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 September 30, 2006
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 000-21430
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Riviera Holdings Corporation
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(Exact name of registrant as specified in its charter)
Nevada 88-0296885
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (702) 794-9527
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(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 ISSUERS 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
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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 November 1, 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 September 30, 2006
and December 31, 2005 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended September 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 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 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 27
Signature Page 28
Exhibits 29
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 accounting
principles generally accepted 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 nine months ended September 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.
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share amounts) September 30 December 31
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2006 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,576 $ 20,571
Accounts receivable, net of
allowance of $1,317 and $1,225 3,331 3,544
Inventories 1,956 2,485
Prepaid expenses and other assets 4,415 4,197
-------------- ------------
Total current assets 41,278 30,797
PROPERTY AND EQUIPMENT, Net 172,506 171,130
OTHER ASSETS, Net 6,128 7,396
DEFERRED INCOME TAXES, net of
valuation allowance of $17,081 2,446 2,446
-------------- ------------
TOTAL $ 222,358 $ 211,769
============== ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 868 $ 824
Current portion of obligation to officers 1,000 1,000
Accounts payable 8,509 10,133
Accrued interest 6,974 1,087
Accrued expenses 13,543 12,261
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Total current liabilities 30,894 25,305
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OBLIGATIONS TO OFFICERS - Net of current portion 2,351 3,126
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OTHER LONG-TERM LIABILITIES 4,000 0
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LONG-TERM DEBT - Net of current portion 214,270 214,607
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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 September 30,
2006 and December 31, 2005, respectively) 17 17
Additional paid-in capital 17,941 17,301
Treasury stock (4,762,393 and 4,859,091
shares at September 30, 2006 and December 31,
2005, respectively) (9,841) (10,047)
Accumulated Deficit (37,274) (38,540)
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Total shareholders' deficiency (29,157) (31,269)
-------------- ------------
TOTAL $ 222,358 $ 211,769
============== ============
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (unaudited) FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30,
2006 AND 2005 Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30, September 30,
--------------------------------------------------------------------------------
REVENUES: 2006 2005 2006 2005
Casino $ 28,262 $ 26,695 $ 85,206 $ 82,755
Rooms 13,996 12,872 43,085 40,067
Food and beverage 8,110 8,434 25,754 26,645
Entertainment 3,625 4,470 11,166 13,582
Other 1,534 2,219 4,970 6,504
--------- --------- --------- ---------
Total revenues 55,527 54,690 170,181 169,553
Less - promotional allowances (5,178) (4,353) (15,706) (13,495)
--------- --------- --------- ---------
Net revenues 50,349 50,337 154,475 156,058
--------- --------- --------- ---------
COSTS AND EXPENSES:
Direct costs and expenses of operating
departments:
Casino 14,457 13,816 43,499 42,676
Rooms 7,003 7,056 20,687 20,810
Food and beverage 6,222 6,354 18,709 18,988
Entertainment 2,426 3,295 7,861 10,490
Other 338 774 1,137 2,267
Other operating expenses:
General and administrative:
Equity compensation 183 222 589 1,207
Other general and administrative 10,133 9,386 30,134 28,978
Mergers, acquisitions and development
costs, net 281 126 1,159 (376)
Sarbanes-Oxley Act expenses 283 371 558 641
Asset impairment 0 0 16 198
Depreciation and amortization 3,035 3,617 9,454 10,495
--------- --------- --------- ---------
Total costs and expenses 44,361 45,017 133,803 136,374
--------- --------- --------- ---------
INCOME FROM OPERATIONS 5,988 5,320 20,672 19,684
--------- --------- --------- ---------
Interest expense, net (6,420) (6,593) (19,406) (19,822)
--------- --------- --------- ---------
INCOME(LOSS) BEFORE PROVISION
FOR INCOME TAXES (432) (1,273) 1,266 (138)
PROVISION FOR INCOME TAXES 0 0 0 0
--------- --------- --------- ---------
NET INCOME (LOSS) $ (432) $ (1,273) $ 1,266 $ (138)
========= ========= ========= =========
INCOME (LOSS) PER SHARE DATA:
Income (Loss) per share:
Basic $ (0.04) $ (0.11) $ 0.10 $ (0.01)
--------- --------- --------- --------
Diluted $ (0.04) $ (0.11) $ 0.10 $ (0.01)
--------- --------- --------- --------
Weighted-average common shares
outstanding 12,170 11,848 12,122 11,795
--------- --------- --------- --------
Weighted-average common and common
equivalent shares 12,170 11,848 12,374 11,795
--------- --------- --------- --------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 Nine Months Ended
(in thousands) September 30,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,266 ($138)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,454 10,495
Provision for bad debts 305 172
Stock Based Compensation - Restricted Stock 547 1,207
Stock Based Compensation - Stock Options 42
Asset Impairment 16 198
Amortization of deferred loan fees 1,507 1,502
Increase in accrued interest 5,887 5,905
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (93) 30
Decrease (increase) in inventories 529 (310)
Increase in prepaid expenses
and other assets (218) (329)
Decrease in accounts payable (1,980) (812)
Increase (decrease) in accrued liabilities 1,282 (1,592)
Increase in deferred compensation plan liability (2) (48)
Decrease in non-qualified pension plan obligation
to CEO upon retirement (750) (750)
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Net cash provided by operating activities 17,792 15,530
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (3,695) (4,294)
Capital expenditures - Black Hawk, Colorado (2,779) (3,025)
Capitalized interest on construction projects 0 59
Decrease in other assets 27 38
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Net cash used in investing activities (6,447) (7,222)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (597) (1,212)
Proceeds from exercise of stock options 257 377
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Net cash used in financing activities (340) (835)
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INCREASE IN CASH AND CASH EQUIVALENTS 11,005 7,473
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 20,571 $ 18,886
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,576 $ 26,359
========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property and equipment acquired with debt and
accounts payable $ 356 $ 31
Cash paid for interest $ 12,390 $ 12,557
Non-cash item Main Street expansion Black Hawk to
be financed by SID bonds $ 4,000
Distribution of deferred compensation treasury shares $ 206 $ 412
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 direct and indirect
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. 427,200, 462,323 and 459,316
potentially dilutive options and nonvested restricted shares have been excluded
from the calculations for the three months ended September 30, 2006 and 2005 and
the nine months ended September 30, 2005, repectively, as their effect would
have been antidilutive since the Company incurred a loss. There were 24,000 new
potentially dilutive options excluded from the calculation for the nine months
ended September 30, 2006.
Income Taxes
The income tax provision for the nine months ended September 30, 2006 was 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 a valuation
allowance that reduces the asset to amounts that approximate AMT credits that
have no expiration. These estimates are made using assumptions about the
economic, social and regulatory environments in which 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 that we
make include useful lives for depreciable and amortizable assets, certain
accrued liabilities and the 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.
As of September 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
Non-Qualified 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 and nine months
ended September 30, 2006 approximately $29,000 and $42,000 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 2005
based on the fair value method under SFAS No. 123 (R) (in thousands, except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
2005 2005
Net loss $ (1,273) $ (138)
Less: Total stock-based employee compensation
expense determined under fair value-based
methods for awards net of related tax effects (11) (33)
Net loss pro forma $ (1,284) $ (171)
Basic loss per common share as reported $ (0.10) $ (0.01)
Basic loss per common share pro forma $ (0.11) $ (0.01)
Diluted loss per common and common
share equivalent as reported $ (0.10) $ (0.01)
Diluted loss per common and common share
equivalent pro forma $ (0.11) $ (0.01)
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
options outstanding as of December 31, 2005 were vested. During the nine months
ended September 30, 2006, 24,000 options were granted to non-employee directors.
7
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("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. We are currently
evaluating the impact of this standard on our Condensed Consolidated Financial
Statements.
On September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108") "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial.
Statements". SAB 108 clarifies how companies should quantify financial statement
misstatements. SAB 108 is effective for fiscal years ending on or after November
15, 2006, with earlier adoption encouraged. We do not believe the adoption of
SAB 108 will have a material impact on our results of operations, financial
position or cash flows.
2. OTHER ASSETS
Other assets at September 30, 2006 and December 31, 2005 include deferred loan
fees of approximately $5.0 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 Securities
Act of 1933-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 September 30, 2006. We incurred loan
fees of approximately $1.5 million in 2002, 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 nine months ended September 30, 2006 or 2005. The Deferred
Compensation Plan distributed to participants 96,698 and 187,983 shares for the
nine months ended September 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 to
them, 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.
This grant of common stock was intended to compensate those executives for the
options that we had attempted to grant. These 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, net of retirements
in 2005, over the vesting period of 60 months on a straight-line basis. Of the
total shares granted, 54,300 shares vested during the nine month period ended
September 30, 2006 and $506,000 was charged to expense in the first nine months
of 2006 and is recorded as a component of general and adminstrative expenses.
During the nine-month period ended September 30, 2006, 48,000 of those shares
were forfeited. As of September 30, 2006, we have 169,200 nonvested Restricted
Stock Plan shares for those executives outstanding and $1,950,000 remaining of
related expense to be recognized. These shares immediately vest upon death,
disability, retirement at age 62, termination of employment by the Company other
than for cause, or in the event of a change in control of the Company.
Effective May 17, 2005, we approved and authorized the grant of 30,000 shares of
common stock to four non-employee directors at no cost to them. We granted those
shares in substitution for stock options that we attempted to grant on April 19
and May 10, 2004 under our 1996 Non-Qualified Stock Option Plan (the "1996
Option Plan"). The 1996 Option Plan expired on July 1, 2003, rendering those
options null and void. This grant of common stock was intended to compensate
those directors for the options that we had attempted to grant. The shares are
subject to a five-year vesting schedule, vesting 20% each May 17, commencing May
17, 2006. We are amortizing the $567,000 fair market value of those shares over
the vesting period of 60 months on a straight-line basis. Of the total shares
granted, 6,000 shares vested during the nine-month period ended September 30,
2006 and $41,000 was charged to expense in the first nine months of 2006 and is
recorded as a component of general and adminstrative expenses. As of September
30, 2006, 24,000 of those shares are nonvested and outstanding and $436,000
remains to be charged to expense. These shares immediately vest upon death,
disability, retirement at age 62, change in control of the Company or any other
termination of directorship status, except resignation prior to reaching age 62
or declining to stand for reelection prior to reaching age 62 which would result
in forfeiture of the non-vested shares.
At September 30, 2006, we had two active stock option plans and two expired
stock option plans, which are described below. Options granted and vested 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 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.
9
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 September 30, 2006 we had $216,000
remaining to be amortized over five years on a straight-line basis. 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 65%; risk-free
interest rate of 4.87%; a forfetiture rate of 25% and expected lives of 6.25
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.
Generally, options granted under this plan will vest over four years, with 20%
vesting on the date of grant, and an additional 20% on each anniversary of the
grant.
The total intrinsic value of options exercised during the nine months ended
September 30, 2006 was $1,614,000. No options were exercised during the three
months ended September 30, 2006. The following table summarizes information
about options outstanding as of September 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
No Activity
---------
Outstanding, September 30, 2006 234,000 $ 4.33
=========
Exercisable September 30, 2006 210,000 $ 2.35 4.66 years $4,290,300
=========
10
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 September 30, 2006, the total amount that would be payable under all such
agreements if all payment obligations were to be paid 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 (the "Prior Complaints"). The Consolidated Complaint was filed pursuant to
a Stipulation and Pretrial Order entered by the Court, and was substantially
similar to the Prior Complaints. The plaintiffs requested 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 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. On August 29, 2006, our stockholders disapproved the
Merger Agreement and we terminated it. As a result, the parties to the
Consolidated Complaint agreed to extend the deadline to file a motion to dismiss
from September 1, 2006 to March 1, 2007. The parties further agreed that any
opposition to the motion to dismiss is to be filed within 45 days of the filing
of any motion to dismiss, with any reply to be filed within 20 days of the
filing of the opposition. 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.
11
Main Street Extension in Black Hawk
On June 29, 2006, the Main Street extension opened in Black Hawk, Colorado. 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 $4 million, which we have
capitalized as a land improvement and recorded as a long-term liability. Once
the cost related to the Main Street Expansion is finalized, the obligation will
be funded through long-term Special Improvement District Bonds issued by the
City of Black Hawk, not to exceed $5 million.
Topping Fee Related to the Merger Agreement
Under the Merger Agreement, we agreed to pay Riv Acquisition Holdings Inc.
("RAHI") a "Topping Fee" of approximately $7.9 million if: (i) the Merger
Agreement is terminated because our shareholders did not approve it; (ii) prior
to such termination, a competing "Takeover Proposal" (which includes a proposal
for the acquisition of 30% or more of the Company's assets or more than 30% of
the outstanding stock of RHC or any RHC subsidiary or for the acquisition of RHC
or any RHC subsidiary through a merger or other business combination) had been
announced and had not been withdrawn; and (iii) within 12 months after such
termination, we enter into a definitive agreement with a third party with
respect to the consummation of a Takeover Proposal or any such Takeover Proposal
is consummated.
On August 8, 2006, we announced that we had received a competing proposal to
acquire all of RHC's outstanding stock through a merger. Prior to our
termination of the Merger Agreement on August 29, 2006 due to disapproval by our
shareholders, the competing proposal had not been withdrawn. (Thereafter, our
board of directors rejected the proposal.)
Guarantor Information
The 11% Notes and the $30 million revolving credit agreement are guaranteed by
all of our restricted subsidiaries. These guaranties are full, unconditional,
and joint and several. Our 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.
12
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 2006 2005 2006 2005
---------- --------- ---------- ---------
Net revenues:
Riviera Las Vegas $36,887 $37,143 $114,975 $116,991
Riviera Black Hawk 13,462 13,194 39,500 39,067
---------- --------- ---------- ---------
Total net revenues $ 50,349 $ 50,337 $ 154,475 156,058
========== ========= ========== =========
Property EBITDA (1):
Riviera Las Vegas $5,712 $5,790 $22,529 $22,259
Riviera Black Hawk 4,870 4,721 12,774 12,748
---------- --------- ---------- ---------
Total property EBITDA $10,582 $10,511 $35,303 $35,007
========== ========= ========== =========
Other Costs and Expenses
Corporate Expenses
Equity based compensation 183 222 589 1,207
Other corporate expenses 812 855 2,855 3,158
Depreciation and amortization 3,035 3,617 9,454 10,495
Mergers, acquisitions and
development costs, net 281 126 1,159 (376)
Sarbanes-Oxley Act expenses 283 371 558 641
Asset impairment - - 16 198
Interest Expense, net 6,420 6,593 19,406 19,822
---------- --------- ---------- ---------
Total Other Costs
and Expenses 11,014 11,784 34,037 35,145
---------- --------- ---------- ---------
Net Income (loss) $ (432) $ (1,273) $ 1,266 $ (138)
========== ========= ========== =========
(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
EBITDA as the primary measure of our business segments' 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 reconcillation of property EBITDA to net income
(loss) is presented above.
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 September 30, 2006, approximately 782, or 75.6%, 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 update our slot product and remain competitive to the
market. As of September 30, 2006, approximately 810, or 87%, of our slot
machines in Black Hawk were on the TITO system and we plan to have 100% of the
slot machines on the TITO system by the end of the year.
On June 29, 2006 the Main Street extension opened in Black Hawk, which we expect
to 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
$4 million, which we have capitalized as a land improvement, a non-depreciable
asset.
On April 5, 2006, 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 would have resulted in our shareholders receiving $17 in cash for each
share of Riviera Holdings Corporation common stock ("Common Stock") they held.
On August 29, 2006, our shareholders disapproved the Merger Agreement and we
terminated it.
Under the Merger Agreement, we agreed to pay RAHI a "Topping Fee" of
approximately $7.9 million if: (i) the Merger Agreement is terminated because
our shareholders did not approve it; (ii) prior to such termination, a competing
"Takeover Proposal" (which includes a proposal for the acquisition of 30% or
more of our assets or more than 30% of our outstanding Common Stock or the stock
of any of our subsidiaries or for the acquisition of us or any of our
subsidiaries through a merger or other business combination) had been announced
and had not been withdrawn; and (iii) within 12 months after such termination,
we enter into a definitive agreement with a third party with respect to the
consummation of a Takeover Proposal or any Takeover Proposal is consummated.
14
On August 8, 2006, we announced that we received an unsolicited, competing
takeover proposal from International Gaming & Entertainment, LLC ("IGE"), under
which IGE offered 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.
Prior to our termination of the Merger Agreement on August 29, 2006 due to
disapproval by our shareholders, IGE's takeover proposal had not been withdrawn.
On September 6, 2006, we announced that our board of directors had terminated
its consideration of IGE's takeover proposal.
Three Months Ended September 30, 2006 Compared to Three Months Ended September
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.
Third Quarter Incr Incr
(In Thousands) 2006 2005 (Decr) (Decr)%
Net revenues
Riviera Las Vegas $36,887 $37,143 $(256) -0.7%
Riviera Black Hawk 13,462 13,194 268 2.0%
------- ------ -----
Total Net Revenues $50,349 $50,337 $12 -0.0%
Income from Operations
Riviera Las Vegas $4,026 $3,797 $229 6.0%
Riviera Black Hawk 3,521 3,097 424 13.7%
------ ------
Property Income from Operations 7,547 6,894 653 9.5%
Corporate Expenses
Equity-Based Compensation
Restricted Stock (183) (222) (39) -17.6%
Other Corporate Expenses (812) (855) (43) -5.0%
Mergers Acquisitions and
Development Costs, net (281) (126) 155 123.0%
Sarbanes-Oxley Act Expenses (283) (371) (88) -23.7%
------- ------ ----
Total Income from Operations $5,988 $5,320 $ 668 12.6%
Operating Margins (1)
Riviera Las Vegas 10.9% 10.2% 0.7%
Riviera Black Hawk 26.2% 23.5% 2.7%
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues decreased $256,000 or 0.7% in the third quarter 2006
compared to the same period last year.
Casino revenues increased $1.1 million or 7.5% from $ 14.1 million in
2005 to $15.2 million in 2006 due primarily to an increase in slot volumes,
driven by a change in casino marketing to direct marketing of hotel rooms to
slot players and an increased casino customer mix in the hotel in the current
quarter primarily from the Westward Ho marketing arrangement. Additionally, the
increased slot revenue is a result of an increase in slot hold percentage, with
increasing popularity of the new lower denomination slot machines.
15
Room revenue increased $1.1 million, or 8.7%, from $12.9 million in
2005 to $14.0 million in 2006 due primarily to an increase in slot player
complimentary room revenue. Hotel occupancy increased to 94.9%, up from last
year's 93.8% and the average daily room rate increased $5.11 from $69.17 in 2005
to $74.28 in 2006. Rev Par (revenue per available room) increased 8.7% or $5.64
to $70.52 for the three months ended September 30, 2006.
Food and beverage revenue decreased $186,000, or 2.7%, from $7.0
million in 2005 to $6.8 million in 2006 primarily due to decreased covers in our
dinner buffet, which was changed to BB's Prime Rib and BBQ early this year. In
September 2006 the dinner buffet replaced BB's Prime Rib and BBQ.
Entertainment revenue decreased $843,000, or 18.9%, from $4.5 million
in 2005 to $3.6 million in 2006 primarily due to lower ticket sales for Splash
and other entertainment venues. Splash closed on September 30, 2006 and we are
in negotiations to replace the show.
Other revenues decreased $587,000, or 29.7%, from $2.0 million in 2005
to $1.4 million in 2006 primarily due to the lease of gift shops to ABC Stores,
which replaced our own gift shops, and lower telephone revenue. The gift shop
lease began in February 2006 and lease payments are recorded as rental income.
Promotional allowances increased by approximately $828,000, or 25.1%,
from $3.3 million during 2005 to $4.1 million during 2006 primarily due to
increases in the number of complimentary rooms related to the increase in direct
marketing for the casino.
Costs and Expenses
Casino expenses increased $467,000, or 5.8% due to the increase in
complimentary rooms provided to the casino. The cost of complimentary rooms is
charged to the casino as an expense.
Entertainment departmental costs and expenses decreased by $873,000, or
26.6% in the quarter, primarily due to lower ticket sales, which resulted in
reduced payments to producers and other cost reductions for other entertainment
venues. Splash closed on September 30, 2006 and we are in negotiations to
replace the show.
Other departmental expenses decreased $436,000 as a result of the lease
of the gift shops to ABC Stores, and the closing of our own gift shops mentioned
above.
Income from Operations
Income from operations in Las Vegas increased $229,000, or 6.0%, from
$3.8 million in 2005 to $4.0 million in 2006 due principally to increased slot
revenues and decreased in other expenses associated with the lease of gift shops
being offset by an increase in energy costs and an unfavorable variance in
general and administrative costs associated with a reversal of reserves related
to incentive compensation in 2005. Depreciation decreased $265,000 as a result
of FF&E associated with our Convention Center, which became fully depreciated in
2005.
16
Riviera Black Hawk
Revenues
Net revenues increased $268,000 or 2.0% from $13.2 million in 2005 to
$13.5 million in 2006. The increase in net revenues is primarily a result of a
slight increase in our slot hold percentage. The increase in our hold percentage
is a result of the increased volumes in the popular lower denomination machines.
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 increased $424,000, or
13.7%, from $3.1 million in 2005 to $3.5 million in 2006, primarily due to the
increase in slot revenue and a reduction in depreciation as a result of a large
number of assets, mainly slot machines, which became fully depreciated at the
end of 2005 and which have been subsequently replaced throughout 2006. Our
operating margins increased from 23.5% in the third quarter of 2005 to 26.2% in
the third quarter of 2006 as a result of the items discussed above.
Consolidated Operations
Mergers Acquisitions and Development Costs, net
The increase in Mergers, Acquisitions and Development costs are related
to the costs associated with the Merger Agreement, which was disapproved by our
shareholders and was terminated in August of 2006.
Other Income (Expense)
Corporate expenses decreased $43,000 or 5.0% from $855,000 in 2005 to
$812,000 in 2006 as a result of reduced payroll and benefits.
Net Income (Loss)
Net loss decreased $841,000 million from a net loss of $1.3 million in 2005
to net loss of $432,000 in 2006 due primarily to the factors described above,
reduced expenses in 2006 associated with compliance with the Sarbanes-Oxley Act
and increased interest income.
17
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September
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.
Nine Months Incr Incr
(In Thousands) 2006 2005 (Decr) (Decr)%
Net revenues
Riviera Las Vegas $114,975 $116,991 $(2,016) -1.7%
Riviera Black Hawk 39,500 39,067 433 1.1%
-------- -------- --------
Total Net Revenues $154,475 $156,058 $(1,583) -1.0%
Income from Operations
Riviera Las Vegas $17,235 $16,552 $683 4.1%
Riviera Black Hawk 8,614 7,960 654 8.2%
------- ------- -----
Property Income from Operations 25,849 24,512 1,337 5.5%
Corporate Expenses
Equity-Based Compensation
Restricted Stock (589) (1,207) (618) -51.2%
Other Corporate Expenses (2,855) (3,158) (303) - 9.6%
Mergers, Acquisitions and
Development
Costs, net (1,159) 376 1,535 408.2%
Asset Impairment (16) (198) (182) -91.9%
Sarbanes-Oxley Act Expenses (558) (641) (83) -12.9%
------- ------- ------
Total Income from
Operations $20,672 $19,684 $ 988 5.0%
Operating Margins (1)
Riviera Las Vegas 15.0% 14.1% 0.9%
Riviera Black Hawk 21.8% 20.4% 1.4%
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues decreased approximately $2.0 million, or 1.7%, from $117.0
million in 2005 to $115.0 million in 2006 due primarily to reduced retail,
entertainment and food and beverage income.
Slot revenue increased $1.3 million (3.8%) over the prior year due to
increased coin-in brought about by an increase in marketing programs, which
primarily provided complimentary hotel rooms to slot players primarily from the
Westward Ho marketing arrangement. These programs replaced mass marketing
promotions that provided free slot play to walk-in customers. Win per machine
increased $22 to $126, as a result of the increase in slot revenues and the
refurbishment of our casino floor and slot product. This on-going refurbishment
has resulted in a reduction of our slot machine count and the removal of
non-TITO slot machines, which have been an under-performing product for us.
Table games revenue was down 8.3% due to lower volume of play and a lower hold
percent, which has been offset by the increase in poker revenue of $524,000 over
the prior year.
18
Room revenue increased $3.0 million, or 7.5%, from $40.1 million in
2005 to $43.1 million in 2006 due to an increase in slot player complimentary
room revenue and an overall increase in average room rate. Hotel occupancy
decreased slightly to 94.0% from 94.4% and the average daily room rate increased
$6.17 or 8.6% to $77.85 in 2006 from $71.68 in 2005. Rev Par (revenue per
available room) increased 8.1% or $5.45 to $73.14.
Food and beverage revenues decreased $674,000, or 3.0%, from $22.5
million in 2005 to $21.8 million in 2006, due to decreased covers due to the
shift from a dinner buffet to BB's Prime Rib & BBQ restaurant. In September
2006, the dinner buffet replaced BB's Prime Rib and BBQ.
Entertainment revenues decreased by approximately $2.4 million, or
17.7%, from $13.6 million during 2005 to $11.2 million during 2006 due primarily
to a decrease in ticket sales associated with our Splash show and other
entertainment venues. In addition, in 2005 the Riviera Las Vegas discontinued
one show, which generated $1.2 million in revenue but provided no profit to us
during the year. Splash closed on September 30, 2006.
Other revenues decreased by approximately $1.5 million, or 24.8%, from
$5.9 million in 2005 to $4.5 million in 2006 primarily due to the lease of the
gift shops to ABC Stores, which began in February 2006, which replaced our own
gift shops, and lower telephone revenue.
Promotional allowances increased by approximately $2.3 million or
22.1%, from $10.2 million during 2005 to $12.5 million during 2006 primarily due
to increases in complimentary room revenue as a result of an increase in
complimentary room nights slot players and increased slot marketing activity.
Costs and Expenses
Casino expenses increased $688,000 or 2.7% from $25.1 million in 2005
to $25.8 million in 2006 due to increased costs associated with our program for
providing complimentary room nights for slot players. That program replaced a
mass marketing promotion of free slot play for walk-in guests, which was
recorded as a reduction of slot revenue, and increased volumes. The cost of
complimentary rooms is charged to the casino as an expense.
Entertainment costs decreased $2.6 million, or 25.2%, primarily due to
lower ticket sales, which resulted in reduced payments to producers and other
cost reductions for other entertainment venues as a result of a discontinued
show in 2005, which generated $1.2 million in revenue but no profit for us
during that year.
Other departmental expenses decreased $1.1 million or 49.8% from $2.3
million in 2005 to $1.1 million in 2006 as a result of the lease of the gift
shops to ABC Stores and the closing of our own gift shops mentioned above. The
gift shop lease began in February 2006, and lease payments are recorded as
rental income.
Income from Operations
Income from operations in Las Vegas increased $683,000 or 4.1%, from
$16.6 million in 2005 to $17.2 million in 2006 due to increased slot revenue,
and lower expenses in entertainment as discussed above. Depreciation decreased
$461,000 or 6.4% from $7.2 million in 2005 to $6.8 million in 2006 due to FF&E
related to our Convention Center, which became fully depreciated in 2005.
Operating margins in Las Vegas increased from 14.1% in 2005 to 15.0% in 2006 as
a result of the factors described above.
19
Riviera Black Hawk
Revenues
Net revenues increased by approximately $433,000, or 1.1%, from $39.1
million in 2005 to $39.5 million in 2006. Casino revenues increased $691,000, or
1.8%, from $37.6 million in 2005 and $38.3 million in 2006. The increase in
casino revenues resulted primarily from an increase in the slot hold percentage
to 5.7% from 5.4%. This was a result of increased volumes in the popular lower
denomination games.
Income from Operations
Income from operations in Black Hawk increased $654,000, or 8.2%,
from $8.0 million in 2005 to $8.6 million in 2006 primarily as a result of the
adverse effects of the rockslide that impacted 2005 revenues and the increase in
the slot hold percentage in 2006. Operating margins in Black Hawk increased from
20.4% in 2005 to 21.8% in 2006 as a result the factors described above.
Consolidated Operations
Mergers, Acquisitions and Development Costs, Net
The increase in Mergers, acquisitions and development costs, net,
related to the costs associated with the Merger Agreement, which was disapproved
by our shareholders in August of 2006. In addition, the total for 2005 includes
the effect of a $1 million fee, which we received from a potential acquirer.
Interest Expense
Interest expense decreased $180,000 due to reduced interest associated with
equipment financing and obligation to officers, as most of our large equipment
leases were completed as of March 2005. Interest expense on our $215 million
Senior Secured 11% Notes (the "11% Notes") of $17.7 million plus related
amortization of loan fees and other financing costs totaled approximately $19.4
million in 2006. Interest expense on equipment financing and obligations to
officers totaled approximately $384,000 for the first nine months of 2006.
Interest income increased $236,000 from $142,000 in 2005 to $378,000 in
2006 as a result of the higher cash balances available for investment and
increased investment interest rates.
Net Income
Net income increased $1.4 million from a net loss of $138,000 in
2005 to net income of $1.3 million in 2006 due primarily to improved operating
results from both Las Vegas and Black Hawk, reduced equity-based compensation,
and depreciation, offset by an unfavorable variance in mergers, acquisitions and
development costs, net, as discussed above.
20
Liquidity and Capital Resources
At September 30, 2006, we had cash and cash equivalents of $31.6 million. Our
cash and cash equivalents increased $11.0 million during the first nine months
of 2006, as a result of $ 17.8 million of cash provided by operations, $ 6.4
million of cash outflow for investing activities and $ 340,000 outflow for
financing activities. Our cash balances include amounts that could be required,
upon five days' notice, to fund our pension obligation to our Chief Executive
Officer ("CEO"), Mr. Westerman, in a rabbi trust. We continue to pay Mr.
Westerman $250,000 per quarter from his pension plan. 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 $3.3 million for this
purpose in a short period. Therefore we have classified the payments over the
next year as a short-term liability and the remainder as a long-term liability.
We believe that cash flow from operations, combined with the $31.6 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 capital
expenditures for both Riviera Las Vegas and Riviera 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
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. We may redeem the
11% Notes from time to time at a premium beginning at 105.5% this year and
declining each subsequent June 15 to par in 2009.
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 without
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
revolving 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 as 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% annual fee is charged in monthly
installments on the unused portions of the revolver plus a $3,000 monthly
service fee.
21
At September 30, 2006, we were 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 as well as our acquisition, development and expansion plans,
objectives or expectations and our liquidity projections. 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. Furthermore, there is no assurance that any
positive trends suggested or referred to in this report will continue. 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 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 liquidity
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 retirement or other loss of any of our senior officers;
22
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;
o 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, hotel or convention 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 and uncertainties 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.
23
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 September 30, 2006, we had $215.1 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 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 $411,000 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 a ten-year period that
began in 2000. The SID bonds bear interest at 5.5%. We are not susecptible 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 September 30, 2006, we had no borrowing outstanding under
our senior secured credit facility. The Main Street Expansion listed below will
be funded through SID bonds issued by the City of Black Hawk.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Dollars in Fair Value
thousands) 2006 2007 2008 2009 2010 Total at 9/30/06
Long-Term Debt,
Including Current Portion
Equipment loans and
capital leases - Las Vegas $ 235 $ 751 $ 187 $ 54 $ 1,227 $ 1,227
Average interest rate 5.8% 5.8% 5.8% 5.5%
11% Notes $ 215,000 $215,000 $ 226,288
Less unamortized Discount $ (1,500) $(1,500) $ (1,500)
Average interest rate 11.8%
SID Bonds -
Black Hawk, Colorado $ - $ 129 $ 137 $ 145 $ 411 $ 411
Average interest rate 5.5% 5.5% 5.5% 5.5%
Total long-term debt,
including current portions $ 235 $ 880 $ 324 $ 199 $ 213,500 $215,138 $ 226,426
Other Long-Term Liabilities,
Including Current Portions
Main Street Expansion
Black Hawk $4,000 $ 4,000 $ 4,000
CEO pension plan obligation $250 $1,000 $1,000 $1,000 $ 100 $ 3,350 $ 3,350
11.8% 11.8% 11.8% 11.8% 11.8%
------------------------------------------------- --------------------------
Total long-term obligations $ 485 $5,880 $1,324 $1,199 $ 213,600 $222,488 $ 233,776
================================================= ==========================
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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 September 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 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 (the "Prior Complaints"). The Consolidated Complaint was filed pursuant to
a Stipulation and Pretrial Order entered by the Court, and was substantially
similar to the Prior Complaints. The plaintiffs requested 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 contemplated by the Merger 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. On August 29, 2006, our
stockholders disapproved the Merger Agreement and we terminated it. As a result,
the parties to the Consolidated Complaint agreed to extend the deadline to file
a motion to dismiss from September 1, 2006 to March 1, 2007. The parties further
agreed that any opposition to the motion to dismiss is to be filed within 45
days of the filing of any motion to dismiss, with any reply to be filed within
20 days of the filing of the opposition. 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.
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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.
Certain Transactions Or Events Could Make Us Liable For An Approximately $7.9
Million Topping Fee
Because our shareholders disapproved the Merger Agreement at a time when a
competing takeover proposal had been announced and had not been withdrawn, we
could be liable to RAHI for a Topping Fee of approximately $7.9 million if,
within 12 months after the August 29, 2006 termination date of the Merger
Agreement, we enter into a definitive agreement with a third party with respect
to the consummation of a "Takeover Proposal" (as described below) or a Takeover
Proposal is consummated. A Takeover Proposal includes a proposal for the
acquisition of 30% or more of our assets or more than 30% of our outstanding
Common Stock or the stock of any of our subsidiaries or for the acquisition of
us or any of our subsidiaries through a merger or other business combination.
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 now that the
Merger Agreement has been terminated would likely add to our difficulties in
finding suitable replacements if we lose the services of any of our executives
or other key personnel.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders on August 8, 2006, stockholders
elected our board of directors.
The number of votes cast for each director nominee, the number of votes
cast against or withheld, and the number of abstentions or broker non-votes were
as follows:
Against or Abstentions or
For Withheld Broker Nonvotes
-------- ---------- --------------
William L. Westerman 6,689,620 3,687,169 -0-
Jeffrey A. Silver 6,404,400 3,972,389 -0-
Paul A. Harvey 7,354,652 3,022,137 -0-
Vincent L. DiVito 7,354,727 3,022,062 -0-
James N. Land, Jr. 7,432,424 2,944,365 -0-
At a reconvening our annual meeting of stockholders on August 29, 2006
our stockholders disapproved the Merger Agreement. The number of votes cast for
the Merger Agreement was 3,502,839, the number of votes cast against it was
5,664,431 and there were 71,862 abstentions or broker non-votes.
26
Also at the August 29, 2006 reconvening of our annual meeting, the vote
to approve an adjournment of the annual meeting, if necessary or appropriate, to
solicit additional proxies if there were insufficient votes at the time of the
annual meeting to approve the Merger Agreement was 3,623,633 for, 5,616,862
against and 469,153 abstentions or broker non-votes.
Item 6. Exhibits.
See list of exhibits on page 29.
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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: November 3, 2006
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Exhibits
Exhibits:
10.1(A) Employment Agreement among Riviera Holdings Corporation, Riviera
Operating Corporation and Robert A. Vannucci
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.
(A) Management contract or compensatory plan or arrangement.
29