under the "Change of Control" provisions of the
employment agreement and amending the agreement with respect to the
establishment of a "Rabbi Trust" for the benefit of Mr. Westerman upon notice by
Mr. Westerman at any time and crediting Mr. Westerman's retirement account with
an amount equal to one year's base salary in the event the Company terminates
his employment or does not renew his employment agreement for any successive one
year term.
64
<PAGE> 68
TERMINATION FEE AGREEMENTS
Twelve significant employees of ROC are party to agreements pursuant to
which each such employee is entitled to receive one year's salary and benefits
if his or her employment is terminated without cause within one year of a change
of control (as defined in the termination fee agreements) of the Company or ROC.
The estimated total amount that would be payable under all such agreements is
approximately $1.4 million in salaries and $425,000 in benefits as of September
30, 1997.
STAY BONUS AGREEMENTS
Seven significant employees of ROC are party to agreements pursuant to
which each such employee is entitled to receive one year's salary (less the
amount of any incentive bonus paid in 1997 for 1996) in the event there is a
change of control (as defined in the stay bonus agreements) of the Company. The
agreements expire on December 31, 1997. The estimated total amount that would be
payable under all such agreements is approximately $352,500 if the Merger is
consummated prior to December 31, 1997. The Company has renewed the stay bonus
agreements for these employees in which case, upon a change of control, each
such employee would be entitled to receive one year's salary less the amount of
any incentive bonus paid in 1998 for 1997 if the Merger is consummated in 1998.
65
<PAGE> 69
OWNERSHIP OF THE COMPANY
The Common Stock is traded on the American Stock Exchange. The following
table sets forth certain information regarding the beneficial ownership of the
Common Stock as of November 4, 1997 by (i) each person who, to the knowledge of
the Company, beneficially owns more than 5% of the outstanding Common Stock,
(ii) the directors and certain officers of the Company and (iii) all directors
and officers of the Company and ROC as a group. The percentages of shares of
Common Stock held or beneficially owned by any stockholder or group of
stockholders are based upon the total number of shares of Common Stock
outstanding as of October 31, 1997. Except as indicated, each person listed
below has sole voting and investment power with respect to the shares set forth
opposite such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME NUMBER PERCENTAGE
---------------------------------------------------- --------- -----------
<S> <C> <C>
William L. Westerman(1)(7).......................... 329,200 6.4%
Ronald P. Johnson(1)(7)............................. 30,250 *
Martin R. Gross(1)(7)............................... 19,250 *
Robert Vannucci(1)(7)............................... 18,850 *
Jerome P. Grippe(1)(7).............................. 19,250 *
Robert R. Barengo(1)(7)............................. 4,380 *
William M. Friedman(1)(7)........................... 400 *
Philip P. Hannifin(1)(7)............................ 33,000 *
Keyport Life Insurance Co.(2)(8).................... 857,160 17.5
SunAmerica Life Insurance Company(3)(8)............. 761,920 15.5
Morgens Entities:(4)(8)
Betje Partners.................................... 29,360 *
Morgens Waterfall Income Partners................. 43,920 *
MWV Employee Retirement Plan Group Trust.......... 7,760 *
Phoenix Partners.................................. 79,440 1.6
Restart Partners, L.P............................. 282,000 5.7
Restart Partners II, L.P.......................... 440,600 9.0
Restart Partners III, L.P......................... 298,600 6.1
The Common Fund................................... 90,880 1.8
--------- ----
Total Morgens Entities.................... 1,272,560 25.9
James D. Bennett(5)................................. 484,265 9.9
Allen E. Paulson(6)................................. 463,655 9.4
All executive officers and directors as a group
(12 persons)(1)(7)................................ 521,480 9.8
</TABLE>
- ---------------
* Less than 1%.
(1) The address for each director and officer of the Company or ROC is c/o
Riviera Holdings Corporation, 2901 Las Vegas Boulevard South, Las Vegas,
Nevada 89109.
(2) The address for Keyport Life Insurance Company ("Keyport") is 125 High
Street, Boston, Massachusetts 02110. Stein Roe, an affiliate of Keyport, is
Keyport's investment advisor, and, as such, has the power and authority to
direct the disposition of the securities, and accordingly, could be deemed
to be a "beneficial" owner within the meaning of Rule 13d-3 of the Exchange
Act. Stein Roe, however, disclaims actual beneficial ownership of such
securities.
(3) The address for SunAmerica Life Insurance Company is One Sun America Center,
Century City, California 90067.
(4) The address for Morgens Waterfall is 10 East 50th Street, New York, New York
10022. Morgens Waterfall or its principals are either investment advisors
to, or trustees or general partners of, the eight entities listed in the
above table ("Morgens Entities") that are the owners of Common Stock.
Morgens
66
<PAGE> 70
Waterfall or its principals have the power and authority to direct the
disposition of these securities and, accordingly, could be deemed to be
"beneficial" owners within the meaning of Rule 13d-3 of the Exchange Act.
Each of Morgens Waterfall, its principals and the Morgens Entities, however,
disclaims beneficial ownership with respect to any securities not actually
beneficially owned by it.
(5) Includes (i) 323,003 shares held by Restructuring Capital Associates, L.P.
and Bennett Restructuring Fund, L.P. and (ii) 161,262 shares held by Bennett
Offshore Restructuring Fund, Inc. The address for Restructuring Capital
Associates, L.P. is 450 Park Avenue, New York, New York 10022.
(6) The address for Mr. Paulson is Del Mar Country Club, 6001 Clubhouse Drive,
Rancho Santa Fe, California 92067.
(7) Includes vested portion of options to purchase shares of Common Stock
granted pursuant to the Stock Option Plan and Nonqualified Stock Option Plan
for Non-Employee Directors.
(8) Pursuant to the Option Agreement, Morgens Waterfall, Sun Life and Stein Roe,
Keyport's investment advisor, have agreed to vote their shares in favor of
the Merger Agreement and the Merger. See "The Proposed Merger."
67
<PAGE> 71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert R. Barengo was formerly a director and 10% stockholder of Leroy's.
In May 1996, Leroy's became a wholly owned subsidiary of AWI, a publicly held
corporation listed on NASDAQ. Mr. Barengo is currently a director of AWI and
owns 7% of the outstanding stock of AWI, which leases approximately 12,000
square feet of the Riviera casino floor. AWI is the operator of the Riviera's
sports book operations. This lease was assumed by the Company from Riviera, Inc.
and is still in effect. The lease provides for rental payments based upon the
monthly and annual revenues derived by AWI from the location. From January 1,
1996 through December 31, 1996, AWI paid aggregate rent to ROC of $168,705 and
$88,600 from January 1, 1997 through June 30, 1997. The Company believes that
the terms of the lease with AWI are at least as favorable to the Company and ROC
as could have been obtained from unaffiliated third parties and are at least as
favorable as terms obtained by other casino/hotels in Las Vegas. AWI also owns
Howard Johnson Hotel & Casino located at the intersection of Tropicana Avenue
and Interstate 15 in Las Vegas, Nevada. The hotel's operations include an
International House of Pancakes restaurant, on-site food and beverage sales, 150
guest rooms (no suites) and approximately 53 gaming machines. The Company
believes that this casino/hotel's operations are not competitive with the
Riviera.
From August 1996 until February 1997, RGME, a wholly owned subsidiary of
the Company, has been operating the Four Queens located adjacent to the Golden
Nugget on Fremont Street in downtown Las Vegas under an interim management
agreement for a fee of $83,333 per month. The long-term management agreement
with Elsinore, the owner of the Four Queens, went into effect on February 28,
1997, the effective date of the Chapter 11 plan of reorganization of Elsinore.
The Morgens Entities, beneficial owners of approximately 25.9% of the Common
Stock of the Company, own more than 90% of the common stock of Elsinore. The
Company believes that the terms of the management agreement are no less
favorable to the Company than if the Company had negotiated with an independent
third party.
The term of the management agreement is approximately 40 months, subject to
earlier termination or extension. Either party may terminate if EBITDA of the
Four Queens for the first two fiscal years is less than $12.8 million. The term
can be extended by an additional 24 months at RGME's option, if cumulative
EBITDA of the Four Queens for the three fiscal years of the term is at least
$19.2 million. RGME will be paid a fee of 25% of any increase in annual EBITDA
of the Four Queens over $4.0 million, subject to a $1.0 million minimum fee,
payable in equal monthly installments. RGME has received warrants to purchase
1,125,000 shares of common stock of Elsinore, exercisable during the term or
extended term of the management agreement at an exercise price of $1.00 per
share. If the proposed acquisition of Elsinore by an affiliate of Allen E.
Paulson is consummated (see "The Proposed Merger -- The Elsinore Transaction"),
the Company would receive approximately $2.4 million, net of the exercise price
of the warrants. To facilitate RGME's performance of the management agreement,
Mr. William L. Westerman is the sole Director, President and Treasurer of the
Four Queens. He receives no compensation and has been licensed by the Nevada
Gaming Commission to hold these positions.
Either party can terminate the management agreement if (i) substantially
all the Four Queens' assets are sold, (ii) the Four Queens is merged or (iii) a
majority of the Four Queens' or Elsinore's shares are sold. Upon such
termination, RGM will receive a $2.0 million termination bonus minus any amount
realized or realizable upon exercise of the warrants.
Since June 23, 1997 Mr. Westerman has been a Director of Darling
International Inc., a publicly held company. Morgens Waterfall entities own
46.13% of the stock of Darling International Inc. which is primarily in the
business of processing animal and bakery waste by-products.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company and ROC
which will be outstanding following consummation of the Transactions. To the
extent such summary contains descriptions of the Revolving Credit Facility and
other loan documents, such descriptions do not purport to be complete and are
qualified in their entirety by reference to such documents, which are available
upon request from the Company.
REVOLVING CREDIT FACILITY
The revolving credit facility (the "Revolving Credit Facility") was
established as of February 28, 1997 on behalf of the Company and ROC pursuant to
agreements among the Company, ROC and U.S. Bank of Nevada, as lender ("USBN").
The Revolving Credit Facility provides for borrowings of up to $15,000,000,
which amount is reduced on a quarterly basis, commencing April 1998. The
Revolving Credit Facility matures on January 1, 2002, unless accelerated earlier
by USBN upon an event of default. Interest on outstanding principal under the
Revolving Credit Facility accrues at either the prime rate plus .50% per annum
or LIBOR plus 2.90% per annum, at the Company's option. Funds under the
Revolving Credit Facility could be used by the Company to acquire gaming and
other equipment when and as needed. Availability of loans under the Revolving
Credit Facility is subject to compliance by the Company and ROC with certain
conditions precedent, including the maintenance of certain financial ratios. The
Revolving Credit Facility was modified as a result of the sale of the Existing
Notes and the proposed Merger. The modifications included an increase in the
allowable funded debt to EBITDA ratio to 4.75 to one. The Company is not
currently meeting this requirement and, therefore, cannot draw down on the
Revolving Credit Facility at this time. The Revolving Credit Facility is
callable upon a change in control other than the Merger.
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DESCRIPTION OF NOTES
GENERAL
The Existing Notes were issued pursuant to an Indenture (the "Indenture"),
dated as of August 13, 1997, between the Company and Norwest Bank Minnesota,
N.A. as trustee (the "Trustee") in a private transaction that is not subject to
the registration requirements of the Securities Act. See "Notice to Investors."
The terms of the indenture apply to the Existing Notes and to the New Notes to
be issued in exchange therefor pursuant to the Exchange Offer (all such Notes
being referred to herein collectively as the "Notes"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of the Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Indenture, the Collateral
Documents (as defined) and the Registration Rights Agreement between the Company
and the Initial Purchasers (the "Registration Rights Agreement") does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, the Collateral Documents and the Registration Rights Agreement,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture, the Collateral Documents and the Registration Rights
Agreement will be made available as set forth below under "-- Additional
Information." The definitions of certain terms used in the following summary are
set forth below under "-- Certain Definitions." For purposes of this summary,
the term "Company" refers to Riviera Holdings Corporation and not to any of its
Subsidiaries.
The Notes are senior secured obligations of the Company and rank senior in
right of payment to all existing and future subordinated Indebtedness of the
Company and pari passu in right of payment with all existing and future senior
Indebtedness of the Company, including borrowings under the Revolving Credit
Facility. As of September 30, 1997, after giving effect to the redemption of the
11% First Mortgage Notes, the total senior Indebtedness of the Company
(including the Notes) would have been approximately $173.8 million. The Notes
are guaranteed (the "Subsidiary Guarantees") on a senior secured basis by each
of the Company's existing and future Restricted Subsidiaries. The Notes and the
Subsidiary Guarantees will be secured by the Collateral as set forth below under
"-- Security."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $175.0 million and
mature on August 15, 2004. Interest on the Notes will accrue at the rate of 10%
per annum and will be payable semi-annually in arrears on February 15 and August
15, commencing on February 15, 1998, to Holders of record on the immediately
preceding February 1 and August 1. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
interest and Liquidated Damages, if any, on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders at their
respective addresses set forth in the register of Holders of the Notes; provided
that all payments of principal, premium, interest and Liquidated Damages, if
any, with respect to the Notes, the Holders of which have given wire transfer
instructions to the Company, will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Trustee maintained for such purpose. The Notes
will be issued in denominations of $1,000 and integral multiples thereof.
SECURITY
The Notes and the Subsidiary Guarantees are secured by the Collateral (as
defined below) owned by the Company or any Guarantor, respectively, whether now
owned or hereafter acquired. "Collateral" means, subject to Permitted Liens, (i)
a first mortgage lien on the Riviera property in Las Vegas, Nevada, including
all improvements thereon, provided, that up to six undeveloped acres of the
Riviera property located adjacent
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to the Riviera hotel-casino (the "Six Acre Tracts") may be released without
consideration from the mortgage for purposes of future development; (ii) a first
priority lien on FF&E, excluding Gaming Equipment, of the Company and all
existing and future Restricted Subsidiaries; (iii) a first priority lien on
certain contract rights and other general intangibles, trademarks, trade names
and other personal property of the Company and all existing and future
Restricted Subsidiaries, and licenses and permits entered into by, or granted
to, the Company or any Guarantor, in each case to the extent permitted by
applicable gaming and other laws, but not including inventory, accounts
receivables, or Gaming Licenses; (iv) subject to approval of Nevada Gaming
Authorities, a pledge of the Capital Stock of all existing and future Guarantors
and other Subsidiaries directly owned by the Company or such Guarantors; and (v)
until the Net Proceeds of the sale of the Existing Notes are applied in
accordance with the provisions set forth in the Prospectus under "Use of
Proceeds," a lien on the bank account into which such Net Proceeds have been
deposited.
The Company and the Guarantors will enter into security agreements,
mortgages, deeds of trust, certain other collateral assignment agreements and
pledge agreements (collectively, the "Collateral Documents") that will provide
for the grant of a security interest in or pledge of the Collateral to the
Trustee, as collateral agent (in such capacity, the "Collateral Agent") for the
Holders of the Notes. Such pledges and security interests will secure the
payment and performance when due of all of the Obligations of the Company and
the Guarantors under the Indenture, the Notes, the Subsidiary Guarantees and the
Collateral Documents.
The Company has used $15.0 million of the net proceeds of the Existing
Notes to purchase the Black Hawk Land (and the Company may contribute additional
cash amounts to the development of the Black Hawk Project in accordance with the
terms of the covenant entitled "Restricted Payments"). The Black Hawk Land was
purchased by or contributed to Black Hawk Operating Company. The Indenture will
allow Black Hawk Operating Company to incur Indebtedness, and to create Liens on
the purchased or contributed land, only in respect of third-party financing for
the Black Hawk Project ("Permitted Black Hawk Debt"). The Indenture will not
restrict Black Hawk Operating Company's ability to create Liens on equipment,
receivables or other personal property. Holders of Notes will have no mortgage
or other security interest in the land or potential improvements relating to the
Black Hawk Project, except as set forth below. Under certain circumstances if
and when the inclusion of Black Hawk Operating Company as a Restricted
Subsidiary would result in an increase in the Fixed Charge Coverage Ratio of the
Company, provided that no Default or Event of Default shall have occurred and be
continuing and provided that a Default or Event of Default would not thereby be
created, Black Hawk Operating Company (i) automatically will become and remain a
Restricted Subsidiary, and (ii) will execute a Subsidiary Guarantee and such
Collateral Documents as are necessary to create and convey a perfected first
priority Lien on the Black Hawk Land and other Collateral (subject to Permitted
Liens) held by such Restricted Subsidiary; provided, that no such Subsidiary
Guarantee shall be executed, and no such Lien shall be created or conveyed with
respect to the Black Hawk Land or other real or personal property owned by Black
Hawk Operating Company, if the execution, creation or conveyance thereof would
violate or conflict with any law or the provisions of any Permitted Black Hawk
Debt outstanding at the time of such conversion. Notwithstanding the foregoing,
if the execution, creation or conveyance thereof would satisfy the conditions in
the preceding sentence but for any filing with or approval of any Gaming
Authority or other regulatory entity, the Company shall use, and shall cause
Black Hawk Operating Company to use, its best efforts to make all such required
filings and obtain all such required approvals in order to permit such
execution, creation and conveyance. See "Certain Covenants -- Additional
Subsidiary Guarantees." See "Certain Covenants -- Additional Subsidiary
Guarantees."
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Collateral
Documents, the Company and its Restricted Subsidiaries will be entitled to
receive all cash dividends, interest and other payments made upon or with
respect to the Capital Stock pledged by them and to exercise any voting and
other consensual rights pertaining to the Collateral pledged by them. Upon the
occurrence and during the continuance of an Event of Default, and subject to the
prior approval of Nevada Gaming Authorities, (a) all rights of the Company and
its Restricted Subsidiaries to exercise such voting or other consensual rights
will cease, and all such rights will become vested in the Collateral Agent,
which, to the extent permitted by law, will have the sole right to exercise such
voting and other consensual rights and (b) all rights of the Company and its
Restricted Subsidiaries to receive all cash
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dividends, interest and other payments made upon or with respect to the pledged
Collateral will cease and such cash dividends, interest and other payments will
be paid to the Collateral Agent, and (c) the Collateral Agent may sell the
pledged Collateral or any part thereof in accordance with the terms of the
Collateral Documents. All funds distributed under the Collateral Documents and
received by the Collateral Agent for the benefit of the Holders of the Notes
will be distributed by the Collateral Agent in accordance with the provisions of
the Indenture.
Under the terms of the Collateral Documents, the Collateral Agent will
determine the circumstances and manner in which the Collateral shall be disposed
of, including, but not limited to, the determination of whether to release all
or any portion of the Collateral from the Liens created by the Collateral
Documents and whether to foreclose on the pledged Collateral following an Event
of Default. Moreover, upon the full and final payment and performance of all
Obligations of the Company under the Indenture and the Notes, the Collateral
Documents will terminate and the Collateral will be released. In addition, in
the event that Collateral is sold and the Net Proceeds are applied in accordance
with the terms of the covenant entitled "Asset Sales," the Collateral Agent will
release the Liens in favor of the Collateral Agent in the assets sold; provided
that in no event shall the Riviera property, or any improvements thereon (except
for the SixAcre Tracts) be sold or released from such Lien, and provided
further, that the Collateral Agent will have received from the Company an
Officers' Certificate that such Net Proceeds have been or will be so applied,
and after giving effect to such sale, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof.
Certain Gaming Law Limitations
The Trustee's ability to foreclose upon the Collateral will be limited by
relevant gaming laws, which generally require that persons who own or operate a
casino or own equity securities of a gaming licensee (including capital stock)
or purchase, possess or sell gaming equipment hold a valid gaming license. No
person can hold a license in the States of Nevada or Colorado unless the person
is found qualified or suitable by the relevant Gaming Authorities. In order for
the Trustee or a purchaser at or after foreclosure to be found qualified or
suitable, such Gaming Authorities would have discretionary authority to require
the Trustee, any or all of the Holders of the Notes or any such purchaser to
file applications, be investigated and be found qualified or suitable as an
owner or operator of gaming establishments. The applicant for qualification, a
finding of suitability or licensing must pay filing fees as well as all costs of
such investigation to determine suitability to hold a gaming license or
interest. If the Trustee is unable or chooses not to qualify, be found suitable,
or licensed to own, operate or sell such assets, it would have to retain or sell
to an entity licensed to operate or sell such assets. In addition, in any
foreclosure sale or subsequent resale by the Trustee, licensing requirements
under the relevant gaming laws may limit the number of potential bidders and may
delay any sale, either of which events would have an adverse effect on the sale
price of the Collateral. Moreover, the gaming industry could become subject to
different or additional regulations during the term of the Notes, which could
further adversely affect the practical rights and remedies of the Trustee.
Therefore, the practical value of realizing on the Collateral may, without the
appropriate approvals, be limited.
Certain Bankruptcy Limitations
The right of the Trustee to repossess and dispose of the Collateral upon
the occurrence of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company or a Guarantor prior to the Trustee having repossessed and
disposed of the Collateral. Under the Bankruptcy Code, a secured creditor such
as the Trustee is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, the Bankruptcy Code permits the
debtor to continue to retain and to use collateral (and the proceeds, products,
offspring, rents or profits of such collateral) even though the debtor is in
default under the applicable debt instruments, provided that the secured
creditor is given "adequate protection." The meaning of the term "adequate
protection" may vary according to circumstances, but it is intended in general
to protect the value of the secured creditor's interest in the collateral and
may include, if approved by the court, cash payments or the granting of
additional
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security for any diminution in the value of the collateral as a result of the
stay of repossession or the disposition or any use of the collateral by the
debtor during the pendency of the bankruptcy case. The court has broad
discretionary powers in all these matters, including the valuation of the
Collateral. In addition, since the enforcement of the Lien of the Trustee in
cash, deposit accounts and cash equivalents may be limited in a bankruptcy
proceeding, the Holders of the Notes may not have any consent rights with
respect to the use of those funds by the Company or any of its Subsidiaries
during the pendency of the proceeding. In view of these considerations, it is
impossible to predict how long payments under the Notes could be delayed
following commencement of a bankruptcy case, whether or when the Trustee could
repossess or dispose of the Collateral or whether or to what extent Holders of
the Notes would be compensated for any delay in payment or loss of value of the
Collateral.
Subsidiary Guarantees
The Company's payment obligations under the Notes are jointly and severally
guaranteed by the Guarantors, which consist of all of the Company's present and
future Restricted Subsidiaries, except for three immaterial Subsidiaries that
will be dissolved following issuance of the Notes. The Subsidiary Guarantees
provide that the obligations of each Guarantor under its Subsidiary Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See "Risk Factors -- Fraudulent Transfer Considerations."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
(other than any other Guarantor or the Company) unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor, any other Guarantor
or the Company) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture and appropriate Collateral Documents in form and
substance reasonably satisfactory to the Trustee, under the Notes, the Indenture
and the Collateral Documents; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) such Guarantor, or any
Person formed by or surviving any such consolidation or merger, would have
Consolidated Net Worth (immediately after giving effect to such transaction but
without giving effect to purchase accounting adjustments), equal to or greater
than the Consolidated Net Worth of such Guarantor immediately preceding the
transaction; (iv) the Company would be permitted by virtue of the Company's pro
forma Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock," and
(v) such transaction would not result in the loss or suspension or material
impairment of any Gaming License (unless a replacement Gaming License is
effective prior to or simultaneously with such loss, suspension or material
impairment).
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor (other than ROC), by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Guarantor (other than ROC), then such Guarantor (in the event of a
sale or other disposition, by way of such a merger, consolidation or otherwise,
of all of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee and any Liens in favor of the Collateral Agent upon the
Collateral owned by such Guarantor will be released; provided that (i)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof and (ii) the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the Indenture. See "Repurchase
at the Option of Holders -- Asset Sales."
The Indenture further provides that in the event that a Guarantor that is a
Restricted Subsidiary is properly designated as an Unrestricted Subsidiary in
accordance with the Indenture, then such Guarantor will be released and relieved
of any obligations under its Subsidiary Guarantee, and any Liens in favor of the
Collateral Agent upon the Collateral owned by such Guarantor will be released.
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OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to August
15, 2001. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on August 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2001...................................................... 105.000%
2002...................................................... 102.500%
2003 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing or any other provisions of the Indenture, if
any Gaming Authority requires that a Holder or beneficial owner of the Notes
must be licensed, qualified or found suitable under any applicable Gaming Law in
order to maintain any or obtain any applied-for Gaming License or franchise of
the Company or any of its Subsidiaries under any applicable Gaming Law, and such
Holder or beneficial owner fails to apply for a license, qualification or
finding of suitability within 30 days after being requested to do so by such
Gaming Authority (or such lesser period that may be required by such Gaming
Authority or Gaming Law) or if such Holder or beneficial owner is not so
licensed, qualified or found suitable by such Gaming Authority (a "Disqualified
Holder"), the Company shall have the right, at its option, (i) to require such
Disqualified Holder or beneficial owner to dispose of such Disqualified Holder's
or beneficial owner's Notes within 30 days of notice of such finding by the
applicable Gaming Authority that such Disqualified Holder or beneficial owner
will not be licensed, qualified or found suitable as directed by such Gaming
Authority (or such earlier date as may be required by the applicable Gaming
Authority or Gaming Law) or (ii) to call for redemption of the Notes of such
Holder or beneficial owner at a redemption price equal to the lesser of 100% of
the principal amount thereof or the price at which the Holder or beneficial
owner acquired such Notes together with, in either case, accrued and unpaid
interest and Liquidated Damages, if any, thereon to the earlier of the date of
redemption or the date of the finding of unsuitability by such Gaming Authority,
which may be less than 30 days following the notice of redemption if so ordered
by such Gaming Authority. In connection with any such redemption, and except as
otherwise may be required by a Gaming Authority, the Company will comply with
the procedures contained in the Indenture for redemption of the Notes.
Immediately upon a determination of unsuitability, the Disqualified Holder shall
have no further rights whatsoever with respect to the Notes (i) to exercise,
directly or indirectly, through any trustee, nominee or any other Person or
entity, any right conferred by the Notes or (ii) to receive any interest or any
other distribution or payment with respect to the Notes, or any remuneration in
any form from the Company for services rendered or otherwise, except the
redemption price of the Notes. Under the Indenture, the Company is not required
to pay or reimburse any Holder or beneficial owner of Notes who is required to
apply for such license, qualification or finding of suitability for the costs of
such application including investigatory costs. Such expenses will, therefore,
be the obligation of such Holder or beneficial owner. See "Risk Factors --
Regulation."
Notwithstanding the foregoing, during the period commencing upon issuance
of the Notes and ending on August 15, 2000, the Company may redeem up to
one-third of the principal amount of Notes at a redemption price of 110.0% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of
an offering of common stock of the Company; provided that at least $116.7
million in aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption; and provided further, that the call for
such redemption shall occur within 30 days of the date of the closing of such
offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
the Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any,
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on which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of the Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on the
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption, purchase or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company's Revolving Credit Facility contains prohibitions of certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of Notes of their right to require the Company to repurchase the
Notes could cause a default under such other senior indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Notes upon a repurchase may be limited by the Company's then existing
financial resources.
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The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to another Person or group may
be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet), of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that, within 30 days of such receipt,
are converted by the Company or such Restricted Subsidiary into cash (to the
extent of the cash received), will be deemed to be cash for purposes of this
provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale or
Event of Loss, the Company may apply such Net Proceeds to the acquisition of an
interest in another business, the making of a capital expenditure, cost of
construction or real property improvements or the acquisition of other assets,
in each case, in the same line of business as the Permitted Businesses. Any Net
Proceeds received from the sale of assets that do not constitute Collateral may
be applied also to the repayment of any senior debt secured by such assets.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce the Revolving Credit Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the first two
sentences of this paragraph will be deemed to constitute "Excess Proceeds."
Within fifteen days of each date on which when the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to commence an offer
to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee will select the Notes to be purchased on
a pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds will be reset at zero.
Conduct of Offers
Any Change of Control Offer or Asset Sale Offer will remain open for a
period of 20 business days, and the purchase date thereunder will not be more
than 60 days after the commencement of the applicable offer. Notwithstanding any
other provisions of the Indenture, any Change of Control Offer or Asset Sale
Offer will
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be conducted in compliance with applicable regulations under the federal
securities laws, including Rule 14e-1 under the Exchange Act.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests or to the
direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than payments,
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or payments, dividends or distributions payable to the
Company or any Restricted Subsidiary); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any
Restricted Subsidiary (other than any such Equity Interests owned by the Company
or any Restricted Subsidiary); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes, except for payment of interest
when due or principal at Stated Maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto (in the case of a Restricted
Investment, as if such Restricted Investment had been made at the beginning
of the applicable four-quarter period), have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described above under caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii) through (xi) of the next succeeding paragraph),
is less than the sum of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date of the Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock), plus (iii) to
the extent that any Restricted Investment that was made after the date of
the Indenture is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) 50% of any
dividends received by the Company or a Wholly Owned Restricted Subsidiary
after the date of the Indenture from an Unrestricted Subsidiary of the
Company, to the extent that such dividends were not otherwise included in
Consolidated Net Income for such period.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Company or a Restricted
Subsidiary or Equity Interests of the Company in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a Subsidiary
of the
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Company) of, other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
redemption, repurchase, retirement, defeasance or other acquisition of
subordinated Indebtedness of the Company or a Restricted Subsidiary or
Disqualified Stock of the Company, in either case in exchange for or with the
net cash proceeds from an incurrence of Permitted Refinancing Indebtedness or
from the issuance of Disqualified Stock; (iv) the redemption, repurchase,
retirement, defeasance or other acquisition, substantially concurrently with the
consummation of the sale of the Existing Notes, of subordinated Indebtedness of
the Company or a Restricted Subsidiary with Net Proceeds of the sale of the
Existing Notes; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any employee of the Company (or any of its
Restricted Subsidiaries); provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests under this clause
(v) will not exceed $1.0 million in any calendar year, provided further that
commencing the second full calendar year following the date of the Indenture,
the aggregate price that may be so paid shall be increased by any amount of such
$1.0 million that was not used for the repurchase of Equity Interests in the
immediately preceding calendar year; (vi) loans or advances to employees of the
Company or its Restricted Subsidiaries; provided that all such loans and
advances will not exceed $1.0 million in any twelve-month period; (vii) payment
of dividends on preferred stock of the Company that was permitted to be issued
pursuant to the Indenture; (viii) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company held
by any member of the Company's management, in connection with the Merger and
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests under this clause (viii) will not exceed
$6.0 million; (ix) Restricted Investments in an aggregate amount, taken together
since the date of the Indenture, of not more than $10,000,000 (it being
understood that if any Restricted Investment acquired with a Restricted Payment
after the date of original issuance of the Notes pursuant to this clause (ix) is
sold, transferred or otherwise conveyed to any person other than the Company or
a Restricted Subsidiary, the portion of the net cash proceeds or fair market
value of securities or properties paid to the Company and its Restricted
Subsidiaries in connection with such sale, transfer or conveyance that relates
or corresponds to the repayment or return of the original cost of such a
Restricted Investment will replenish or increase the amount of Restricted
Investments permitted to be made pursuant to this clause (ix), so that up to
$10,000,000 of Restricted Investments may be outstanding under this clause (ix)
at any given time); (x) following the Merger, distributions, loans or payments
from the Company or its Restricted Subsidiaries to the Company's direct parent
corporation pursuant to intercompany Indebtedness, intercompany tax sharing
agreements (so long as the distributions, loans or payments thereunder by the
Company and its Subsidiaries shall not exceed the amount of taxes the Company
would be required to pay if it were the filing person for all applicable taxes,
and other intercompany payments for the purpose of enabling the parent
corporation to perform accounting, legal, corporate reporting and administrative
functions (including, without limitation, amounts necessary to pay fees and
expenses in connection with the Merger); and (xi) additional Restricted Payments
in an aggregate amount, taken together since the date of the Indenture, of not
more than $5,000,000; provided that with respect to the actions described in
clauses (i), (v), (vii), (viii), (ix) and (xi), no Default or Event of Default
shall have occurred and be continuing, or would occur as a consequence of such
actions.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by ROC or RGM be
transferred to or held by an Unrestricted Subsidiary, and provided, further that
following any conversion of Black Hawk Operating Company to a Restricted
Subsidiary pursuant to the provisions described above under "-- Security," in no
event shall the Black Hawk Project or related business thereafter operated by
Black Hawk Operating Company be transferred to or held by an Unrestricted
Subsidiary. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the time
of
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such designation, (y) the fair market value of such Investments at the time of
such designation and (z) the original fair market value of such Investments at
the time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that following the issuance of the Notes and
Subsidiary Guarantees, the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt) and that the Company will not issue any Disqualified Stock and will not
permit any Restricted Subsidiary to issue any shares of preferred stock;
provided, however, that the Company or its Subsidiaries may incur Indebtedness
(including Acquired Debt) and the Company may issue shares of Disqualified Stock
if (i) the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such stock is issued would have been at least equal to 2.00 to 1, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the stock
had been issued, as the case may be, at the beginning of such four-quarter
period and (ii) except with respect to revolving credit Indebtedness, the
Weighted Average Life to Maturity of such Indebtedness is greater than the
remaining Weighted Average Life to Maturity of the Notes.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness, so long as after
giving effect to such incurrence, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof
(collectively, "Permitted Debt"):
(i) the incurrence of revolving credit Indebtedness and letters of
credit (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its
Subsidiaries thereunder) under the Revolving Credit Facility; provided that
the aggregate principal amount outstanding under the Revolving Credit
Facility after giving effect to such incurrence, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (i), does not exceed an
amount equal to $20.0 million;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment (including
slot machines and other gaming equipment) used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount not
to exceed $15.0 million at any time outstanding;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was
permitted by the Indenture to be incurred or was existing on the date of
the Indenture;
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(iv) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding;
(v) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(vi) the incurrence of additional Indebtedness in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any other Indebtedness incurred pursuant to
this clause (vi), not to exceed $10.0 million;
(vii) the incurrence by the Company of additional Indebtedness that is
subordinated to the Notes pursuant to customary subordination provisions,
that has no mandatory obligation to pay principal on a date earlier than
the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Notes, and that is in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (vii), not to exceed $10.0
million;
(viii) the incurrence by Black Hawk Operating Company of Permitted
Black Hawk Debt;
(ix) the incurrence by the Company's Unrestricted Subsidiaries (other
than Black Hawk Operating Company) of Non-Recourse Debt, provided, however,
that if any such Indebtedness ceases to be Non-Recourse Debt, such event
will be deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company; and provided, further, that any Permitted Black
Hawk Debt outstanding at the time, if at all, that Black Hawk Operating
Company becomes a Restricted Subsidiary pursuant to the provisions
described above under "-- Security" shall not be deemed at such time to
constitute an incurrence of Indebtedness for purposes of this covenant so
long as such Indebtedness is taken into account in the calculation of the
Fixed Charge Coverage Ratio of the Company as described above under
"-- Security";
(x) reimbursement obligations with respect to letters of credit issued
in the ordinary course of business, indemnifications, adjustments of
purchase prices, performance bonds, appeal bonds, surety bonds, workers'
compensation obligations, insurance obligations or bonds, completion
guaranties and other similar bonds or obligations incurred in the ordinary
course of business;
(xi) Indebtedness owed by (i) a Restricted Subsidiary to the Company
or to another Restricted Subsidiary or (ii) the Company to a Restricted
Subsidiary;
(xii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business;
(xiii) Indebtedness representing the balance deferred and unpaid of
the purchase price of any property or services used in the ordinary course
of the business of the Company and its Restricted Subsidiaries that would
constitute ordinarily a trade payable to trade creditors;
(xiv) a bond or surety obligation posted in order to prevent the loss
or material impairment of a Gaming License or as otherwise required by an
order of any Gaming Authority, in each case to the extent required by
applicable law and consistent in character and amount with customary
industry practice; and
(xv) guarantees, "keep well" provisions or other evidences of credit
support by the Company or its Restricted Subsidiaries of Permitted Black
Hawk Debt, provided that the terms of such guarantees or other instruments
shall not require or permit payments thereunder by the Company or its
Restricted Subsidiaries in an amount greater than $5.0 million in any
twelve-month period.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xv)
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above or is entitled to be incurred pursuant to the first paragraph of this
covenant, the Company will, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. Accrual of interest and
the accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens. So long as Black Hawk Operating Company is an
Unrestricted Subsidiary, the Indenture will allow Black Hawk Operating Company
to create, incur, assume or suffer to exist (i) Liens (in addition to Permitted
Liens) on the Black Hawk Land only in respect of Permitted Black Hawk Debt and
(ii) Liens upon any other assets without restriction. See "-- Incurrence of
Indebtedness and Issuance of Preferred Stock."
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries, (ii) make loans or advances to the Company
or any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the Indenture
and the Notes, (b) Indebtedness outstanding upon the acquisition of a
Subsidiary, or upon the conversion of Black Hawk Operating Company to a
Restricted Subsidiary pursuant to the provisions described above under
"-- Security," provided, that such Indebtedness was not incurred in connection
with, or in contemplation of, such acquisition or conversion, and such
encumbrance or restriction is not applicable to any Person or the property or
assets of any Person other than the new Restricted Subsidiary, (c) a Permitted
Lien, solely to the extent that such Lien limits the sale, disposition or
transfer of the property which is the subject thereof, (d) applicable law, (e)
by reason of customary non-assignment, subletting and net worth provisions in
leases entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, or (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) except in the case of a
merger of the Company with or into a Wholly Owned Restricted Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
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consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock," and (v)
such transaction would not require any Holder or beneficial owner of Notes to
obtain a Gaming License or be qualified or found suitable under the law of any
applicable gaming jurisdiction; provided, that such Holder or beneficial owner
would not have been required to obtain a Gaming License or be qualified or found
suitable under the laws of any applicable gaming jurisdiction in the absence of
such transaction. The foregoing provision will not prohibit the Merger.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million (except with respect to any
Management Agreement, in which case the following requirement will not apply),
an opinion as to the fairness to the Holders of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that (u) purchases of goods and
services in the ordinary course of business, (v) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the Company
or such Restricted Subsidiary, (w) registration rights agreements, existing on
the date of the Indenture, (x) transactions between or among the Company and/or
its Restricted Subsidiaries, (y) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption "-- Restricted
Payments," and (z) reasonable fees and compensation (including, without
limitation, bonuses retirement plans and securities, stock options and stock
ownership plans) paid or issued to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary in the ordinary course of business, in each case, shall not be deemed
Affiliate Transactions.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Restricted Subsidiaries taken as a
whole.
Use of Proceeds
The Company and its Subsidiaries will apply the Net Proceeds from the sale
of the Existing Notes in accordance with the disclosure set forth under the
caption "Use of Proceeds."
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries acquires or creates another Subsidiary after the date of the
Indenture, then such newly acquired or created Subsidiary will execute a
supplemental indenture setting forth its Subsidiary Guarantee, together with
such Collateral Documents as are necessary to create and convey to the Trustee
or other Collateral Agent, for the benefit of the Holders, a perfected
first-priority Lien on all Collateral (subject to Permitted Liens) held by such
Subsidiary, provided such Subsidiary shall have first obtained all approvals
required, if any, by Gaming Authorities to execute the supplemental indenture
and such Collateral Documents, and deliver an opinion of counsel, in accordance
with the terms of the Indenture, except in either case for all Subsidiaries that
have properly been designated as Unrestricted Subsidiaries in accordance with
the Indenture for so long as they continue to constitute Unrestricted
Subsidiaries. Upon any conversion of (i) Black Hawk Operating Company from an
Unrestricted Subsidiary to a Restricted Subsidiary pursuant to the provisions
described above under "-- Security," or (ii) any other Unrestricted Subsidiary
to a Restricted Subsidiary pursuant to the definition below of "Unrestricted
Subsidiary," the newly-created Restricted Subsidiary will also be subject to the
requirements of the preceding sentence; provided, that no such Subsidiary
Guarantee shall be executed, and no such Lien shall be created or conveyed with
respect to the Black Hawk Land or other real or personal property owned by Black
Hawk Operating Company, if the execution, creation or conveyance thereof would
violate or conflict with any law or the provisions of any Permitted Black Hawk
Debt outstanding at the time of such conversion. In addition, if the Company or
any of its Restricted Subsidiaries acquires or creates another Subsidiary after
the date of the Indenture, whether such acquired or newly-created Subsidiary is
a Restricted Subsidiary or an Unrestricted Subsidiary, the Company or such
Restricted Subsidiary that is the owner of Capital Stock of such Subsidiary
shall execute a Pledge Agreement with respect to such Capital Stock, in
substantially the same form as the Pledge Agreements executed as of the date of
the Indenture, pledging to the Trustee or other Collateral Agent designated by
the Trustee all of such Capital Stock owned by pledgor.
Maintenance of Insurance
The Indenture provides that, from and at all times after the date of
issuance of the Notes until the Notes have been paid in full, the Company and
the Guarantors will, and will cause their Restricted Subsidiaries to, have and
maintain in effect insurance with responsible carriers against such risks and in
such amounts as is customarily carried by similar businesses with such
deductibles, retentions, self insured amounts and coinsurance provisions as are
customarily carried by similar businesses of similar size, including, without
limitation, property and casualty coverage.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Trustee and
the Holders of Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms that describe the
financial condition and results of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial statements or
in the footnotes thereto and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial condition and
results of operations of the Company and its Restricted Subsidiaries separate
from the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company and the Guarantors have agreed that, for so
long as any Notes remain outstanding, they will furnish to the
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trustee and all Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when due
of the principal of or premium, if any, on the Notes; (iii) failure by the
Company to comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation or Sale of Assets"; (iv) failure by the
Company for 60 days after notice to comply with any of its other agreements in
the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $5.0
million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (vii)
breach by the Company or any Guarantor in any material respect of any
representation or warranty set forth in the Collateral Documents, or default by
the Company or any Guarantor in the performance of any covenant set forth in the
Collateral Documents (in either case, continuing for 60 days after receiving
notice of such breach), or repudiation by the Company or any Guarantor of its
obligations under the Collateral Documents or the unenforceability of the
Collateral Documents against the Company or any Guarantor for any reason; (viii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Restricted Subsidiaries; (ix) except as permitted by the Indenture, any
Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and (x) under
certain circumstances if a Gaming License of the Company is revoked or
suspended, resulting in the cessation of operation of the Company's casino
business for 90 days.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
August 15, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to
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August 15, 2001, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
Subsidiary or Affiliate thereof, as such, shall have any liability for any
obligations of the Company under the Notes, the Indenture or the Collateral
Documents or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain material covenants
that are described herein ("Covenant Defeasance") and thereafter any omission to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer constitute
an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages on
the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
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will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit); (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (v) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (vi) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating, subject to certain factual
assumptions and bankruptcy and insolvency exceptions that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the timing of, and payment with respect
to, redemption of the Notes (other than provisions relating to the covenants
described above under the caption "-- Repurchase at the Option of Holders" or
"-- Asset Sales"), (iii) reduce the rate of or change the time for payment of
interest on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a rescission
of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of principal of or premium, if any, or interest on the Notes,
(vii) waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders" or "-- Asset Sales") or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
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assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, to release Collateral that
is permitted to be released under the Indenture, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture provides that the Trustee may make loans to, accept deposits
from, and perform services for, the Company and its affiliates, and may
otherwise deal with the Company or its affiliates, as if it were not the
Trustee. However, if the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Collateral Documents without charge by writing to Riviera Holdings
Corporation, 2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109, Attention:
Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes to be exchanged as set
forth herein will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the date of the closing of
the sale of the Notes offered hereby (the "Closing Date") with, or on behalf of,
The Depository Trust Company (the "Depositary") and registered in the name of
Cede & Co., as nominee of the Depositary (such nominee being referred to herein
as the "Global Note Holder").
Notes that are issued as described below under "-- Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only thorough the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global
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Note will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent. For
certain other restrictions on the transferability of the Notes, see "Notice to
Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes. The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to the
legend requirements described herein under "Notice to Investors." In addition,
if (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note Holder of its Global Note, Notes in such form will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Securities, the Company will make all payments of principal, premium, if any,
interest and Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company has agreed to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the New Notes. Upon
the effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for New Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company within 20 business days of the consummation of
the Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Existing Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of all Transfer Restricted Securities by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective by the Commission on or prior to the 120th day following such
filing. For purposes of the foregoing, "Transfer Restricted Securities" means
each Existing Note until the earliest to occur of (a) the date on which such
Existing Note is exchanged in the Exchange Offer and entitled to be resold to
the public by the Holder thereof without complying with the prospectus delivery
requirements of the Act, (b) the date on which such Existing Note has been
effectively registered under the Act and disposed of in accordance with a Shelf
Registration Statement and (c) the date on which such Existing Note is
distributed to the public pursuant to Rule 144 under the Act or by a
Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained herein).
The Registration Rights Agreement provides that the Company and the
Restricted Subsidiaries will (i) file an Exchange Offer Registration Statement
with the Commission on or prior to 60 days after the Closing Date, (ii) use
their best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 120 days after the Closing Date,
(iii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will commence the Exchange Offer and use its best
efforts to issue on or prior to 30 business days after the date on which the
Exchange Offer Registration Statement was declared effective by the Commission,
New Notes in exchange for all Existing Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will file the Shelf Registration Statement with the Commission on or
prior to 60 days after such filing obligation arises and use its best efforts to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 120 days after such obligation arises. If (a) the Company fails to file
any of the Registration Statements required by the Registration Rights Agreement
on or before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Company will pay Liquidated Damages to each Holder of Notes, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.50
per week per $1,000 principal amount of Notes. All accrued Liquidated Damages
will be paid by the Company on each Damages Payment Date to the Global Note
Holder by wire transfer of immediately available funds or by
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federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition by
the Company or a Restricted Subsidiary of any assets or rights (including,
without limitation, by way of a sale and leaseback) other than sales of assets
(excluding capital assets) or rights in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the caption "-- Change of Control" and/or
the provisions described above under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii)
the issuance of Equity Interests by the Company or any Restricted Subsidiary, or
the sale by the Company or any of its Restricted Subsidiaries of Equity
Interests of any of the Company's Subsidiaries (other than directors' qualifying
shares), in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii)
a Restricted Payment that is permitted by the covenant described above under the
caption "-- Restricted Payments," (iv) the surrender or waiver of contract
rights or the settlement, release or surrender of contract, tort or other claims
of any kind, and (v) the grant in the ordinary course of business of any
non-exclusive license of patents, trademarks, registrations therefor and other
similar intellectual property, will not be deemed to be Asset Sales. In
addition, no sale or disposition of the Riviera real property or any improvement
thereon (except a sale or disposition of the Six Acre Tracts) shall be a
permitted Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease
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included in such sale and leaseback transaction (including any period for which
such lease has been extended or may, at the option of the lessor, be extended).
"Black Hawk Land" means that certain 71,000 square foot parcel of real
property in Black Hawk, Colorado which has been purchased by the Company as
described in the Prospectus.
"Black Hawk Project" means the pending project to develop, construct,
equip, open and operate a casino, substantially as described in this Prospectus,
which will be located on the Black Hawk Land. See "Business -- The Black Hawk
Project."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited), and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than twelve
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding twelve months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Keefe Bank Watch
Rating of "B" or better, provided that any deposit accounts with balances at all
times less than $250,000 individually or $1,000,000 in the aggregate need not
meet such capital, surplus or rating requirements, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation and in each case maturing within
twelve months after the date of acquisition, and (vi) money market funds,
substantially all the assets of which comprise securities of the types described
in clauses (ii) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than any Controlling Person or its Related Parties, (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than any Controlling Person and its Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, of more than
35% of the outstanding Voting Stock of the Company (measured by voting power
rather than number of shares) and a greater percentage of the outstanding Voting
Stock of the Company than the percentage of such Voting Stock beneficially owned
by the Controlling Person and its Related Parties, holding the largest such
percentage, (iv) the first day prior to the Merger, if any, on which a majority
of the members of the Board of Directors of the Company are not Continuing
Directors, or (v) the Company consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which any of the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or
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exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance). Notwithstanding the foregoing clauses (i) through (v),
neither the consummation of the Merger nor any acquisition of Elsinore by the
Company (whether effected by way of merger, stock or asset purchase, or
otherwise) will constitute an event of "Change of Control."
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses, other than pre-opening expenses, that
were paid in a prior period) and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash expense,
other than preopening expenses, that was paid in a prior period) of such Person
and its Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income, plus (v) all expenses relating to the defeasance and
redemption of the Company's Exiting First Mortgage Notes, including any
redemption premium and the excess, if any, of the interest expense over interest
income earned from the amounts deposited in trust for the defeasance to the
extent such expenses were deducted in computed such Consolidated Net Income,
minus (vi) non-cash items increasing such Consolidated Net Income for such
period, in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to the Company
by such Subsidiary without prior governmental approval (that has not been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof,
(ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and (v)
the Net Income of any Unrestricted Subsidiary will be excluded, whether or not
distributed to the Company or one of its Subsidiaries.
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"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock), but only to the
extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the date of the Indenture in the book value of any asset owned by
such Person or a consolidated Subsidiary of such Person, (y) all investments as
of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Controlling Person" means Mr. Allen Paulson, Morgens Waterfall or the
"Morgens Entities" referred to in this Prospectus, Sun America Life Insurance
Company, or Keyport Life Insurance Co.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Elsinore" means Elsinore Corporation, a Nevada corporation.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Loss" means, with respect to any property or asset (tangible or
intangible, real or personal) constituting Collateral owned by the Company or
any Restricted Subsidiary, any of the following: (i) any loss, destruction or
damage of such property or asset; (ii) any actual condemnation, seizure or
taking by exercise of the power of eminent domain or otherwise of such property
or asset, or confiscation of such property or asset or the requisition of the
use of such property or asset; or (iii) any settlement in lieu of clause (ii)
above, in the case of clause (i), (ii) or (iii), whether in a single event or a
series of related events, which results in Net Proceeds in excess of $500,000.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense, of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(excluding amortization of debt issuance costs and issuance discount in
connection with the sale of the Existing Notes and costs of extinguishing
Indebtedness to be repaid with the net proceeds of the sale of the Existing
Notes, but including, without limitation, amortization of other debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or any of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or any of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable solely in
Equity
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Interests of the Company, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"FF&E" means furnitures, fixtures and equipment.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person or
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be given pro
forma effect as though they had occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded on a pro forma basis, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded on a
pro forma basis, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Gaming Authority" means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States of America or foreign government, any state, province or any city or
other political subdivision, whether now or hereafter existing, or any officer
or official thereof, including without limitation, the Nevada Commission, the
Nevada Board, the Colorado Commission and any other agency with authority to
regulate any gaming operation (or proposed gaming operation) owned, managed or
operated by the Company or any of its Subsidiaries.
"Gaming Equipment" means slot machines, gaming tables and other gaming
devices, including, without limitation, gaming devices as defined in Nevada
Revised Statutes Section 463.0155, and related equipment.
"Gaming Law" means the gaming laws of any jurisdiction or jurisdictions to
which the Company, any of its Subsidiaries or any of the Guarantors is, or may
at any time after the date of the Indenture, be subject.
"Gaming License" means every material license, franchise or other
authorization required to own, lease, operate or otherwise conduct gaming
activities of the Company or any of its Subsidiaries, including without
limitation all such licenses granted under the Nevada Gaming Act, the
regulations promulgated pursuant thereto, and other applicable federal, state,
foreign or local laws.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"Guarantors" means each of (i) ROC, RGM, RGMC, and RGME and (ii) any other
subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person but excluding
the Company's 11% First Mortgage Notes and any guaranty by ROC of payment
thereof. The amount of any Indebtedness outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Indebtedness that does not
require current payments of interest, and (ii) the principal amount thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
Investments do not include amounts deposited in trust for employee benefit
plans, and without limiting the generality of the foregoing, do not include
amounts deposited by the Company in any "rabbi" trust for the benefit of
executive officers or other employees of the Company. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Agreement" means an agreement providing for the management by
the Company or any of its Restricted Subsidiaries of a Person engaged in
Permitted Businesses, provided that the only cash consideration payable
thereunder shall be payable to the Company or a Restricted Subsidiary.
"Merger" means the acquisition of the Company by one or more entities
controlled by Mr. Allen Paulson.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any net gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback
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transactions) or (b) the disposition of any securities by such Person or any of
its Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary or
nonrecurring net gain or loss, together with any related provision for taxes on
such extraordinary or nonrecurring net gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale or Event of Loss
or in respect of the initial issuance and sale of the Notes (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale or Event of Loss and insurance
proceeds), net of the direct costs relating to such Asset Sale, Event of Loss or
sale of Notes (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than the Revolving Credit Facility) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets, or for liabilities
retained by the Company or its Restricted Subsidiaries at the time of the Asset
Sale, in each case established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness as to which neither the Company nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable as a guarantor or
otherwise), or (c) constitutes the lender.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Businesses" means the lines of business engaged in by the
Company and its Subsidiaries on the date of the Indenture, and all businesses
related, complementary, or incidental thereto, including but not limited to
gaming, lodging, entertainment and food and beverage service, retail store
leasing and concessions, licensing products, services and trade names, and
consulting with and managing third parties who are engaged in the foregoing and
similar lines of businesses.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor; (b) any Investment in
Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary
of the Company in a Person if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary of the Company and a Guarantor; or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Restricted Subsidiary of the Company that is a Guarantor; (d) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales"; (e) any acquisition of assets solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the Company;
(f) Hedging Obligations; (g) any Investment in the Black Hawk Project (or an
alternative project as to which the Company is permitted to invest Net Proceeds
of the sale of the Existing Notes pursuant to the covenant described under "Use
of Proceeds") not to exceed $30.0 million; (h) any Investment in an entity
formed for the purpose of developing the Six Acre Tracts not to exceed $5.0
million (plus the value of the underlying real property, if contributed to such
entity); and (i) credit extensions to gaming customers.
"Permitted Liens" means (i) Liens created or permitted by the Collateral
Documents; (ii) Liens on Gaming Equipment, inventory and receivables securing
Indebtedness that was permitted by the terms of the Indenture to be incurred;
(iii) Liens in favor of the Company; (iv) Liens on property of a Person existing
at the time such Person is merged into, consolidated with or acquired by the
Company or any Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger, consolidation or
acquisition and do not extend to any assets other than those of the Person
merged into, consolidated with or acquired by the Company; (v) Liens on property
(other than the Black Hawk Land) existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were in
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existence prior to the contemplation of such acquisition and do not extend to
any property other than the property acquired; (vi) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature incurred in the ordinary course of
business; (vii) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (ii) of the third paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" (and any
refinancing thereof) covering only the assets acquired, constructed or improved
with such Indebtedness; (viii) Liens existing on the date of the Indenture; (ix)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (x) Liens incurred in the ordinary course of business of the
Company or any Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Subsidiary; (xi) Liens incurred in the ordinary course of business in respect of
Hedging Obligations; (xii) Liens arising by reason of any judgment, decree or
order of any court with respect to which the Company or any of its Restricted
Subsidiaries is then in good faith diligently prosecuting an appeal or other
proceedings for review, provided that the existence of such judgment, decree or
order is not a Default or Event of Default under the Indenture and any reserve
or other appropriate provision as shall be required in conformity with GAAP
shall have been made therefor; (xiii) Liens securing the Permitted Black Hawk
Debt in existence on the date, if any, on which Black Hawk Operating Company
becomes a Restricted Subsidiary pursuant to the provisions described above under
"Security"; (xiv) carriers' liens, warehousemen's liens, repairmen's liens,
vendors' liens, and similar encumbrances, rights or restrictions on personal
property, not in existence on the date of the Indenture and not interfering in
any material respect with the ordinary conduct of the business of the Company or
any of its Subsidiaries and not impairing in any material respect the value of
the Collateral; (xv) leases, subleases, easements, licenses and rights of way
not in existence on the date of the Indenture and not interfering in any
material respect with the ordinary conduct of the business of the Company or any
of its Subsidiaries and not impairing in any material respect the value of the
Collateral; (xvi) mechanics' liens incurred in the ordinary course of business,
provided that the same are being contested in good faith by appropriate
proceedings and (if required) bonded in an amount sufficient to cover the amount
of any such lien; (xvii) Liens securing Permitted Refinancing Indebtedness in
compliance with the Indenture with respect to secured Indebtedness, provided
that the Liens securing such Permitted Refinancing Indebtedness do not extend to
any assets other than those that secured the Indebtedness refinanced; (xviii)
with respect to any vessel included in the Collateral, certain maritime liens,
including liens for crew's wages and salvage; and (xix) any extension, renewal,
or replacement (or successive extensions, renewals or replacements) in whole or
in part, of Liens described in clauses (i) through (xviii) above.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that: (i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) except for
revolving credit Indebtedness, such Permitted Refinancing Indebtedness has no
mandatory obligation to pay principal on a date earlier than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to the Notes on terms at least
as favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebted-
97
<PAGE> 101
ness is incurred either by the Company, or by the Restricted Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933, as amended, as
interpreted by the Company's chief financial officer or Board of Directors in
consultation with its independent certified public accountants.
"Related Party" with respect to any Controlling Person means (a) any
Affiliate, or spouse or immediate family member (in the case of an individual)
of such Controlling Person, or (b) any trust, corporation, partnership or other
entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding a majority interest of which consist of such Controlling
Person and/or such other Persons referred to in the immediately preceding clause
(a), or (c) any trustee, executor or receiver appointed to manage or administer
the assets of a Controlling Person who is an individual following the death of
such individual.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Revolving Credit Facility" means the Revolving Line of Credit Loan
Agreement, entered into on February 28, 1997 between the Company and the lender
named therein, as the same may be further amended, modified, renewed, refunded,
replaced or refinanced from time to time, including (i) any related notes,
letters of credit, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time, and (ii) any notes,
guarantees, collateral documents, instruments and agreements executed in
connection with such amendments, modification, renewal, refunding, replacement
or refinancing.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation, except as permitted pursuant to clause (xv) under the caption
"Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," (x) to subscribe for additional Equity Interests or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and (d) has not guaranteed or
otherwise directly or indirectly provided
98
<PAGE> 102
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "Certain Covenants
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be incurred as of such date under the covenant described
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock,"
the Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Existing Notes
where such Existing Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of one
year after the Effective Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until March 10, 1998 (90 days after the date of this
Prospectus), all dealers effecting transactions in the New Notes may be required
to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market price or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and
99
<PAGE> 103
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. For a period of one year
after the Effective Date, the Company will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay all expenses incident to the Exchange Offer (including
the expenses of one counsel for the holders of the Existing Notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the Existing Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
The Company is required to file with the Commission this Registration
Statement under the Securities Act with respect to the New Notes, use its best
efforts to cause this Registration Statement to become effective under the
Securities Act, and offer to the holders of Existing Notes who are not
prohibited by law or policy of the Commission from participating in the Exchange
Offer the opportunity to exchange their Existing Notes for New Notes, which New
Notes will be substantially identical in all respects to the Existing Notes
(except that the New Notes generally will not contain terms with respect to
transfer restrictions). Under certain circumstances, the Company has agreed to
file a Shelf Registration Statement and to use its best efforts to cause such
Shelf Registration Statement to be declared effective. The Company, under
certain circumstances, will be required to pay liquidated damages if the Company
is not in compliance with certain of its obligations under the Registration
Rights Agreement. See "Description of Notes -- Registration Rights; Liquidated
Damages."
Under a letter agreement dated July 14, 1997 between the Company and
Jefferies & Company, Inc., the Company has agreed to engage Jefferies & Company,
Inc. as exclusive financial advisor and sole placement agent to the Company for
a period ending October 30, 1997 in connection with the structuring and
consummation of project financing for the Company's Black Hawk Project ("Project
Financing"). In consideration of the services rendered by Jefferies & Company,
Inc. as exclusive financial advisor and sole placement agent in connection with
the Project Financing, the Company has agreed to pay to Jefferies & Company,
Inc. a customary fee.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Dechert Price & Rhoads, New York, New York.
The statements as to matters of law and legal conclusions concerning Nevada
gaming laws included under the caption "Business -- Regulation and Licensing"
have been prepared by Schreck Morris, Las Vegas, Nevada, Nevada gaming counsel
for the Company. The statements as to matters of law and legal conclusions
concerning Colorado gaming laws included under the caption
"Business -- Regulation and Licensing" have been prepared by Holme Roberts &
Owen LLP, Denver, Colorado, Colorado gaming counsel for the Company.
EXPERTS
The consolidated financial statements of Riviera Holdings Corporation and
its subsidiaries as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the Registration Statement, and is
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
100
<PAGE> 104
RIVIERA HOLDINGS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996, and for the Nine Months and Three Months Ended September 30, 1996 and 1997
(unaudited)......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996, and for the Nine Months and Three Months Ended September 30, 1997
(unaudited)......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996, and for the Nine Months and Three Months Ended September 30, 1996 and 1997
(unaudited)......................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
Riviera Holdings Corporation
d.b.a. Riviera Hotel & Casino
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Riviera
Holdings Corporation and subsidiaries (the "Company") d.b.a. Riviera Hotel &
Casino as of December 31, 1995 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 28, 1997
F-2
<PAGE> 106
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)..................... $ 21,962 $ 25,747 $ 62,407
Accounts receivable, net (Notes 1 and 2)............... 4,334 5,113 5,117
Inventories (Note 1)................................... 2,186 3,039 3,191
Prepaid expenses and other assets...................... 2,602 2,692 3,554
-------- -------- ---------
Total current assets........................... 31,084 36,591 74,269
U.S. TREASURY BILLS HELD TO RETIRE $100 MILLION NOTES.... -- -- 110,602
PROPERTY AND EQUIPMENT, NET
(Notes 1, 3, 6 and 8).................................. 121,049 127,760 146,440
OTHER ASSETS............................................. 4,759 2,853 10,376
RESTRICTED CASH FOR PERIODIC SLOT PAYMENTS (Notes 1 and
5)..................................................... 1,039 461 208
-------- -------- ---------
TOTAL ASSETS............................................. $157,931 $167,665 $ 341,895
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 6)............. $ 2,005 $ 1,297 $ 356
Accounts payable (Notes 1 and 4)....................... 8,364 8,530 7,168
Current income taxes payable (Note 7).................. 51 413 --
Accrued interest on $100 million notes................. -- -- 2,750
Accrued interest, other................................ -- -- 2,195
Accrued expenses (Notes 1 and 4)....................... 9,640 9,757 9,872
-------- -------- ---------
Total current liabilities...................... 20,060 19,997 22,341
-------- -------- ---------
DEFERRED INCOME TAXES PAYABLE (Note 7)................... 3,023 4,626 4,665
-------- -------- ---------
$100 MILLION NOTES TO BE RETIRED BY U.S. TREASURY BILLS
(Note 13).............................................. 100,000
---------
OTHER LONG-TERM LIABILITIES (Note 5)..................... 2,749 3,210 3,837
-------- -------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION
(Notes 1, 6 and 13).................................... 105,817 104,581 173,453
-------- -------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 8, 9, 10, 11 and 13)
STOCKHOLDERS' EQUITY: (Note 1)
Common stock ($.001 par value; 20,000,000 shares
authorized; 4,800,000 shares at December 31, 1995,
4,922,503 shares at December 31, 1996, and 4,908,180
shares at September 30, 1997, issued and
outstanding)........................................... 5 5 5
Additional paid-in capital............................. 12,537 13,919 13,751
Notes receivable from Employee Stockholders............ -- (853) (353)
Retained earnings...................................... 13,740 22,180 24,196
-------- -------- ---------
Total stockholders' equity..................... 26,282 35,251 37,599
-------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $157,931 $167,665 $ 341,895
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 107
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------- -----------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES: (Note 1)
Casino............................... $ 82,060 $ 77,337 $ 80,384 $61,378 $55,123 $20,996 $16,989
Rooms................................ 35,422 39,848 41,835 30,869 30,635 9,098 9,211
Food and beverage.................... 22,961 21,895 22,641 17,228 16,260 5,185 5,012
Entertainment........................ 16,945 14,423 20,883 16,961 16,233 5,714 5,475
Other (Notes 8 and 10)............... 9,390 9,515 11,293 7,636 7,904 2,884 2,663
-------- -------- -------- ------- ------- ------- -------
166,778 163,018 177,036 134,072 126,155 43,877 39,350
Less promotional allowances (Note
1)................................ 12,857 11,873 12,627 9,867 9,670 2,946 2,967
-------- -------- -------- ------- ------- ------- -------
Net revenues................. 153,921 151,145 164,409 124,205 116,485 40,931 36,383
-------- -------- -------- ------- ------- ------- -------
COSTS AND EXPENSES: (Notes 1, 8, and
11)
Direct costs and expenses of
operating departments:
Casino............................... 48,826 45,325 47,509 36,592 32,809 12,116 10,604
Rooms................................ 17,594 18,787 18,834 14,155 13,685 4,787 4,516
Food and beverage.................... 15,588 15,768 15,916 11,924 11,801 3,837 3,798
Entertainment........................ 13,982 10,329 15,290 12,262 11,752 4,361 4,203
Other................................ 3,516 3,527 3,913 2,194 2,300 742 827
Other operating expenses:
Selling, general and
administrative.................... 28,822 29,618 31,454 23,755 22,923 8,153 7,085
Depreciation and amortization........ 5,674 6,811 8,212 5,959 7,700 2,097 2,690
-------- -------- -------- ------- ------- ------- -------
Total costs and expenses..... 134,002 130,165 141,128 106,841 102,970 36,093 33,723
-------- -------- -------- ------- ------- ------- -------
INCOME FROM OPERATIONS................. 19,919 20,980 23,281 17,364 13,515 4,838 2,660
-------- -------- -------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense on $100 million
notes............................. -- -- -- (8,250) (8,300) (2,750) (2,767)
Interest income on Treasury Bills
held to retire $100 million
notes............................. -- -- -- -- 773 -- 773
Interest expense, other (Notes 6 and
8)................................ (12,764) (12,453) (12,085) (865) (3,015) (265) (2,505)
Interest income, other............... 510 1,149 1,167 857 1,175 264 551
Other, net (Notes 4 and 13).......... -- -- 505 -- (1,070) -- (220)
-------- -------- -------- ------- ------- ------- -------
Total other income
(expense).................. (12,254) (11,304) (10,413) (8,258) (10,437) (2,751) (4,168)
-------- -------- -------- ------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES........... 7,665 9,676 12,868 9,106 3,078 2,087 (1,508)
PROVISION (BENEFIT) FOR INCOME TAXES
(Notes 1 and 7)...................... 2,875 3,332 4,428 3,072 1,062 670 (520)
-------- -------- -------- ------- ------- ------- -------
NET INCOME (LOSS)...................... $ 4,790 $ 6,344 $ 8,440 $ 6,034 $ 2,016 $ 1,417 $ (988)
======== ======== ======== ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding (Notes
1 and 12)............................ 4,800 5,040 5,177 5,127 5,241 5,227 5,234
======== ======== ======== ======= ======= ======= =======
Net income (loss) per common and common
equivalent shares (Notes 1 and 12)... $ 1.00 $ 1.26 $ 1.63 $ 1.18 $ 0.38 $ 0.27 $ (0.19)
======== ======== ======== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 108
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ADDITIONAL FROM
SHARES COMMON PAID-IN RETAINED EMPLOYEE
OUTSTANDING STOCK CAPITAL EARNINGS STOCKHOLDERS TOTAL
----------- ------ ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994........... 4,800,000 $ 5 $ 12,537 $ 2,606 -- $15,148
Net Income.......................... 4,790 -- 4,790
--------- ---- -------- -------- -------- -------
Balances, December 31, 1994......... 4,800,000 5 12,537 7,396 -- 19,938
Net Income.......................... 6,344 -- 6,344
--------- ---- -------- -------- -------- -------
Balances, December 31, 1995......... 4,800,000 5 12,537 13,740 -- 26,282
Stock Issued Under Employee Stock
Purchase Plan..................... 137,000 -- 1,543 -- $ (1,383) 160
Collections of Stockholders'
Receivables....................... -- -- -- -- 332 332
Refunds on Employee Stock
Purchases......................... (17,600) -- (198) -- 198
Director Compensation Plan.......... 3,103 -- 37 -- -- 37
Net Income.......................... -- -- -- 8,440 8,440
--------- ---- -------- -------- -------- -------
Balances, December 31, 1996......... 4,922,503 5 13,919 22,180 (853) 35,251
Stock Issued Under Employee Stock
Purchase Plan (unaudited)......... 6,200 -- 71 -- (71) --
Collections of Stockholders'
Receivables
(unaudited)....................... -- -- -- -- 319 319
Refunds on Employee Stock Purchases
(unaudited)....................... (21,400) -- (252) -- 252 --
Director Compensation Plan
(unaudited)....................... 877 -- 13 -- -- 13
Net Income (unaudited).............. -- -- -- 2,016 -- 2,016
--------- ---- -------- -------- -------- -------
Balances, September 30, 1997
(unaudited)....................... 4,908,180 $ 5 $ 13,751 $ 24,196 $ (353) $37,599
========= ==== ======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 109
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------- -------------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------- --------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 4,790 $ 6,344 $ 8,440 $ 6,034 $ 2,016 $ 1,417 $ (988)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 5,674 6,811 8,212 5,959 7,700 2,097 2,690
Provision for bad debts....................... 991 478 524 363 5 123 67
Provision for gaming discounts................ 133 143 232 33 (78) 19 (12)
Write-off of secondary offering and other
costs....................................... -- -- -- -- 1,070 -- 220
Gain on disposition of long-term debt, net.... -- -- (505) -- -- -- --
Interest expense.............................. 12,764 12,453 12,085 9,115 11,315 3,015 5,272
Interest paid................................. (13,052) (12,489) (12,072) (6,222) (5,899) (102) (265)
Changes in operating assets and liabilities:
Decrease (increase) in accounts
receivable................................ (1,116) 126 (1,535) (16) 69 65 (726)
Decrease (increase) in inventories.......... (508) 86 (853) (660) (153) (333) (400)
Decrease (increase) in prepaid expenses and
other assets.............................. (310) (212) (90) (864) (196) (34) (622)
Decrease in restricted cash for periodic
slot payments............................. 591 318 578 577 253 325 --
Increase (decrease) in accounts payable..... 1,064 1,033 166 (996) (1,169) (87) 621
Increase (decrease) in accrued expenses..... 2,393 758 104 573 (549) 526 1,155
Increase (decrease) in current income taxes
payable................................... 573 (522) 362 (51) (1,079) -- (1,244)
Increase (decrease) in deferred income taxes
payable................................... 2,010 1,013 1,603 1,289 39 281 (219)
Increase in non-qualified pension plan
obligation to CEO upon retirement......... 375 400 1,039 319 880 107 240
-------- -------- -------- ------- --------- ------- ---------
Net cash provided by operating
activities.............................. 16,372 16,740 18,290 15,453 14,224 7,419 5,789
-------- -------- -------- ------- --------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and
equipment..................................... (8,933) (7,836) (14,923) (9,502) (11,379) (4,242) (4,494)
Purchase of Land -- Black Hawk, Colorado........ -- -- -- -- (15,000) -- (15,000)
Increase in other assets -- Black Hawk,
Colorado...................................... -- -- -- -- (531) -- (531)
Increase (decrease) in other assets............. (1,506) (382) 1,906 2,691 (7,842) (8) (6,742)
-------- -------- -------- ------- --------- ------- ---------
Net cash used in investing activities..... (10,439) (8,218) (13,017) (6,811) (34,752) (4,250) (26,767)
-------- -------- -------- ------- --------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.............. 675 176 209 154 172,886 56 172,886
US Treasury Bills purchased to retire $100
Million Notes................................. -- -- -- -- (110,602) -- (110,602)
Payments on long-term borrowings................ (3,371) (3,159) (2,226) (2,132) (5,427) (511) (4,601)
Proceeds from issuance of stock to employees and
directors..................................... -- -- 197 1,523 (168) 1,511 (77)
Collections of notes receivable from
employees..................................... -- -- 332 (1,163) 499 (1,323) 154
-------- -------- -------- ------- --------- ------- ---------
Net cash provided by (used in) financing
activities.............................. (2,696) (2,983) (1,488) (1,618) 57,188 (267) 57,760
-------- -------- -------- ------- --------- ------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............. 3,237 5,539 3,785 7,024 36,660 2,902 36,782
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD:... 13,186 16,423 21,962 21,962 25,747 26,083 25,625
-------- -------- -------- ------- --------- ------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 16,423 $ 21,962 $ 25,747 $28,986 $ 62,407 $28,985 $ 62,407
======== ======== ======== ======= ========= ======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid............................... $ 292 $ 2,852 $ 2,463 $ 2,032 $ 1,860
======== ======== ======== ======= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES
Stock issued to employees for notes
receivable.................................... -- -- $ 1,383
Non-cash reductions of long-term debt........... -- -- $ 845
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 110
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Riviera Holdings Corporation (the "Company") and its wholly-owned
subsidiary Riviera Operating Corporation ("ROC") were incorporated on January
27, 1993, in order to acquire all assets and liabilities of Riviera, Inc.
Casino-Hotel Division on June 30, 1993, pursuant to a plan of reorganization.
In July 1994, management established a new division, Riviera Gaming
Management, Inc. ("RGM") for the purpose of obtaining management contracts in
Nevada and other jurisdictions. In August 1995, RGM incorporated in the state of
Nevada as a wholly owned subsidiary of ROC.
Nature of Operations
The primary line of business of the Company is the operation of the Riviera
Hotel and Casino on the "Strip" in Las Vegas, Nevada. The Company is engaged in
a single industry segment, the operation of a hotel/casino with restaurants and
related facilities. The Company also manages the Four Queens Hotel & Casino in
downtown Las Vegas (see Note 10).
Casino operations are subject to extensive regulation in the State of
Nevada by the Gaming Control Board and various other state and local regulatory
agencies. Management believes that the Company's procedures for supervising
casino operations, for recording casino and other revenues and for granting
credit comply, in all material respects, with the applicable regulations.
Interim Financial Information
The financial information at September 30, 1997 and for the three and nine
months ended September 30, 1996 and 1997, is unaudited. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary to a fair
presentation of the financial position results of operations and cash flows for
the interim period. The results of operations for the three and nine months
ended September 30, 1996 and 1997, are not necessarily indicative of the results
that will be achieved for the entire year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries ROC and RGM entities. All material
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
All highly liquid investments securities with a maturity of three months or
less when acquired are considered to be cash equivalents. The Company accounts
for investment securities in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and
Equity Securities.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under SFAS 115, are carried on the
consolidated balance sheets in the cash and cash equivalents category. SFAS 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities, and requires such securities to be classified as either
held-to-maturity, trading or available-for-sale. Management determines the
appropriate classification of its investment securities at the time of purchase
and re-evaluates such determination at each balance sheet date. Held to maturity
securities are required to be carried at amortized cost. At December 31, 1995
and 1996, securities classified as held to maturity were comprised of debt
securities issued by the U.S.
F-7
<PAGE> 111
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Treasury and other U.S. government corporations and agencies and repurchase
agreements with an amortized cost of $15,000,000 and $19,756,000 maturing in
three months or less.
Inventories
Inventories consist primarily of food, beverage, gift shop and promotional
inventories and are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and Equipment
Property and equipment are stated at cost, and capitalized lease assets are
stated at the present value of future minimum lease payments at the date of
lease inception. Interest incurred during construction of new facilities or
major additions to facilities is capitalized and amortized over the life of the
asset. Depreciation is computed by the straight-line method over the shorter of
the estimated useful lives or lease terms, if applicable, of the related assets,
which range from 5 to 40 years. The costs of normal maintenance and repairs is
charged to expense as incurred. Gains or losses on disposals are recognized as
incurred.
Restricted Cash for Periodic Slot Payments
At December 31, 1995 and 1996, the Company had interest-bearing deposits
with a commercial bank in the amount of $1,039,000 and $461,000 respectively,
which are restricted as to use. These amounts represent deposits required by the
State of Nevada Gaming Control Board to fund periodic slot payments due
customers through the year 2000.
Fair Value Disclosure as of December 31, 1996
Cash and cash equivalents, accounts receivable, restricted cash for
periodic slot payments, accounts payable and accrued liabilities -- The carrying
value of these items are a reasonable estimate of their fair value.
Long-term Debt -- The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. Based on the borrowing rates currently available to the Company for
debt with similar terms and average maturities, the estimated fair value of
long-term debt is approximately $112,588,000.
Casino Revenue
The Company recognizes, as gross revenue, the net win from gaming
activities, which is the difference between gaming wins and losses.
Promotional Allowances
Promotional allowances consist primarily of accommodations, entertainment,
and food and beverage services furnished without charge to customers. The retail
value of such services is included in the respective revenue classifications and
is then deducted as promotional allowances.
F-8
<PAGE> 112
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated costs of providing promotional allowances are classified as
costs of the casino operating department through interdepartmental allocations.
These allocations for the years ended December 31, 1994, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Food and beverage............................. $ 7,225 $ 6,570 $ 6,671
Rooms......................................... 1,843 1,451 1,410
Entertainment................................. 2,121 2,280 2,592
------- ------- -------
Total costs allocated to casino............... $11,189 $10,301 $10,673
======= ======= =======
</TABLE>
Federal Income Taxes
The Company and its subsidiaries file a consolidated federal tax return.
The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes. SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred income taxes
reflect the net tax effects of (i) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and (ii) operating loss and tax credit
carryforwards.
Net Income Per Share
Earnings per common and common equivalent share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock. Fully diluted
per share amounts are substantially the same as primary per share amounts for
the periods presented.
On November 16, 1995, the stockholders of the Company approved an amendment
to the Company's Amended and Restated Articles of Incorporation to increase the
authorized shares of common stock from 5,000,000 to 20,000,000 and a four for
one stock split. Accordingly, per share information, average number of shares
outstanding and number of shares outstanding in the accompanying consolidated
financial statements have been adjusted for the stock split as of the earliest
date presented (January 1, 1994).
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results may differ from estimates.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the current year presentation.
Recently Adopted Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. During 1996 the Company
adopted the provisions of SFAS 121. SFAS 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS 121 is effective for
F-9
<PAGE> 113
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fiscal years beginning after December 15, 1995. Adoption of SFAS 121 in the
current year did not have a material impact on the consolidated financial
statements of the Company.
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation, which establishes financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. The Company continues to account for stock based
compensation arrangements in accordance with Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees, and therefore the adoption of SFAS No.
123 had no effect on the financial position or results of operations of the
Company. The Company has included additional disclosures about stock-based
employee compensation plans as required by SFAS 123 (see Note 12).
Recently Issued Accounting Standards
The FASB recently issued SFAS No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share and is
effective for financial statements issued for periods ending after December 15,
1997. Earlier application of this statement is not permitted and upon adoption
requires restatement (as applicable) of all prior-period earnings per share data
presented. Management believes that the implementation of this standard will not
have a significant impact on earnings per share.
In addition, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure in February 1997. This statement establishes standards for
disclosing information about an entity's capital structure. Management intends
to comply with the disclosure requirements of this statement which are effective
for periods ending after December 15, 1997.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Casino..................................................... $2,581 $2,280
Hotel...................................................... 2,494 3,479
------ ------
Total...................................................... 5,075 5,759
Less allowance for bad debts and discounts................. 741 646
------ ------
Total...................................................... $4,334 $5,113
====== ======
</TABLE>
Changes in the casino and hotel allowance for bad debts and discounts for
the years ended December 31, 1995, and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
------- -----
(IN THOUSANDS)
<S> <C> <C>
Beginning balance......................................... $ 1,424 $ 741
Write-offs................................................ (1,358) (912)
Recoveries................................................ 54 61
Provision for bad debts................................... 478 524
Provision for gaming discounts............................ 143 232
------- -----
Ending balance............................................ $ 741 $ 646
======= =====
</TABLE>
F-10
<PAGE> 114
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements.................................. $ 21,751 $ 21,751
Buildings and improvements............................. 75,875 77,455
Equipment, furniture, and fixtures..................... 38,307 51,650
-------- --------
Total property and equipment......................... 135,933 150,856
Less accumulated depreciation.......................... 14,884 23,096
-------- --------
Net property and equipment............................. $121,049 $127,760
======== ========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Outstanding chip and token liability....................... $ 854 $ 836
Casino account deposits.................................... 642 498
Unpaid race and sports book winners........................ 26 17
Miscellaneous gaming....................................... 850 762
------ ------
Total liabilities related to gaming activities........... 2,372 2,113
Accounts payable to vendors................................ 4,497 5,118
Hotel deposits............................................. 1,415 1,123
Other...................................................... 80 176
------ ------
Total...................................................... $8,364 $8,530
====== ======
</TABLE>
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Payroll, related payroll taxes and vacation................ $5,095 $5,244
Health and other liability claims.......................... 548 450
Union benefits and dues.................................... 816 663
Progressive slot machine liability......................... 226 203
Taxes...................................................... 518 631
Professional fees.......................................... 208 176
Incentive plans............................................ 2,209 2,357
Interest................................................... 20 33
------ ------
Total...................................................... $9,640 $9,757
====== ======
</TABLE>
F-11
<PAGE> 115
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER LONG TERM LIABILITIES
Other long term liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Periodic slot payments due to customers through 2000,
prefunded by restricted cash (see Note 1)................ $1,039 $ 461
Non-qualified pension plan obligation to the CEO of the
Company, payable in 20 quarterly installments upon
expiration of his employment contract.................... 1,710 2,749
------ ------
$2,749 $3,210
====== ======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
First Mortgage Notes maturing on December 31, 2002, bearing
interest at the rate of 11% per annum, payable semi-annually
on June 30 and December 31, redeemable beginning June 1, 1998,
at 104.3125%; 1999 at 102.8750%; 2000 at 101.4375%; and 2001
and thereafter at 100%. These notes are collateralized by the
physical structures comprising the Riviera Hotel and Casino... $100,000 $100,000
Unsecured, non-interest bearing notes to settle Class 4, 5 and
12 claims, discounted at 16.8%, paid in 1996.................. 2,056 --
Unsecured, non-interest bearing promissory note in an original
principal amount of $8,000,000 (the "Class 13/14 Note") to
settle the claims of the former sole shareholder, and his
affiliates, payable to a bank in semi-annual installments of
$250,000 until the Class 12 Note is paid in full and
commencing on the next payment due thereafter in semi-annual
installments of $500,000 to $750,000 discounted at 12%........ 4,159 4,707
Capitalized lease obligations (see Note 8)...................... 1,341 986
Unsecured, promissory notes in the original principal amount of
$441,262, bearing interest at the rate of 8.5% per annum,
payable monthly and maturing December 31, 1998................ 266 185
-------- --------
Total long-term debt............................................ 107,822 105,878
Less current maturities by terms of debt........................ 2,005 1,297
-------- --------
Total................................................. $105,817 $104,581
======== ========
</TABLE>
Maturities of long-term debt for the years ending December 31, were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................... $ 1,297
1998........................................................... 1,181
1999........................................................... 1,215
2000........................................................... 1,491
2001........................................................... 694
Thereafter..................................................... 100,000
--------
Total.......................................................... $105,878
========
</TABLE>
The Indenture for the First Mortgage Notes imposes certain financial
covenants and restrictions on the Company, including but not limited to the
maintenance of a minimum consolidated net worth, which should
F-12
<PAGE> 116
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not be less than $2,542,000 for any two consecutive fiscal quarters, and
limitations on (i) dividends on common stock, (ii) liquidation of assets, (iii)
incurrence of indebtedness, (iv) creation of subsidiaries and joint ventures and
(v) capital purchases. Capital purchases are limited to cash expenditures of
$6,000,000 plus 80% of cumulative available cash flow from the Company's
inception at July 1, 1993, to the extent that this cash flow has not been
utilized in any prior year. Management believes the Company is in compliance
with the covenants of the Indenture as of December 31, 1996.
Effective September 8, 1995, the Board of Directors and holders of 94% of
the Company's First Mortgage Notes approved amendments to certain note
restrictive covenants. Noteholders who consented to the modification of the
restrictive covenants were paid a fee of $5.00 for each $1,000 of Notes held for
a total payment of $500,000 which is included in other assets at December 31,
1995 and 1996 and amortized over the life of the related debt. These costs are
being amortized using the straight-line method which approximates the effective
interest method over the life of the indebtedness. The amendments to the
restrictive covenants were designed to permit the Company's management team to
utilize its expertise in turning around troubled gaming properties which are
either in or on the verge of bankruptcy and to manage casinos in so called "new
venues".
During the fourth quarter of 1996, the Company made the final payment on
the note issued to settle the Class 12 claim, which was less than what was
recorded and resulted in income of approximately $845,000. Also during the
fourth quarter of 1996, the terms of the Class 13/14 Note was revised, which
resulted in a decrease in the discount rate from 16.8% to 12.0% and increased
principal, resulting in additional expense of $340,000. Other, net income for
the year ended December 31, 1996, includes the net effect of the above
transactions.
In February, 1997, the Company entered into a $15.0 million five year
reducing revolving line of credit collateralized by equipment. The revolving
line of credit bears interest at 0.5% or LIBOR plus 2.9%. Availability of loans
under the Revolving Credit Facility is subject to compliance by the Company and
ROC with certain conditions precedent, including the maintenance of certain
financial ratios. As a result of the sale of the Existing Notes, the Company
ceased to meet such conditions for borrowing availability. The Company intends
to renegotiate the conditions to borrowing under the Revolving Credit Facility
or to seek a replacement facility. There can be no assurance, however, that such
renegotiations or replacement will be successful. The Company has not utilized
this line of credit.
The Company has credit facilities totaling $1,100,000 at banks for letters
of credit issued periodically to foreign vendors for purchases of merchandise.
7. FEDERAL INCOME TAXES
SFAS 109 requires the Company to compute deferred income taxes based upon
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
The effective income tax rates on income attributable to continuing
operations differ from the statutory federal income tax rates for the years
ended December 31, 1994, 1995 and 1996, as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes at federal statutory
rate....................... $2,680 35.0% $3,386 35.0% $4,504 35.0%
Other........................ 195 2.5 (54) (1.0) (76) (1.0)
------ ---- ------ ---- ------ ----
Provision for income taxes... $2,875 37.5% $3,332 34.0% $4,428 34.0%
====== ==== ====== ==== ====== ====
</TABLE>
F-13
<PAGE> 117
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of the items comprising the Company's net deferred tax
liability consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Basis in long-term debt obligations...................... $ 640 $ 457
Reserve differential for hospitality and gaming
activities............................................ 1,090 1,133
Difference between book and tax depreciable property..... 4,430 5,226
Other.................................................... 383 806
------ ------
Total................................................. 6,543 7,622
------ ------
Deferred Tax Assets:
Reserves not currently deductible........................ 1,500 1,806
Bad debt reserves........................................ 260 226
AMT credit............................................... 1,760 964
------ ------
Total................................................. 3,520 2,996
------ ------
Net deferred tax liability............................... $3,023 $4,626
====== ======
</TABLE>
The Company has $964,000 of alternative minimum tax credit available to
offset future income tax liabilities. The credit has no expiration date.
8. LEASING ACTIVITIES
The Company leases certain equipment under capital leases. These agreements
have been capitalized at the present value of the future minimum lease payments
at lease inception and are included with property and equipment. Management
estimates the fair market value of the property and equipment subject to the
leases approximates the net present value of the leases. The leased property and
equipment consist primarily of signs and air conditioning equipment.
The following is a schedule by year of the minimum rental payments due
under capital leases, as of December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................... $ 441
1998........................................................... 441
1999........................................................... 429
2000........................................................... 227
------
Total minimum lease payments................................... 1,538
Less taxes, maintenance and insurance.......................... 390
Less interest portion of payments.............................. 162
------
Present value of net minimum lease payments.................... $ 986
======
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996, was
approximately $295,000, $406,000 and $334,000, respectively.
In addition, the Company leases retail space to third parties under terms
of noncancelable operating leases which expire in various years through 1999.
Rental income, which is included in other income, for the years ended December
31, 1994, 1995 and 1996, was approximately $1,687,000, $1,533,000 and
$1,573,000, respectively.
F-14
<PAGE> 118
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, the Company had future minimum annual rental income
due under noncancelable operating leases as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................... $1,159
1998........................................................... 946
1999........................................................... 748
2000........................................................... 494
2001........................................................... 351
Thereafter..................................................... 993
------
Total..................................................... $4,691
======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company is party to several routine lawsuits both as plaintiff and
defendant arising from normal operations of a hotel. Management does not believe
that the outcome of such litigation in the aggregate, will have a material
adverse effect on the financial position, results of operations, or cash flows
of the Company.
10. MANAGEMENT AGREEMENTS
From August 1996 until February 1997, RGM has been operating the Four
Queens located adjacent to the Golden Nugget on Fremont Street in downtown Las
Vegas under an interim management agreement for a fee of $83,333 per month. The
long-term management agreement (the "Management Agreement") with Elsinore
Corporation ("Elsinore"), the owner of the Four Queens, went into effect on
February 28, 1997, the effective date of the Chapter 11 plan of reorganization
of Elsinore. The Company believes that the terms of the Management Agreement are
no less favorable to the Company than if the Company had negotiated with an
independent party.
The term of the Management Agreement is approximately 40 months, subject to
earlier termination or extension. Either party may terminate if cumulative
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the first two fiscal years is less than $12.8 million. The term can be extended
by an additional 24 months at RGM's option, if cumulative EBITDA for the three
fiscal years of the term is at least $19.2 million. RGM will be paid a fee of
25% of any increase in annual EBITDA over $4.0 million, subject to a $1.0
million minimum fee, payable in equal monthly installments. In addition, the
management agreement entitles RGM to receive warrants for 1,125,000 shares of
common stock of Elsinore, exercisable during the term or extended term of the
management agreement at an exercise price based on the higher of (i) the per
share book value on the effective date of the Elsinore bankruptcy plan or (ii)
total stockholders' equity of $5.0 million.
Either party can terminate the management agreement if (i) substantially
all the Four Queens' assets are sold, (ii) the Four Queens is merged or (iii) a
majority of the Four Queens' or Elsinore's shares are sold. Upon such
termination, RGM will receive a $2.0 million termination bonus minus any amount
realized or realizable upon exercise of the warrants.
11. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS
The Company has an employment agreement with Mr. Westerman, Chairman of the
Board and Chief Executive Officer of the Company. This agreement includes an
annual base salary, an incentive bonus based upon the extent of adjusted
operating earnings, contributions to a Non-Qualified Pension Plan and
contributions to a Profit Sharing and 401(k) Plan. In addition, the Company has
termination fee agreements with each of the Directors, Executive Officers and
Significant Employees pursuant to which each of such employees will be entitled
to receive one year's salary and health insurance benefits if their employment
with the Company is terminated within one year of a change of control of the
Company and without cause, or the involuntary termination of Mr. Westerman. On
November 21, 1996, the Company amended Mr. Westerman's employment agreement
subject to stockholder approval, which was granted at the annual meeting held on
May 8, 1997.
F-15
<PAGE> 119
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has an incentive compensation plan, covering employees of the
Company who, in the opinion of the Chairman of the Board, either serve in key
executive, administrative, professional or technical capacities with the Company
or other employees who also have made a significant contribution to the
successful and profitable operation of the Company. The amount of the bonus is
based on operating earnings before depreciation, amortization, interest expense,
provision for income taxes, extraordinary losses and gains, any provisions or
payments made pursuant to the Plan, and any provisions or payments made pursuant
to the incentive compensation of the Chairman and Chief Executive Officer.
During the years ended December 31, 1994, 1995 and 1996, the Company recorded
accrued bonuses of $1,430,000 and $2,123,000 and $2,588,000, respectively, based
upon the above incentive compensation plan and the incentive compensation plan
established for the Chairman of the Board under his employment agreement.
The Company contributes to multi-employer pension plans under various union
agreements to which the Company is a party. Contributions, based on wages paid
to covered employees, were approximately $1,725,000, $1,576,000 and $1,650,000
for the years ended December 31, 1994, 1995 and 1996. These contributions were
for approximately 1,364 employees including food and beverage employees, room
department employees, carpenters, engineers, stage hands, electricians, painters
and teamsters. The Company's share of any unfunded liability related to
multi-employer plans, if any, is not determinable.
The Company sponsors a Profit Sharing and 401(k) Plan which incurred
administrative expenses of approximately $67,000, $59,000 and $34,000 for the
years ended 1994, 1995 and 1996.
The profit sharing component of the Profit Sharing and 401(k) Plan provides
that the Company will make a contribution equal to 1% of each eligible
employee's annual compensation if a prescribed annual operating earnings target
is attained and an additional 1/10th of 1% thereof for each $200,000 by which
operating earnings is exceeded, up to a maximum of 3% thereof. The Company may
elect not to contribute to the Profit Sharing and 401(k) Plan if it notifies its
employees by January of the Profit Sharing and 401(k) Plan year. An employee
will become vested in the Company's contributions based on the employee's years
of service. An employee will receive a year of vesting service for each plan
year in which the employee completed 1,000 hours of service. Vesting credit will
be allocated in 20% increments for each year of service commencing with the
attainment of two years of service. An employee will be fully vested following
the completion of six years of service.
The 401(k) component of the Profit Sharing and 401(k) Plan provides that
each eligible employee may contribute up to 15% of such employee's annual
compensation, and that the Company will contribute 1% of each employee's annual
compensation for each 4% of compensation contributed by the employee, up to a
maximum of 2%. All non-union employees of the Company are eligible to
participate in the Profit Sharing and 401(k) Plan after twelve consecutive
months of service with the Company.
ROC is a party to termination fee agreements with certain significant
employees pursuant to which each such employee is entitled to receive one year's
salary and benefits if his or her employment with ROC is terminated within one
year of a change of control of the Company or ROC, or the involuntary
termination of Mr. Westerman's employment. The estimated total amount that would
be payable under all such agreements at December 31, 1996 is approximately $1.3
million in salaries and $400,000 in benefits.
ROC is a party to stay bonus agreements with certain significant employees
pursuant to which each such employee is entitled to receive one year's salary
(less the amount of any incentive bonus paid in 1997 for 1996) in the event
there is a change of control of the Company. The agreements expire on December
31, 1997. The estimated total amount that would be payable under all such
agreements is approximately $300,000.
12. STOCK OPTION PLANS
At a meeting held on July 27, 1993, the Company's Board of Directors
adopted a stock option plan providing for the issuance of both non-qualified and
incentive stock options (as defined in the Internal
F-16
<PAGE> 120
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Code). This stock option plan was ratified by the Company's stockholders
at the April 26, 1994 annual meeting. The number of shares available for
purchase under the Stock Option Plan as adopted was 120,000 (as adjusted
pursuant to antidilution provisions). The stockholders approved a four-for-one
stock split, increasing the number of shares of Common Stock available for
purchase under the Stock Option Plan to 480,000. Options were granted for
228,000 shares for 1993, 132,000 shares for 1994, none for 1995, and 110,000 for
1996, leaving a balance available for future grants of 10,000 shares. No options
were exercised in 1994, 1995 or 1996. On November 21, 1996, the Company amended
the Stock Option Plan, which was approved at the annual meeting held on May 8,
1997, to increase the number of shares available under the Stock Option Plan
from 480,000 shares to 1,000,000 shares and granted options to purchase 300,000
additional shares to Mr. Westerman. Options vest 25% one year after the date of
grant and 25% each subsequent year. The term of an option can in no event be
exercisable more than ten years (five years in the case of an incentive option
granted to a shareholder owning more than 10% of the Common Stock), or such
shorter period, if any, as may be necessary to comply with the requirements of
state securities laws, from the date such option is granted.
On March 5, 1996, the Board of Directors adopted an employee stock purchase
plan (the "Stock Purchase Plan"), which was approved by the stockholders on May
10, 1996. A total of 300,000 shares of common stock (subject to adjustment for
capital changes) in the aggregate may be granted under the stock purchase plan.
The Stock Purchase Plan is administered by the compensation committee. The
purchase price per share of stock shall be 85% of per share market value of the
common stock on the purchase date. On May 31, 1996, approximately 560 union and
non-union employees participated in the 1996 employee stock purchase plan. Under
the plan, 137,000 shares were issues to employees at $11.26 (85 percent of
market price at May 10, 1996), for $160,000 cash and the balance in notes
receivable of $1,383,000 which are payable over two years via payroll deduction.
During 1996, 17,600 shares were returned through the plan as the result of
refunds through the employees.
On May 10, 1996, the stockholders approved a Nonqualified Stock Option Plan
for Non-Employee Directors (the "Nonqualified Stock Option Plan") and a Stock
Compensation Plan for Directors serving on the Compensation Committee (the
"Stock Compensation Plan"). The total number of shares available for purchase
under each plan is 50,000. Pursuant to the Nonqualified Stock Option Plan, two
directors were granted options to purchase 4,000 shares at an exercise price of
$13.25, which represented fair market value. As of December 31, 1996, 3,103
shares were issued pursuant to the Stock Compensation Plan at $12.08 per share.
The Company has adopted the disclosures-only provision of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the date of grant for awards consistent with the provisions
of SFAS 123, the Company's net income and pro forma net income common share and
common share equivalent would have been decreased to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income -- as reported..................................... $6,344 $8,440
Net income -- pro forma....................................... $6,289 $8,380
Net income per common and common share equivalent -- as
reported.................................................... $ 1.26 $ 1.63
Net income per common and common share equivalent -- pro
forma....................................................... $ 1.25 $ 1.61
</TABLE>
F-17
<PAGE> 121
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED)
Secondary Offering Costs -- The Company withdrew its secondary offering due
to market conditions and, as a result, charged costs totaling $850,000 to
earnings for the quarter ended March 31, 1997.
Proposed Merger -- On September 15, 1997 the Company entered into a
Agreement and Plan of Merger with R&E Gaming Corp., an entity controlled by
Allen E. Paulson, pursuant to which Riviera would be acquired by R&E Gaming and
Riviera shareholders would receive $15 per share in cash for each share of
Riviera common stock owned by them, plus an amount equal to 7% per annum from
June 1, 1997 to the date of the closing. As part of its review of the
transaction, Riviera's Board of Directors received an opinion from its financial
advisor. Ladenburg, Thalmann & Co., Inc., as to the fairness, from a financial
point of view, of the consideration to be received in the merger by Riviera's
shareholders. In connection with the execution of the merger agreement,
shareholders owning approximately 56% of the outstanding, fully diluted Riviera
shares have granted R&E Gaming an option to purchase their shares at the same
price that all shareholders would receive in the merger and have agreed to vote
in favor of the transaction. Closing of the merger is subject to a number of
conditions, including approval by the holders of at least 60% of the Riviera
shares (excluding the shares owned by Mr. Paulson or his affiliates) at a
meeting of shareholders scheduled to be held in December 1997, and the receipt
of all necessary approvals by the Nevada Gaming Authorities. There can be no
assurance that the conditions to the merger will be met or that the merger will
be consummated.
A subsidiary of R&E Gaming has entered into an agreement to purchase the
outstanding common stock of Elsinore Corporation, the primary asset of which is
the Four Queens Hotel and Casino in Downtown Las Vegas, Nevada. Since August,
1996, Riviera Gaming Management-Elsinore, Inc. (RGME), an indirect subsidiary of
the Company, has been managing the Four Queens under a contract which guarantees
RGME a minimum management fee plus additional compensation based on EBITDA
improvement of the Four Queens, and warrants to purchase 1,125,000 shares of
Elsinore common stock (equals to 18.4% of the equity of Elsinore on a fully
diluted basis) at $1.00 per share. Upon consummation of the Elsinore Merger, the
Company would receive approximately $2.4 million, net of the exercise price of
the warrants.
Proposed Black Hawk Project -- The Company intends to construct a casino in
Black Hawk, Colorado on a site which was purchased for $15 million in August
1997. The Company expects to receive the necessary excavation and other permits
in the near future. As of September 30, 1997 the Company had expended
approximately $15.5 million on the project.
Subsequent Financing -- On August 13, 1997, the Company issued 10% First
Mortgage Notes ("the 10% Notes") with a principal amount of $175 million
dollars. The Notes were issued at a discount in the amount of $2.2 million. The
discount is being amortized over the life of the note on a straight line basis.
On August 13, 1997, the Company used part of these proceeds to purchase United
States Government securities ("the Securities") at a cost of $109.8 million
which were deposited into an irrevocable trust. These Securities, together with
interest that will be earned by the Securities will be used to pay the
principal, interest and call premium due on the 11% First Mortgage Notes ("the
11% Notes") on June 1, 1998, the earliest date the 11% Notes can be redeemed.
Interest earned from the Securities is included in interest income. The interest
expense from the 10% Notes and from the 11% Notes is included in interest
expense. The 10% Note Indenture contains certain covenants, which limit the
ability of the Company and its restricted subsidiaries, subject to certain
exceptions, to: (i) incur additional indebtedness; (ii) pay dividends or other
distributions, repurchase capital stock or other equity interests or
subordinated indebtedness; (iii) enter into certain transactions with
affiliates; (iv) create certain liens; sell certain assets; and (v) enter into
certain mergers and consolidations. A portion of the proceeds from the 10% Notes
totaling $4.5 million was paid to a bank to retire the Class 13/14 Notes.
The First Mortgage Notes are unconditionally guaranteed by all existing and
future restricted subsidiaries of the Company, which will not initially include
Black Hawk Operating Company. As of September 30, 1997, Black Hawk Operating
Company had no operations. At September 30, 1997, Black Hawk Operating
F-18
<PAGE> 122
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company only had assets of approximately $15.5 million, which represents the
cost of the land of the Black Hawk project. Therefore the Company has not
included separate financial information for the guarantors as of September 30,
1997. The Company intends to disclose such additional information in the future
as the subsidiary develops.
The Company is obligated to register under the Securities Act of 1933, as
amended, securities identical to the 10% First Mortgage Notes and to exchange
such registered securities for the First Mortgage Notes.
Recently Issued Accounting Standards
On June 30, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management does not believe this new
FASB will have material impact on their financial statements.
On June 30, 1997, the FASB issued SFAS No. 131, Disclosure About Segments
of an Enterprise and Related Information. This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company believes the segment
information required to be disclosed under SFAS No. 131 will be more
comprehensive than previously provided, including expanded disclosure of income
statement and balance sheet items for each of its reportable segments under SFAS
No. 131. However, the Company has not yet completed its analysis of which
operating segments it will report on.
F-19
<PAGE> 123
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................. i
Summary............................... 1
Risk Factors.......................... 9
Use of Proceeds....................... 16
Capitalization........................ 17
Selected Historical Financial and
Operating Data...................... 18
Ratio of Earnings to Fixed Charges.... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
The Exchange Offer.................... 30
Certain Federal Income Tax
Considerations...................... 36
Business.............................. 38
The Proposed Merger................... 57
Management............................ 59
Ownership of the Company.............. 66
Certain Relationships and Related
Transactions........................ 68
Description of Certain Indebtedness... 69
Description of Notes.................. 70
Plan of Distribution.................. 99
Legal Matters......................... 100
Experts............................... 100
Index to Combined Financial Statements
and Information..................... F-1
</TABLE>
UNTIL MARCH 10, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THE
ORIGINAL DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
$175,000,000
LOGO
------------------------------
PROSPECTUS
------------------------------
OFFER TO EXCHANGE
10% FIRST MORTGAGE NOTES
DUE 2004
FOR ALL OUTSTANDING
10% FIRST MORTGAGE NOTES
DUE 2004
DECEMBER 10, 1997
======================================================
