FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------- -----------------
Commission file number 000-21430
----------------------------
Riviera Holdings Corporation
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0296885
----------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (702) 794-9527
---------------------------------------------------------------------
--------------------------------------------
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check One)
Large accelerated filer ___ Accelerated filer _X_ Non-accelerated filer ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO _X__ -
APPLICABLE ONLY TO ISSUER'S INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documentation and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No ____
APPLICABLE ONLY TO CORPORATE ISSURERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of August 7, 2006, there were 12,463,755 shares of Common Stock, $.001 par
value per share, outstanding.
RIVIERA HOLDINGS CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at June 30, 2006 and
December 31, 2005 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2006 and 2005 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 27
Item 6. Exhibits 28
Signature Page 29
Exhibits 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements of
Riviera Holdings Corporation have been prepared in accordance with the
instructions to Form 10-Q, and therefore, do not include all information and
notes necessary for complete financial statements in conformity with generally
accepted accounting principles in the United States. The results from the
periods indicated are unaudited, but reflect all adjustments (consisting only of
normal recurring adjustments) that management considers necessary for a fair
presentation of operating results.
The results of operations for the three and six months ended June 30, 2006 and
2005 are not necessarily indicative of the results for the entire year. These
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2005,
included in our Annual Report on Form 10-K.
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands, except share amounts) June 30 December 31
--------------------------------------------------------------------------------
2006 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,260 $ 20,571
Accounts receivable, net 2,385 3,544
Inventories 1,853 2,485
Prepaid expenses and other assets 3,451 4,197
---------------- -------------
Total current assets 32,949 30,797
PROPERTY AND EQUIPMENT, Net 171,812 171,130
OTHER ASSETS, Net 6,557 7,396
DEFERRED INCOME TAXES, Net of valuation
allowance of $17,081 2,446 2,446
---------------- -------------
TOTAL $ 213,764 $ 211,769
================ =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 853 $ 824
Current portion of obligation to officers 1,000 1,000
Accounts payable 8,695 10,133
Accrued interest 1,065 1,087
Accrued expenses 14,083 12,261
---------------- -------------
Total current liabilities 25,696 25,305
---------------- -------------
OBLIGATIONS TO OFFICERS, Net of current portion 2,607 3,126
---------------- -------------
LONG-TERM DEBT, Net of current portion 214,369 214,607
---------------- -------------
Commitments & Contingencies (Note 6)
SHAREHOLDERS' DEFICIENCY:
Common stock ($.001 par value; 60,000,000
shares authorized; 17,131,824 and
17,082,324 shares issued at June 30,
2006 and December 31, 2005, respectively) 17 17
Additional paid-in capital 17,758 17,301
Treasury stock (4,762,393 and 4,859,091
shares at June 30, 2006 and December 31,
2005, respectively) (9,841) (10,047)
Accumulated Deficit (36,842) (38,540)
---------------- -------------
Total shareholders' deficiency (28,908) (31,269)
---------------- -------------
TOTAL $ 213,764 $ 211,769
================ =============
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2006 AND 2005 Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
--------------------------------------------------------------------------------
REVENUES: 2006 2005 2006 2005
Casino $ 29,862 $ 28,577 56,944 $ 56,060
Rooms 14,246 13,770 29,089 27,195
Food and beverage 8,746 9,368 17,644 18,211
Entertainment 3,860 4,230 7,541 9,112
Other 1,733 2,248 3,436 4,285
--------- --------- -------- ---------
Total revenues 58,447 58,193 114,654 114,863
Less - promotional allowances (6,010) (4,936) (10,528) (9,142)
--------- --------- -------- ---------
Net revenues 52,437 53,257 104,126 105,721
--------- --------- -------- ---------
COSTS AND EXPENSES:
Direct costs and expenses of
operating departments:
Casino 15,222 14,996 29,042 28,860
Rooms 6,895 7,196 13,684 13,754
Food and beverage 6,155 6,581 12,487 12,634
Entertainment 2,793 3,525 5,435 7,195
Other 333 814 799 1,493
Other operating expenses:
General and administrative:
Equity compensation 190 932 406 985
Other general and administrative 9,984 9,587 20,001 19,592
Mergers, acquisitions and development
costs, net 761 165 878 (502)
Sarbanes-Oxley Act expenses 47 270 275 270
Asset impairment 3 0 16 198
Depreciation and amortization 3,159 3,584 6,419 6,878
--------- --------- -------- ---------
Total costs and expenses 45,542 47,650 89,442 91,357
--------- --------- -------- ---------
INCOME FROM OPERATIONS 6,895 5,607 14,684 14,364
--------- --------- -------- ---------
Interest expense, net (6,477) (6,610) (12,986) (13,229)
--------- --------- -------- ---------
INCOME(LOSS) BEFORE PROVISION
FOR INCOME TAXES 418 (1,003) 1,698 1,135
PROVISION FOR INCOME TAXES 0 0 0 0
--------- --------- -------- ---------
NET INCOME (LOSS) $ 418 $ (1,003) $ 1,698 $ 1,135
========= ========= ======== =========
INCOME (LOSS) PER SHARE DATA:
Income (Loss) per share:
Basic $ 0.03 $ (0.08) $ 0.14 $ 0.09
--------- --------- -------- --------
Diluted $ 0.03 $ (0.08) $ 0.14 $ 0.09
--------- --------- -------- --------
Weighted-average common shares
outstanding 12,040 12,182 12,001 11,986
--------- --------- -------- --------
Weighted-average common and common
equivalent shares 12,326 12,182 12,271 12,267
--------- --------- -------- --------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 Six Months Ended
(in thousands) June 30,
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,698 $1,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,419 6,878
Provision for bad debts, net 221 95
Stock Compensation - Restricted Stock 392 985
Stock Compensation - Stock Options 14
Asset Impairment 16 197
Amortization of deferred loan fees 979 981
Changes in operating assets and liabilities:
Decrease in accounts receivable 938 1,252
Decrease (increase) in inventories 632 (233)
Decrease in prepaid expenses
and other assets 746 205
Decrease in accounts payable (1,438) (771)
Decrease in accrued liabilities (178) (1,607)
Increase in deferred compensation plan liability (2) (48)
Decrease in non-qualified pension plan obligation
to CEO upon retirement (500) (500)
--------- ---------
Net cash provided by operating activities 9,937 8,569
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (2,481) (3,224)
Capital expenditures - Black Hawk, Colorado (2,621) (2,921)
Capitalized interest on construction projects 0 59
Decrease in other assets 9 21
--------- ---------
Net cash used in investing activities (5,093) (6,065)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (412) (1,044)
Proceeds from exercise of stock options 257 377
--------- ---------
Net cash used in financing activities (155) (667)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 4,689 1,837
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 20,571 $ 18,886
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,260 $ 20,723
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $ 21 $ 397
Cash paid for interest $ 12,212 $ 12,332
See notes to condensed consolidated financial statements
5
RIVIERA HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
Riviera Holdings Corporation ("RHC") and its wholly-owned subsidiary, Riviera
Operating Corporation ("ROC") (together with their wholly-owned subsidiaries,
the "Company"), were incorporated on January 27, 1993, in order to acquire all
assets and liabilities of Riviera, Inc. Casino-Hotel Division on June 30, 1993,
pursuant to a plan of reorganization. The Company operates the Riviera Hotel &
Casino (the "Riviera Las Vegas") on the Strip in Las Vegas, Nevada. In February
2000, the Company opened its casino in Black Hawk, Colorado, which is owned
through Riviera Black Hawk, Inc. ("RBH"), a wholly-owned subsidiary of ROC.
Casino operations are subject to extensive regulation in the states of Nevada
and Colorado by the respective Gaming Control Boards and various other state and
local regulatory agencies. Our management believes that the Company's procedures
comply, in all material respects, with the applicable regulations for
supervising casino operations, recording casino and other revenues, and granting
credit.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its direct and indirect wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Earnings Per Share
Basic per-share amounts are computed by dividing net income by weighted average
shares outstanding during the period. Diluted net income per share amounts are
computed by dividing net income by weighted average shares outstanding plus the
dilutive effect of common share equivalents. The effect of 273,652 options
outstanding was not included in diluted calculations for the three months ended
June 30, 2005 since the Company incurred a net loss and their effect would have
been antidilutive. There were no potentially dilutive options excluded from the
calculation for the three months ended June 30, 2006 and 18,000 and 24,000 for
the six months ended June 30, 2005 and 2006, respectively.
Income Taxes
The income tax provisions for the six months ended June 30, 2006 and 2005, as
well as the three months ended June 30, 2006 were fully offset by the
utilization of loss carryforwards for which a valuation allowance had been
previously provided. The estimates used to determine the remaining valuation
allowance are based upon recent operating results and budgets for future
operating results. Remaining deferred tax assets are net of valuation allowance
that reduces the asset to amounts that approximate AMT credits that do not
expire. These estimates are made using assumptions about the economic, social
and regulatory environments in which we operate. These estimates could be
impacted by numerous unforeseen events including changes to regulations
affecting how we operate the business, changes in the labor market or economic
downturns in the areas where we operate.
6
Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
the Company include estimated useful lives for depreciable and amortizable
assets, certain accrued liabilities and the estimated allowances for receivables
and deferred tax assets. Actual results may differ from estimates.
Stock Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards
("SFAS") No.123(R), using the modified prospective application. Accordingly,
prior amounts have not been restated. In the first quarter of 2006, our adoption
of SFAS No. 123 (R) resulted in no incremental stock-based compensation expense,
as we had no non-vested options outstanding at January 1, 2006. However, as
required by SFAS No. 123 (R), upon adoption, we reclassified $3.6 million of
deferred compensation as additional paid in capital.
As of June 30, 2006, we had outstanding options under three stock option plans.
Prior to January 1, 2006 we had adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation. Under our 2005 Stock Option
Plan for Non-Employee Directors (the "Directors Plan") we granted options for
24,000 shares to our non-employee directors on May 22, 2006 at an exercise price
of $21.60 per share. For the three months ended June 30, 2006 approximately
$14,000 of compensation expense was recognized on the new options granted and is
recorded as a component of general and administrative expenses.
The following table details the effect on net income and earnings per share had
compensation expense for the employee stock-based awards been recorded in the
first half of 2005 based on the fair value method under SFAS No. 123 (R) (in
thousands, except per share amounts):
Three months Six months
ended ended
June 30, June 30,
2005 2005
Net income (loss) $ (1,003) $ 1,135
Less: Total stock-based employee compensation
expense determined under fair value-based
methods for awards net of related tax effects (11) (22)
Net Income (loss) pro forma $ (1,014) $ 1,113
Basic Income (loss) per common share as reported $ (0.08) $ 0.09
Basic Income (loss) per common share pro forma $ (0.08) $ 0.09
Diluted Income (loss) per common and common
share equivalent as reported $ (0.08) $ 0.09
Diluted Income (loss) per common and common share
equivalent pro forma $ (0.08) $ 0.09
7
We estimated the fair value of each option grant on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2003: dividend yield of 0%; expected volatility
of 52%; risk-free interest rate of 4.49%; and expected lives of 10 years. All
outstanding options were vested as of December 31, 2005. During the three and
six months ended June 30, 2006, 24,000 options were granted to non-employee
directors.
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of this standard on the Condensed Consolidated Financial Statements.
2. OTHER ASSETS
Other assets at June 30, 2006 and December 31, 2005 include deferred loan fees
of approximately $5.4 million and $6.2 million respectively, associated with the
refinancing of our debt in 2002.
3. LONG TERM DEBT AND COMMITMENTS
On June 26, 2002, we issued 11% Senior Secured Notes with a principal amount of
$215 million, substantially all of which were later exchanged for our registered
Senior Secured Notes with substantially the same terms (collectively, the "11%
Notes"). The 11% Notes were issued at a discount of $3.2 million. The discount
is being amortized over the life of the 11% Notes. We incurred fees of
approximately $9.3 million in connection with the issuance of the 11% Notes,
which are included in other assets and are being amortized to interest expense
over the life of the 11% Notes.
Effective July 26, 2002, we entered into a $30 million, five-year revolving
credit arrangement with a financial institution. Terms of the arrangement
include interest at prime plus .75 percent or a LIBOR-derived rate. There were
no advances outstanding on this revolver at June 30, 2006. We incurred loan fees
of approximately $1.5 million, which are being expensed over the life of the
arrangement. A 0.5 percent annual fee is payable in monthly installments on the
unused portions of the revolver plus a $3,000 monthly service fee.
4. STOCK REPURCHASES
There were no shares of our common stock purchased by our Deferred Compensation
Plan for the six months ended June 30, 2006 or 2005. The Deferred Compensation
Plan distributed to participants 96,698 and 187,983 shares for the six months
ended June 30, 2006 and 2005, respectively.
8
5. SHARED-BASED PAYMENTS
Effective March 10, 2005, we approved and authorized the grant of 337,500 shares
of Common Stock under our Restricted Stock Plan to 19 executives at no cost,
subject to their execution of appropriate acceptances. We granted those shares
in substitution for stock options that we attempted to grant on July 15, 1993
under our 1993 Employee Stock Option Plan (the "1993 Option Plan"). The 1993
Option Plan expired on July 1, 2003, rendering those options null and void. The
grant of restricted Common Stock was intended to compensate those executives for
the value of the options that we attempted to grant. The restricted shares are
subject to a five-year vesting schedule, vesting 20% each March 10, commencing
March 10, 2006. We are amortizing the $4,584,000 fair market value of those
shares over the vesting period of 60 months. Of the total shares granted, 54,300
shares vested during the six month period ended June 30, 2006 and $391,796 was
charged to expense in the first six months of 2006 and is recorded as a
component of general and adminstrative expenses. In May 2006, 48,000 shares were
forfeited due to the resignation of two of our officers. As of June 30, 2006, we
have 169,200 Restricted Stock Plan shares outstanding and $2,540,776 remaining
to be recognized. These shares immediately vest upon death, disability,
retirement at age 62, termination of employment other than for cause, or in the
event of a change in control of the Company.
At June 30, 2006, we had two active stock option plans and two expired stock
option plans, which are described below. Options granted prior to the adoption
of SFAS No. 123(R) on January 1, 2006 were accounted for in accordance with
Accounting Principles Board Opinion No. 25. Under the 1993 Option Plan, we were
authorized to grant options to employees for up to one million shares of Common
Stock. Under the Non-Qualified Stock Option Plan for Non-Employee Directors (the
"1996 Option Plan"), we were authorized to grant options to non-employee
directors for up to 150,000 shares of our stock. Under these plans, the exercise
price of each option equaled the market price of our stock on the date of grant
(110% of market value in the case of an incentive option granted to an owner of
more than 10% of our stock) and an option's maximum term was 10 years (5 years
in the case of an incentive option granted to a an owner of more than 10% of our
stock). Under the 1993 Option Plan, options vest 25% on the date of grant and
25% each subsequent year. All options have become vested under the 1996 Option
Plan. Although the 1993 Option Plan and 1996 Option Plan have expired, some
options granted under these plans remain outstanding.
Effective May 17, 2005, we implemented two new stock option plans and reserved a
total of 1,150,000 shares for options issuable under the plans. We allocated
150,000 shares to the Directors Plan. We will grant options for 6,000 shares to
each non-employee director on each anniversary of the effective date of the
Directors Plan. Also, we will grant options for 6,000 shares to each person who
becomes a non-employee director after May 17, 2005. The option exercise price
will be the closing market price of our stock on the date of the option grant.
The options will vest over five years at 20% per year, commencing on the first
anniversary of the grant. The non-employee directors were granted 24,000 shares
on May 22, 2006 at an exercise price of $21.60. The grant date fair value of the
options was $14.32 per share and as of June 30, 2006 we had $244,000 remaining
to be amortized. We estimated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2006: dividend yield of 0%;
expected volatility of 59%; risk-free interest rate of 4.93%; and expected lives
of 7 years.
Also, we allocated one million shares to our 2005 Incentive Stock Option Plan
for our officers and key employees. Our Stock Option Committee has discretion as
to whom those options will be granted and the number of shares to be allocated
to each option grant. The option exercise price will be the closing market price
of our stock (110% of market value in the case of an incentive option granted to
an owner of more than 10% of our stock) on the date of the option grant. The
options will vest over four years, with 20% vesting on the date of grant, and an
additional 20% on each anniversary of the grant.
9
The total intrinsic value of options exercised during the three and six months
ended June 30, 2006 was $1,140,150 and $1,614,495, respectively. The following
table summarizes information about options outstanding as of June 30, 2006.
The activities of all stock option plans are as follows:
Weighted Average Aggregate
Shares Share Exercise Remaining Intrinsic
Price Life Value
Outstanding, December 31, 2005 310,500 $ 2.44
Exercised (37,500) $ 3.07
Expired (3,000) $ 2.45
----------
Outstanding, March 31, 2006 270,000 $ 2.35
Issued 24,000 $ 21.60
Exercised (60,000) $ 2.36
Expired -
-------------
Outstanding, June 30, 2006 234,000 $ 4.33 6.20 years $3,852,775
=============
Exercisable June 30, 2006 210,000 $ 2.35 4.91 years $3,852,775
=============
6. COMMITMENTS AND CONTINGENCIES
Salary Continuation Agreements
Approximately 60 officers and significant employees (excluding Mr. Westerman and
Mr. Vannucci) have salary continuation agreements effective through December 31,
2006, under which they will be entitled to receive (1) either six months' or one
year's base salary if their employment is terminated, without cause, within 12
or 24 months of a change of control of the Company; and (2) group health
insurance for periods of either one or two years. The base salary payments would
be made in bi-weekly installments, subject to the employee's duty to mitigate by
making best efforts to find other employment. In addition, one officer and one
significant employee have salary continuation agreements effective through
December 31, 2006, under which each of them would be entitled to receive two
years' base salary and certain benefits for two years, if their employment is
terminated without cause within 24 months of a change of control of the Company.
These two salary continuation agreements are not subject to a duty to mitigate.
As of June 30, 2006, the total amount that would be payable under all such
agreements if all payment obligations were to be triggered was approximately
$5.8 million.
Legal Proceedings
On June 19, 2006, a complaint (the "Consolidated Complaint") captioned "In Re
Riviera Holdings Corporation Shareholders' Litigation" was filed against RHC and
its directors in the District Court of Clark County, Nevada (the "Court") (Case
No. A520100), as a consolidation of four class action complaints previously
filed against RHC (the "Prior Complaints"). The Consolidated Complaint was
served on RHC on June 20, 2006 pursuant to a Stipulation and Pretrial Order
entered by the Court, and is substantially similar to the Prior Complaints. The
plaintiffs request the Court to do the following, among other things: (i)
declare that the case is maintainable as a class action; (ii) declare that the
Agreement and Plan of Merger, dated April 5, 2006 (the "Merger Agreement"),
among Riv Acquisition Holdings Inc.("RAHI"), Riv Acquisition Inc. and RHC is
unlawful; (iii) enjoin consummation of the merger contemplated by the Merger
10
Agreement "unless and until ...[RHC] adopts and implements a procedure or
process to obtain the highest possible price for shareholders"; (iv) direct the
defendants to disclose all material information before seeking shareholder
approval of "any acquisition;" and (v) impose a constructive trust, in favor of
the plaintiffs, on any benefits improperly received by the defendants. A Court
hearing on the plaintiffs'motion to enjoin RHC's meeting of shareholders for a
vote on the Merger Agreement has been scheduled for Ausgust 24, 2006. We believe
the allegations in the Consolidated Complaint and the Prior Complaints are
without merit.
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
Main Street Extension in Black Hawk
On June 29, 2006 the Main Street extension opened in Black Hawk, Colorado, which
is expected to provide increased traffic past our casino. We are obligated,
based on the Fourth Addendum to Subdivision Agreement with the City of Black
Hawk and the Main Street Cost Allocation Study, to pay 21.45% of the cost of the
project, once the City of Black Hawk has finalized the costs. Our estimated
share of the cost will be at least $2 million, which has been capitalized as a
land improvement.
Guarantor Information
The 11% Notes and the $30 million line of credit are guaranteed by all of our
restricted subsidiaries. These guaranties are full, unconditional, and joint and
several. RHC's unrestricted subsidiaries, which have no operations and do not
significantly contribute to our financial position or results of operations, are
not guarantors of the 11% Notes or the revolving credit arrangement.
7. SUBSEQUENT EVENTS
On August 8, 2006, William L. Westerman, our Chairman of the Board and Chief
Executive Officer ("CEO"), is expected to sell substantially all of his shares
of Common Stock to certain affiliates of RAHI (the "Buyers") for $15 per share
pursuant to a December 22, 2005 Stock Purchase Agreement between the Buyers and
Mr. Westerman. We have been informed that as a result of this transaction, the
Buyers and their affiliates will beneficially own approximately 18.3% of the
outstanding Common Stock and Mr. Westerman will beneficially own approximately
0.04% of the outstanding Common Stock.
On August 8, 2006, we announced that we received an unsolicited, competing
takeover proposal from International Gaming & Entertainment, LLC ("IGE"), which
is a newly-formed, special-purpose acquisition company affiliated with BT
Enterprises, LLC, a Boston-based merchant equity fund. The principals of IGE
include Jeffrey Wu, Michael Signorelli and Bagus Tjahjono. Mr. Wu is the
majority shareholder and a director of United International Bank in New York.
IGE has informed us that it is offering to acquire all of our outstanding Common
Stock for $20 per share on substantially the same terms and conditions set forth
in the Merger Agreement, subject to IGE's satisfactory review of certain
disclosure schedules. IGE has further informed us that its investors have
committed a sufficient amount of equity capital to complete the acquisition of
RHC as contemplated, but IGE does not yet have a financing commitment for the
portion of the acquisition price that it intends to finance. IGE's proposed
acquisition, however, would not be subject to a financing contingency.
11
If the Board of Directors determine that the IGE proposal is a superior offer,
the Company may be required to pay a Topping Fee of approximately $7.9 million
to RAHI.
The Merger Agreement, which provides for RAHI's acquisition of all of our
outstanding Common Stock at $17 per share, was scheduled for a shareholder vote
on August 8, 2006 at our annual meeting of shareholders.
In accordance with the our board of directors' fiduciary duties, our board is
giving proper consideration to all aspects of IGE's proposal and is evaluating
it in comparison to the Merger Agreement.
In order for us to give IGE's proposal proper consideration and to consult
further with our legal and financial advisors and with IGE's representatives,
as appropriate, we have postponed a shareholder vote on the Merger Agreement
until August 29, 2006 at 1:00 p.m., PDT.
In the meantime, our board of directors maintains its support for the Merger
Agreement.
12
8. SEGMENT DISCLOSURES
We determines our segments based upon the review process of our chief decision
maker who reviews by geographic gaming market segments: Riviera Las Vegas and
Riviera Black Hawk. The key indicator reviewed by our chief decision maker is
property EBITDA, as defined below. All intersegment revenues have been
eliminated.
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2006 2005 2006 2005
Net revenues:
Riviera Las Vegas $39,662 $40,501 $78,088 $79,848
Riviera Black Hawk 12,775 12,756 26,038 25,873
---------- ---------- ----------- -----------
Total net revenues $ 52,437 $ 53,257 $ 104,126 $ 105,721
========== ========== =========== ===========
Property EBITDA (1):
Riviera Las Vegas $8,350 $7,616 $16,817 $16,469
Riviera Black Hawk 3,716 4,088 7,904 8,027
---------- ---------- ----------- -----------
Total property EBITDA $12,066 $11,704 $24,721 $24,496
========== ========== =========== ===========
Other Costs and Expenses
Corporate Expenses
Equity compensation 176 932 392 985
Other corporate expenses 1,011 1,146 2,043 2,303
Depreciation and amortization 3,159 3,584 6,419 6,878
Mergers, Acquitions and
Development Costs, net 761 165 878 (502)
Sarabanes-Oxley Act expenses 47 270 275 270
Asset impairment 17 - 30 198
Interest Expense, net 6,477 6,610 12,986 13,229
----------- ----------------------- -----------
Total Other Costs and
Expenses 11,648 12,707 23,023 23,361
---------- ---------- ----------- -----------
Net Income (loss) $ 418 $ (1,003) $ 1,698 $ 1,135
========== ========== =========== ===========
(1)Property EBITDA consists of earnings before interest, income taxes,
depreciation, and amortization. Property EBITDA is presented solely as a
supplemental disclosure because we believe that it is 1) a widely used measure
of operating performance in the gaming industry, and 2) a principal basis for
valuation of gaming companies by certain analysts and investors. We use
property-level EBITDA (property EBITDA before corporate expense) as the primary
measure of our business segment properties' performance, including the
evaluation of operating personnel. Property EBITDA should not be construed as an
alternative to operating income, as an indicator of our operating performance,
as an alternative to cash flows from operating activities, as a measure of
liquidity, or as any other measure determined in accordance with generally
accepted accounting principles. We have significant uses of cash flows,
including capital expenditures, interest payments and debt principal repayments,
which are not reflected in property EBITDA. Also, other companies that report
property EBITDA information may calculate property EBITDA in a different manner
than we do. A reconciliation of property EBITDA to net income (loss) is included
in the following financial schedules.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overall Outlook and Recent Developments
We own and operate the Riviera Hotel and Casino on the Strip in Las Vegas,
Nevada ("Riviera Las Vegas"), and the Riviera Black Hawk Casino in Colorado
("Riviera Black Hawk").
Our capital expenditures for Riviera Las Vegas are geared to maintain the hotel
rooms and amenities in sufficient condition to compete for customers in the
convention market and the mature adult customer. Room rates and slot revenues
are the primary factors driving our operating margins. We use technology to
maintain labor costs at a reasonable level, including kiosks for hotel check-in
and slot club redemptions as well as coinless ticket-in ticket-out ("TITO") slot
machines. At June 30, 2006, approximately 774, or 70.1%, of our slot machines in
Las Vegas were on the TITO system.
In Black Hawk, the $5 maximum bet restricts table games to a minimum, and the
area is basically a "locals" slot customer market. Our capital expenditures in
Black Hawk are geared to maintain competitive slot machines compared to the
market.
On June 29, 2006 the Main Street extension opened in Black Hawk, which will
provide increased traffic directly past our casino. We are obligated, based on
the Fourth Addendum to Subdivision Agreement with the City of Black Hawk and the
Main Street Cost Allocation Study, to pay 21.45% of the cost of the project,
once the costs are finalized. Our estimated share of the cost will be at least
$2 million and will be capitalized as a land improvement, a non-depreciable
asset.
On April 6, 2006, we announced that we entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Riv Acquisition Holdings Inc. ("RAHI"), a
company owned by a private investment group comprised principally of four real
estate developers and investors. Consummation of the merger as contemplated by
the Merger Agreement (the "Merger") would result in our shareholders receiving
$17 in cash for each share of Riviera Holdings Corporation common stock ("Common
Stock") they hold. Also, holders of options under our stock option plans would
receive a cash payment equal to the excess of $17 over the per-share exercise
price of their options, multiplied by the number of shares subject to the
options.
The Merger Agreement provides for Riv Acquisition Inc. ("Merger Sub"), which is
a wholly-owned subsidiary of RAHI and is also a party to the Merger Agreement,
to merge into Riviera Holdings Corporation (the "Company"), whereupon the
separate existence of Merger Sub would cease and the Company would become a
wholly-owned subsidiary of RAHI. Under the Merger Agreement, RAHI and Merger Sub
have agreed to deposit funds necessary to redeem our outstanding 11% Senior
Secured Notes (the "11% Notes") prior to consummation of the Merger. RAHI has
made a $15 million escrow deposit to secure its obligations under the Merger
Agreement to consummate the Merger.
Consummation of the Merger is subject to approval by holders of at least 60% of
the outstanding Common Stock and various other closing conditions, including
approval or clearance by gaming regulators.
14
The deadline for consummation of the Merger is eight months from the date that
our shareholders approve the Merger. However this deadline may be extended for
one three-month period if RAHI and Merger Sub are still awaiting the gaming
approvals required to consummate the Merger and have a reasonable expectation of
obtaining those approvals by the extended deadline. If RAHI and Merger Sub wish
to extend the deadline for that three-month period, they are required to
increase the amount of their escrow deposit by $3 million and deliver to us a
financing commitment from a reputable financial institution for the funds needed
to consummate the Merger.
On August 4, 2006, we received an unsolicited, competing takeover proposal from
International Gaming & Entertainment, LLC ("IGE"), which is a newly-formed,
special-purpose acquisition company affiliated with BT Enterprises, LLC, a
Boston-based merchant equity fund. The principals of IGE include Jeffrey Wu,
Michael Signorelli and Bagus Tjahjono. Mr. Wu is the majority shareholder and a
director of United International Bank in New York.
IGE informed us that it is offering to acquire all of our outstanding Common
Stock for $20 per share on substantially the same terms and conditions set forth
in the Merger Agreement, subject to IGE's satisfactory review of certain
disclosure schedules. IGE has further informed us that its investors have
committed a sufficient amount of equity capital to complete the acquisition of
the Company as contemplated, but IGE does not yet have a financing commitment
for the portion of the acquisition price that it intends to finance. IGE's
proposed acquisition, however, would not be subject to a financing contingency.
In accordance with our board of directors' fiduciary duties, our board is giving
proper consideration to all aspects of IGE's proposal and is evaluating it in
comparison to the Merger Agreement.
In order for us to give IGE's proposal proper consideration and to consult
further with our legal and financial advisors and with IGE's representatives, as
appropriate, we have postponed a shareholder vote on the Merger Agreement until
August 29, 2006 at 1:00 p.m., PDT.
In the meantime, our board of directors maintains its support for the Merger
Agreement.
The Merger Agreement appears in Appendix A to our revised definitive proxy
statement for our 2006 annual meeting of shareholders (our "Proxy Statement"),
which we filed with the Securities and Exchange Commission (the "SEC") on July
3, 2006 and which is incorporated as an exhibit to this Form 10-Q. The
statements in this Form 10-Q concerning the Merger Agreement are qualified in
their entirety by reference to the complete Merger Agreement.
Information in this Form 10-Q concerning IGE and its related parties has been
provided to us by IGE.
If our shareholders do not approve the Merger, the Merger Agreement can be
terminated, which would also terminate RAHI's and Merger Sub's obligation to
deposit funds for redemption of the 11% Notes. The Merger Agreement contains
representations and warranties, which the parties made to, and solely for, the
benefit of each other. Those representations and warranties are qualified by
information contained in a confidential disclosure schedule that the parties
exchanged in connection with signing the Merger Agreement and that modifies,
qualifies and creates exceptions to the representations and warranties.
15
On or shortly after the date of our filing of this Form 10-Q, William L.
Westerman, our Chairman of the Board and Chief Executive Officer ("CEO"), is
expected to sell substantially all of his shares of Common Stock to certain
affiliates of RAHI (the "Buyers") for $15 per share pursuant to a December 22,
2005 Stock Purchase Agreement between the Buyers and Mr. Westerman. We have been
informed that as a result of this transaction, the Buyers and their affiliates
will beneficially own approximately 18.3% of our outstanding Common Stock and
Mr. Westerman will beneficially own approximately 0.04% of our outstanding
Common Stock.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Income from Operations
includes intercompany management fees.
Second Quarter Incr Incr
(In Thousands) 2006 2005 (Decr) (Decr)%
---- ---- ------ -------
Net revenues:
Riviera Las Vegas $39,662 $40,501 $(839) -2.1%
Riviera Black Hawk 12,775 12,756 19 0.1%
------ ------ ----
Total Net Revenues $52,437 $53,257 $(820) -1.5%
======= ======= =======
Income from Operations
Riviera Las Vegas $6,567 $5,647 $920 16.3%
Riviera Black Hawk 2,340 2,473 (133) -5.4%
----- ----- ----------
Property Income from Operations 8,907 8,120 787 9.7%
Corporate Expenses
Equity Compensation -
Restricted Stock (190) (932) 742 79.6%
Other Corporate Expenses (1,011) (1,146) 135 11.8%
Mergers Acquisitions and
Development Costs, net (761) (165) (596) -361.2%
Asset Impairment (3) (3)
Sarbanes-Oxley Act Expenses (47) (270) 223 82.6%
---- ------- ---------
Total Income from Operations $6,895 $5,607 $ 1,288 23.0%
====== ======= =========
Operating Margins (1)
Riviera Las Vegas 16.6% 13.9% 2.7%
Riviera Black Hawk 18.3% 19.4% -1.1%
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues decreased $839,000 or 2.1% in the second quarter 2006
compared to the same period last year.
Casino revenues increased $1.3 million or 7.8% due to an increase in
slot revenue, driven by the increased casino marketing efforts in the quarter,
and increased coin-in as a result of the customer mix in the hotel.
Room revenue increased $476,000, or 3.5%, from $13.8 million in 2005 to
$14.2 million in 2006 due to an increase in slot player complimentary room
revenue. Hotel occupancy increased to 96.0%, up from last year's 95.6% and the
average daily room rate increased $2.95 from $73.04 in 2005 to $75.99 in 2006.
Rev Par (revenue per available room) increased 4.6% or $3.18 to $72.97 for the
three months ended June 30, 2006.
16
Food and beverage revenue decreased $660,000, or 8.2%, from $8.1
million in 2005 to $7.4 million in 2006 primarily due to decreased covers in our
dinner buffet, which was changed to BB's Prime Rib and BBQ this year, and lower
banquet revenue resulting from fewer events (which in 2005 included our 50th
Anniversary parties).
Entertainment revenue decreased $354,000, or 8.4%, from $4.2 million in
2005 to $3.9 million in 2006 primarily due to lower ticket sales for Splash and
other entertainment venues.
Other revenues decreased $542,000, or 26.4%, from $2.1 million in 2005
to $1.5 million in 2006 primarily due to the lease of the gift shops to ABC
Stores and lower telephone revenue. The gift shop lease began in February 2006
and is recorded as rental income.
Promotional allowances increased by approximately $1.0 million, or
26.4%, from $3.9 million during 2005 to $4.9 million during 2006 primarily due
to increases in the number of complimentary rooms related to casino activity.
Costs and Expenses
Hotel expenses decreased $301,000, or 4.2% due to the credit for
complimentary rooms provided to the casino.
Food and beverage departmental costs and expenses decreased by 7.0% in
the quarter, due to reduced sales and number of covers. 2005 costs were impacted
by lower cost of sales associated with complimentary banquet revenue related to
our 50th Anniversary being classified as casino expense; and the impact of a
significant convention in 2005 that was not here in 2006.
Entertainment departmental costs and expenses decreased by $737,000, or
20.9% in the quarter, primarily due to lower ticket sales, which resulted in
reduced payments to producers, decreased advertising for Splash and other cost
reductions for other entertainment venues.
Other departmental expenses decreased $480,000 as a result of the lease
of the gift shops to ABC Stores mentioned above.
Income from Operations
Income from operations in Las Vegas increased $920,000, or 16.3%,
from $5.6 million in 2005 to $6.6 million in 2006 due principally to increased
slot revenues, the decrease in casino promotional expenses associated with our
50th anniversary in 2005 and cost reductions in entertainment as discussed
above.
17
Riviera Black Hawk
Revenues
Net revenues remained flat at $12.8 million in 2005 and 2006. Food and
beverage revenues were approximately $1.3 million in 2006, of which $1.1 million
was complimentary (promotional allowance).
Income From Operations
Income from operations at Riviera Black Hawk decreased $133,000, or
5.4%, from $2.5 million in 2005 to $2.3 million in 2006, primarily due to the
increase in casino expenses. Our operating margins decreased from 19.4% in the
second quarter of 2005 to 18.3% in the second quarter of 2006.
Consolidated Operations
Other Income (Expense)
Corporate expenses decreased $135,000 or 11.8% from $1.1
million in 2005 to $1.0 million in 2006 as a result of reduced payroll benefits.
Net Income (Loss)
Net income increased $1.4 million from a net loss of $1.0 million in
2005 to net income of $418,000 in 2006 due primarily to the factors described
above, reduced expenses in 2006 associated with compliance with the
Sarbanes-Oxley Act and lower depreciation costs.
18
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Operating Income includes
intercompany management fees.
Six Months Incr Incr
(In Thousands) 2006 2005 (Decr) (Decr)%
---- ---- ------ -------
Net revenues:
Riviera Las Vegas $78,088 $79,848 $(1,760) -2.2%
Riviera Black Hawk 26,038 25,873 165 0.6%
------ ------ ---
Total Net Revenues $104,126 $105,721 $(1,595) -1.5%
======== ======= ========
Income from Operations
Riviera Las Vegas $13,209 $12,755 $454 3.6%
Riviera Black Hawk 5,093 4,863 230 4.7%
----- ----- -------
Property Income from Operations 18,302 17,618 684 3.9%
Corporate Expenses
Equity Compensation -
Restricted Stock (406) (985) 579 58.8%
Other Corporate Expenses (2,043) (2,303) 260 11.3%
Mergers, Acquisitions and
Development
Costs, net (878) 502 (1,380) -274.9%
Asset Impairment (16) (198) 182 91.9%
Sarbanes-Oxley Act Expenses (275) (270) (5) -1.9%
----- ----- -------
Total Income from Operations $14,684 $14,364 $ 320 2.2%
========= ======= =======
Operating Margins (1)
Riviera Las Vegas 16.9% 16.0% 0.9%
Riviera Black Hawk 19.6% 18.8% 0.8%
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues decreased approximately $1.8 million, or 2.2%, from $79.8
million in 2005 to $78.1 million in 2006 due primarily to reduced retail,
telephone, entertainment and food and beverage.
Slot revenue increased $1.2 million (5.5%) over the prior year due to
increased coin-in brought about by new marketing programs, which provided
complimentary hotel rooms to slot players. Table games revenue was down 9% due
to lower volume of play and hold percent while poker contributed $253,000
increase over prior year.
Room revenue increased $1.9 million, or 7.0%, from $27.2 million in
2005 to $29.1 million in 2006 due to an increase in slot player complimentary
room revenue and an overall increase in average room rate. Hotel occupancy
decreased to 93.5%, from last year's 94.8% and average daily room rate increased
$6.76 to $79.70 in 2006 from $72.94 in 2005. Rev Par (revenue per available
room) increased 7.8% or $5.36 to $74.48.
19
Food and beverage revenues decreased $488,000, or 3.2%, from $15.0
million in 2005 to $15.5 million in 2006, due to decreased covers due to the
shift from a dinner buffet to BB's Prime Rib & BBQ restaurant, and a decrease in
banquets covers, which were down 16.2%.
Entertainment revenues decreased by approximately $1.6 million, or
17.1%, from $9.1 million during 2005 to $7.5 million during 2006 due primarily
to a decrease in ticket sales associated with our Splash show.
Other revenues decreased by approximately $881,000, or 22.3%, from $4.0
million in 2005 to $3.1 million in 2006 primarily due to the lease of the gift
shops to ABC Stores, which began in February 2006, and lower telephone revenue.
Promotional allowances increased by approximately $1.4 million or
20.6%, from $6.9 million during 2005 to $8.3 million during 2006 primarily due
to increases in complimentary room revenue as a result of an increase in
complimentary room rates and an increase in slot marketing activity.
Costs and Expenses
Casino expenses increased $221,000 or 1.3% from $17.0 million in 2005
to $17.2 million in 2006 due to increased costs of complimentary room nights.
Entertainment costs decreased $1.8 million, or 24.5%, primarily due to
lower ticket sales, which resulted in reduced payments to producers, decreased
advertising for Splash and other cost reductions for other entertainment venues.
Other departmental expenses decreased $694,000 or 46.5% from $1.5
million in 2005 to $799,000 in 2006 as a result of the lease of the gift shops
to ABC Stores. The gift shop lease began in February 2006 and is recorded as
rental income.
Income from Operations
Income from operations in Las Vegas increased $454,000, or 3.6%, from
$12.8 million in 2005 to $13.2 million in 2006 due to increased slot revenue,
and lower expenses in entertainment as discussed above. Operating margins in Las
Vegas increased from 16.0% in 2005 to 16.9% in 2006 as a result of the factors
described above.
Riviera Black Hawk
Revenues
Net revenues increased by approximately $165,000, or 0.6%, from $25.9
million in 2005 to $26.0 million in 2006. Casino revenues increased $188,000, or
0.8%, from $25.0 million in 2005 and $25.2 million in 2006.
Income from Operations
Income from operations in Black Hawk increased $230,000, or 4.7%,
from $4.9 million in 2005 to $5.1 million in 2006 primarily as a result of the
adverse effects of the rockslide that impacted 2005 revenues. Operating margins
in Black Hawk increased from 18.8% in 2005 to 19.6% in 2006 as a result of more
targeted marketing promotions and the impact in 2005 described above.
20
Consolidated Operations
Interest Expense
Interest expense decreased $122,000 due to reduced interest associated with
equipment financing as most of our large equipment leases were completed as of
March 2005. Interest expense on our $215 million 11% Notes of $11.8 million plus
related amortization of loan fees and other financing costs totaled
approximately $13.0 million in 2006. Interest expense on equipment and other
financing totaled approximately $191,000 for the first six months of 2006.
Interest income increased $121,000 from $84,000 in 2005 to $205,000 in
2006 as a result of the higher cash balances available for investment and
increased investment interest rates.
Net Income
Net income increased $563,000 from net income of $1.1 million in 2005 to
net income of $1.7 million in 2006 due primarily to reduced equity based
compensation, asset impairment costs (net of mergers and acquisition cost
recoveries) and costs associated with our 50th anniversary celebration in 2005.
Liquidity and Capital Resources
At June 30, 2006, we had cash and cash equivalents of $25.3 million. Our cash
and cash equivalents increased $4.7 million during the first six months of 2006,
as a result of $9.9 million of cash provided by operations, $5.1 million of cash
outflow for investing activities and $ 155,000 outflow for financing activities.
Our cash balances include amounts that could be required, upon five days'
notice, to fund our CEO's (Mr. Westerman's) pension obligation in a rabbi trust.
We continue to pay Mr. Westerman $250,000 per quarter from his pension plan. In
exchange for these payments, Mr. Westerman has agreed to continue his
forbearance of his right to receive full transfer of his pension fund balance to
the rabbi trust. This does not limit his ability to give the five-day notice at
any time. Although Mr. Westerman has expressed no current intention to require
this funding, under certain circumstances we may be required to disburse
approximately $3.6 million for this purpose in a short period.
We believe that cash flow from operations, combined with the $25.3 million cash
and cash equivalents and the $30 million revolving credit facility, will be
sufficient to cover our current debt service and enable investment in budgeted
capital expenditures of $11.0 million for 2006 for both Riviera Las Vegas and
Riviera Black Hawk and assessments for the Main Street expansion in Black Hawk.
On June 26, 2002, we secured debt in the principal amount of $215 million in the
form of the 11% Notes with a maturity date of June 15, 2010. Interest on the 11%
Notes is at the annual rate of 11%, paid semiannually on each June 15 and
December 15. Our cash flow from operations is not expected to be sufficient to
pay 100% of the principal of the 11% Notes at maturity. Accordingly, our ability
to repay the 11% Notes at maturity will be dependent upon our ability to
21
refinance the 11% Notes. There can be no assurance that we will be able to
refinance the principal amount of the 11% Notes at maturity. On or after June
15, 2006, we may redeem the 11% Notes from time to time at a premium beginning
at 105.5% and declining each subsequent year to par in 2009. If we consummate
the Merger, RAHI has agreed to redeem the 11% Notes prior to consummation.
The Indenture governing the 11% Notes (the "Note Indenture") provides that, in
certain circumstances, we must offer to repurchase the 11% 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, we would be unable to pay
the principal amount of the 11% Notes without a refinancing or withour
redemption by the party who acquires control.
The Note Indenture contains certain covenants, which limit our ability, subject
to certain exceptions, to: (1) incur additional indebtedness; (2) pay dividends
or other distributions, repurchase capital stock or other equity interests or
subordinated indebtedness; (3) enter into certain transactions with affiliates;
(4) create certain liens; (5) sell certain assets; and (6) enter into certain
mergers and consolidations. As a result of these restrictions, our ability 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, we would be required to curtail or defer certain of our
capital expenditure programs, which could have an adverse effect on operations.
On July 26, 2002, we entered into a $30 million, five-year senior secured credit
facility. The credit facility is secured by substantially the same collateral
that secures the 11% Notes. The lien on the collateral securing the credit
facility is senior to the lien on the collateral securing the 11% Notes. The
credit facility contains customary conditions to borrowing and certain
representations and warranties customary in gaming-related finance. The credit
facility also contains financial covenants and restrictions regarding, among
other things, indebtedness, distributions and changes in control. Under the
credit facility, we can obtain extensions of credit in the forms of cash and
letters of credit. We are required to pay interest on all outstanding cash
advances at the rate of interest announced by Wells Fargo at its principal
office in San Francisco at its prime rate plus 0.75% or at the rate at which
major international banks in London charge each other for borrowings in U.S.
dollars plus 3.00%. However, the minimum interest rate we will be charged on
outstanding cash advances is 4.50%. A 0.5 percent annual fee is charged in
monthly installments on the unused portions of the revolver plus a $3,000
monthly service fee.
At June 30, 2006, we are in compliance with the covenants of the 11% Notes and
the $30 million revolving credit facility.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our Form 10-K for the year ended December 31, 2005. For a further
discussion of our accounting policies, see Note 1, Summary of Significant
Accounting Policies, in the Notes to the Condensed Consolidated Financial
Statements in this Form 10-Q.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements include the words "may," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and similar words and include all discussions about the Merger Agreement, the
competing takeover proposal from IGE, as well as our acquisition, development
and expansion plans, objectives or expectations and our liquidity projections.
22
We caution you that there is no assurance that the Merger will be approved by
shareholders and regulatory authorities and consummated, nor is there any
assurance that IGE's competing proposal will lead to a definitive acquisition
agreement. Moreover, even if we enter into a definitive agreement with IGE, the
acquisition might not be consummated for a variety of reasons, including the
failure to obtain the requisite shareholder and regulatory approvals.
Furthermore, there is no assurance that any of the other transactions or events
described in this report will happen as described or that any positive trends
suggested or referred to in this report will continue. These forward-looking
statements generally relate to our plans, objectives, prospects and expectations
for future operations and results and are based upon what we consider to be
reasonable future estimates. Although we believe that our plans, objectives,
prospects and expectations reflected in, or suggested by, such forward-looking
statements are reasonable at the present time, we may not achieve or we may
modify them from time to time. You should read this report thoroughly and with
the understanding that actual future results may be materially different from
what we expect. We do not plan to update forward-looking statements even though
our situation or plans may change in the future, unless applicable law requires
us to do so.
Specific factors that might cause our actual results to differ from our plans,
objectives or expectations, might cause us to modify them, or might affect our
ability to achieve them, include, but are not limited to:
o the possibility that our Merger will not be consummated due to our
failure to obtain shareholder approval or due to other factors
beyond our control;
o the uncertainties associated with our recent receipt of a
competing takeover proposal by IGE, which requires additional
time for us to consider and evaluate in comparison to the Merger
Agreement;
o retirement or other loss of any of our senior officers;
o the availability and adequacy of our cash flow to meet our
requirements, including payment of amounts due under our debt
instruments;
o our substantial indebtedness, debt service requirements and
iquidity constraints;
o the availability of additional capital to support capital
improvements and development;
o fluctuations in the value of our real estate, particularly in
Las Vegas;
o competition in the gaming industry, including the availability
and success of alternative gaming venues and other entertainment
attractions;
o economic, competitive, demographic, business and other conditions
in our local and regional markets;
o changes or developments in laws, regulations or taxes in the
gaming industry;
o actions taken or not taken by third parties, such as our
customers, suppliers, and competitors, as well as legislative,
regulatory, judicial and other governmental authorities;
23
o other changes in our personnel or their compensation, including
those resulting from changes in minimum wage requirements;
o our failure to obtain, delays in obtaining, or the loss of, any
licenses, permits or approvals, including gaming and liquor
licenses, or the limitation, conditioning, suspension or
revocation of any such licenses, permits or approvals, or our
failure to obtain an unconditional renewal of any of our licenses,
permits or approvals on a timely basis;
o the loss of any of our casino facilities due to terrorist acts,
casualty, weather, mechanical failure or any extended or
extraordinary maintenance or inspection that may be required;
o other adverse conditions, such as economic downturns, changes in
general customer confidence or spending, increased transportation
costs, travel concerns or weather-related factors, that may
adversely affect the economy in general or the casino industry in
particular;
o changes in our business strategy, capital improvements or
development plans;
o the consequences of the war in Iraq and other military conflicts
in the Middle East and any future security alerts or terrorist
attacks such as the attacks that occurred on September 11, 2001;
and
o other risk factors discussed elsewhere in this report.
All future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. In light of
these and other risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
24
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of June 30, 2006, we had $215.2 million in borrowings. The borrowings include
$215 million in 11% Notes maturing in 2010 and capital leases maturing at
various dates through 2009. Interest under the $215 million 11% Notes is based
on a fixed rate of 11%. The equipment loans and capital leases have interest
rates ranging from 5.5% to 5.8%. The borrowings also include $472,000 in a
special improvement district ("SID") bond offering with the City of Black Hawk.
Our share of the debt on the SID bonds of $1.2 million, is payable over ten
years beginning in 2000. The SID bonds bear interest at 5.5%. We are not
susceptible to interest rate risk because our outstanding debt is at fixed
rates. Our $30 million senior secured revolving credit facility is at prime plus
three-quarters of one percent. As of June 30, 2006, we had no borrowing
outstanding under our senior secured credit facility.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Dollars in Fair Value
thousands) 2006 2007 2008 2009 2010 Total at 6/30/06
Long-Term Debt, Including
Current Portion
Equipment loans and
capital leases - Las Vegas $ 359 $ 751 $ 187 $ 54 $ 1,351 $ 1,351
Average interest rate 5.8% 5.8% 5.8% 5.5%
11% Notes $ 215,000 $215,000 $ 225,492
Less unamortized Discount $ (1,601) $ (1,601) $ (1,601)
Average interest rate 11.8%
SID Bonds -
Black Hawk, Colorado $ 62 $ 129 $ 137 $ 144 $ 472 $ 472
Average interest rate 5.5% 5.5% 5.5% 5.5%
Total long-term debt,
including current portions $ 421 $ 880 $ 324 $ 198 $ 213,399 # $215,222 $ 225,715
Other Long-Term Liabilities,
Including Current Portions
CEO pension plan obligation $500 $1,000 $1,000 $1,000 $ 107 $ 3,607 $ 3,607
11.8% 11.8% 11.8% 11.8% 11.8%
----------------------------------------------- ---------------------
Total long-term obligations $ 921 $1,880 $1,324 $1,198 $ 213,506 $218,829 $ 229,322
=============================================== =====================
25
ITEM 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and that such information is accumulated and communicated to our
management, including our CEO and chief financial officer ("CFO"), as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of June 30, 2006, we carried out an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our CEO and CFO concluded that our
disclosure controls and procedures were effective.
During our last fiscal quarter there were no changes in our internal control
over financial reporting, (as defined in Exchange Act Rules 13a-15(f) and 15(d)-
15(f)), that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 19, 2006, a complaint (the "Consolidated Complaint") captioned "In Re
Riviera Holdings Corporation Shareholders' Litigation" was filed against the
Company and its directors in the District Court of Clark County, Nevada (the
"Court") (Case No. A520100), as a consolidation of four class action complaints
previously filed against the Company (the "Prior Complaints"). The Consolidated
Complaint was served on the Company on June 20, 2006 pursuant to a Stipulation
and Pretrial Order entered by the Court, and is substantially similar to the
Prior Complaints. The plaintiffs request the Court to do the following, among
other things: (i) declare that the case is maintainable as a class action; (ii)
declare that the Merger Agreement is unlawful; (iii) enjoin consummation of the
Merger "unless and until the Company adopts and implements a procedure or
process to obtain the highest possible price for shareholders"; (iv) direct the
defendants to disclose all material information before seeking shareholder
approval of "any acquisition;" and (v) impose a constructive trust, in favor of
the plaintiffs, on any benefits improperly received by the defendants. A Court
hearing on the plaintiffs' motion to enjoin the shareholder vote on the Merger
Agreement has been scheduled for August 24, 2006. The Company believes the
allegations in the Consolidated Complaint and the Prior Complaints are without
merit.
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
26
Item 1A. Risk Factors.
Our annual report on Form 10-K (as amended) for the fiscal year ended December
31, 2005 (our "2005 Form 10-K") contains a detailed discussion of our risk
factors. The information below updates and should be read in conjunction with
the risk factors and other information disclosed in our 2005 Form 10-K.
Our Common Stock Has Been Trading At Prices That Exceed The Merger Price.
Consummation of the Merger would result in our shareholders receiving $17.00 in
cash for each share of Common Stock they hold. Our Common Stock has been trading
on the American Stock Exchange ("Amex") at prices higher than $17.00. On August
3, 2006, the closing price of the Common Stock on Amex was $19.78.
If the conditions precedent to consummation of the Merger, including approval of
the Merger by holders of at least 60% of our outstanding Common Stock, are
satisfied and the Merger is consummated, then shareholders who purchase our
Common Stock at a price that exceeds $17.00 per share will incur a loss on their
investment.
The Competing Takeover Proposal By IGE May Cause Even Greater Volatility In Our
Stock Trading Price And Liability For An Approximately $7.9 Million Topping Fee.
Prior to our entry into the Merger Agreement, the trading price of our Common
Stock had been volatile, as explained in our discussion of risk factors in our
2005 Form 10-K. After we entered into the Merger Agreement, that volatility
continued, as shown in the "Market Price Of Common Stock And Dividend
Information" section of our Proxy Statement. IGE's competing takeover proposal
at $20.00 per share, which we received on August 4, 2006 and which we need time
to evaluate further, may lead to even greater stock price volatility and market
speculation that is not within our control.
Furthermore, under certain circumstances IGE's proposal could ultimately lead to
our liability to RAHI for a topping fee of approximately $7.9 million under the
Merger Agreement. For example, if prior to a shareholder vote on the Merger, we
accept or support IGE's competing takeover proposal or withdraw our support for
the Merger, then we will be liable to RAHI for the topping fee. Also, if our
shareholders reject the Merger at a time when IGE's competing takeover proposal
has not been withdrawn and within 12 months thereafter we enter into another
agreement to consummate a takeover proposal, we will be liable to RAHI for the
topping fee.
Recent Market Perceptions About Our Prospects Make It Particularly Difficult
For Us To Replace Any Key Personnel If We Lose Them.
As explained in our discussion of risk factors in our 2005 Form 10-K, the
shortage of skilled management-level employees in the gaming industry, combined
with our relatively limited financial and marketing resources, competitive
position and market perceptions about our future prospects, makes it generally
difficult for us to attract and retain qualified executives and other key
personnel. More recent market perceptions about our prospects if shareholders
approve the Merger or if they do not approve it, or if we proceed with IGE's
competing takeover proposal, or if the Merger is not consummated for any other
reason, would likely add to our difficulties in finding suitable replacements if
we lose the services of any of our executives or other key personnel.
27
Item 6. Exhibits.
See list of exhibits on page 30.
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By:/s/ William L. Westerman
William L. Westerman
Chairman of the Board and
Chief Executive Officer
By: /s/ Mark Lefever
Mark Lefever
Treasurer and
Chief Financial Officer
Date: August 7, 2006
29
Exhibits
Exhibits:
10.1* Agreement and Plan of Merger, dated April 5, 2006, among Riv
Acquisition Holdings Inc., Riv Acquisition Inc. and the Company
(see Appendix A to revised definitive proxy materials on Schedule 14A
filed on July 3, 2006, Commission File No. 0-21430).
10.2* Escrow Agreement, dated April 5, 2006, among Riv Acquisition Holdings
Inc., the Company and Wilmington Trust Company (see Appendix A to
revised definitive proxy materials on Schedule 14A filed on July 3,
2006, Commission File No. 0-21430).
10.3(A) Employment Agreement between the Company and Mark B. Lefever.
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
* These are incorporated herein by reference as exhibits hereto. Following the
description of each such exhibit is a reference to it as it appeared in a
specified document previously filed with the Securities and Exchange Commission,
to which there have been no amendments or changes, unless otherwise indicated.
(A) Management contract or compensatory plan or arrangement.
30