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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 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
RIVIERA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0296885
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(State or other jurisdiction of (I.R.S. 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) 734-5110
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES NO X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES NO X
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or amendment
to this Form 10-K. [ X ]
1
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check One)
Large accelerated filer Accelerated filer X
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Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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Based on the closing sale price of the registrant's common stock on
the American Stock Exchange on June 30, 2006, the aggregate market value of the
common stock held by non-affiliates of the registrant was approximately
$228,167,000.
As of February 23, 2007 the number of outstanding shares of the
registrant's common stock was 12,463,755.
Documents incorporated by reference: Portions of the registrant's 2007
definitive annual meeting proxy statement on Schedule 14A (to be filed pursuant
to Regulation 14A) are incorporated by reference into Part III of this Form
10-K.
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Page 1 of 59 pages
Exhibit Index Appears on Page 51 hereof.
2
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
Item 1. Business........................................................4
General .....................................................4
Riviera Las Vegas............................................4
Riviera Black Hawk...........................................9
Geographical Markets........................................10
Competition.................................................11
Employees and Labor Relations...............................13
Regulation and Licensing....................................14
Federal Registration........................................21
Item 1A. Risk Factors....................................................22
Item 2. Properties.....................................................30
Item 3. Legal Proceedings..............................................31
Item 4. Submission of Matters to a Vote of Security Holders............31
Item 5. Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................31
Item 6. Selected Financial Data........................................34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................34
Overall Outlook and Recent Developments.....................34
Results of Operations.......................................35
2006 Compared to 2005.......................................35
2005 Compared to 2004.......................................37
Liquidity and Capital Resources.............................38
Critical Accounting Policies................................39
Recently Issued Accounting Standards........................41
Forward-Looking Statements..................................42
Item 7A. Qualitative and Quantitative Disclosure About Market Risk.......43
Item 8. Financial Statements and Supplementary Data....................44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................44
Item 9A. Controls and Procedures.........................................44
Item 9B. Other Information...............................................45
Item 10. Directors and Executive Officers of the Registrant.............45
Item 11. Executive Compensation.........................................48
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................48
Item 13. Certain Relationships and Related Transactions ................48
Item 14. Principal Accountant Fees and Services.........................48
Item 15. Exhibits and Financial Statement Schedules.....................48
3
PART I
Item 1. Business
General
Riviera Holdings Corporation, a Nevada corporation (the "Company"),
through its wholly owned subsidiary, Riviera Operating Corporation, owns and
operates the Riviera Hotel & Casino ("Riviera Las Vegas") located on the Las
Vegas Boulevard in Las Vegas, Nevada. Riviera Las Vegas opened in 1955, and has
a long-standing reputation for delivering traditional Las Vegas-style gaming,
entertainment and other amenities.
The Company, through its wholly owned subsidiary, Riviera Black Hawk,
Inc., owns and operates the Riviera Black Hawk Casino ("Riviera Black Hawk"), a
limited-stakes casino in Black Hawk, Colorado, which opened on February 4, 2000.
The Company determines segments based upon geographic gaming markets
and also reviews corporate expenses separately. The Company has two segments:
the Las Vegas, Nevada market and the Black Hawk, Colorado market. The segment
information can be found in Note 15 of the Notes to the Consolidated Financial
Statements included in this document.
The Company maintains an Internet website at www.rivierahotel.com and
makes available on the website, free of charge, the Company's Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any
and all amendments to such reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as soon as reasonably practicable after the Company electronically files
such material with, or furnishes it to, the United States Securities and
Exchange Commission (the "SEC"). The Company has included its website address in
this filing only as a textual reference. The information contained on that
website is not incorporated by reference into this Annual Report on Form 10-K.
Riviera Las Vegas
General
Riviera Las Vegas is located on the corner of Las Vegas Boulevard and
Riviera Boulevard in Clark County, Nevada, across from Circus Circus. Riviera
Las Vegas targets slot and mid-level table game customers and various convention
groups with a focus on creating repeat customers and increasing our loyalty
program membership. Key elements of this strategy includes offering a
value-oriented experience by providing a variety of hotel rooms, restaurants and
entertainment, with traditional Las Vegas shows, all at reasonable prices.
Gaming
Riviera Las Vegas has 110,000 square feet of casino space. The casino
currently has approximately 990 slot machines and 35 gaming tables, including
blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) Poker, Three Card
Poker, Let It Ride(R), 357 Poker, Texas Hold'em Bonus Poker and mini-baccarat.
The casino also includes a poker room and a race and sports book.
We continually update gaming operations at Riviera Las Vegas to
respond to both changing market conditions and customer demand in an effort to
attract new customers and encourage repeat customer business through player
tracking and database management. We maintain a slot players club, through which
members receive special promotions and targeted mailings. New and innovative
slot and table games have been introduced based on customer feedback. We devote
substantial time and attention to the type, location and player activity of all
of our slot machines. We maintain a capital investment program for the upgrade
of our slot machines and related equipment.
Our current marketing programs are directed at mid-level gaming
customers as opposed to high-stakes bettors. Mid-level gaming customers tend to
provide us with a less volatile, more consistent gaming revenue stream.
Consistent with our focus on mid-level gaming customers is our tendency to offer
lower table game limits, stricter credit policies and more emphasis on slot
machine play.
4
During 2006, we continued a number of initiatives at Riviera Las
Vegas to increase slot play, including the replacement of older slot machines
with new machines utilizing ticket-in/ticket-out "TITO" technology and relocated
our slot hosts to a more visable and accessible area to improve service and
convenience to our customers. Slot hosts are our employees who interact with
patrons as goodwill ambassadors to generate loyalty. Our strategy is to continue
to increase slot play through marketing programs and other improvements,
including (1) our ongoing slot upgrade program, (2) operation of our player
tracking system, (3) addition of a new multi-tiered players club, called Club
Riviera, (4) sponsorship of slot tournaments, (5) creation of promotional
programs, and (6) "Penny Town". Penny Town is comprised primarily of penny and
nickel slot machines, which is one of the most popular segments of the Las Vegas
slot market.
Hotel
Riviera Las Vegas' hotel is comprised of five towers with 2,075 guest
rooms, including 177 suites, as follows:
Latest
Year Std. Remodel
Tower Description Built Rooms Suites Total Year
North Tower 1955 379 11 390 2004
South Tower 1967 132 30 162 2004
Monte Carlo 1974 216 81 297 2005
San Remo 1977 241 6 247 2006
Monaco 1988 930 49 979 2004
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Total 1,898 177 2,075
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Despite the significant increase in rooms on the Las Vegas Strip
since 1997, we believe Riviera Las Vegas has attained room occupancy rates that
are consistent with other properties on the Las Vegas Strip. From 1994 to 2000,
the occupancy rate ranged from 95.2% to 98.2%, and was 91.5% for 2001, 89.6% for
2002, 92.2% for 2003, 92.6% for 2004, 92.6% for 2005 and 92.2% for 2006 (based
on available rooms). The average occupancy rate through December 2006, citywide
was 93.9% in 2006 according to the Las Vegas Convention and Visitors Authority
(the "LVCVA").
Restaurants
The quality, value and variety of food services are critical to
attracting Las Vegas visitors. Riviera Las Vegas offers five bars, four
restaurants and serves an average of approximately 4,500 meals per day,
including banquets and room service. Riviera Las Vegas completely remodeled its
buffet in 2001, upgrading the ambiance and food quality, and featuring cuisine
from various countries as well as a carving station. In 2006, Kady's Coffee Shop
was remolded with new carpet, chairs and flat panel tv's. The following outlines
for each restaurant, the type of service provided and total seating capacity:
Seating
Name Type Capacity
Kady's Coffee Shop 290
Kristofer's Steak and Seafood 162
Ristorante Italiano Italian 126
World's Fare Buffet All-you-can-eat 366
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Total 944
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In addition, Riviera Las Vegas operates a snack bar and continental
breakfast, and has a fast-food "food court" operated by a third party. The food
court has 200 seats and several fast-food restaurants, including A&W/KFC
Express, Pizza Hut Express(R), Quiznos(R) and La Salsa(R). Riviera Las Vegas has
also contracted with a third party, who will own and operate The Banana Leaf,
which is scheduled to open in the first quarter of 2007. Banana Leaf will serve
breakfast, lunch and dinner, and will feature Asian cuisine.
5
Convention Center
Riviera Las Vegas features 160,000 square feet of convention, meeting
and banquet space. The convention center is one of the larger ones in Las Vegas
and is an important feature that attracts customers. The facility can be
reconfigured for multiple meetings of small groups or large gatherings of up to
5,000 people. Riviera Las Vegas hosted 290 conventions in 2006. The hotel
currently has over 750,000 convention-related advance bookings of rooms through
2011, consisting of over 386,000 definite bookings and over 371,000 tentative
bookings. In 2006 approximately 36% of the hotel's rooms were occupied for
conventions. Based on current bookings we estimate that 35% of the rooms will be
occupied for conventions in 2007.
The Royal Pavilion portion of the convention center, which opened in
February 1999 and comprises approximately 60,000 square feet of our convention
facility, features convention, meeting and banquet facilities, teleconferencing,
wireless Internet and satellite uplink capability, and 12 skyboxes. The
convention space at the Las Vegas, Venetian and Mandalay convention centers and
others has enabled Las Vegas to attract and book new conventions that may have
had date and exhibit space conflicts in the past. Our flexibility of meeting
space and proximity to the Las Vegas Convention Center continues to position us
to increase our mix of small meetings and conventions, as well as new
multi-hotel conventions booked into the Las Vegas Convention Center.
Entertainment
Riviera Las Vegas has one of the most extensive entertainment
programs in Las Vegas, offering a variety of regularly scheduled shows. We
believe entertainment provides an effective marketing tool to attract our
customers. Riviera Las Vegas' entertainment program includes such well received
shows as An Evening at La Cage(R) (a female impersonation show), Crazy Girls(R)
(an adult revue), and featured comedians at the Riviera Comedy Club as well as a
variety of regularly scheduled shows in our LeBistro Theater. In addition, a new
ice show entitled "ICE/Direct From Moscow" is scheduled to open in our
Versailles Showroom by mid-2007. We update our shows continually in response to
customer surveys and to keep them fresh. Tickets for the shows are offered at
reasonable prices in keeping with our emphasis on mid-level customers.
The following outlines for each entertainment center, the type of
service provided and total seating capacity:
Name Type Seating Capacity
ICE/Direct
From Moscow* Variety 875
La Cage Female Impersonation 575
Crazy Girls Adult Revue 375
Comedy Club Comedy 350
Le Bistro Variety 190
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2,365
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* Scheduled to open by mid-2007.
We opened a nightclub in 2005, Syn City, which operates five nights
per week in our Le Bistro Theater. Syn City opens at 12:00 am, which allows us
to continue to offer a variety of entertainment in the Le Bistro Theater prior
to 12:00 am and during Syn City's nights off.
A majority of our shows are owned and operated by third parties,
which gives us financial flexibility in utilizing our marketing dollars. We
receive rent, ticket sales commissions, and a number of comp seats for use by
our marketing department.
6
Future Expansion Possibilities
We continue to explore the possible development of an approximately
60,000 square-foot entertainment complex that would be constructed directly over
the casino, and could contain specialty-themed entertainment that would appeal
to Riviera Las Vegas' main target audience, adults aged 45 to 65. The exit from
the complex would deliver patrons to the casino.
We also continue to explore options for the development of our
26-acre site. These options include a joint venture for the development of a
condominium, time-share or an additional hotel tower and parking garage. Under
the terms of the indenture governing our $215 million 11% Senior Secured Notes
(the "Note Indenture"), we could contribute up to 6 acres of land to such
projects, and if we decide to develop a hotel, condominium or time-share tower,
a third party could construct and sell condominium or time-share units and
arrange financing. We believe that additional rooms adjacent to the Las Vegas
Convention Center would be particularly attractive to business customers and
would provide a base for additional casino customers. The development of a
condominium tower, time-share tower, hotel tower or parking facility would
require additional financing and, in the case of a condominium or time-share
tower, a joint venture partner, none of which we have in place at this time.
Marketing Strategies-Las Vegas
Our tiered marketing program, Club Riviera, is intended to develop
and retain a loyal following of repeat slot and mid-level table game customers.
We believe we have been able to successfully attract these patrons using Riviera
Las Vegas' restaurants, hotel accommodations and entertainment and by focusing
on customer service. We have adopted a selective approach to the extension of
credit to these customers in order to reduce volatility of operating results. We
use our research data to tailor promotional offers to the specific tastes and
level of play of our targeted customers.
Riviera Las Vegas will continue to emphasize marketing programs that
appeal to slot and mid-level table game customers with a focus on creating
repeat customers and increasing walk-in traffic. In addition, a key marketing
focus is expanding Riviera Las Vegas' core conventioneer customer base. In
developing an overall marketing program, we conduct extensive, ongoing research
of our target customers' preferences through surveys, one-on-one interviews and
focus groups.
Create Repeat Customers
Generating customer loyalty is a critical component of our business
strategy, as retaining customers is less expensive than attracting new ones. We
have developed a focused and coordinated multi-tiered marketing program intended
to develop a loyal customer base which emphasizes (1) providing a high level of
service to our customers to ensure an enjoyable experience while at the Riviera
Las Vegas, (2) responding to customer surveys, (3) focusing marketing efforts
and promotional programs on customers with positive gaming profiles and (4)
rewarding loyalty with increased incentives to our higher-tiered members. We
believe our player tracking system helps us retain customers and use our player
data to tailor promotional offers to the specific tastes and level of play of
our targeted customers. All slot and table players are encouraged to join Club
Riviera, which tracks their level of play, and participate in surveys that
provide us with helpful information and personal preferences. Members of Club
Riviera earn bonus points based upon their level of play, redeemable for free
gifts, complimentary services or bonus credits. We make promotional offers to
qualifying customers through direct mail, telemarketing and e-mail. We design
promotional offers targeted at certain mid-level gaming patrons that are
expected to provide significant revenues based upon their historical gaming
patterns. We contact these customers through a combination of direct mail and
telemarketing by an in-house marketing staff and independent representatives
located in major cities. We use a proprietary database which is linked to our
player tracking system to help identify customers' requirements and preferences,
thereby allowing us to customize promotions to attract repeat visitors. We offer
customers personalized service, credit availability and access to a variety of
complimentary or reduced-rate room, dinner and entertainment reservations all
based on the customer's profile. We use a specialized multi-tiered marketing
approach to attract customers in each of our major markets. We design slot and
table game tournaments and special events for specific levels of play. Utilizing
our proprietary database, our marketing department targets and invites the most
appropriate customers for the customized events. In addition, we host an array
of special events, including slot and table game tournaments, designed to
attract customers for an extended stay. We have found that this individualized
marketing approach has provided significant revenues and profitable repeat
business.
7
Provide Extensive Entertainment Options
We also focus on attracting guests through a range of entertainment
options. We have one of the most extensive entertainment programs in Las Vegas
with a variety of regularly scheduled shows and special limited engagement
shows. The shows attract additional gaming revenue as well as provide us rental
and commission revenue.
Attract Walk-In Traffic
We seek to maximize the number of people who patronize the Riviera
Las Vegas but who are not guests in the hotel by capitalizing on Riviera Las
Vegas' prime Las Vegas Strip location, convention center proximity and several
popular in-house productions. Riviera Las Vegas is well situated on the Las
Vegas Strip near Circus Circus, Sahara, Las Vegas Hilton, the Las Vegas
Convention Center, Wynn Las Vegas, the planned $4.5 billion Echelon project
planned on the site of the recently closed Stardust and the $2 billion
Fontainebleau project just to our north, as well as numerous non-gaming
condominium and time-share projects which are either planned or under
construction within walking distance of our casino. However, recent closures and
construction in our immediate area, has caused a significant reduction in
walk-in traffic and may continue to do so for the foreseeable future. We
continue to strive to attract customers from those facilities, as well as
capitalize on the visitors in Las Vegas in general, with the goal of increasing
walk-in traffic by (1) promoting Penny Town, (2) providing a variety of quality,
value-priced entertainment and dining options, and (3) offering the "$40 for
$20" slot promotions, and placing them inside the casino.
Focus on Convention Customers
This market consists of two groups: (1) those trade organizations and
groups that hold their events in the banquet and meeting space provided by a
single hotel and (2) those attending city-wide events, usually held at the Las
Vegas Convention Center. We target convention business because it typically
provides patrons willing to pay higher room rates and we are able to provide
certain advance planning benefits, since conventions are usually booked two
years in advance of the event date. We focus our marketing efforts on
conventions whose participants have the most active gaming profile and higher
room rates, banquet and function spending habits. We also benefit from our
proximity to the Las Vegas Convention Center, which makes us attractive to
city-wide conventioneers looking to avoid the congestion that occurs during a
major convention, particularly at the south end of the Las Vegas Strip. In 2006
we derived 36% of our hotel occupancy and 41% of our room revenues from
convention customers and we consider them to be a critical component of our
customer base. We believe that the completed expansion of Riviera Las Vegas'
convention facility in February 1999, from 100,000 to 160,000 square feet, has
accommodated the growth in the size and number of groups that presently use the
facility, attracted new convention groups and increased the percentage of rooms
occupied by conventioneers.
We have found that our customers also use tour and travel "package"
options to reduce the cost of travel, lodging and entertainment. These packages
are produced by wholesale operators and travel agents and emphasize mid-week
stays. Tour and travel patrons often book at off-peak periods, enabling us to
maintain occupancy rates at the highest levels throughout the year. We have
developed specialized marketing programs and cultivated relationships with
wholesale operators, travel agents and major domestic air carriers to expand
this market. We make an effort to convert many tour and travel customers who
meet our target customer gaming profile into repeat slot customers. While we
continue to pursue the tour and travel market, we have allocated less room
inventory to this market due to the lower room rates. As a result, we are
placing more emphasis and dedicating more rooms to our rated slot customers,
which we believe generates greater revenue.
Internet
The Internet segment of our business remained stable in 2006. This
segment attracts customers in search of a bargain, those making last-minute
travel arrangements and those who have the confidence in and find it convenient
to book rooms over the Internet. In 2006, our Internet bookings accounted for
approximately 10.9% of total occupied rooms.
8
Riviera Black Hawk
Business
Riviera Black Hawk opened on February 4, 2000. Located in Black Hawk,
Colorado, approximately 40 miles west of Denver, our casino is the first casino
encountered by visitors arriving from Denver on Highway 119. Our casino features
the fourth largest number of gaming devices in the market with approximately 900
slot machines and 8 live gaming tables. For Colorado gaming and tax law
purposes, each slot machine or table game is considered one gaming device.
We also offer a variety of non-gaming amenities designed to help
differentiate our casino, including:
o parking spaces for 520 vehicles, of which 92% are covered, with convenient and
free self-park and valet options; o a 252-seat casual buffet-styled restaurant;
o a delicatessen; o two themed bars; and o an entertainment center with seating
for approximately 400 people.
The initial participants in this market were small, privately held
gaming facilities whose inability to offer convenient parking and a full range
of traditional casino amenities limited the growth of this market. Subsequently,
larger casinos offering such amenities have entered the market, have been
gaining market share and have contributed to the consistent growth in the
overall market. As of December 31, 2006, there were 25 casinos in the Black
Hawk/Central City market, with 11 casinos each offering more than 400 gaming
devices. The Isle of Capri, located across the street from our casino, has 1,407
gaming machines, 18 gaming tables, 1,100 covered parking spaces and 238 hotel
rooms, and it owns and is connected by inside walkways to the Colorado Central
Station, which has 677 gaming machines, 12 gaming tables, 1,250 parking spaces
and 164 hotel rooms.
Marketing strategy
We attract customers to our casino by implementing marketing
strategies and promotions designed specifically for this market. In so doing, we
hope to create customer loyalty and benefit from repeat visits by our customers.
Specific marketing programs to support this strategy include the Riviera Black
Hawk Player's Club and "V.I.P." services offered to repeat gaming customers. The
Riviera Black Hawk Player's Club is a loyalty program that rewards casino play
and repeat visits to the casino with various privileges and amenities such as
free play, logo gift items and invitations to special events, such as parties,
concerts and complimentary accommodations at our Las Vegas property. We have
used the Player's Club promotion in Riviera Las Vegas and have tailored it for
the Black Hawk/Central City market to implement it at Riviera Black Hawk.
"V.I.P." services are available to the highest level of players and include
special valet and self-parking services, complimentary food and entertainment
offerings and special events specifically designed for this group of customers.
We benefit from strong walk-in traffic due to the proximity of our
casino to the Colorado Central Station and the Isle of Capri. We have and
continue to develop specific marketing programs designed to attract these
walk-in customers. We emphasize quality food and beverage amenities with
friendly service as a marketing tool. In addition, we provide entertainment
programs designed to meet the tastes of the Black Hawk/Central City market, such
as live music performances by popular regional and national groups.
We rely on database marketing in order to best identify target
customer segments of the population and to tailor our casino's promotions and
amenities to our core group of customers. We use the database to identify and
stratify slot players living primarily in Colorado for appropriate incentives.
Approximately 323,000 of these slot players have been identified as of December
31, 2006. In addition, we promote our casino by advertising in newspapers and on
the radio in the local areas.
9
Geographical Markets
The Las Vegas Market
Las Vegas is one of the largest and fastest growing entertainment
markets in the country. According to the LVCVA, the number of visitors who
traveled to Las Vegas during 2006 increased to approximately 38.9 million in
2006. Approximately 35.5 million people visited Las Vegas in 2003, 37.4 million
in 2004, 38.6 million in 2005, and 38.9 million in 2006. Clark County gaming
continues to be a strong and growing business. Clark County gaming revenues were
$7.8 billion in 2003, $8.7 billion in 2004, $9.7 billion in 2005 and $10.6
billion in 2006. The terrorist attacks of September 11, 2001 had an adverse
effect on the number of visitors traveling to Las Vegas. Similar events in the
future could have an adverse effect on the number of visitors traveling to Las
Vegas.
Gaming and tourism are the major attractions of Las Vegas,
complemented by warm weather and the availability of many year-round
recreational activities. Although Las Vegas' principal market is the western
region of the United States, most significantly southern California and Arizona,
Las Vegas also serves as a destination resort for visitors from all over the
world. Significant percentages of visitors to Las Vegas are international
visitors.
Historically, Las Vegas has had one of the strongest hotel markets in
the country. The number of hotel and motel rooms in Las Vegas has increased by
97% from approximately 67,000 at the end of 1989 to approximately 132,000 at the
end of 2006, giving Las Vegas the most hotel and motel rooms of any metropolitan
area in the world. Despite this significant increase in the number of rooms, the
Las Vegas hotel occupancy rate equaled or exceeded 84% each year from 1993
through 2006, with a hotel occupancy rate of 94% in 2006. During 2006,
approximately 2,900 new hotel rooms opened and 3,900 closed in Las Vegas.
We believe that the growth in the Las Vegas market has been enhanced
as a result of: (1) a dedicated program by the LVCVA and major Las Vegas
casino/hotels to promote Las Vegas as a major convention site, (2) the increased
capacity of McCarran International Airport and (3) the introduction of large
themed "must see" destination resorts in Las Vegas. In 1988, approximately 1.7
million people attended conventions in Las Vegas and generated approximately
$1.2 billion of economic impact. The number of convention attendees was up to
6.3 million in 2006 with an economic impact of $8.2 billion.
During the past 13 years, McCarran International Airport has expanded
its facilities to accommodate the increased number of airlines and passengers,
which it services. The number of passengers traveling through McCarran
International Airport has increased from approximately 22.5 million in 1993 to
an estimated 46.2 million in 2006. Work continues on the nearly $4 billion
capital additions planned for McCarran International Airport over the next
four-year period.
The Black Hawk/Central City Market
Gaming was introduced to the Black Hawk/Central City market in
October 1991 following a statewide referendum where Colorado voters approved
limited stakes gaming for three historic mining towns, namely Black Hawk,
Central City and Cripple Creek. Limited stakes gaming is defined as a maximum
single bet of $5.00. Black Hawk and Central City are contiguous cities located
approximately 40 miles west of Denver and about 10 miles north of Interstate
Highway 70, the main east-west artery from Denver. Historically, these two gold
mining communities were popular tourist towns. However, since the inception of
casino gaming in October 1991, gaming establishments have displaced many of the
former tourist-related businesses.
The first casino in the Black Hawk/Central City market opened in
October 1991, with 13 casinos open by the end of that year. The pace of
expansion increased in 1992 with the number of casinos in the market peaking at
42. However, due to a trend of consolidation in the market and the displacement
of small casinos by the entry of larger, better-capitalized operators, the
number of casinos has declined to 26 as of December 31, 2006.
10
The Black Hawk/Central City market primarily caters to "day-trip"
customers from Denver, Boulder, Fort Collins and Golden as well as Cheyenne,
Wyoming. The United States Census Bureau estimates that in 2005 the population
of the Denver-Aurora-Boulder Combined Statistical area was 2.9 million. Since
1992, the number of gaming devices in the Black Hawk/Central City market has
grown approximately 81% from 7,252 in 1992 to 13,162 in 2006. Gaming revenues in
the Black Hawk/Central City market increased by approximately 4.1% in 2006 over
2005. The City of Black Hawk itself experienced an approximate 4.3% increase in
gaming revenue in 2006.
The City of Black Hawk has experienced more significant growth in
gaming revenues than Central City from 1992 through 2004. The popularity of
Black Hawk in comparison to Central City was due primarily to Black Hawk's
superior access to major highways, as patrons had to first pass through Black
Hawk to access Central City from Denver. However, a new road opened in November
2004, which links Central City directly with Interstate 70, and allows customers
to reach Central City without driving through Black Hawk. As a result of this
new access road Central City gaming revenues grew by 36% in 2005 and 2.7% in
2006 as compared to 2.6% and 4.3% growth for Black Hawk in 2005 and 2006,
respectively. Despite the impressive growth experienced by Central City casinos
in 2005 and 2006, gaming revenues in Central City still represent only 13% of
the total gaming revenues for the Central City/Black Hawk market. Although the
new road allows customers direct access to Central City, most customers continue
to frequent Black Hawk casinos because of the superior amenities Black Hawk
casinos offer. Due to this superior location, larger casino operators have
focused on building in Black Hawk. As a result, casinos in Black Hawk now
generally feature a larger average number of gaming devices, a wider variety of
amenities and convenient free parking for patrons.
Competition
Las Vegas, Nevada
Intense competition exists among companies in the gaming industry,
many of which have significantly greater resources than we do. Riviera Las Vegas
faces competition from all other casinos and hotels in the Las Vegas area. We
believe that our most direct competition comes from certain large casino/hotels
located on or near the Las Vegas Strip, which offer amenities and marketing
programs similar to those offered by Riviera Las Vegas.
Las Vegas gaming square footage and room capacity are continuing to
grow and are expected to continue to increase during the next several years.
As of December 31, 2006, there were 15 Las Vegas projects slated for
completion by 2011, including the development or expansion of existing
casino/hotels. Current and future expansions, additions and enhancements to
existing properties and construction of new properties by our competitors could
divert business from our facilities. There can be no assurance that we will
compete successfully in the Las Vegas market in the future.
During 2006, available room nights in the Las Vegas market decreased
from approximately 48.5 million to approximately 48.0 million, or 1.4%, while
total room nights occupied increased from approximately 43.2 million to 43.6
million, or 1.0%. The ending room inventory at December 31, 2006 was
approximately 132,000. At Riviera Las Vegas, room occupancy decreased from 92.6%
in 2005 to 92.2% in 2006 (lower than the Las Vegas hotel average of 93.9%). Room
rates increased by $6.63 or 9.2% from $71.84_in 2005 to $78.47 in 2006. Revenue
per available room (Rev/Par) increased $5.86 or 8.8% from $66.51 in 2005 to
$72.37 in 2006.
We also compete to some extent with casinos in other states,
riverboat and Native American gaming ventures, state-sponsored lotteries, on-
and off-track wagering, card parlors and other forms of legalized gaming in the
United States, as well as with gaming on cruise ships and other parts of the
world. In addition, certain states have recently legalized or are considering
legalizing casino gaming in specific geographical areas within those states and
internationally. Any future development of casinos, lotteries or other forms of
gaming in other states and internationally, could have a material adverse effect
on our results of operations.
11
The number of casinos on Native American lands has increased since
the enactment of the Indian Gaming Regulatory Act of 1988. California voters
addressed this issue on March 7, 2000 when they voted in favor of an amendment
to the California Constitution that allows Las Vegas-style gambling on Native
American lands in that state. While new gaming jurisdictions generally have not
materially impacted Las Vegas, the expansion of gaming into California poses a
more serious threat to the continued growth of Las Vegas.
Our current business is highly dependent on gaming in Las Vegas.
Riviera Las Vegas derives a substantial percentage of its business from
tourists, including customers from southern California and the southwestern
United States. Weakness in the economy of southern California has in the past,
and could in the future, adversely affect our financial results. The events of
September 11, 2001 had the most serious effect on our financial results. Similar
events in the future could also have a material adverse effect on our financial
results.
Black Hawk, Colorado
The Black Hawk/Central City gaming market is characterized by intense
competition. The primary competitive factors in the market are location,
availability and convenience of parking, number of slot machines and gaming
tables, promotional incentives, hotel rooms, types and pricing of non-gaming
amenities, name recognition and overall atmosphere. Our main competitors are the
larger gaming facilities, particularly those with considerable on-site or nearby
parking and established reputations in the local market. As of December 31,
2006, there were 26 gaming facilities in the Black Hawk/Central City market with
11 casinos each offering more than 400 gaming positions. Additional projects
have also been announced, proposed, discussed or rumored for the Black
Hawk/Central City market.
The gaming facilities near the intersection of Main and Mill Streets
provide significant competition to our casino. Colorado Central Station which is
now owned through a joint venture with Isle of Capri and is connected via inside
walkways to the Isle of Capri, is located across the street from our casino and
has 687 slot machines, 12 gaming tables, approximately 1,250 parking spaces and
164 hotel rooms. The Isle of Capri, one of the most successful casinos in
Colorado, is located directly across the street from our casino and features
1,407 slot machines, 18 table games, 1,100 parking spaces, and 238 hotel rooms.
An expansion and renovation of Main Street was completed in the second quarter
of 2006. As a result of the Main Street expansion, Riviera Black Hawk is the
first property on Main Street accessible to all customers traveling to Black
Hawk from the Denver Metro area via State Route 119. Our parking garage is the
first and most easily accessible parking garage directly from Main Street.
The number of hotel rooms currently in the Black Hawk/Central City
market is 596, with only 5 gaming facilities providing hotel accommodations.
These include Fortune Valley with 118 rooms, Century Casino with 26 rooms, the
Lodge at Black Hawk with 50 rooms, the Isle of Capri with 238 rooms and Colorado
Central Station with 164 rooms. Casinos offering hotel accommodations for
overnight stay have a competitive advantage over our casino. However, we believe
that self-parking is a more effective utilization of our available space
providing hotel accommodations is not a cost-effective use of our capital
resources at this time.
The Ameristar Black Hawk property was re-branded in the Ameristar
name on April 1, 2006, and has received significant increased traffic to the
property in the second half of 2006. Ameristar is moving along with its $260
million major capital expansion, with the first phase completed in November
2005, which included an expansion of the parking garage to 1,550 parking spaces.
In December 2005, the remodeling of the first floor, which contains the casino
and non-gaming venues, was substantially completed. Once the first floor was
completed, the construction disruption dissipated. Recently, the second floor
was opened with 700 more slot machines. The hotel construction began last
quarter, with 536 rooms slated to open in the first quarter of 2009.
Historically, the City of Black Hawk has enjoyed an advantage over
Central City because customers have to drive through Black Hawk to reach Central
City. However, there is a new road that opened in November 2004, which links
Central City directly with Interstate 70 and allows customers to reach Central
City without driving through Black Hawk. Although this road allows customers to
directly access Central City, we believe that most customers will continue to
frequent Black Hawk casinos because of the superior amenities Black Hawk casinos
offer. This new road provides additional access to the Black Hawk/Central City
market, which is especially important on weekends when the traditional road
system is overburdened. We believe the new access road is important for the
continued growth of the market. The new access road proved valuable between June
21st and September 13th of 2005 when a major rockslide closed Highway 6, the
major route customers from the Denver area take to the Black Hawk/Central City
market.
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Limited stakes gaming in Colorado is constitutionally authorized in
Central City, Black Hawk, Cripple Creek and two Native American reservations in
southwest Colorado. However, gaming could be approved in other Colorado
communities in the future. The legalization of gaming closer to Denver would
likely have a material adverse effect on our results of operations. We also
compete with other forms of gaming in Colorado, including lottery gaming, and
horse and dog racing, as well as other forms of entertainment.
It is also possible that new forms of gaming could compete with our
casino. Currently, Colorado law does not authorize video lottery terminals.
However, Colorado law permits the legislature, with executive approval, to
authorize new types of lottery gaming, such as video lottery terminals. Video
lottery terminals are games of chance, similar to slot machines, in which the
player pushes a button that causes a random set of numbers or characters to be
displayed on a video screen. The player may be awarded a ticket, which can be
exchanged for cash or credit play. This form of gaming could compete with slot
machine gaming. Voters in the State of Colorado have rejected a proposal, which
would have authorized video lottery terminals in five racetracks in Colorado.
However, there is no guarantee that such a proposal or similar one will not be
approved in the future.
In addition, Colorado enacted a smoking ban in 2006, which excludes
casinos. However, recent significant efforts have been undertaken to lift this
exclusion and restrict smoking in Colorado casinos as well. This could have a
material adverse effect on our results of operations.
Pursuant to a license agreement, Riviera Las Vegas licenses the use
at Riviera Black Hawk of all of the trademarks, service marks and logos used by
Riviera Las Vegas. The license agreement provides that additional trademarks,
service marks and logos acquired or developed by us and used at our other
facilities will be subject to the license agreement.
Employees and Labor Relations
Riviera Las Vegas
As of December 31, 2006, Riviera Las Vegas had 1,257 full-time
equivalent employees and had collective bargaining contracts with eight unions
covering approximately 714 of such employees, including food and beverage
employees, rooms department employees, carpenters, engineers, stagehands,
musicians, electricians, painters and teamsters. Riviera Las Vegas' agreement
with the Painters Union expires on May 31, 2010. The Carpenters' Union agreement
expired on July 31, 2005, and an initial one-year and subsequent open-ended
extensions were agreed to by us and the Union. Negotiations with the Carpenters'
Union for a new multiyear agreement commenced in 2006 and are ongoing.
Agreements with the Southern Nevada Culinary and Bartenders Union, covering the
majority of our unionized employees expire in 2007, as does our agreement with
the Stagehands Union. Our negotiations with the Southern Nevada Culinary and
Bartenders Union and Stagehands Union will commence in the first half of 2007.
Our agreement with the Teamsters Union expires in 2008 and the Operating
Engineers Union and Electrician Union agreements expire in 2009. Our collective
bargaining agreement with the Musicians Union expired in 1999 and we continue to
operate under the terms of that agreement. Although unions have been active in
Las Vegas, Riviera Las Vegas considers its employee relations to be
satisfactory. There can be no assurance, however, that new agreements will be
reached without union action or on terms satisfactory to Riviera Las Vegas.
Riviera Black Hawk
As of December 31, 2006, Riviera Black Hawk had 243 full-time
equivalent employees, none of whom are covered by collective bargaining
contracts. The Black Hawk/Central City labor market is very competitive. Riviera
Black Hawk believes that it will be able to maintain its current employee level.
There can be no assurance, however, that new and existing casinos will not
affect Riviera Black Hawk's ability to maintain its current employee level.
13
Although there are no collective bargaining agreements in Black Hawk
casinos, we have recently become aware of organization activity by Local 7 of
the United Food & Commercial Workers International Union. This activity is
targeting casino employees in Black Hawk and Central City. There can be no
assurance that the union will not succeed in its organization effort, and if
successful, that an agreement will be reached without union action or on terms
satisfactory to Riviera Black Hawk.
Regulation and Licensing
Nevada
Nevada Gaming Authorities
The ownership and operation of casino gaming facilities in Nevada are
subject to: (1) The Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act") and (2) various local ordinances and
regulations. Our gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Commission (the "Nevada Commission"), the State of
Nevada Gaming Control Board (the "Nevada Board"), the Clark County Business
Department and the Clark County liquor/gaming authorities (collectively, the
"Clark County Board"), all of which are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time and in any
capacity; (2) the establishment and maintenance of responsible accounting
practices and procedures; (3) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (4) the prevention of cheating and
fraudulent practices; and (5) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on our operations.
Riviera Operating Corporation is required to be and is licensed by
the Nevada Gaming Authorities (a "Corporate Licensee"). The gaming license held
by Riviera Operating Corporation requires the periodic payment of fees and taxes
and is not transferable. Riviera Operating Corporation is also licensed as a
manufacturer and distributor of gaming devices. Such licenses require the
periodic payment of fees and are not transferable. We are registered by the
Nevada Commission as a publicly traded corporation (a "Registered Corporation")
and have been found suitable to own the stock of Riviera Operating Corporation.
As a Registered Corporation, we are required periodically to submit detailed
financial and operating reports to the Nevada Commission and to furnish any
other information, which the Nevada Commission may require. No person may become
a stockholder of, or receive any percentage of profits from, Riviera Operating
Corporation without first obtaining licenses and approvals from the Nevada
Gaming Authorities. We and Riviera Operating Corporation have obtained, from the
Nevada Gaming Authorities, the various registrations, approvals, permits,
findings of suitability and licenses required in order to engage in gaming
activities and manufacturing and distribution activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, us or Riviera
Operating Corporation in order to determine whether such individual is suitable
or should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of Riviera Operating Corporation must file
applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Our officers,
directors and key employees who are actively and directly involved in the gaming
activities of Riviera Operating Corporation may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing for any cause, which they deem reasonable.
A finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all the costs of the investigation. Any change in a corporate position by a
licensed person must be reported to the Nevada Gaming Authorities. In addition
to their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
14
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with Riviera Operating Corporation or us, we would have to sever
all relationships with such person. In addition, the Nevada Commission may
require us or Riviera Operating Corporation to terminate the employment of any
person who refuses to file appropriate applications. Determinations of
suitability or questions pertaining to licensing are not subject to judicial
review in Nevada.
We and Riviera Operating Corporation are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by Riviera Operating Corporation must be reported to or approved by the Nevada
Commission.
If it were determined that the Nevada Act was violated by Riviera
Operating Corporation, the gaming license it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, we or Riviera Operating Corporation and
the persons involved could be subject to substantial fines for each violation of
the Nevada Act, at the discretion of the Nevada Commission. Further, a
supervisor could be appointed by the Nevada Commission to operate our casino
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for reasonable rental value of the casino) could be
forfeited to the State of Nevada. Limitation, conditioning or suspension of the
gaming license of Riviera Operating Corporation or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect our gaming operations.
Any beneficial holder of our voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have its suitability as a beneficial holder of our voting securities
determined if the Nevada Commission has reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the State of
Nevada. The applicant must pay all costs of investigation incurred by the Nevada
Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of our voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10%, but not more than 15%, of our voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds our voting securities for investment purposes only. An
institutional investor that has obtained a waiver may, in certain circumstances,
hold up to 19% of our voting securities and maintain its waiver for a limited
period of time. An institutional investor shall not be deemed to hold our voting
securities for investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an institutional investor and
not for the purpose of causing, directly or indirectly, the election of a
majority of the members of our board of directors, any change in our corporate
charter, bylaws, management, policies or operations, or any of our gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding our voting securities for investment purposes only.
Activities which are deemed consistent with holding our voting securities for
investment purposes only include: (1) voting on all matters voted on by
stockholders; (2) making financial and other inquiries of management of the type
normally made by securities analysts for informational purposes and not to cause
a change in management, policies or operations; and (3) such other activities as
the Nevada Commission may determine to be consistent with such investment
intent. If the beneficial holder of our voting securities who must be found
suitable is a business entity or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board may be found unsuitable. The same
restrictions apply to a record owner of stock if the record owner, after
request, fails to identify the beneficial owner. Any stockholder who is found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
stock beyond such period of time prescribed by the Nevada Commission may be
guilty of a criminal offense. We are subject to disciplinary action if, after we
receive notice that a person is unsuitable to be a stockholder or to have any
other relationship with us or Riviera Operating Corporation, we (1) pay that
person any dividend or interest upon voting our securities, (2) allow that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (3) pay remuneration in any form to that person
for services rendered or otherwise, or (4) fail to pursue all lawful efforts to
require such unsuitable person to relinquish his voting securities including, if
necessary, the immediate purchase of said voting securities for cash at fair
market value. Additionally, the Clark County Board has the authority to approve
all persons owning or controlling the stock of any corporation controlling a
gaming licensee.
15
The Nevada Commission may, in its discretion, require any holder of
our debt securities to file applications, be investigated and be found suitable
to own such securities, if it has reason to believe that such ownership would be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then we
can be sanctioned (which may include the loss of our approvals) if, without the
prior approval of the Nevada Commission, we (1) pay to the unsuitable person any
dividend, interest, or any distribution whatsoever, (2) recognize any voting
right by such unsuitable person in connection with such securities, (3) pay the
unsuitable person remuneration in any form or (4) make any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
We are required to maintain a current stock ledger in Nevada, which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. We are also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require our stock certificates to bear a legend indicating that the
securities are subject to the Nevada Act. However, the Nevada Commission has not
imposed such a requirement on us.
We may not make a public offering of our securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. In
addition, (1) a Corporate Licensee, such as Riviera Operating Corporation, may
not guarantee a security issued by a Registered Corporation pursuant to a public
offering, or hypothecate its assets to secure the payment or performance of the
obligations evidenced by such a security, without the prior approval of the
Nevada Commission; (2) the pledge of the stock of a Corporate Licensee is void
without the prior approval of the Nevada Commission; and (3) restrictions upon
the transfer of an equity security issued by a Corporate Licensee and agreements
not to encumber such securities are ineffective without the prior approval of
the Nevada Commission.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must meet a variety of stringent standards
of the Nevada Board and Nevada Commission prior to assuming control. The Nevada
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defensive
tactics affecting Nevada corporate gaming licensees and Registered Corporations
that are affiliated with those operations may be injurious to stable and
productive corporate gaming. The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (1) assure the
financial stability of corporate gaming licensees and their affiliates; (2)
preserve the beneficial aspects of conducting business in the corporate form;
and (3) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's board of directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
16
License fees and taxes, computed in various ways depending on the
type of gaming or activity involved, are payable to the State of Nevada and to
the county in which Riviera Operating Corporation's operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable monthly, quarterly or annually and are based upon: (1) a percentage of
the gross revenues received; (2) the number of gaming devices operated; or (3)
the number of table games operated. A live entertainment tax is also paid by
casinos where live entertainment is furnished in connection with admission
charges, the serving or selling of food, refreshments or the selling of
merchandise. Nevada licensees that hold a license to manufacture and distribute
slot machines and gaming devices, such as Riviera Operating Corporation, also
pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, or
required to be registered, or a person who is under common control with any of
such persons (collectively, "Licensees"), and who proposes to become involved in
a gaming venture outside of Nevada, is required to deposit with the Nevada
Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay
the expenses of investigation by the Nevada Board of such person's participation
in such foreign gaming. The revolving fund is subject to increase or decrease in
the discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities or enter into associations that are harmful to
the State of Nevada or its ability to collect gaming taxes and fees, or employ,
have contact with or associate with a person in the foreign operation who has
been denied a license or finding of suitability in Nevada on the ground of
personal unsuitability.
Other Nevada Regulation
The sale of alcoholic beverages at Riviera Las Vegas is subject to
licensing, control and regulation by the Clark County Board. All such licenses
are revocable and none of them are transferable. The Clark County Board has full
power to limit, condition, suspend or revoke any such license, and any such
disciplinary action could (and revocation would) have a material adverse effect
on our operations.
Colorado
Colorado Gaming and Liquor Regulation
Summary
In general, Riviera Black Hawk, its principal executive officers and
those of Riviera Holdings Corporation, and any Riviera Black Hawk employees who
are involved in Colorado gaming operations are required to be found suitable for
licensure by the Colorado Gaming Commission (the "Colorado Commission").
Colorado also requires that persons owning, directly or indirectly, 5% or more
of our stock be certified as suitable for licensure. Riviera Black Hawk's
original retail gaming license was approved by the Colorado Commission on
November 18, 1999, and has been renewed each subsequent year.
Background
Pursuant to an amendment to the Colorado Constitution (the "Colorado
Amendment"), limited stakes gaming became lawful in the cities of Central City,
Black Hawk and Cripple Creek on October 1, 1991. Limited stakes gaming means a
maximum single bet of five dollars on slot machines and in the card games of
blackjack and poker.
Limited stakes gaming is confined to the commercial district of Black
Hawk, as defined by Black Hawk on May 4, 1978. In addition, the Colorado
Amendment restricts limited stakes gaming to structures that conform to the
architectural styles and designs that were common to the areas prior to World
War I, and which conform to the requirements of applicable city ordinances
regardless of the age of the structures. Under the Colorado Amendment, no more
than 35% of the square footage of any building and no more than 50% of any one
floor of any building may be used for limited stakes gaming. Persons under the
age of 21 cannot participate in limited stakes gaming. The Colorado Amendment
also prohibits limited stakes gaming between the hours of 2:00 a.m. and 8:00
a.m., and allows limited stakes gaming in establishments licensed to sell
alcoholic beverages.
17
Further, the Colorado Limited Gaming Act of 1991 (the "Colorado Act")
provides that, in addition to any applicable license fees, a gaming tax shall be
imposed upon retail gaming licensees (casinos) up to a maximum of 40% of the
adjusted gross proceeds ("AGP") derived from limited stakes gaming. AGP is
generally defined as the total amounts wagered less payouts to players, except
for poker in which AGP means the monies retained by the casino as compensation
(the "rake"). The tax rates are set by the Colorado Commission annually.
The Colorado Act declares public policy on limited stakes gaming to
be that: (1) the success of limited stakes gaming is dependent upon public
confidence and trust that licensed limited stakes gaming is conducted honestly
and competitively; the rights of the creditors of licensees are protected;
gaming is free from criminal and corruptive elements; (2) public confidence and
trust can be maintained only by strict regulation of all persons, locations,
practices, associations and activities related to the operation of licensed
gaming establishments and the manufacture or distribution of gaming devices and
equipment; (3) all establishments where limited gaming is conducted and where
gambling devices are operated, and all manufacturers, sellers and distributors
of certain gambling devices and equipment must therefore be licensed, controlled
and assisted to protect the public health, safety, good order and the general
welfare of the inhabitants of the state to foster the stability and success of
limited stakes gaming and to preserve the economy, policies and free competition
in Colorado; and (4) no applicant for a license or other affirmative Colorado
Commission approval has any right to a license or to the granting of the
approval sought. Any license issued or other Colorado Commission approval
granted pursuant to the provisions of the Colorado Act is a revocable privilege,
and no holder acquires any vested rights therein.
Regulatory Structure
The Colorado Act subjects the ownership and operation of limited
stakes gaming facilities in Colorado to extensive licensing and regulation by
the Colorado Commission. The Colorado Commission has full and exclusive
authority to promulgate, and has promulgated, rules and regulations governing
the licensing, conduct and operation of limited stakes gaming. The Colorado Act
also created the Colorado Division of Gaming within the Colorado Revenue
Department to license, regulate and supervise the conduct of limited stakes
gaming in Colorado. The division is supervised and administered by the Director
of the Division of Gaming.
Gaming Licenses
The Colorado Commission may issue the following licenses applicable
to the operation of Riviera Black Hawk:
o operator;
o retail gaming;
o support; and
o key employee.
The first two licenses require annual renewal by the Colorado
Commission. Support and key employee licenses are issued for two-year periods
and are renewable by the Division of Gaming Director. The Colorado Commission
has broad discretion to condition, suspend for up to six months, revoke, limit
or restrict a license at any time and also has the authority to impose fines.
An applicant for a gaming license must complete comprehensive
application forms, pay required fees and provide all information required by the
Colorado Commission and the Division of Gaming. Prior to licensure, applicants
must satisfy the Colorado Commission that they are suitable for licensing.
Applicants have the burden of proving their qualifications and must pay the full
cost of any background investigations. There is no limit on the cost of, or the
time it takes to complete, such background investigations.
18
Gaming employees must hold either a support or key employee license.
Every large retail gaming licensee, such as Riviera Black Hawk, must have a key
employee licensee on premises and in charge of all limited stakes gaming
activities when limited stakes gaming is being conducted. The Colorado
Commission may determine that a gaming employee is a key employee and require
that such person apply for a key employee license.
A retail gaming license is required for all persons conducting
limited stakes gaming on their premises. In addition, an operator license is
required for all persons who engage in the business of placing and operating
slot machines on the premises of a retailer. However, a retailer is not required
to hold an operator license. No person may have an ownership interest in more
than three retail gaming licenses. The definition of "ownership interest" for
purposes of the multiple license prohibition, however, has numerous exclusions
based on percentages of ownership interest or voting rights.
A slot machine manufacturer or distributor license is required for
all persons who manufacture, import and distribute slot machines in Colorado. No
manufacturer or distributor of slot machines or associated equipment may
knowingly, without notification being provided to the Colorado Division within
ten days, have any interest in any casino operator, allow any of its officers or
any other person with a substantial interest in such business to have such an
interest, employ any person employed by a casino operator, or allow any casino
operator or any person having a substantial interest therein, to have any
interest in such business.
The Colorado Act and regulations thereunder (the "Colorado
Regulations") require that every officer, director, and stockholder of private
corporations, or equivalent office or ownership holders for non-corporate
applicants, and every officer, director or stockholder holding a 5% or greater
interest or controlling interest in a publicly traded corporation, or owners of
an applicant or licensee, shall be a person of good moral character and submit
to a full background investigation conducted by the Division of Gaming and the
Colorado Commission. The Colorado Commission may require any person having an
interest, of any kind, in a license to undergo a full background investigation
and pay the cost of investigation in the same manner as an applicant.
Persons found unsuitable by the Colorado Commission may be required
immediately to terminate any interest, association, or agreement with, or
relationship to, a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant also may jeopardize the licensee's license or the applicant's
application. A license approval may be conditioned upon the termination of any
relationship with unsuitable persons. A person may be found unsuitable because
of prior acts, associations or financial conditions. Acts that would lead to a
finding of unsuitability include, among others, those that would violate the
Colorado Act or the Colorado Regulations or that contravene the legislative
purpose of the Colorado Act.
Duties of Licensees
A licensee must keep the Division of Gaming advised of its business
operations including, but not limited to, gaming contracts and leases. All rules
for the conduct of gaming activity pursuant to the Colorado Act or the Colorado
Regulations must be strictly followed.
Licensees, such as Riviera Black Hawk, have a continuing duty to
report immediately to the Division of Gaming the name, date of birth and social
security number of each person who obtains an ownership, financial or equity
interest in the licensee of 5% or greater, who has the ability to control the
licensee, who has the ability to exercise significant influence over the
licensee or who loans any money or other thing of value to the licensee.
Licensees must report to the Division of Gaming all gaming licenses, and all
applications for gaming licenses, in foreign jurisdictions.
With limited exceptions applicable to licensees that are publicly
traded entities, no person may sell, lease, purchase, convey or acquire any
interest in a retail gaming or operator license or business without the prior
approval of the Colorado Commission.
All agreements, contracts, leases, or arrangements in violation of
the Colorado Amendment, the Colorado Act or the Colorado Regulations are void
and unenforceable.
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Taxes, Fees and Fines
The Colorado Amendment requires each retail gaming licensee to pay in
monthly increments an annual tax of up to 40% of its AGP derived from limited
stakes gaming. Annually during April, May, and June, the Colorado Commission, as
mandated by the Colorado Regulations, conducts rule-making hearings concerning
the gaming tax rate and device fee rate for the subsequent gaming year. The
gaming year begins on July 1st. However, during such hearings rigid adherence to
addressing only specific, designated subjects related to the gaming taxes is not
required, and there is not a limit to the time or practical restriction on the
subject matters which the Colorado Commission may consider in determining the
various tax rates. Currently, the gaming tax is:
o 0.25% on the first $2 million of these amounts;
o 2% on amounts from $2 million to $4 million;
o 4% on amounts from $4 million to $5 million;
o 11% on amounts from $5 million to $10 million;
o 16% on amounts from $10 million to $15 million; and
o 20% on amounts over $15 million.
The City of Black Hawk assesses an annual device fee of $750.00 per
device on all gaming devices exceeding 50. There is no statutory limit on state
or city device fees, which may be increased at the discretion of the Colorado
Commission or the city. In addition, a business improvement fee of as much as
$7.42 per device and a monthly transportation authority device fee of $6.41 per
device also may apply depending upon the location of the licensed premises in
Black Hawk.
Black Hawk also imposes taxes and fees on other aspects of the
businesses of retail gaming licensees, such as parking, alcoholic beverage
licenses and other municipal taxes and fees. Significant increases in these fees
and taxes, or the imposition of new taxes and fees, may occur.
Violation of the Colorado Act or the Colorado Regulations generally
constitutes a class 1 misdemeanor, except as may be specifically provided
otherwise in the Colorado Act, which may subject the violator to fines or
incarceration or both. A licensee who violates the Colorado Act or Colorado
Regulations is subject to suspension of the license for a period of up to six
months, fines or both, or to license revocation.
Requirements for Publicly Traded Corporations
The Colorado Commission has enacted Rule 4.5, which imposes
requirements on publicly traded corporations holding gaming licenses in Colorado
and on gaming licenses owned directly or indirectly by a publicly traded
corporation, whether through a subsidiary or intermediary company. The term
"publicly traded corporation" includes corporations, firms, limited liability
companies, trusts, partnerships and other forms of business organizations. Such
requirements automatically apply to any ownership interest held by a publicly
traded corporation, holding company or intermediary company thereof, where the
ownership interest directly or indirectly is, or will be upon approval of the
Colorado Commission, 5% or more of the entire licensee. In any event, if the
Colorado Commission determines that a publicly traded corporation, or a
subsidiary, intermediary company or holding company, has the actual ability to
exercise influence over a licensee, regardless of the percentage of ownership
possessed by said entity, the Colorado Commission may require the entity to
comply with the disclosure regulations contained in Rule 4.5.
Under Rule 4.5, gaming licensees, affiliated companies and
controlling persons commencing a public offering of voting securities must
notify the Colorado Commission no later than ten business days after the initial
filing of a registration statement with the SEC. Licensed, publicly traded
corporations are also required to send proxy statements to the Division of
Gaming within five days after their distribution. Licensees to whom Rule 4.5
applies must include in their charter documents provisions that: restrict the
rights of the licensees to issue voting interests or securities except in
accordance with the Colorado Act and the Colorado Regulations; limit the rights
of persons to transfer voting interests or securities of licensees except in
accordance with the Colorado Act and the Colorado Regulations; and provide that
holders of voting interests or securities of licensees found unsuitable by the
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Colorado Commission may, within 60 days of such finding of unsuitability, be
required to sell their interests or securities back to the issuer at the lesser
of the cash equivalent of the holders' investment or the market price as of the
date of the finding of unsuitability. Alternatively, the holders may, within 60
days after the finding of unsuitability, transfer the voting interests or
securities to a suitable person, as determined by the Colorado Commission. Until
the voting interests or securities are held by suitable persons, the issuer may
not pay dividends or interest, the securities may not be voted, they may not be
included in the voting or securities of the issuer, and the issuer may not pay
any remuneration in any form to the holders of the securities.
Pursuant to Rule 4.5, persons who acquire direct or indirect
beneficial ownership of either (1) 5% or more of any class of voting securities
of a publicly traded corporation that is required to include in its articles of
organization the Rule 4.5 charter provisions, or (2) a 5% or greater beneficial
interest in a gaming licensee, directly or indirectly through any class of
voting securities of any holding company or intermediary company of a licensee
(collectively such persons are hereinafter referred to as the "qualifying
persons"), must notify the Division of Gaming within 10 days of such
acquisition, must submit all requested information, and are subject to a finding
of suitability as required by the Division of Gaming or the Colorado Commission.
Licensees also must notify any qualifying persons of these requirements. A
qualifying person other than an institutional investor whose interest equals 10%
or more must apply to the Colorado Commission for a finding of suitability
within 45 days after acquiring such securities. Licensees must also notify any
qualifying persons of these requirements. Whether or not notified, qualifying
persons are responsible for complying with these requirements.
A qualifying person who is an institutional investor under Rule 4.5
and who, individually or in association with others, acquires, directly or
indirectly, the beneficial ownership of 15% or more of any class of voting
securities must apply to the Colorado Commission for a finding of suitability
within 45 days after acquiring such interests.
The Colorado Regulations also provide for exemption from the
requirements for a finding of suitability when the Colorado Commission finds
such action to be consistent with the purposes of the Colorado Act.
Pursuant to Rule 4.5, persons found unsuitable by the Colorado
Commission must be removed from any position as an officer, director, or
employee of a licensee, or from a holding or intermediary company. Such
unsuitable persons also are prohibited from any beneficial ownership of the
voting securities of any such entities. Licensees, or affiliated entities of
licensees, are subject to sanctions for paying dividends or distributions to
persons found unsuitable by the Colorado Commission, or for recognizing voting
rights of, or paying a salary or any remuneration for services to, unsuitable
persons. Licensees or their affiliated entities also may be sanctioned for
failing to pursue efforts to require unsuitable persons to relinquish their
interest. The Colorado Commission may determine that anyone with a material
relationship to, or material involvement with, a licensee or an affiliated
company must apply for a finding of suitability or must apply for a key employee
license.
Alcoholic Beverage Licenses
The sale of alcoholic beverages in gaming establishments is subject
to strict licensing, control and regulation by state and local authorities.
Alcoholic beverage licenses are revocable and nontransferable. State and local
licensing authorities have full power to limit, condition, suspend for as long
as six months or revoke any such licenses. Violation of state alcoholic beverage
laws may constitute a criminal offense resulting in incarceration, fines, or
both.
There are various classes of retail liquor licenses, which may be
issued under the Colorado Liquor Code. A gaming licensee may sell malt, vinous
or spirituous liquors only by the individual drink for consumption on the
premises. Even though a retail gaming licensee may be issued one of the various
classes of retail liquor licenses, such gaming licensee, and persons affiliated
with that licensee, are subject to restrictions concerning what other types of
liquor licenses they may hold. An application for an alcoholic beverage license
in Colorado requires notice, posting and a public hearing before the local
liquor licensing authority (e.g., the City of Black Hawk) prior to approval of
the same. The Colorado Department of Revenue's Liquor Enforcement Division must
also approve the application. Riviera Black Hawk's hotel and restaurant license
has been approved by both the local licensing authority and the State Division
of Liquor Enforcement. Such license must be, and has been, renewed annually
since its issuance.
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Federal Registration
Riviera Operating Corporation is required to annually file with the
Attorney General of the United States in connection with the sales,
distribution, or operations of slot machines. All requisite filings for 2006
have been made.
Item 1A. Risk Factors
An investment in our securities involves a high degree of risk. We
operate in a highly competitive, dynamic and rapidly changing industry that
involves numerous risks and uncertainties. Moreover, our debt instruments impose
restrictions on us that are for the benefit of certain of our creditors, but not
necessarily for our stockholders or us. Anyone who is making an investment
decision regarding our securities should carefully consider the following risk
factors, as well as the other information contained or incorporated by reference
in this report. The risks and uncertainties described below are those that we
currently believe may materially affect our company or your investment. Other
risks and uncertainties that we do not presently consider to be material, or of
which we are not presently aware, may become important factors that adversely
affect our security holders or us in the future. If any of the risks discussed
below actually materialize, then our business, financial condition, operating
results, cash flows and future prospects, or your investment in our securities,
could be materially and adversely affected, resulting in a loss of all or part
of your investment.
Risks Relating To Our Business And Our Capital Structure
We Face Intense Competition In The Two Markets Where We Operate
In Las Vegas, intense competition has resulted from, among other
things, significant increases in new hotel rooms, casino sizes and convention,
trade show and meeting facilities. Our success depends on the success of Riviera
Las Vegas and its ability to attract visitors and to continue operating
successfully. Riviera Las Vegas competes with high-end, middle market and other
casinos resort properties and hotels, including those located on or near the Las
Vegas Strip or in downtown Las Vegas, on the basis of overall atmosphere, range
of amenities, level of service, price, location, entertainment offered, shopping
and restaurant facilities, theme and size. Currently, there are approximately 30
major gaming properties located on or near the Las Vegas Strip, approximately
ten additional major gaming properties in the downtown area and many additional
gaming properties located in other areas of Las Vegas. Companies that have more
than one hotel/casino facility operate many of these properties, and many have
greater name recognition and financial and marketing resources than we do and
market to the same target demographic groups as we do. Furthermore, additional
major hotel/casino openings and significant expansion of existing properties,
containing a large number of hotel rooms and attractions, are expected to occur
in Las Vegas in the coming years, which will put even further pressure on us to
remain competitive.
In Black Hawk/Central City, the primary competitive factors are
location, availability and convenience of parking, number of slot machines and
gaming tables, promotional incentives, hotel rooms, types and pricing of
non-gaming amenities, name recognition and overall atmosphere. Our main
competitors are the larger gaming facilities, particularly those with
considerable on-site or nearby parking and established reputations in the local
market. Two of the most successful casinos in Colorado are located across the
street from, and are considerably larger than, Riviera Black Hawk. Three other
casinos in our market offer hotel accommodations as well as gaming facilities,
and thereby have some competitive advantages over us. Also, a road which opened
in November 2004 and which enables drivers to bypass Black Hawk on their way to
Central City, has led to significant recent growth in the Central City gaming
market and may give our Central City competitors an advantage over us.
There have also been efforts in Colorado by Native American tribes to
acquire land to use for construction of a casino that would operate without the
limitations imposed on the Colorado casino industry, and efforts by other
parties to amend the Colorado Constitution to permit installation of slot
machines at five racetracks. Thus far, the Native American casino initiatives in
Colorado have either been rejected or have failed to win support from government
authorities, and in 2003 a race track/slot machine initiative was rejected by
Colorado voters. Nevertheless, if either of these types of initiatives were to
be pursued further in Colorado and gain the necessary approvals, then our
Colorado operations could be adversely affected.
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In addition to the competition that we face from our competitors in
Las Vegas and Colorado, we face substantial competition from other companies in
the gaming industry generally, such as land-based casinos, dockside casinos,
riverboat casinos, casinos located on Native American land in California and
elsewhere, and other forms of legalized gambling. If other casinos operate more
successfully, if other existing gaming properties continue to be enhanced or
expanded, or if additional hotels and casinos are established in or around the
locations where we conduct business, we may lose market share.
The number of casinos on Native American lands has increased since
enactment of the Indian Gaming Regulatory Act of 1988. In 2000 California voters
approved an amendment to the California Constitution that allows Las Vegas-style
gaming on Native America lands in that state. While new gaming jurisdictions
generally have not materially impacted Las Vegas, the expansion of gaming into
California poses a more serious threat to the continued growth of Las Vegas.
We also compete, to some extent, with other forms of gaming on both a
local and national level, including state-sponsored lotteries, Internet gaming,
on- and off-track wagering and card parlors. In particular, the legalization of
gaming or the expansion of legalized gaming in or near any geographic area from
which we attract or expect to attract a significant number of our customers
could have a significant adverse effect on our business, financial condition,
results of operations and future prospects.
Increased competition may also require us to make substantial capital
expenditures to maintain or enhance the competitive positions of our two
properties. Because we are highly leveraged, after we satisfy our obligations
under our outstanding indebtedness we might not have sufficient financing to
make such expenditures. If we are unable to make such expenditures, our
competitive position, results of operations and future prospects could be
materially and adversely affected.
Our Company Operates In Only Two Markets, Las Vegas And Black Hawk,
Which Exposes Us To Greater Risks Than Gaming Companies
With More Operating Properties Or A Presence In More Markets
We do not have material assets or operations other than Riviera Las
Vegas and Riviera Black Hawk. Therefore, we are entirely dependent upon these
two properties for our cash flow. This makes us more sensitive to events and
conditions affecting the markets in which we operate, including the following:
o local economic and competitive conditions,
o inaccessibility due to weather conditions, road construction
or closure of primary access routes;
o decline in air passenger traffic due to higher ticket costs or
fears concerning air travel;
o a decline in automobile traffic due to higher gasoline prices;
o changes in state and local laws and regulations, including
those affecting gaming;
o an increase in the cost of electrical power for Riviera Las
Vegas as a result of, among other things, power shortages in
California or other western states with which Nevada shares a
single regional power grid; and
o a decline in the number of visitors to Las Vegas or the number
of Colorado residents who visit Black Hawk.
Our Significant Indebtedness Could Adversely Affect Our Financial
Health And Prevent Us From Fulfilling Our Obligations
Under Our Outstanding Indebtedness
We have a significant amount of debt, which could have important
consequences to our stockholders and significant effects on our business and our
ability to satisfy our debt obligations. For example, it could:
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o increase our vulnerability to adverse economic or industry
conditions or a downturn in our business;
o limit our ability to redeem our 11% Senior Secured Notes ("11%
Notes") if we are required to do so as a result of a change in
control of our company or regulatory requirements;
o result in an event of default if we fail to comply with the
financial and other restrictive covenants in our Note Indenture
or our senior secured credit facility, which could result in
all of our indebtedness becoming immediately due and payable
and would permit certain lenders to foreclose on our assets
securing that indebtedness;
o limit our ability to fund or obtain additional financing for
future working capital needs, capital expenditures and other
general financial requirements;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital needs, capital expenditures, development projects,
acquisitions and other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes
in our business and industry; and
o place us at a disadvantage compared to our competitors that
have less debt or whose debt is at lower interest rates and on
more favorable terms than our debt.
We Will Need To Refinance Our 11% Notes In Order To Repay Them, And
Refinancing Terms May Be Unfavorable To Us
Our ability to repay the 11% Notes on or before the June 15, 2010
maturity date will depend on our ability to refinance them, because our cash
flow from operations is insufficient for this purpose. We are currently
exploring refinancing opportunities, with a view to refinancing in the second
half of 2007. However, in view of, among other things, our lack of profitability
and the other risk factors that we are reporting, we may have to accept
refinancing terms that are unfavorable to us. This, in turn, could have further
adverse effects on our financial health and our ability to satisfy our debt
obligations.
We Are Dependent On Key Personnel Whom We Might Have Difficulty Replacing,
Due To A Shortage Of Management-Level Personnel In Our Industry And
Market Perceptions About Our Prospects
Our ability to operate successfully is dependent, in part, upon the
continued services of certain of our executive personnel. Our loss of any of
them or our inability to attract or retain key employees in the future could
have a material adverse effect on us. We have an employment agreement with
William L. Westerman, our Chairman of the Board, President and Chief Executive
Officer ("CEO") who has been with us or our predecessor company since 1991. Mr.
Westerman is employed for an indefinite period, subject to termination by us
upon at least 90 days' written notice or termination by him upon at least 180
days' written notice. Mr. Westerman's contract is also subject to earlier
termination upon the occurrence of certain events. We cannot assure you that we
would find a suitable replacement for Mr. Westerman if he retires or his
employment terminates for any other reason. There is a shortage of skilled
management-level employees in the gaming industry. This shortage, combined with
our relatively limited financial and marketing resources, competitive position
and market perceptions about our future prospects, particularly since our April
5, 2006 Agreement and Plan of Merger (the "Merger Agreement") was terminated on
August 29, 2006, would likely add to our difficulties in finding suitable
replacements if we lose the services of any of our executives or other key
personnel which might make it difficult for us to attract and retain qualified
personnel at that level.
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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 Riviera Acquisition Holdings Inc. ("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" 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.
Regulations Issued By Gaming Or Other Governmental Authorities Could
Adversely Affect Our Operations
As owners and operators of gaming facilities, we are subject to
extensive governmental regulation. The ownership, management and operation of
gaming facilities are subject to extensive laws, regulations and ordinances,
which are administered by various federal, state and local government entities
and agencies. The gaming authorities in the jurisdictions in which we operate
have broad authority and discretion to require us and our officers, directors,
managers, employees and certain security holders to obtain various licenses,
registrations, permits, findings of suitability or other approvals. To enforce
applicable gaming regulations, gaming authorities may, among other things,
limit, suspend or revoke the licenses of any gaming entity or individual, and
may levy fines against us or individuals or may cause us to forfeit our assets
for violations of gaming laws or regulations. Any of these actions would have a
material adverse effect on us.
Nevada and Colorado state and local government authorities require us
to obtain gaming licenses and require our officers and key employees to
demonstrate suitability to be involved in gaming operations. Those authorities
may limit, condition, suspend or revoke a license for any cause they deem
reasonable. Also, if we violate any gaming laws or regulations, those
authorities may levy substantial fines against us or the individuals involved in
the violations. The occurrence of any of these events could have a material
adverse effect on our business, financial condition, results of operations and
future prospects.
We can not assure you that any new licenses, registrations, findings
of suitability, permits and approvals, including for any proposed expansion of
our properties or our entry into new markets, will be given or that our existing
ones will be renewed when they expire. Any failure to renew or maintain our
licenses or receive new licenses when necessary would have a material adverse
effect on us.
We are subject to a variety of other laws, rules and regulations,
including those pertaining to zoning, environmental matters, construction, land
use and the serving of alcoholic beverages. We also pay substantial taxes and
fees in connection with our operations as a gaming company, which taxes and fees
are subject to increase or other change at any time. Any changes to these laws
could have a material adverse effect on our business, financial condition,
results of operations and future prospects.
Our compliance costs associated with these laws, regulations and
licenses are significant. A change in the laws, regulations and licenses
applicable to our business or a violation of any of them could require us to
make material expenditures or could otherwise materially adversely affect our
business, financial condition, results of operations and future prospects.
In Black Hawk and in other jurisdictions from which we attract
customers, or in which we may expand, gaming is subject to local referendum. If
the results of a referendum held in a jurisdiction in which we operate were to
restrict gaming in whole or in part or if the results of a referendum in a
nearby non-gaming jurisdiction were to permit gaming, our results of operations
could be negatively impacted.
We Are Subject To Potential Exposure To Environmental Liabilities
25
Generally, we are subject to various federal, state and local
governmental laws and regulations relating to the use, storage, discharge,
emission and disposal of hazardous materials. Failure to comply could result in
the imposition of severe penalties or restrictions on our operations by
governmental agencies or courts. We are not aware of any such exposure at our
properties. Riviera Black Hawk is located within a 400-square mile area that in
1983 was designated as the Clear Creek Central/City National Priorities List
Site Study Area under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended. Although Riviera Black Hawk is not within any
of the specific areas currently identified for investigation or remediation
under that statute, environmental problems may subsequently be discovered,
including in connection with any future construction on our property.
Furthermore, governmental authorities could broaden their investigations and
identify areas of concern within the site, we could be identified as a
"potentially responsible party" and any related liability could have a material
adverse effect on us. We do not have insurance to cover environmental
liabilities, if we incur any.
Energy Price Increases May Adversely Affect Our Costs Of Operations
And Our Revenues
Our casino properties use significant amounts of electricity, natural
gas and other forms of energy. Recent substantial increases in the cost of
electricity in the United States have negatively affected our operating results
and are likely to continue to do so. The extent of the impact is subject to the
magnitude and duration of energy price increases, but this impact could be
material. In addition, energy price increases in cities that constitute a
significant source of customers for our properties could result in a decline in
disposable income of potential customers and a corresponding decrease in
visitation to our properties, which could negatively impact our revenues.
Our Business, Financial Condition, Results Of Operations And Future
Prospects Are Dependent On Many Factors That Are Beyond
Our Control
The economic health of our business is generally affected by a number
of factors that are beyond our control, including:
o decline in tourism and travel due to concerns about homeland
security, terrorism or other destabilizing events;
o decline in the Las Vegas convention business;
o intense competitive conditions in the gaming industry,
including the effect of such conditions on the pricing of our
games and products;
o general economic conditions and economic conditions specific
to our primary markets;
o changes in the regulatory regimes affecting our business,
including changes to applicable gaming, employment,
environmental or tax regulations;
o inaccessibility to our property due to construction on
adjoining or nearby properties, streets or walkways;
o substantial increases in the cost of electricity, natural gas
and other forms of energy;
o local conditions in key gaming markets, including seasonal and
weather-related factors;
o increased transportation costs;
o levels of disposable income of casino customers;
o continued increases in health care costs;
26
o increases in gaming taxes or fees;
o the relative popularity of entertainment alternatives to
casino gaming that compete for the leisure dollar;
o an outbreak or suspicion of an outbreak of an infectious
communicable disease; and
o the adoption of anti-smoking regulations.
Any of these factors could negatively impact our property or the
casino industry generally, and as a result, our business, financial condition
and results of operations.
We May Incur Losses That Are Not Adequately Covered By Insurance
Insurance may not be available in the future or adequate to cover all
loss or damage to which our business or our assets might be subjected. Since the
terrorist attacks of September 11, 2001, insurance coverage for certain types of
damages or occurrences has diminished substantially and is no longer available
at reasonable commercial rates. The lack of adequate insurance for certain types
or levels of risk could expose us to significant losses if a catastrophe or
lawsuit occurs for which we do not have insurance coverage. Any losses we incur
that are not adequately covered by insurance may decrease our future operating
income, require us to pay the costs of replacing or repairing destroyed property
and reduce the funds available for payment of our debt obligations.
We Are Subject To Litigation, Which, If Adversely Determined, Could
Cause Us To Incur Substantial Losses
From time to time during the normal course of operating our business,
we are subject to various litigation claims and other legal disputes. Some of
the litigation claims may not be covered under our insurance policies or our
insurance carriers may seek to deny coverage. As a result, we might be required
to incur significant legal fees, which may have a material adverse effect on us.
In addition, because we cannot predict the outcome of any legal action, it is
possible that as a result of litigation, we will be subject to adverse judgments
or settlements that could significantly reduce our earnings or result in losses.
Homeland Security, Terrorism And War Concerns, As Well As Other
Factors Affecting Discretionary Consumer Spending, May Harm
Our Operating Results
The strength and profitability of our business depend on consumer
demand for hotel/casino resorts, gaming in general and the types of amenities we
offer. A general downturn in economic conditions and changes in consumer
preferences or discretionary consumer spending could harm our business. The
terrorist attacks of September 11, 2001, ongoing war activities and concerns
about terrorism and homeland security have had a negative impact on travel and
leisure expenditures, including lodging, gaming (in some jurisdictions) and
tourism. We cannot predict the extent to which those events may continue to
affect us, directly or indirectly, in the future. An extended period of reduced
discretionary spending or disruptions or declines in travel could significantly
harm our operations.
In addition to concerns about war, homeland security and terrorism,
other factors affecting discretionary consumer spending, including general or
regional economic conditions, disposable consumer income, fears of recession and
consumer confidence in the economy, may negatively impact our business. Negative
changes in factors affecting discretionary spending could reduce customer demand
for the products and services we offer, thus imposing practical limits on our
pricing and harming our operations.
Risks Relating To Our Common Stock
Our Stock Price Has Been Volatile, Which Could Result In Substantial
Losses For Our Shareholders.
Our common stock is traded on the American Stock Exchange ("AMEX").
Our stock's average daily trading volume for the 52-week period ended February
21, 2007 was approximately 71,830 shares. The daily closing sale prices of our
stock, as reported by AMEX, have ranged from $13.80 to $25.35 for the 52-week
period ended February 21, 2007. The volatility of the trading price of our stock
could be due to many factors including, but not limited to:
27
. our entry into the Merger Agreement on April 5, 2006 and
termination of it on August 29, 2006;
. our announcement that we received a competing takeover proposal
while the Merger Agreement was still in effect;
. the announcements in November 2006 of our receipt of a new
takeover proposal and in December 2006 of the withdrawal
of that proposal;
. the 2006 sale by our CEO of 2,095,593 shares of our stock at
$15.00 per share;
. fluctuations in Las Vegas real estate values, particularly as
they affect property on the Las Vegas Strip;
. the relatively low trading volume for our stock;
. quarterly fluctuations in our financial results;
. changes in analysts' estimates of our financial performance or
future prospects;
. announcements of new services or programs;
. additions or departures of key personnel;
. general conditions in our industry and in the financial
markets; and
. a variety of other risk factors including the ones described
elsewhere in this report.
The Volatility Of The Las Vegas Real Estate Market Might Result In A
Substantial Decline In Our Stock Price
Over the past three years, the market value of real estate located on
or near the Las Vegas Strip has increased substantially. Over that same period,
there has been a substantial increase in the trading price of our stock. Our Las
Vegas property, which is located near the northern end of the Las Vegas Strip
and consists of approximately 26 acres, is valued on our balance sheet at its
1993 historical cost of $21 million. We believe that the increase in the value
of real estate on the Las Vegas Strip has been a significant factor in the
increase in our stock price over the past three years. Likewise, we believe that
any future downward trend in those real estate values could cause a significant
drop in the price of our stock.
There Are Limitations On Changes In Control Of Our Company That Could
Reduce Your Ability To Sell Our Shares In Excess Of
Current Market Prices
The Note Indenture restricts the ability of anyone to effect a change
in control of our company. If anyone acquires 35% or more of our outstanding
stock, or if other events occur that constitute a change in control according to
our Note Indenture, then we would have to make a prompt offer to repurchase all
of our 11% Notes at 101% of their principal amount plus accrued interest. It is
unlikely that we would have the funds to repurchase our 11% Notes within the
required time frame unless we obtained the necessary funding as part of the
change in control transaction, which adds significantly to the funding that a
buyer would need to acquire our company. Our Note Indenture also would require
us to obtain the consent of holders of a majority of the outstanding principal
amount of the 11% Notes in order for us to be a party to a merger or to sell all
or substantially all of our assets unless, after giving effect to the
transaction, we meet certain net worth or financial ratio tests, which might be
difficult or impossible for us to meet.
28
Besides our Note Indenture, our articles of incorporation and bylaws
contain provisions that could reduce the likelihood of a change in control or
acquisition of our company. These could limit your ability to sell your shares
at a premium or otherwise affect the price of our common stock. These
provisions:
. limit the voting power of persons who acquire more than 10% of
our outstanding stock without our prior approval.
. permit us to issue up to 60 million shares of common stock;
. permit us to increase the size of our board of directors and
fill the resulting vacancies without a vote by shareholders; and
. limit the persons who may call special meetings of shareholders.
In addition, Nevada law contains provisions governing the acquisition
of a substantial or controlling interest in certain publicly-held Nevada
corporations, including our company. Those laws provide generally that any
person who acquires more than a specified percentage of our outstanding stock
must obtain certain approvals from us before the acquisition or they might be
denied voting rights or the ability to engage in various transactions with us,
unless our disinterested stockholders vote to restore those rights. The
ownership percentage that triggers some of these restrictions is 10%, and
further restrictions can be triggered at the 20%, 33-1/3% or 50.1% ownership
level.
Also, a person that seeks to acquire control must satisfy the
licensing requirements of the Nevada and Colorado gaming authorities. The gaming
authorities may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with a person
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.
Nevada law also provides that we may resist a change or potential
change in control if our board of directors determines that the change is not in
the best interest of our company.
We Have Never Paid Dividends, Do Not Intend To Pay Dividends In The
Foreseeable Future And Cannot Pay Dividends To Any Unsuitable Person
We have never paid dividends on our stock, nor do we anticipate
paying dividends in the foreseeable future. We intend to retain our cash flow or
earnings, if any, to use in our growth and ongoing operations. In addition,
because we are a holding company, our ability to pay dividends would be
dependent on our subsidiaries' ability to provide funds to us. However, the
terms of our debt instruments and credit facilities materially restrict our
ability to pay dividends even when our subsidiaries pay dividends to us. Also,
due to gaming law considerations, our articles of incorporation prohibit the
payment of dividends to anyone who is deemed an "unsuitable person" or is an
affiliate of an "unsuitable person."
Certain Owners Of Our Stock May Have To File An Application With, And Be
Investigated By, Nevada Gaming Authorities. If That Owner Is Deemed
"Unsuitable," It Will Lose Most Of The Attributes Of Being A Stockholder
Any person who acquires beneficial ownership of more than 10% of our
voting securities must apply to the Nevada Commission for a finding of
suitability within 30 days after the Chairman of the Nevada Board mails a
written notice requiring such application. Under certain circumstances, if an
"institutional investor" (as defined in Nevada gaming regulations) acquires
beneficial ownership of more than 10% but not more than 15% of our voting
securities and holds the securities only for investment purposes, it may apply
for a waiver of such finding of suitability requirement. In addition, any
beneficial owner of our voting securities, regardless of the number of shares
owned, may be required, at the discretion of the Nevada Commission, to apply for
a finding of suitability. A finding of suitability is comparable to licensing,
and the applicant must pay all costs of investigation incurred by the Nevada
gaming authorities in conducting the investigation.
Any such person who fails to apply for a finding of suitability within
30 days after being ordered to do so by the Nevada Commission may be found to be
unsuitable. Any person who is found by the Nevada Commission to be unsuitable to
be a beneficial owner of our voting securities but continues such beneficial
ownership beyond the period of time prescribed by the Nevada Commission may be
guilty of a criminal offense. We will be subject to disciplinary action if,
after we receive notice that a person is unsuitable to be a beneficial owner of
our voting securities or to have any other relationship with us, we:
29
. pay that person any dividend or interest on our voting
securities;
. allow that person to exercise, directly or indirectly, any
voting right conferred through our voting securities held by
that person;
. pay that person any remuneration in any form for services
rendered or otherwise; or
. fail to pursue all lawful efforts to require that person to
relinquish our voting securities for cash at fair market value.
We May Redeem Shares Due To Gaming Law Considerations, Either As
Required By Gaming Authorities Or In Our Discretion
Our articles of incorporation provide that if a gaming authority
determines that any stockholder or its affiliates are unsuitable, or if deemed
necessary or advisable by us for gaming law considerations, we may redeem shares
of our stock that the stockholder or the stockholder's affiliates own or
control. The redemption price will be the amount required by the gaming
authority or, if the gaming authority does not determine the price, the price
deemed reasonable by us. If we determine the redemption price, that price will
be capped at the market price of the shares on the date we give the redemption
notice. We may pay the redemption price in cash, by promissory note, or both, as
required by the applicable gaming authority and, if not so required, as we
elect.
We Do Not Meet AMEX's Earnings Or Net Worth Listing Standards
Our common stock is listed on AMEX under the symbol RIV. We do not
currently meet the earnings or net worth standards of AMEX. We have been
informed, however, that according to AMEX policy, AMEX will not normally
consider suspending dealings in or delisting the securities of a company which
is below the earnings and net worth standards if the total market value of that
company's publicly held shares is at least $15 million. Based on the number of
our publicly held shares as of February 21, 2006, our shares must have a
per-share market value of at least $1.50 in order to meet that $15 million
level. However, we cannot be sure that AMEX will continue to follow that policy
or that the price of our shares will continue to enable us to stay at that level
in the future. If our shares were delisted from AMEX, the marketability and
liquidity of our stock could be significantly reduced.
Item 2. Properties
Riviera Las Vegas
Riviera Las Vegas is located on the Las Vegas Strip, at 2901 Las
Vegas Boulevard South, Las Vegas, Nevada and occupies approximately 26 acres.
The buildings comprise approximately 1.8 million square feet, including 110,000
square feet of casino space, a 160,000 square-foot convention, meeting and
banquet facility, 2,075 hotel rooms (including 177 luxury suites) in five
towers, three restaurants, a buffet, four showrooms, a lounge and approximately
2,300 parking spaces. In addition, executive and other offices for Riviera Las
Vegas are located on the property.
There are approximately 35 food and retail concessions operated under
individual leases with third parties. The leases are for periods from one month
to, including option periods, up to twenty years.
The Riviera Las Vegas and Riviera Black Hawk properties are
encumbered by deeds of trust securing our 11% Notes, which mature in June 2010
and our five-year senior secured credit facility, which expires in July 2007.
30
Riviera Black Hawk
Riviera Black Hawk is located on 1.63 acres of land at 400 Main
Street, Black Hawk, Colorado. The buildings include approximately 325,000 square
feet and comprise 32,000 square feet of gaming space, parking spaces for
approximately 520 vehicles (substantially all of which are covered), a 252-seat
buffet, two bars and an entertainment center with seating for approximately 400
people.
Item 3. 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 (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 ...[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. 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. On or around February 26, 2007, the
parties agreed to dismiss the Consolidated Complaint and on March 2, 2007, the
parties filed a Stipulation and Order to Dismiss the Consolidated Complaint
("Dismissal Order") with the Court. The Consolidated Complaint will be formally
dismissed upon the Court's execution of the Dismissal Order.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
(a) Our common stock is traded on AMEX. As of March 1, 2007, we had
approximately 270 shareholders of record and individual participants in security
position listings. There are a significantly greater number of shareholders
whose shares are held in street name. Based on information we collected as of
March 1, 2007, we estimate that we have at least 1,100 beneficial holders in
total.
We have never paid dividends on our common stock and do not expect to
pay dividends (cash or otherwise) on our common stock for the foreseeable
future. Our ability to pay dividends is primarily dependent upon receipt of
dividends and distributions from our subsidiaries, which include the operations
of Riviera Las Vegas and Riviera Black Hawk. In addition, the Note Indenture and
our senior secured credit facility, which are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and in Note 8 to our financial statements in
this report, materially restrict our ability to pay dividends.
We do not currently meet the earnings or net worth listing standards
of AMEX. We have been informed, however, that according to AMEX policy, AMEX
will not normally consider suspending dealings in or delisting the securities of
a company that does not meet the earnings or net worth standards if the
company's publicly held shares have a market value of at least $15 million.
However, we cannot give any assurance that AMEX will continue to follow that
policy or that our share price will continue to enable us to stay at that level
in the future. Based on the number of our publicly held shares as of February
23, 2007, our share price would have to be at least $1.50 in order for us to
reach the $15 million level. If our shares were delisted from AMEX, the
marketability and liquidity of our common stock could be significantly reduced.
31
The table below sets forth the high and low sale prices by quarter
for the years ended December 31, 2006 and 2005, based on AMEX reported prices by
certain brokers who have had transactions in our common stock during the year:
First Second Third Fourth
Quarter Quarter Quarter Quarter
2006
HIGH $16.85 $25.11 $22.52 $24.16
LOW 13.95 17.11 19.25 19.23
2005
HIGH $16.23 $24.00 $26.83 $22.27
LOW 11.25 11.30 20.22 12.59
Equity Compensation Plan Information (as of December 31, 2006)
Plan category A B C
-------------- Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price remaining available for
of outstanding options, of outstanding future issuance under equity
warrants and rights options, warrants compensation plans (excluding
------------------- and rights securities reflected in
------- column A)
---------
Equity compensation
plans approved by 258,000 $3.93 1,126,000
security holders
Equity compensation
plans not approved by 169,200 N/A 167,472(1)
security holders(2)
Total 427,200 $3.93 1,293,472
(1) Of the 167,472 shares referenced in column C of the above table,
121,452 are from our Restricted Stock Plan and 46,020 are from our Stock
Compensation Plan for Directors Serving on the Compensation Committee, which are
described in Note 12 of our consolidated financial statements included in this
report. We have a Stock Compensation Plan, under which directors who are members
of the Compensation Committee have the right to receive all or part of their
annual fees in the form of Common Stock having a fair market value equal to the
amount of their fees. Of the 50,000 shares that are allocated to this plan,
46,020 remain available for issuance.
(2) Restricted stock for employees issued in 2005 which was not
approved by security holders.
32
Comparison of Five-Year Cumulative Total Returns
Performance Graph for
Riviera Holdings Corporation
Produced on 03/01/07 including data to 12/29/2006
The following graph compares the annual change in the cumulative total
return, assuming reinvestment of dividends, on the Company's Common Stock with
the annual change in the cumulative total returns of the NASDAQ Broad Market,
the American Stock Exchange Index (the "AMEX Index"), the New York Stock
Exchange (the "NYSE") and the NASDAQ Amusement and Recreation Services Index
(the "NASDAQ 79xx"), which the Company considers to be its peer industry group.
The graph assumes an investment of $100 on December 31, 2001, in each of the
Common Stock, the stocks comprising the NASDAQ Broad Market, the stocks
comprising the AMEX Index and the stocks comprising the NASDAQ 79xx.
The graph is a Comparison of Cumulative Total Return Among the Company, NYSE/
AMEX/Nasdaq Stock Market (US Companies) and Nasdaq stocks (SIC 7900 - 7999 US
Companies amusement and recreation services) (1).
Riviera NYSE/AMEX/Nasdaq Nasdaq
U.S. Companies (SIC 79xx)
US Amusement Companies
12/31/01 100.0 100.0 100.0
12/31/02 101.9 79.4 81.9
12/31/03 127.6 104.6 115.5
12/31/04 978.8 117.5 145.9
12/31/05 1159.7 124.7 139.5
12/31/06 1709.4 144.6 187.8
(1) Comprised of companies whose stock is traded on the Nasdaq National Market
and whose standard industrial classification is within 7900-7999. The
company does not necessarily believe that this is an indication of the value
of the Company's stock.
33
(b) Not Applicable
(c) Not Applicable
Item 6. Selected Financial Data
The following table sets forth a summary of selected financial data
for the Company for the years ended December 31 (in thousands, except Net Loss
Per Diluted Common Share, and adjusted for three-for-one stock split in 2005):
---------------------- ---------- ----------- ---------- ----------- ----------
2006 2005 2004 2003 2002
---------------------- ---------- ----------- ---------- ----------- ----------
Net Operating Revenue $200,994 $202,227 $201,350 $190,159 $188,292
Net Loss ($335) ($3,992) ($2,086) ($14,453) ($24,726)
Net Loss Per Diluted
Common Share ($0.03) ($0.34) ($0.20) ($1.39) ($2.39)
Total Assets $213,682 $211,769 $217,536 $221,538 $235,896
Long-Term Debt $215,004 $215,431 $216,467 $219,625 $220,124
---------------------- ---------- ----------- ---------- ----------- ----------
The net loss for 2006 was impacted by costs totaling approximately
$3.0 million or $0.25 per share, including mergers, acquisitions and development
costs of $1.3 million, Sarbanes-Oxley expenses of $820,000 and equity based
compensation expense of $813,000. The net loss for 2005 was impacted by costs
totaling approximately $3.6 million or $0.30 per share, including Sarbanes-Oxley
Act expenses of $1.2 million, equity-based compensation expense of $1.6 million
and asset impairment write-down of $777,000. The net losses for 2003 and 2004
were impacted by $2.4 million or ($0.23) per share and $1.1 million or ($0.10)
per share, respectively, for mergers, acquisitions or development costs. The net
loss for 2002 was impacted by costs associated with refinancing our bonds.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overall Outlook and Recent Developments
We own and operate Riviera Las Vegas on the Las Vegas Strip in Las
Vegas, Nevada, and Riviera Black Hawk in Black Hawk, Colorado.
Our capital expenditures for Riviera Las Vegas are geared to maintain
the hotel rooms, gaming product and amenities in sufficient condition to compete
for customers in the convention market and casino market. In 2007, we intend to
begin a process of upgrading our rooms in Las Vegas by featuring new Euro beds
and flat screen TV's. Room rates and slot revenues are the primary factors
driving our operating margins. We use technology to maintain labor costs at a
reasonable level, including kiosks for hotel check-in, slot ticket redemption
and slot club redemptions. As of December 31, 2006 substantially all of our slot
machines had been converted to the Ticket-In Ticket-Out (TITO) system in both
Las Vegas and Black Hawk. 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 and upgrade our Food & Beverage amenities.
Our marketing focus in Las Vegas is on using direct marketing efforts
to customers in our database and providing complimentary rooms to our slot
customers based on the level of their play, while reducing the number of rooms
available for our Tour and Travel customers. We also seek to maximize the number
of people who patronize Las Vegas but who are not guests in our hotel by
capitalizing on our prime Las Vegas Strip location, convention center proximity
and several popular in-house productions. We are well situated on the Las Vegas
Strip near Circus Circus, Sahara, Las Vegas Hilton, the Las Vegas Convention
Center, Wynn Las Vegas, the planned $4.5 billion Echelon project planned on the
site of the recently closed Stardust and the $2 billion Fontainebleau project
just to our north, as well as numerous non-gaming condominium and time-share
projects which are either planned or under construction within walking distance
of our casino. However, the recent closures of the Stardust and Westward Ho as
well as construction in our immediate area, has caused a significant reduction
in walk-in traffic and may continue to do so for the foreseeable future.
34
Our marketing focus in Black Hawk is on using direct marketing
efforts to customers in our database and providing exciting events and
give-aways to our loyalty program members.
On August 29, 2006, our shareholders disapproved the Merger Agreement
that we had entered into on April 5, 2006 and we terminated it. Consummation of
the merger as contemplated by the Merger Agreement would have resulted in our
shareholders receiving $17 in cash for each share of our stock that they held.
Under the Merger Agreement, we agreed to pay 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 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.
On August 8, 2006, we announced that we received an unsolicited,
competing takeover proposal on substantially the same terms and conditions set
forth in the Merger Agreement. Prior to our termination of the Merger Agreement,
that competing takeover proposal had not been withdrawn. On September 6, 2006,
we announced that our board of directors had terminated its consideration of
that takeover proposal.
On November 13, 2006, we reported (i) our receipt of a non-binding
proposal from Ian Bruce Eichner and the D.E. Shaw group, on behalf of an entity
to be formed by them, to acquire by merger all of our outstanding shares at a
cash price of $21 per share, (ii) our entry into an exclusive negotiating
agreement with Mr. Eichner and a member of the D.E. Shaw group and (iii) certain
related resolutions adopted by our board of directors. On December 13, 2006, the
exclusive negotiating agreement and the related approvals and waivers by our
board of directors expired and the proposal was withdrawn.
In order to attain profitable operations, we must reach income from
operations of approximately $26.0 million, (which is 2.3 percent higher than our
year-end 2006 level of such income) based on our current debt structure. Going
forward, we expect our Sarbanes-Oxley Act expenses to decrease significantly as
we move into our third year (2007) of being an accelerated filer, we estimate
our future annual equity-based compensation expense to be approximately
$800,000, and we expect asset impairment charges to be nominal. Mergers,
acquisitions and development costs are in large part the results of contacts
made or opportunities offered by third parties, which may be outside of our
control and may require our attention and resources in view of our fiduciary
duties to stockholders. If, however, we can significantly reduce our mergers,
acquisitions and development costs and meet our estimated requirements mentioned
above in this paragraph, our income from operations would exceed $26 million,
which would slightly exceed our current interest expense and would likely result
in a nominal net income.
If we are able to refinance our 11% Notes at a more favorable
interest rate, we could save in excess of $2 million for each percentage point
reduction in interest rate. This could have a significant positive effect on our
net income. We are currently exploring refinancing opportunities and we expect
to refinance in 2007.
Results of Operations
2006 Compared to 2005
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of cash rebates
and promotional allowances. Operating income from properties is presented on the
following schedule:
35
Year Ended December 31, $ Change % Change
(Dollars In Thousands) 2006 2005 Incr/(Decr) Incr/(Decr)
Net Revenues:
Riviera Las Vegas $ 149,202 $ 150,688 $ (1,486) (1.0)%
Riviera Black Hawk 51,742 51,539 203 0.4 %
-------- -------- -------- ------
Total Net Revenues $ 200,944 $ 202,227 $ (1,283) (0.6)%
======== ======== ======== =======
Operating Income:
Riviera Las Vegas $ 21,000 $ 19,065 $ 1,935 10.1 %
Riviera Black Hawk 11,209 10,941 268 2.4 %
Mergers, Acquisitions, Development
and Project Costs (1,318) 65 (1,383) N/M
Sarbanes-Oxley Act Expenses (820) (1,233) 413 (33.5)%
Equity Compensation (813) (1,627) 814 (50.0)%
Asset Impairment (19) (777) 758 (97.6)%
Corporate Expenses (3,823) (4,045) 222 (5.5)%
-------- -------- ------- -------
Total Operating Income $ 25,416 $ 22,389 $ 3,027 13.5 %
======== ======== ======= =======
Riviera Las Vegas
Revenues
Net revenues for Riviera Las Vegas decreased by approximately $1.5
million, or 1.0%, from $150.7 million in 2005 to $149.2 million in 2006
primarily due to decreased entertainment and other revenue. Poker was
reestablished in 2005 and continued to show growth in 2006. Entertainment
revenues decreased by approximately $3.7 million, or 21.2%, from $17.4 million
during 2005 to $13.7 million during 2006 due to the closure of our Splash show
in the main showroom in September 2006 and reduced covers in our other shows. We
are in negotiation for a replacement show and the showroom should reopen
sometime in mid 2007. Other revenues decreased $1.8 million as a result of the
outsourcing of our gift shops to ABC Stores in February 2006. Slot revenues
increased $2.4 million from $45.0 million in 2005 to $47.4 million in 2006 as a
result of increased volume and the increase in hold percentage. Poker revenues
increased from $652,000 in 2005 to $1.2 million in 2006 and offset the decrease
in table games revenue, resulting from lower volume and a lower hold percentage
in 2006. Room revenues increased $4.7 million, as the average room rate
increased $6.63 or 9.2% from $71.87 to $78.47 and hotel occupancy decreased
slightly from 92.6% in 2005 to 92.2% in 2006. Revenue per available room (Rev
Par) increased $5.86 from $66.51 to $72.37 or 8.8%. The increase was due to a
11.1% increase in convention room revenue, which made up 41.4% of total room
revenue.
Operating Income
Operating income in 2006 increased $1.9 million, to $21.0 million or 10.1%
from $19.1 million in 2005. This increase is primarily due to increased gaming
and hotel revenues as described above, and the effects of increased spending of
casino marketing and other expenses in the gaming departments due to increased
promotional costs for our 50th anniversary celebration and free slot play
program in 2005 that were not profitable when compared to current promotions.
36
Riviera Black Hawk
Revenues
Net revenues for Riviera Black Hawk, which are primarily gaming
revenues, increased $203,000, or 0.4% from $51.5 million in 2005 to $51.7
million in 2006. Revenues in 2005 were negatively impacted by a rockslide that
closed a major access road to the market for three months and by other road
projects throughout the year. Revenues in 2006 were negatively impacted by
weather conditions in December 2006, including a large snowfall which caused the
major roads to be closed for approximately five days and by increased
competition in the region with expansions and new property openings during 2006.
Operating Income
Operating income increased $735,000 from $10.5 million in 2005 to
$11.2 million in 2006. The improvement results from efficiencies generated from
the TITO conversion and the 2005 asset impairment write-off of approximately
$467,000 due to the discontinuation of a project to build a pedestrian bridge
connecting to the Isle of Capri.
Consolidated Operations
Operating income increased $3.0 million from $22.4 million in 2005 to
$25.4 million in 2006 due to increased gaming and hotel revenue and a decrease
in depreciation and amortization expense as a result of our convention center in
Las Vegas and slot machines and equipment in Black Hawk becoming fully
depreciated in late 2005 and early 2006.
Net loss was $335,000 in 2006 down $3.6 million from a net loss of $3.9 million
in 2005 due to an increase in operating income and reduced interest expense.
Results of Operations
2005 Compared to 2004
The following table sets forth, for the periods indicated, certain
operating data for Riviera Las Vegas and Riviera Black Hawk. Net revenues
displayed in this table and discussed in this section are net of cash rebates
and promotional allowances. Operating income from properties is presented as
shown on the Consolidated Statement of Operations.
Year Ended December 31, $ Change % Change
(Dollars In Thousands) 2005 2004 Incr/(Decr) Incr/(Decr)
Net Revenues:
Riviera Las Vegas $ 150,688 $ 147,949 $ 2,739 1.9%
Riviera Black Hawk 51,539 53,401 (1,862) (3.5)%
-------- -------- -------- ------
Total Net Revenues $ 202,227 $ 201,350 $ 877 0.4%
======== ======== ======== =======
Operating Income:
Riviera Las Vegas $ 19,065 $ 19,271 $ (206) (1.1)%
Riviera Black Hawk 10,941 10,919 22 0.2 %
Mergers, Acquisitions, Development
and Project Costs 65 (1,193) 1,258 (105.4)%
Sarbanes-Oxley Act Expenses (1,233) 0 (1,233)
Equity Compensation (1,627) 0 (1,627)
Asset Impairment (777) 0 (777)
Corporate Expenses (4,045) (4,038) (7) (0.2)%
-------- -------- ------- -------
Total Operating Income $ 22,389 $ 24,959 $(2,570) (10.3)%
======== ======== ======= =======
37
Riviera Las Vegas
Revenues
Riviera Las Vegas' net revenues increased by approximately $2.7
million, or 1.8%, from $148.0 million in 2004 to $151.0 million in 2005
primarily due to increased average daily rate for our rooms. Room revenues
increased $5.1 million, as the average room rate increased $7.03 or 10.8% from
$64.81 to $71.87 and hotel occupancy remained constant at 92.6%. Rev Par
increased $6.52 from $59.99 to $66.51 or 10.9%. The increase was due to a 16.1%
increase in convention room revenue, which made up 42.9% of total room revenue.
Revenues at the gaming tables increased $1.2 million due to an increase in hold
percentage as customers continued to play new games, which generally have a high
hold percentage. Slot revenues increased slightly, however after deducting cash
rebates and free play, net slot revenues were down $2.2 million or 5.1%. Surveys
indicate that our gaming customers are spending less of their gaming budgets at
our casino than in the past. As a result of these surveys, we have revised our
marketing plans to include activities, which our customers favor, including more
entertainment on the casino floor during the daytime hours and more food and
beverage options. Entertainment revenues decreased by approximately $3.3
million, or 16.2%, from $20.7 million during 2004 to $17.1 million during 2005
due primarily to the addition of new shows by Las Vegas Strip competitors.
Largely due to this increase in competition, we experienced an overall
attendance decrease of 163,100 or approximately 25%.
Operating Income
Operating income decreased $206,000, or 1.1%, from $19.3 million in
2004 to $19.1 million in 2005 primarily due to higher slot marketing costs in
2005. During 2005, casino marketing and other expenses increased $1.7 million as
our margin decreased 3.5% in the gaming departments, due to increased
promotional costs of approximately $600,000 for our 50th anniversary celebration
and free slot play programs that supported revenues but were not as profitable
when compared with prior promotions. Food, beverage and entertainment
departmental profits were down approximately $1.5 million due, in part, to
higher payroll costs under union contracts.
Riviera Black Hawk
Revenues
Riviera Black Hawk's net revenues decreased $1.9 million, or 3.5%
from $53.4 million in 2004 to $51.6 million in 2005.Revenues were negatively
impacted by a rockslide that closed a major access road to the market for three
months and by other road projects throughout the year.
Operating Income
Operating income decreased by $445,000, or 4.1% from $10.9 million in
2004 to $10.5 million in 2005. Lower revenues were partially offset by decreased
general and administrative expense.
Consolidated Operations
Operating income was impacted by costs totaling approximately $3.6
million or $0.30 per share, including Sarbanes-Oxley Act expenses of $1.2
million, equity-based compensation of $1.6 million and asset impairment of
$837,000. Mergers, acquisitions and development costs decreased $1.3 million,
resulting from a $1 million fee paid to us by a potential buyer of our company,
which offset 2005 costs. Our discussions with that party ended in 2005, and we
retained the fee.
Net loss increased $1.9 million from $2.1 million in 2004 to $3.9 million in
2005 due to a decrease in operating income as discussed above.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2006 increased $4.7 million
from December 31, 2005 to $25.3 million. Cash balances include amounts that may
be required to fund our CEO's pension obligation with five days notice. (See
Notes 7 and 12 to the financial statements). Although we are aware of no current
intention of our CEO to require this funding, under certain circumstances we
would have to disburse approximately $3.0 million in a short period, subject to
the provisions of our agreement with him.
38
For 2006, our net cash provided by operating activities increased to
$14.4 million compared to $11.0 million in 2005 due primarily to a decrease in
operating loss. Cash flows used in investing activities were $9.1 million in
2006 compared to $8.3 million in 2005 due to an increase in capital
expenditures. Net cash used in financing activities was $587,000 in 2006
compared to $1.0 million in 2005. We believe that cash flow from operations,
combined with our $25.3 million cash and the $30 million available on our senior
secured credit facility discussed below, will be sufficient to cover our annual
debt service and enable our investment in budgeted capital expenditures. Such
expenditures include approximately $8.0 million in maintenance capital
expenditures and property upgrades of approximately $3.0 million, which we will
use primarily for the room renovation program at Rivera Las Vegas, the purchase
of slot machines in Las Vegas and Black Hawk and for other contingencies.
On June 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. 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 or
that any such refinancing will be on favorable terms. On June 15, 2006, we were
able to redeem the 11% Notes at a premium beginning at 105.5% and declining each
subsequent year to par in 2009. We are currently exploring refinancing
opportunities, with a view to refinancing the 11% Notes in the second half of
2007, on more favorable terms and rates than exist today. At that time, the call
premium will be 103.67%.
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.
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 capital expenditure programs, which could have an
adverse effect on operations. As of December 31, 2006, we believe that we were
in compliance with the covenants.
On July 26, 2002, we entered into a $30 million, five-year senior
secured credit facility, which expires July 26, 2007. 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
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 Bank
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 (LIBOR) in U.S. dollars plus 3.00%. However, the minimum interest
rate we will be charged on outstanding cash advances is 4.50%. We expect to
refinance a similar type arrangement in the second-half of 2007 in connection
with our refinancing of the 11% Notes.
Contractual Obligations
The table under "Item 7A. Quantitative and Qualitative Disclosures
about Market Risk" summarizes our contractual obligations and commitments as of
December 31, 2006.
39
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us
to adopt accounting policies and to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses and provision for
income taxes. We periodically evaluate our policies, and our estimates and
assumptions related to these policies. We operate in a highly regulated
industry. For Riviera Las Vegas and Riviera Black Hawk we are subject to
regulations governing operating and internal control procedures. The majority of
our casino revenue is in the form of cash, personal checks or gaming chips and
tokens, which by their nature do not require complex estimations. We estimate
certain liabilities with payment periods that extend for longer than several
months. Such estimates include customer loyalty liabilities, self-insured
medical and workers compensation costs and litigation costs. We believe that
these estimates are reasonable based upon our past experience with the business
and based upon our assumptions related to possible outcomes in the future.
Future actual results might differ materially from these estimates.
We have determined that the following accounting policies and related
estimates are critical to the preparation of our consolidated financial
statements because such estimates are highly uncertain or susceptible to change
so as to present a significant risk of a material impact on our financial
condition or operating performance, and such policies and estimates were
selected from among available alternatives, or require the exercise of
significant management judgment to apply.
Long-lived Assets
We have a significant investment in long-lived property and
equipment. We estimate that the non-discounted future cash flows expected to
result from the use of these assets exceed the current carrying value of these
assets. Any adverse change to the estimate of these non-discounted future cash
flows could necessitate an impairment charge that would adversely affect our
operating results. We estimate useful lives for our assets based on historical
experience, estimates of such classes of assets' commercial lives generally, and
the likelihood of technological obsolescence. Should the actual useful life of a
class of assets differ from the estimated useful life, we would record an
impairment charge or adjust the period over which this asset is depreciated. We
review useful lives, and obsolescence, and we assess commercial viability of
these assets periodically.
Deferred Tax Assets
We utilize estimates related to estimated future taxable income in
the application of Statement of Financial Accounting Standards ("SFAS") No. 109
to the realization of deferred tax assets. Our estimates are based upon recent
operating results and budgets for future operating results. The valuation
allowance has been recorded for our net operating loss carry forwards, excluding
our AMT credits, which have an indefinite life.
Allowance for Credit Losses
We maintain an allowance for estimated credit losses based on
historical experience and specific customer collection issues. Any unforeseen
change in customer liquidity or financial condition could adversely affect the
collectibility of that account and our operating results.
Litigation Cost Accrued
We assess our exposures to loss contingencies including legal
matters, and we provide for an exposure if it is judged to be probable and
estimable. However, any accruals made in relation thereto do not include the
estimated costs of defense for any legal services that we have not yet received.
If the actual loss from a contingency exceeds our estimate, our operating
results could be adversely impacted.
Self-insurance Provisions
We are self-insured for various levels of general liability, workers'
compensation, and non-union employee medical insurance coverage. Insurance
claims and provisions include accruals of estimated settlements for known
claims, as well as accrued estimates of incurred but not reported claims. In
estimating these costs, we consider our historical claims experience and make
judgments about the expected levels of costs per claim. Changes in health care
costs, accident frequency and severity and other factors can materially affect
the estimate for these liabilities.
40
Self-insurance reserves can be affected by price changes in the
medical field, speed of processing claims by our third party administrator,
estimates of claims incurred but not reported, homogeneous nature of claims and
other factors. Significant changes in those factors could affect the estimates
for self-insurance by $100,000 or more. A 10% increase in medical costs could
impact our reserves and increase our expense by approximately $280,000 on an
annual basis.
Loyalty Club Program
We offer to our guests the opportunity to earn points redeemable for
cash and complimentary rooms and food and beverage based on their level of
gaming and non-gaming activities while at our properties. An accrual is recorded
as points are earned based upon expected redemption rates and, in the case of
complimentaries, the estimated cost of the complimentary to be provided.
Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities". SFAS No. 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by SFAS No. 159 permits all
companies to choose to measure eligible items at fair value at specified
election dates. At each subsequent reporting date, a company shall report in
earnings any unrealized gains and losses on items for which the fair value
option has been elected. SFAS No. 159 is effective as of the beginning of a
company's first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the company also elects to apply the provisions of
SFAS No. 157, "Fair Value Measurements" (see below). We are currently evaluating
the impact that the adoption of SFAS No. 159 will have on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans--an
amendment of FASB Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires
employers to recognize the over-funded or under-funded status of a defined
benefit postretirement plan as an asset or liability and to recognize changes in
that funded status in the year in which the changes occur through other
comprehensive income. This Statement also requires employers to measure the
funded status of a plan as of the date of its year end and is effective for
publicly traded companies as of the end of the fiscal year ending after December
31, 2006. The adoption of SFAS No. 158 did not have a material effect on our
consolidated financial statements as we do not currently have a defined benefit
postretirement plan that meets the criteria specified under SFAS No. 158.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements", which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We are currently evaluating the impact that the adoption of SFAS No. 157
will have on our 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. The adoption of SAB 108 did not have
a material impact on our results of operations, financial position or cash
flows.
41
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 and we do not believe the adoption will have a
material impact.
In June 2006, the Emerging Issues Task Force reached a consensus on
Issue No. 06-3 ("EITF 06-3"), "Disclosure Requirements for Taxes Assessed by a
Governmental Authority on Revenue-Producing Transactions." The consensus allows
companies to choose between two acceptable alternatives based on their
accounting policies for transactions in which the company collects taxes on
behalf of a governmental authority, such as sales taxes. Under the gross method,
taxes collected are accounted for as a component of sales revenue with an
offsetting expense. Conversely, the net method allows a reduction to sales
revenue. If such taxes are reported gross and are significant, companies should
disclose the amount of those taxes. The guidance should be applied to financial
reports through retrospective application for all periods presented, if amounts
are significant, for interim and annual reporting beginning February 1, 2007. We
do not expect the adoption of EITF 06-3 to have a material effect on our
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154
replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements and changes the requirement
for the accounting for and reporting of a change in accounting principles not
prescribed by specific transition provisions of the newly adopted standard. It
carries forward without change the requirements of APB Opinion No. 20 for
accounting for error corrections and changes in estimates. The provisions of
SFAS No. 154 will be effective for accounting changes made in the fiscal year
beginning after December 15, 2005. The adoption did not have a material impact
on our consolidated financial statements.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that
term is defined in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. Forward-looking statements include the words
"may," "would," "could," "likely," "estimate," "intend," "plan," "continue,"
"believe," "expect," "projections" or "anticipate" and similar words and include
all discussions about our ongoing or future plans, objectives or expectations.
We do not guarantee that any of the transactions or events described in this
report will happen as described or that any positive trends referred to in this
report will continue. These forward-looking statements generally relate to our
plans, objectives and expectations for future operations and results and are
based upon what we consider to be reasonable estimates. Although we believe that
our forward-looking statements are reasonable at the present time, we may not
achieve or we may modify our plans, objectives and expectations. You should read
this report completely and with the understanding that actual future results may
be materially different from what we expect. We do not plan to update
forward-looking statements even though our situation or plans may change in the
future, unless applicable law requires us to do so.
Specific factors that might cause our actual results to differ from
our expectations, might cause us to modify our plans or objectives, or might
affect our ability to meet our expectations include, but are not limited to:
o the 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 our ability to refinance our 11% Notes on more favorable terms later this
year;
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 our senior officers;
o economic, competitive, demographic, business and other conditions in our
local and regional markets;
o changes or developments in laws, regulations or taxes in the gaming industry;
42
o actions taken or not taken by third parties, such as our customers, suppliers
and competitors, as well as legislative, regulatory, judicial and other
governmental authorities;
o changes in personnel or compensation, including federal minimum wage
requirements;
o our failure to obtain, delays in obtaining, or the loss of, any licenses,
permits or approvals, including gaming and liquor licenses, or the
limitation, conditioning, suspension or revocation of any such licenses,
permits or approvals, or our failure to obtain an unconditional renewal
of any of our licenses, permits or approvals on a timely basis;
o the loss of any of our casino facilities due to terrorist acts, casualty,
weather, mechanical failure or any extended or extraordinary maintenance
or inspection that may be required;
o other adverse conditions, such as economic downturns, changes in general
customer confidence or spending, increased transportation costs, travel
concerns or weather-related factors, that may adversely affect the
economy in general or the casino industry in particular;
o changes in our business strategy, capital improvements or development plans;
o the consequences of the war in Iraq and other military conflicts in the
Middle East, concerns about homeland security and any future security
alerts or terrorist attacks such as the attacks that occurred on
September 11, 2001;
o other risk factors discussed elsewhere in this report; and
o a decline in the public acceptance of gaming.
All future written and oral forward-looking statements attributable
to us or any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
In light of these and other risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to our operations result primarily from changes
in interest rates. We invest our cash and cash equivalents in U.S. Treasury
Bills with maturities of 30 days or less. Such investments are generally not
affected by changes in interest rates.
As of December 31, 2006, we had $215.0 million in borrowings. The
borrowings include $215 million in 11% Notes maturing in 2010 (with a carrying
value of $213.2 million) and equipment loans/capital leases maturing at various
dates through 2009. Interest under the 11% Notes is at 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
bond offering ("SID Bonds") 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 ending 2010.
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
and does not subject us to a material interest rate fluctuation as we have had
virtually no borrowings on the revolver. An annual fee of 0.5 percent is charged
in monthly installments on the unused portions of the revolver plus a $3,000
monthly service fee. As of December 31, 2006, we had no borrowings outstanding
under our senior secured credit facility.
43
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Dollars in Thousands) Fair Value
2007 2008 2009 2010 2011 Thereafter Total At 12/31/06
---- ---- ----- ---- ---- ---------- ----- ------------
Long -Term Debt All interest rates are fixed
Including Current Portions
Equipment loans and
capital leases-Las Vegas $751 $187 $54 $992 $992
Average interest rate 5.8% 5.8% 5.8%
11% Notes $215,000 $215,000 $227,105
Less unamortized discount (1,399) (1,399) (1,399)
Average interest rate 11.8%
SID Bonds-Black Hawk,
Colorado casino project $128 $137 $146 $411 $411
Average interest rate 5.5% 5.5% 5.5%
Total of all Long-Term Debt,
Including Current Portions
$879 $324 $200 $213,601 $215,004 $227,109
Other Long - Term Liabilities
Including Current Portion
CEO pension plan obligation $1,000 $1,000 $1,000 $93 $3,093 $3,093
Average interest rate 11.8% 11.8% 11.8% 11.8%
Total Long-Term Obligations $1,879 $1,324 $1,200 $213,694 $218,097 $230,613
Expected Interest payments $24,087 $23,828 $23,692 $11,836
Item 8. Financial Statements and Supplementary Data
See Financial Statements in Part IV; Item 15(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 15(e) and 15d - 15(e)) that are designed to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our CEO and Chief
Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
44
As of December 31, 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 are effective.
Internal Control Over Financial Reporting
Internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) refers to the process designed
by, or under the supervision of, our CEO and CFO, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our management is responsible for establishing and
maintaining adequate internal control over our financial reporting.
We have evaluated the effectiveness of our internal control over
financial reporting as of December 31, 2006. This evaluation was performed using
the internal control evaluation framework developed by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such evaluation,
our management has concluded that, as of such date, our internal control over
financial reporting was effective.
The registered public accounting firm that audited our financial
statements included in this Form 10-K has issued an attestation report on our
management's assessment of our internal control over financial reporting. That
attestation report appears under "Report of Independent Registered Public
Accounting Firm" on page F - 1 of this Form 10-K.
There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The following table presents information as of February 23, 2007
regarding our directors and the directors of Riviera Operating Corporation
("ROC"), our wholly-owned subsidiary:
Name Age Position
William L. Westerman 75 Our Chairman of the Board, CEO and President;
Chairman of the Board and Chief Executive
Officer of ROC
Jeffrey A. Silver 61 Our and ROC's Director
Paul A. Harvey 69 Our and ROC's Director
Vincent L. DiVito 47 Our and ROC's Director
James N. Land, Jr. 77 Our and ROC's Director
45
William L. Westerman has been our Chairman of the Board and CEO since
February 1993. Mr. Westerman was a consultant to Riviera, Inc. (our predecessor
company) from July 1, 1991 until he was appointed Chairman of the Board and CEO
of Riviera, Inc. on January 1, 1992. From 1973 to June 30, 1991, Mr. Westerman
was President and CEO of Cellu-Craft Inc., a manufacturer of flexible packaging
primarily for food products, and then had several positions with Alusuisse, a
multi-national aluminum and chemical company, following its acquisition of
Cellu-Craft in 1989.
Jeffrey A. Silver has been one of our and ROC's Directors since
February 26, 2001. Mr. Silver is a shareholder with the law firm of Gordon &
Silver, Ltd., in Las Vegas, Nevada. Mr. Silver served as the Chief Deputy
District Attorney, Clark County, Nevada from 1972 to 1975 and was a Board Member
with the Nevada Gaming Control Board from 1975 to 1978 before engaging in the
private practice of law from 1979 to 1981 and 1984 to the present. Mr. Silver
was the Chief Operating Officer ("COO") and General Counsel of the Landmark
Hotel & Casino from 1981 to 1983, CEO of the Riviera, Inc. from 1983 to 1984 and
Senior Vice President at Caesars Palace in 1984. Mr. Silver served on the Board
of the LVCVA from 1989 to 1992 as Secretary/Treasurer and also served as
trustee. He was a member of the Board of Directors of the Greater Las Vegas
Chamber of Commerce from 1988 to 1995 and in 1988 was its Chairman. Mr. Silver
served for four years as a member of the United States Travel and Tourism
Advisory Board. He was President of the International Association of Gaming
Attorneys from 1992 to 1994 and Chairman of the American Bar Association Section
of Gaming Law from 1994 to 1996.
Major General Paul A. Harvey USAF (Ret) has been one of our and ROC's
Directors since May 18, 2001. General Harvey is a consultant to the gaming,
hotel and resort industry. General Harvey spent 32 years on active duty in the
United States Air Force where he held numerous command positions throughout the
United States, Europe, Africa and the Middle East. He flew 160 combat missions
in Vietnam and Southeast Asia before retiring in 1991 as a command pilot with
over 5,000 flying hours. Following retirement, he was an Executive in Residence
and Assistant to the President of William Carey College and taught MBA studies
in management and leadership. General Harvey was the Executive Director of the
Mississippi Gaming Commission from 1993 through 1998 before becoming President
and CEO of Signature Works, Inc., the largest employer of blind and visually
impaired people in the world. In 2000 Signature Works, Inc. merged with LCI,
Inc. His present company, PDH Associates, Inc., provides consulting service to
the gaming, hotel and resort industry. Since 1996, General Harvey has served on
the board of directors of the National Center for Responsible Gaming. He also
serves on the board of directors of Vending Data Corporation which is
headquartered in Las Vegas, Nevada and is an AMEX-listed company, and on the
board of directors of Mikohn Gaming Corporation, d/b/a Progressive International
Corporation, also headquartered in Las Vegas, Nevada and a publicly reporting
company under the Exchange Act. General Harvey is also a Commissioner on the
Mississippi Band of Choctaw Indians Athletic and Boxing Commission.
Vincent L. DiVito was appointed as one of our and ROC's Directors
effective June 14, 2002. Mr. DiVito is Vice President, CFO and Treasurer of
Lonza, Inc., a global specialties chemical business headquartered in Allendale,
New Jersey. Lonza, Inc. is part of Lonza Group, whose stock is traded on the
Swiss Stock Exchange. Prior to September 2000, Mr. DiVito was the Vice President
and CFO of Algroup Wheaton, a global pharmaceutical and cosmetics packaging
company, after having served as the Director of Business Development. From 1984
to 1990 Mr. DiVito was the Vice President of Miracle Adhesives Corp. (a division
of Pratt & Lambert, an AMEX-listed manufacturer of paints, coatings and
adhesives). He also serves on the board of directors of Vending Data Corporation
which is headquartered in Las Vegas, Nevada and is an AMEX-listed company. Prior
to 1984, Mr. DiVito spent two years on an audit team at Ernst & Whinney (now
Ernst & Young). Mr. DiVito is a certified public accountant and certified
management accountant.
James N. Land, Jr., is a corporate consultant and was appointed as
one of our and ROC's Directors on April 12, 2004. Mr. Land was first elected a
Director of the Company and ROC on January 21, 1999 and served in that position
until May 31, 2002. From 1956 to 1976, Mr. Land was employed by The First Boston
Corporation in various capacities, including Director, Senior Vice President,
Co-Head of Corporate Finance, and head of International Operations. From 1971
through 1999, he served as Director of various companies, including Kaiser
Industries Corporation, Marathon Oil Company, Castle & Cooke, Inc., Manville
Corporation, NWA, Inc., Northwest Airlines, and Raytheon Company.
46
Executive Officers
The following table presents information as of February 23, 2007
regarding our and ROC's executive officers:
Name Age Position
William L. Westerman 75 Our and ROC's Chairman of the Board and
CEO, and our President
Mark B. Lefever 42 Our and ROC's Treasurer and CFO, and
Executive Vice President of Finance of ROC
Tullio J. Marchionne 52 Our Secretary and General Counsel, and Secretary
and Executive Vice President of ROC
Robert A. Vannucci 59 President and Chief Operating Officer of ROC
For a description of the business experience of William L. Westerman, see
"Directors" above.
Mark Lefever became our and ROC's CFO and Treasurer and ROC's
Executive Vice President of Finance on May 22, 2006. From 2004 to April 2006,
Mr. Lefever was Senior Vice President and CFO of Resorts International Hotel &
Casino, Inc., located in Atlantic City, New Jersey. From 2001 until December
2003, Mr. Lefever was General Manager and Vice President of 29 Palms Enterprises
& Operating Company for Trump 29 Casino, a California Native American casino
located in the greater Palm Springs area. Prior to that, Mr. Lefever served
initially as Vice President and CFO and later as COO of the Desert Inn Resort &
Casino from 1997 through 2000. Mr. Lefever's gaming career began in Tunica,
Mississippi as the Vice President and CFO of Sheraton Casino from 1996 through
1997. Prior to his gaming positions, Mr. Lefever spent 10 years in the audit and
business advisory practice with Arthur Andersen LLC. He is a member of the New
Jersey Society of Certified Public Accountants, and holds a BS degree in
Accounting from Villanova University.
Tullio J. Marchionne became our General Counsel on January 10, 2000,
was appointed as our and ROC's Secretary on February 17, 2000 and was elected
Vice President of ROC on February 26, 2001 and Executive Vice President in June
of 2005. Mr. Marchionne was initially employed by Riviera, Inc., in June 1986 as
a casino dealer and served in various capacities including Pit Manager, General
Counsel and Director of Gaming Administration until September 1996, when he was
transferred to the Four Queens Hotel and Casino as Director of Casino Operations
pursuant to the management agreement our subsidiary had with the Four Queens. He
served in that position until May 1997. Mr. Marchionne served as the General
Manager of the Regency Casino Thessaloniki, located in Thessaloniki, Greece,
from June 1997 until December 1997. Mr. Marchionne served as a Casino Supervisor
with Bally's Las Vegas from February 1998 until June 1998, Director of Casino
Operations at the Maxim Hotel and Casino in Las Vegas from June 1998 until
November 1998 and Director of Table Games at the Resort At Summerlin from
November 1998 until December 1999.
Robert A. Vannucci was elected Vice President of Marketing and
Entertainment of ROC on April 26, 1994, Executive Vice President of Marketing
and Entertainment on July 1, 1998 and President of ROC on October 1, 2000. Mr.
Vannucci had been Director of Marketing of ROC since July 19, 1993. Mr. Vannucci
was Senior Vice President of Marketing and Operations at the Sands Casino Hotel
in Las Vegas from April 1991 to February 1993. He was Vice President and General
Manager of Fitzgerald's Las Vegas (a casino/hotel) from 1988 to January 1991.
Our and ROC's officers serve at the discretion of our and ROC's
respective Boards of Directors, and they are also subject to the licensing
requirements of the Nevada Gaming Commission and Colorado Gaming Commission.
Audit Committee; Audit Committee Financial Expert
We have a separately-designated standing Audit Committee,
established in accordance with section 3(a)(58)(A) of the Exchange Act. The
members of our Audit Committee are Vincent L. DiVito, Paul A. Harvey and James
N. Land, Jr.
47
We have determined that the Chairman of our Audit Committee, Vincent
L. DiVito, who meets the AMEX audit committee independence requirements, is an
"audit committee financial expert", as defined in Item 407(d)(5)(ii) of SEC
Regulation S-K. Mr. DiVito is a certified public accountant and certified
management accountant, spent two years on the audit team at Ernst & Whinney (now
Ernst & Young) and is currently the CFO and treasurer of a global specialties
chemical business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act (Section 16(a)) requires our
directors and executive officers and persons who own more than 10% of our common
stock to file with the SEC certain reports regarding ownership of our common
stock. Such persons are required to furnish us with copies of all Section 16(a)
reports they file. Based solely on our review of such reports that were
furnished to us and written representations made to us by those reporting
persons in connection with certain of those reporting requirements, we believe
that all the reporting persons met their Section 16(a) reporting obligations on
a timely basis during 2006.
Code of Ethics
We have adopted certain ethical policies that apply to all of our
employees at the level of Supervisor or higher, including our principal
executive officer, principal financial officer and principal accounting officer.
Those policies, together with certain rules adopted by our Disclosure Committee,
comprise what we consider to be our code of ethics. Those policies and rules are
posted on our Internet web site at www.theriviera.com.
Item 11. Executive Compensation
Information regarding this item is incorporated herein by reference
to our proxy statement to be filed on or about April 6, 2007, relating to the
annual meeting of our stockholders to be held on May 15, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding this item is incorporated herein by reference
to our proxy statement to be filed on or about April 6, 2007, relating to our
annual meeting of stockholders to be held on May 15, 2007.
Item 13. Certain Relationships and Related Transactions
Information regarding this item is incorporated herein by reference
to our proxy statement to be filed on or about April 6, 2007, relating to our
annual meeting of stockholders to be held on May 15, 2007.
Item 14. Principal Accountant Fees and Services
Information regarding this item is incorporated herein by reference
to our proxy statement to be filed on or about April 6, 2007, relating to our
annual meeting of stockholders of the Company to be held on May 15, 2007.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) List of Financial Statements
The following is the list of Registered Public Accounting Firm
Reports and the consolidated Financial Statements of the Company:
48
. Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting . Report of
Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
. Consolidated Balance Sheets as of December 31, 2006 and 2005
. Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004
. Consolidated Statements of Stockholders' Deficiency for the
Years Ended December 31, 2006, 2005, and 2004
. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
. Notes to Consolidated Financial Statements
(a)(2) List of Financial Statement Schedules
No financial statement schedules have been filed herewith since they
are either not required, are not applicable, or the required
information is shown in the consolidated financial statements or
related notes.
(a)(3) List of Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index herein, which information is incorporated herein by reference, and
such exhibits are filed herewith.
(b) The exhibits required by Item 601 of Regulation S-K are
filed as exhibits to this Form 10-K.
(c) Not applicable.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By: /s/ WILLIAM L. WESTERMAN
-------------------------
William L. Westerman
Chief Executive Officer and President
(Principal Executive Officer)
March 2, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM L. WESTERMAN Chairman of the Board, Chief March 2, 2007
------------------------ Executive Officer and President
William L. Westerman
/s/ MARK B. LEFEVER Treasurer (Principal Financial March 2, 2007
------------------------ and Accounting Officer)
Mark B. Lefever
/s/ JEFFREY A. SILVER Director March 2, 2007
------------------------
Jeffrey A. Silver
/s/ PAUL A. HARVEY Director March 2, 2007
------------------------
Paul A. Harvey
/s/ VINCENT L. DIVITO Director March 2, 2007
-----------------------
Vincent L. DiVito
/s/ JAMES N. LAND, JR. Director March 2, 2007
-----------------------
James N. Land, Jr.
50
EXHIBIT INDEX
Exhibit Description
Number
3.1* Articles of Incorporation of the Company (see Exhibit 3 to Quarterly
Report on Form 10-Q filed on November 10, 2003, Commission File No.
0-21430)
3.2* Bylaws of the Company (see Exhibit 3.2 to Registration Statement on
Form S-4 filed on September 10, 1997, Commission File No. 0-21430)
3.3* Articles of Incorporation of Riviera Operating Corporation (see
Exhibit 3.3 to Registration Statement on Form S-4 filed on September
10, 1997, Commission File No. 0-21430)
3.4* Bylaws of Riviera Operating Corporation (see Exhibit 3.4 to
Registration Statement on Form S-4 filed on September 10, 1997,
Commission File No. 0-21430)
3.5* Articles of Incorporation of Riviera Gaming Management, Inc. (see
Exhibit 3.5 to Registration Statement on Form S-4 filed on September
10, 1997, Commission File No. 0-21430)
3.6* Bylaws of Riviera Gaming Management, Inc. (see Exhibit 3.6 to
Registration Statement on Form S-4 filed on September 10, 1997,
Commission File No. 0-21430)
3.7* Articles of Incorporation of Riviera Black Hawk, Inc. (see Exhibits
3.01 and 3.02 to Amendment No. 1 to Registration Statement on Form S-4
filed by Riviera Black Hawk, Inc. on August 31, 1999, Commission File
No. 333-81613)
3.8* Bylaws of Riviera Black Hawk, Inc. (see Exhibit 3.03 to Amendment No.
1 to Registration Statement on Form S-4 filed by Riviera Black Hawk,
Inc. on August 31, 1999, Commission File No. 333-81613).
4.1* Indenture dated as of June 26, 2002 among the Company, the
Guarantors party thereto and The Bank of New York, as trustee
(see Exhibit 4.1 to Registration Statement on Form S-4 filed on
August 9, 2002, Commission File No. 333-97907).
4.2* Form of the Company's 11% Senior Secured Notes due 2010 (see Exhibit
4.1 to Registration Statement on Form S-4 filed on August 9, 2002,
Commission File No. 333-97907)
10.1* Registration Rights Agreement dated as of June 26, 2002 by and among
the Company, the Guarantors party thereto, and Jefferies & Company,
Inc. (see Exhibit 10.1 to Registration Statement on Form S-4 filed on
August 9, 2002, Commission File No. 333-97907)
10.2* Purchase Agreement dated June 19, 2002 among the Company, the
Guarantors party thereto, and Jefferies & Company, Inc. (see
Exhibit 10.2 to Registration Statement on Form S-4 filed on
August 9, 2002, Commission File No. 333-97907)
10.3* Amended and Restated Lease Agreement between Riviera Operating
Corporation and Mardi Gras Food Court, Inc. dated March 15, 1998
(see Exhibit 10.3 to Registration Statement on Form S-4 filed on
August 9, 2002, Commission File No.
333-97907)
10.4* Lease Agreement between Riviera, Inc. and Leroy's Horse and Sports
Place (see Exhibit 10.3 to Form 10, Commission File No. 0-21430)
10.5* Indemnity Agreement, dated June 30, 1993, from Riviera, Inc. and
Meshulam Riklis in favor of the Company and Riviera Operating
Corporation (see Exhibit 10.7 to Registration Statement on Form S-1
filed on August 11, 1993, Commission File No. 33-67206)
51
10.6* Equity Registration Rights Agreement dated June 30, 1993, among
the Company and the Holders of Registerable Shares (see Exhibit
10.9 to Registration Statement on Form S-1 filed on August 11,
1993, Commission File No. 33-67206)
10.7* Operating Agreement dated June 30, 1993, between the Company and
Riviera Operating Corporation (see Exhibit 10.15 to Registration
Statement on Form S-1 filed on August 11, 1993, Commission File No.
33-67206)
10.8* Adoption Agreement regarding Profit Sharing and 401(k) Plans of
the Company (see Exhibit 10.16 to Registration Statement on Form
S-1 filed on August 11, 1993, Commission File No. 33-67206)
10.9* Tax Sharing Agreement between the Company and Riviera Operating
Corporation dated June 30, 1993 (see Exhibit 10.24 to Amendment No. 1
to Registration Statement on Form S-1 filed on August 19, 1993,
Commission File No. 33-67206)
10.10* Tax Sharing Agreement between the Company and Riviera Black Hawk, Inc.
dated March 31, 1999 (see Exhibit 10.12 to Registration Statement on
Form S-4 filed on August 9, 2002, Commission File No. 333-97907)
10.11*(A)1993 Stock Option Plan (see Exhibit 4.4 to Registration Statement on
Form S-8 filed on May 13, 1996, Commission File No. 333-03631)
10.12*(A)Stock Compensation Plan for Directors Serving on the
Compensation Committee (see Exhibit 10.14 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File
No. 333-97907)
10.13*(A)Employment Agreement dated as of November 21, 1996 among the
Company, Riviera Operating Corporation and William L. Westerman
(see Exhibit 10.31 to Form 10-K for the fiscal year ended
December 31, 1996, Commission File No. 0-21430)
10.14*(A)Amendment to Employment Agreement between the Company and William L.
Westerman effective January 1, 2001 (see Exhibit 10.40 to Form 10-K
filed March 23, 2001, Commission File No. 0-21430)
10.15*(A)Deferred Compensation Plan dated November 1, 2000 (see Exhibit
10.19 to Form 10-K filed March 25, 2005, Commission File No. 0-21430)
10.16*(A)Restricted Stock Plan (see Exhibit 10.20 to Form 10-K filed March 25,
2005, Commission File No. 0-21430)
10.17* Deed of Trust, Assignment of Rents, Leases, Fixture Filing and
Security Agreement dated June 26, 2002, executed by the Company for the
benefit of The Bank of New York (see Exhibit 10.21 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.18* Deed of Trust to Public Trustee, Security Agreement, Fixture
Filing and Assignment of Rents, Leases and Leasehold Interests
dated as of June 26, 2002, by Riviera Black Hawk, Inc. for the
benefit of The Bank of New York (see Exhibit 10.22 to
Registration Statement on Form S-4 filed on August 9, 2002,
Commission File No. 333-97907)
10.19* Security Agreement dated June 26, 2002 by and among the Company,
Riviera Operating Corporation, Riviera Gaming Management, Inc.,
Riviera Gaming Management of Colorado, Inc., Riviera Black Hawk, Inc,
and The Bank of New York (see Exhibit 10.23 to Registration Statement
on Form S-4 filed on August 9, 2002, Commission File No. 333-97907)
52
10.20* Assignment of Rents, Leases and Leasehold Interests dated as of
June 26, 2002 by Riviera Black Hawk, Inc. for the benefit of The
Bank of New York (see Exhibit 10.24 to Registration Statement on
Form S-4 filed on August 9, 2002, Commission File No. 333-97907)
10.21* Stock Pledge and Security Agreement dated June 26, 2002, executed
by the Company (see Exhibit 10.25 to Registration Statement on Form S-4
filed on August 9, 2002, Commission File No. 333-97907)
10.22* Stock Pledge and Security Agreement dated June 26, 2002, executed by
Riviera Operating Corporation (see Exhibit 10.26 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.23* Stock Pledge and Security Agreement dated June 26, 2002, executed
by Riviera Gaming Management, Inc. (see Exhibit 10.27 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.24* Environmental Indemnity dated as of June 26, 2002 by and among
the Company and Riviera Black Hawk, Inc., as indemnitors, and
The Bank of New York, as trustee (see Exhibit 10.28 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.25* Environmental Indemnity dated as of June 26, 2002 by and between the
Company, as indemnitor, and The Bank of New York, as trustee (see
Exhibit 10.29 to Registration Statement on Form S-4 filed on August 9,
2002, Commission File No. 333-97907)
10.26* Loan and Security Agreement dated as of July 26, 2002 by and among the
Company and the other Borrower parties thereto, the Guarantors parties
thereto and Foothill Capital Corporation (see Exhibit 10.30 to
Registration Statement on Form S-4 filed on August 9, 2002, Commission
File No. 333-97907)
10.27* Intercreditor Agreement dated as of July 26, 2002 by and between
The Bank of New York, as trustee, and Foothill Capital Corporation
(see Exhibit 10.31 to Registration Statement on Form S-4 filed on
August 9, 2002, Commission File No. 333-97907)
10.28* Fee Letter, dated July 26, 2002, issued by the Company, Riviera Black
Hawk, Inc. and Riviera Operating Corporation to Foothill Capital
Corporation (see Exhibit 10.32 to Registration Statement on Form S-4
filed on August 9, 2002, Commission File No. 333-97907)
10.29* Intellectual Property Security Agreement dated as of July 26, 2002
by and between the Company and the other Debtors parties thereto, and
Foothill Capital Corporation (see Exhibit 10.33 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.30* Deed of Trust, Assignment of Rents, Leases, Fixture Filing and
Security Agreement dated July 26, 2002, executed by the Company
for the benefit of Foothill Capital Corporation (see Exhibit
10.34 to Amendment No. 1 to Registration Statement on Form S-4
filed on September 26, 2002, Commission File No. 333-97907)
10.31* Environmental Indemnity dated July 26, 2002 from the Company in favor
of Foothill Capital Corporation (see Exhibit 10.35 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.32* Continuing Guaranty dated July 26, 2002 by and among the Company,
the other Borrowers parties thereto and the Guarantors parties
thereto in favor of Foothill Capital Corporation. (see Exhibit 10.36
to Registration Statement on Form S-4 filed on August 9, 2002,
Commission File No. 333-97907)
53
10.33* Subordination Agreement dated July 26, 2002 by and among the Company
and the other Creditors parties thereto in favor of Foothill Capital
Corporation (see Exhibit 10.37 to Registration Statement on Form
S-4 filed on August 9, 2002, Commission File No. 333-97907)
10.34* Stock Pledge and Security Agreement dated July 26, 2002, executed
by the Company (see Exhibit 10.38 to Registration Statement on Form S-4
filed on August 9, 2002, Commission File No. 333-97907)
10.35* Stock Pledge and Security Agreement dated July 26, 2002, executed by
Riviera Operating Corporation (see Exhibit 10.39 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.36* Stock Pledge and Security Agreement dated July 26, 2002, executed
by Riviera Gaming Management, Inc. (see Exhibit 10.40 to Registration
Statement on Form S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.37* Deed of Trust to Public Trustee, Security Agreement, Fixture Filing
and Assignment of Rents, Leases and Leasehold Interests dated July
26, 2002, executed by Riviera Black Hawk, Inc. for the benefit of
Foothill Capital Corporation (see Exhibit 10.41 to Amendment No. 1
to Registration Statement on Form S-4 filed on September 26, 2002,
Commission File No. 333-97907)
10.38* Environmental Indemnity dated July 26, 2002 from the Company and
Riviera Black Hawk, Inc. in favor of Foothill Capital
Corporation (see Exhibit 10.42 to Registration Statement on Form
S-4 filed on August 9, 2002, Commission File No.
333-97907)
10.39*(A)Non-Qualified Stock Option Plan for Non-Employee Directors (see
Exhibit 4.6 to Registration Statement on Form S-8 filed on May 13,
1996, Commission File No. 333-03631)
10.40*(A)Second Amendment to Employment Agreement between the Company and
William L. Westerman effective July 15, 2003 (see Exhibit 10.46 to
Form 10-K filed on March 16, 2004, Commission File No. 0-21430)
10.41*(A)Amendment of 1993 Stock Option Plan (see Exhibit 10.47 to Form 10-K
filed on March 25, 2005, Commission File No. 0-21430)
10.42* Amendment Numbers One, Two, Three and Four to Loan and Security
Agreement, originally dated July 26, 2002, by and among the Company
and the other borrowers thereto, the Guarantors party thereto and
Foothill Capital Corporation (see Exhibit 10.48 to Form 10-K filed on
March 25, 2005, Commission File No. 0-21430)
10.43* Purchase and License Agreement, dated September 25, 2003, between
Bally Gaming, Inc. and Riviera Operating Corporation (see Exhibit 10.49
filed on March 25, 2005, Commission File No. 0-21430)
10.44*(A)2005 Incentive Stock Option Plan (see Exhibit A To Schedule 14A filed
on April 22, 2005, Commission File No. 0-21430)
10.45*(A)2005 Non-Qualified Stock Option Plan for Non-Employee Directors
(see Exhibit B to Schedule 14A filed on April 22, 2005, Commission
File No. 0-21430)
10.46*(A)Incentive Compensation Program as amended August 3, 1995 (see
Exhibit 10.51 to Form 10-K filed on March 15, 2006, Commission File
No. 0-21430.
10.47*(A)Form of Restricted Stock Agreement under the Company's
Restricted Stock Plan (see Exhibit 10.52 to Form 10-K filed on
March 15, 2006, Commission File No. 0-21430)
54
10.48* 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)
10.49*(A)Employment Agreement between the Company and Mark B. Lefever
(see Exhibit 10.3 to Form 10-Q filed on August 9, 2006,
Commission File No. 0-21430)
10.50*(A)Employment Agreement among Riviera Holdings Corporation,
Riviera Operating Corporation and Robert A. Vannucci (see
Exhibit 10.1 to Form 10-Q filed on November 6, 2006, Commission
File No. 0-21430
10.51(A) Forms of Salary Continuation Agreements with Riviera Operating
Corporation and Riviera Black Hawk, Inc.
21.1* Subsidiaries of the Company (see Exhibit 21.1 to Registration
Statement on Form S-4 filed with the Commission on August 9, 2002,
Commission File No. 333-97907)
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a)
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a)
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350
* These are incorporated herein by reference as exhibits hereto. Following the
description of each such exhibit is a reference to it as it appeared in a
specified document previously filed with the Securities and Exchange Commission,
to which there have been no amendments or changes, unless otherwise indicated.
(A) Management contract or compensatory plan or arrangement
55
Riviera Holdings
Corporation
Consolidated Financial Statements for the Years Ended December 31,
2006, 2005 and 2004 and Reports of Independent Registered Public
Accounting Firm
RIVIERA HOLDINGS CORPORATION
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 2006 and 2005
Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
Statements of Stockholders' Deficiency for the Years Ended
December 31, 2006, 2005 and 2004
Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Riviera Holdings Corporation
Las Vegas, Nevada
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Riviera Holdings Corporation and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
F-1
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
the criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year December 31, 2006 of the
Company and our report dated March 9, 2007 expressed an unqualified opinion
on those financial statements and includes an explanatory paragraph related
to the adoption of Statement of Financial Accounting Standards No. 123(R),
Accounting of Stock-Based Payment, on January 1, 2006.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 9, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Riviera Holdings Corporation
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Riviera
Holdings Corporation and subsidiaries (the "Company") as of December 31,
2006 and 2005, and the related consolidated statements of operations,
stockholders' deficiency, and cash flows for each of the three years in the
period ended December 31, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Riviera Holdings
Corporation and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on
January 1, 2006, the Company changed their method of accounting for
share-based compendation to conform to Statement of Financial Accounting
Standards No. 123(R), Accounting of Stock-Based Payment.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
the Company's internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 9, 2007, expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over
financial reporting.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 9, 2007
F-3
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(In Thousands, except shares)
-------------------------------------------------------------------------------
ASSETS 2006 2005
CURRENT ASSETS:
Cash and cash equivalents $ 25,285 $ 20,571
Accounts receivable - net of allowance
of $163 and $1,244 3,063 3,544
Inventories 1,792 2,485
Prepaid expenses 4,002 4,197
------ -------
Total current assets 34,142 30,797
PROPERTY AND EQUIPMENT Net 171,320 171,130
OTHER ASSETS 5,774 7,396
DEFERRED INCOME TAXES-Net 2,446 2,446
-------- ---------
Total assets $ 213,682 $ 211,769
========= ==========
LIABILITIES AND STOCKHOLDERS DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 879 $ 824
Current portion of obligation to officers 1,000 1,000
Accounts payable 9,126 10,133
Accrued interest 1,063 1,087
Accrued expenses 13,167 12,261
------ ------
Total current liabilities 25,235 25,305
LONG-TERM DEBT - Net of current portion 214,124 214,607
OTHER LONG-TERM DEBT 2,763 -
OBLIGATION TO OFFICERS - Net of current portion 2,094 3,126
------- -------
Total liabilities 244,216 243,038
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS EQUITY (DEFICIENCY):
Common stock, $.001 par value 60,000,000 shares
authorized; 17,131,824 and 17,082,324 shares
issued at December 31, 2006 and 2005, respectively, 17 17
12,369,431 and 12,223,233 shares outstanding
Additional paid-in capital 18,165 17,301
Treasury stock, 4,762,393 and 4,859,091 shares at
December 31, 2006 and 2005, respectively (9,841) (10,047)
Acumulated Deficit (38,875) (38,540)
-------- --------
Total stockholders deficiency (30,534) (31,269)
Total liabilities and stockholders --------- ---------
deficiency $ 213,682 $ 211,769
========= ==========
See notes to consolidated financial statements.
F-4
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In Thousands, Except Per Share Amounts)
-------------------------------------------------------------------------------
2006 2005 2004
REVENUES
Casino $ 111,459 $ 108,130 $ 110,461
Rooms 56,700 52,021 46,925
Food and beverage 33,125 34,132 34,123
Entertainment 13,672 17,371 20,767
Other 6,431 8,312 8,243
------- ------- -------
Total revenues 221,387 219,966 220,519
------- ------- -------
Less promotional allowances 20,443 17,739 19,169
------- ------- -------
Net revenues 200,944 202,227 201,350
COSTS AND EXPENSES
Direct costs and expenses of operating
departments:
Casino 58,000 56,092 54,530
Rooms 27,185 27,133 25,987
Food and beverage 24,224 24,645 23,675
Entertainment 9,536 13,214 14,066
Other 1,437 2,906 2,836
Other operating expenses
General and administrative
Equity compensation 813 1,627 -
Sarbanes-Oxley Act professional fees 820 1,233 -
Other general and administrative 39,485 38,211 40,252
Mergers, acquisitions and development
costs, net 1,318 (65) 1,193
Asset impairments 19 777 -
Depreciation and amortization 12,691 14,065 13,852
------- ------- -------
Total costs and expenses 175,528 179,838 176,391
------- ------- --------
INCOME FROM OPERATIONS 25,416 22,389 24,959
------- ------- --------
Interest expense, net, including related
party interest of $400, $518 and $638
in 2006, 2005 and 2004, respectively (25,751) (26,388) (27,045)
------- ------- --------
Total interest expense, net (25,751) (26,388) (27,045)
------- -------- --------
NET LOSS $ (335) $ (3,999) $ (2,086)
======== ========= =========
EARNINGS PER SHARE DATA Loss per share,
basic and diluted $ (0.03) $ (0.34) $ (0.20)
======== ========= =========
Weighted-average common and common
equivalent shares 12,134 11,833 10,671
======== ======== ========
See notes to consolidated financial statements.
F-5
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Dollars In Thousands)
----------------------------------------------------------------------------------------------------------
Common Stock Additional Retained Treasury Stock
----------------- Paid-In Earnings -------------------
Shares Amount Capital (Deficit) Shares Amount Total
------------------------------------------------------------------------
BALANCE January 1, 2004 15,498,624 $ 15 $ 13,723 $ (32,455) (5,063,871) $ (11,320) $(30,037)
Distribution of treasury
stock-deferred compensation
trust - - - - 16,707 37 37
Stock issued under executive
option plan 1,048,500 1 2,167 - - - 2,168
Other 1,200 - (198) - 90 824 626
Net loss - - - (2,086) - - (2,086)
----------- ---- ------- -------- ----------- -------- --------
BALANCE December 31, 2004 16,548,324 16 15,692 (34,541) (5,047,074) (10,459) (29,292)
Stock issued under executive
option plan 166,500 1 395 - - - 396
Stock based compensation -
stock options - - 60 - - - 60
Distribution of treasury stock
deferred compensation trust - - (412) - 187,983 412 -
Stock based compensation -
restricted stock - - 1,566 - - - 1,566
Issuance of deferred compensation
-restricted stock 367,500 - - - - - -
Net loss - - - (3,999) - - (3,999)
--------- ---- ------- -------- ---------- ------ ---------
BALANCE December 31, 2005 17,082,324 17 17,301 (38,540) (4,859,091) (10,047) (31,269)
Stock based compensation -
stock options - - 72 - - - 72
Stock issued under executive
option plan 97,500 - 257 - - - 257
Restricted stock - Forfeited (48,000) - - - - - -
Stock based compensation -
restricted stock - - 741 - - - 741
Distribution of treasury stock -
deferred compensation - - (206) - 96,698 206 -
Net loss - - - (335) - - (335)
---------- ----- --------- ----------- ---------- -------------------
BALANCE December 31, 2006 17,131,824 $ 17 $ 18,165 $ (38,875) (4,762,393) $ (9,841)$(30,534)
See notes to consolidated financial statements.
F-6
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In Thousands)
------------------------------------------------------------------------------
2006 2005 2004
OPERATING ACTIVITIES:
Net loss $ (335) $ (3,999) $ (2,086)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 12,691 14,065 13,852
Write off of development and project cost - - 1,193
Stock-based compensation - restricted stock 741 1,566 -
Stock-based compensation - stock options 72 60 -
Provision for bad debts 146 243 (49)
Amortization of deferred loan fees 1,999 2,000 2,056
Change in operating assets and liabilities:
Accounts receivable net 335 111 (859)
Inventories 693 (438) (21)
Prepaid expenses and other assets 195 (96) (1,100)
Accounts payable (1,979) 1,261 800
Accrued expenses 906 (2,936) 326
Other assets 15 219 557
Deferred compensation plan obligation (32) (48) (691)
Obligation to officers (1,000) (1,000) (1,000)
-------- ------- --------
Net cash provided by operating activities 14,447 11,008 12,978
INVESTING ACTIVITIES:
Capital expenditures for property and equipment
Las Vegas (5,651) (5,240) (7,169)
Capital expenditures for property and equipment
Black Hawk (3,495) (3,038) (3,477)
------- -------- --------
Net cash used in investing activities (9,146) (8,278) (10,646)
------- -------- --------
F-7
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In Thousands)
--------------------------------------------------------------------------------
2006 2005 2004
---- ---- ----
FINANCING ACTIVITIES:
Proceeds from long-term borrowings - - $ 316
Repayment of Foothill line of credit - - (2,000)
Repayments on long-term borrowings (844) (1,440) (3,937)
Exercise of employee stock options 257 395 2,168
Other - - 663
------ ------ -------
Net cash used in financing activities (587) (1,045) (2,790)
------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,714 1,685 (458)
CASH AND CASH EQUIVALENTS Beginning of year 20,571 18,886 19,344
------ ------- -------
CASH AND CASH EQUIVALENTS End of year $ 25,285 $ 20,571 $ 18,886
====== ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Property acquired with accounts payable
Las Vegas, Nevada $ 812 $ 406 $ 331
===== ====== ======
Property acquired with debt Las Vegas, Nevada - - $ 325
===== ====== ======
Property acquired with accounts payable
Black Hawk, Colorado $ 619 $ 53 $ 354
===== ====== ======
Non-cash item Main Street expansion Black Hawk
to financed by SID bonds $ 2,763 - -
====== ====== ======
Cash interest paid $ 24,329 $ 24,608 $ 25,023
====== ====== ======
Distribution of deferred compensation treasury
shares $ 206 $ 412 $ 37
====== ======= =======
See notes to consolidated financial statements.
F-8
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Riviera Holdings Corporation ("RHC") and its
wholly-owned subsidiaries (together, the "Company") own and operate the
Riviera Hotel & Casino ("Riviera Las Vegas") on the Strip in Las Vegas,
Nevada and the Riviera Black Hawk Casino ("Riviera Black Hawk") in Black
Hawk, Colorado.
Riviera Las Vegas is located on the Las Vegas Strip, at 2901 Las Vegas
Boulevard South, Las Vegas, Nevada and occupies approximately 26 acres.
Riviera Black Hawk is located on 1.63 acres of land at 400 Main Street,
Black Hawk, Colorado.
The Company's operations are subject to extensive regulation in the states
of Nevada and Colorado by the respective Gaming Control Boards and various
other state and local regulatory agencies. Management believes that the
Company's procedures comply, in all material respects, with the applicable
regulations for supervising casino operations, recording casino and other
revenues, and granting credit.
Principles of Consolidation--The consolidated financial statements include
the accounts of Riviera Holdings Corporation and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
Cash Equivalents--All highly liquid investment securities with maturity of
three months or less when acquired are considered to be cash equivalents.
Securities classified as cash equivalents consist of short-term investment
and money market accounts (all with original maturities of 90 days or less)
and had a value of $10,809,000 and $4,614,000 at December 31, 2006 and
2005, respectively.
Inventories--Inventories consist primarily of food, beverage, gift shop,
and promotional items and are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment--Property and equipment are stated at cost, and
capitalized lease assets are stated at the present value of future minimum
lease payments at the date of lease inception. Depreciation is computed by
the straight-line method over the shorter of the estimated useful lives or
lease terms, if applicable, of the related assets, which lives range from
three years for certain equipment to 40 years for buildings.
The Company periodically assesses the recoverability of property and
equipment and evaluates such assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Asset impairment is determined to exist if estimated future
cash flows, undiscounted and without interest charges, are less than the
carrying amount.
F-9
Other Assets--Other assets include deferred bond offering costs and
commissions, which are amortized over the life of the debt using the
"interest method". Such amortized costs are included in interest expense.
Stock-Based Compensation--As of December 31, 2006, the Company has five
active stock-based compensation plans and two expired stock-based
compensation plans. On January 1,2006 we adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (R), using the modified prospective
method 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. Under the Company's Stock
Compensation Plan, the Company shall at the discretion of the non-employee
directors serving on the Company's Compensation Committee, issue shares of
Company common stock to those directors in lieu of cash compensation. The
shares issued under this plan are valued at the market value of the shares
on each regularly scheduled date for paying directors' fees.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the date of grant for awards consistent with the
provisions of SFAS No. 123 (using the grant date fair value method value
method), the Company's net loss and pro forma net loss per common share and
common share equivalent would have been increased to the pro forma amounts
indicated below at December 31 (in thousands, except per share amounts):
2005 2004
Net loss as reported $ (3,999) $ (2,086)
Stock -based employee compenstion expense 60 -
Deduct: Total stock-based employee compensation
expense determined under fair value-based methods
for awards net of related tax effects (44) (48)
Net loss pro forma $ (3,983) $ (2,134)
Basic loss per common share as reported $ (0.34) $ (0.20)
Basic loss per common share pro forma $ (0.34) $ (0.20)
Diluted loss per common and common
share equivalent as reported $ (0.34) $ (0.20)
Diluted loss per common and common share
equivalent pro forma $ (0.34) $ (0.20)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2006, respectively: dividend yield of 0%;
expected volatility 64%; risk-free interest rates of 4.87%; and expected
lives of 6.25 years. No options were granted in 2004 or 2005. The weighted
fair value of options granted in 2006 was $14.30 per share.
Fair Value Disclosures
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, and
Accrued Expenses--The carrying value of these items is a reasonable
estimate of their fair value due to their short term nature.
F-10
Long-Term Debt--The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities. Based on the borrowing rates currently available to the Company
for debt with similar terms and average maturities, the estimated fair
value of long-term debt outstanding at December 31, 2006 and 2005 is
approximately $227,105,000 and $231,019,000, respectively.
Treasury Stock
Treasury shares are stated at cost. Included, as treasury shares at
December 31, 2006 and 2005 were 94,324 and 191,022 shares held by the
Company's Deferred Compensation Plan. These shares are eligible for voting
by the plan participants. 96,698 and 187,893 shares were distributed
under the Deferred Compensation Plan during the years ended December 31,
2006 and 2005.
Revenue Recognition
Casino Revenue--Casino revenue is the net win from gaming activities, which
is the difference between gaming wins and losses less slot club cash
points, cash vouchers, free play and other related customer cash
incentives.
Room Revenue, Food and Beverage Revenue, Entertainment Revenue, and Other
Revenue--The Company recognizes room, food and beverage, entertainment
revenue, and other revenue at the time that goods or services are provided.
Prices are fixed or determinable, pervasive evidence of an arrangement
exists, and collection is reasonably assured.
Promotional Allowances-Revenues include the estimated retail value of
rooms, food and beverage, and entertainment provided to customers on a
complimentary basis. Such amounts are then deducted as promotional
allowance. The estimated cost of providing these promotional allowances is
charged to the casino department in the following amounts in thousands:
Year Ended December 31
-------------------------------
2006 2005 2004
--------- -------- ---------
Food and beverage $ 9,147 $ 8,510 $ 8,693
Rooms 2,693 1,333 1,096
Entertainment 629 632 890
--------- ---------- --------
Total costs allocated to casino departments $12,469 $10,475 $10,679
======== ========= =======
Estimates and Assumptions-The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Significant estimates used by the Company include recoverability of
and estimated useful lives for depreciable and amortizable assets, certain
accrued liabilities (including self-insurance reserves and customer loyalty
programs), realizability of deferred tax assets, valuation of stock based
compensation and collection allowances for receivables. Actual results may
differ materially from estimates.
F-11
Self-Insurance Reserves-The Company is self-insured for various levels of
general liability, workers' compensation, and non-union employee medical
insurance coverage. Insurance claims and reserves include accruals of
estimated settlements for known claims, as well as accrued estimates of
incurred but not reported claims. In estimating these costs, the Company
considers its historical claims experience and makes judgments about the
expected levels of costs per claim. Changes in health care costs, accident
frequency and severity and other factors can materially affect the estimate
for these liabilities.
Loyalty Club Program-We offer to our guests the opportunity to earn points
redeemable for cash and complimentary rooms and food and beverage based on
their level of gaming and non-gaming activities while at our properties. An
accrual is recorded as points are earned based upon expected redemption
rates and, in the case of complimentaries, the estimated cost of the
complimentary to be provided.
Advertising-The costs of advertising are expensed as incurred and are
allocated to each revenue department based upon content. Advertising
expense was $2,814,000, $2,472,000 and $3,338,000 in 2006, 2005, and 2004,
respectively.
Sarbanes-Oxley Act Expenses -These costs represent professional fees to
consultants and external auditors directly related to the compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Recently Issued Accounting Standards-- In February 2007, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities". SFAS No. 159
permits companies to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by SFAS No. 159 permits all
companies to choose to measure eligible items at fair value at specified
election dates. At each subsequent reporting date, a company shall report
in earnings any unrealized gains and losses on items for which the fair
value option has been elected. SFAS No. 159 is effective as of the
beginning of a company's first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the company also elects to
apply the provisions of SFAS No. 157, "Fair Value Measurements" (see
below). We are currently evaluating the impact that the adoption of SFAS
No. 159 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of
FASB Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires
employers to recognize the over-funded or under-funded status of a defined
benefit postretirement plan as an asset or liability and to recognize
changes in that funded status in the year in which the changes occur
through other comprehensive income. This Statement also requires employers
to measure the funded status of a plan as of the date of its year end and
is effective for publicly traded companies as of the end of the fiscal year
ending after December 31, 2006. The adoption of SFAS No. 158 did not have a
material effect on our consolidated financial statements as we do not
currently have a defined benefit postretirement plan that meets the
criteria specified under SFAS No. 158. In September 2006, the FASB issued
SFAS No. 157, "Fair Value Measurements", which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We are currently evaluating the impact that the adoption of SFAS No.
157 will have on our consolidated financial statements.
F-12
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. The
adoption of SAB 108 did not have an impact on our results of operations,
financial position or cash flows.
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 Consolidated Financial Statements, but
currently we do not believe the adoption will have a material impact.
In June 2006, the Emerging Issues Task Force reached a consensus on Issue
No. 06-3 ("EITF 06-3"), "Disclosure Requirements for Taxes Assessed by a
Governmental Authority on Revenue-Producing Transactions." The consensus
allows companies to choose between two acceptable alternatives based on
their accounting policies for transactions in which the company collects
taxes on behalf of a governmental authority, such as sales taxes. Under the
gross method, taxes collected are accounted for as a component of sales
revenue with an offsetting expense. Conversely, the net method allows a
reduction to sales revenue. If such taxes are reported gross and are
significant, companies should disclose the amount of those taxes. The
guidance should be applied to financial reports through retrospective
application for all periods presented, if amounts are significant, for
interim and annual reporting beginning February 1, 2007. We do not expect
the adoption of EITF 06-3 to have a material effect on our consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3.
SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes and SFAS
No. 3, Reporting Accounting Changes in Interim Financial Statements and
changes the requirement for the accounting for and reporting of a change
in accounting principles not prescribed by specific transition provisions
of the newly adopted standard. It carries forward without change the
requirements of APB Opinion No. 20 for accounting for error corrections
and changes in estimates. The provisions of SFAS No. 154 will be effective
for accounting changes made in the fiscal year beginning after December
15, 2005. The adoption did not have a material impact on our consolidated
financial statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31 (in thousands):
F-13
2006 2005
----- ------
Casino $ 335 $1,454
Hotel 2,891 3,334
----- ------
Total 3,226 4,788
Less - Collection allowances (163) (1,244)
----- -----
Accounts receivable - net $3,063 $3,544
====== ======
Changes in the collection allowances consist of the following for the years
ended December 31 (in thousands):
2006 2005 2004
----- ----- -----
Beginning balance $ 1,244 $ 1,214 $ 1,047
Write-offs (1,257) (229) (68)
Recoveries 30 16 37
Provision for doubtful collection 146 243 198
----- ------ ------
Ending balance $ 163 $ 1,244 $ 1,214
===== ====== =======
The Company manages its credit risk by evaluating customers' credit
worthiness before extending credit. The maximum credit losses that might be
sustained are limited to the recorded receivables less any amounts
reserved.
In 2006 Riviera Black Hawk entered into an agreement with Global Payments
Gaming Services Inc. a company that guarantees approved checks cashed at
the property for a fee.
3. PREPAID EXPENSES
Prepaid expenses consist of the following at December 31 (in thousands):
2006 2005
---- ----
Prepaid gaming taxes $1,527 $ 1,439
Prepaid insurance 891 814
Other 1,584 1,944
------ ------
Total $4,002 $ 4,197
====== ======
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands):
F-14
2006 2005
---- ------
Land and improvements $ 40,904 $ 38,130
Buildings and improvements 143,417 143,417
Equipment, furniture, and fixtures 150,576 143,004
------- -------
Total cost 334,897 324,551
Accumulated depreciation and
amortization (163,577) (153,421)
--------- ---------
Property and equipment-net $171,320 $171,130
======== =========
Substantially all of the Company's property and equipment are pledged as
collateral to secure debt (see Note 8).
5. OTHER ASSETS
Other assets consist of the following at December 31 (in thousands):
2006 2005
---- ----
Deposits $ 58 $ 83
Bond offering costs and commissions,
net of accumulated amortization
of $7,149 and $5,556 4,559 6,153
Other 1,157 1,160
------ -----
Total $ 5,774 $ 7,396
====== ======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consist of the following at December 31 (in thousands):
2006 2005
---- ----
Outstanding chip and token liability $ 569 $ 401
Customer loyality liabilities 742 859
Progressive jackpot liabilities 515 654
Customer deposits and other 295 302
----- -----
Total customer-related payables 2,121 2,216
Accounts payable vendors 5,015 6,077
Insurance premiums - 246
Customer deposits, non-gaming 1,544 1,159
Other 446 435
----- ------
Total $ 9,126 $ 10,133
====== ======
Accrued expenses consist of the following at December 31 (in thousands):
2006 2005
Payroll and related taxes and benefits $ 8,886 $ 9,127
Property and gaming taxes 3,037 2,093
Other 1,244 1,041
----- -------
Total $13,167 $12,261
====== ======
F-15
7. OBLIGATION TO OFFICERS
Obligation to officers consists of the nonqualified pension plan obligation
to our Chief Executive Officer ("CEO"), including accrued interest and
deferred compensation plan liabilities, payable upon expiration of his
employment contract or a change of control of the Company. See Note 12 for
a description of this plan. Obligation to officers consists of the
following at December 31 (in thousands).
2006 2005
---- ----
Nonqualified pension obligation CEO,
unfunded $ - $ 513
Accrued interest on pension CEO,
unfunded 3,093 3,610
Deferred compensation funded 1 3
3,094 4,126
----- -----
Less-current portion (1,000) (1,000)
----- -----
Obligation to officers - net of
current portion $2,094 $ 3,126
===== =====
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
2006 2005
11% Senior Secured Notes maturing on
June 15, 2010, bearing interest, payable
semiannually on June 15 and December 15
of each year, redeemable June 15, 2006
at 105.5%; 2007 at 103.7%, 2008 at 101.8%,
2009 and thereafter at 100%. These notes
are collateralized by the land and physical
structures comprising Riviera Las Vegas and
the assets of Riviera Black Hawk $213,601 $213,196
5.5% to 5.9% notes collateralized by equipment,
payable monthly, including interest 802 1,448
Capitalized lease obligations (Note 9) 189 252
5.5% Special Improvement District Bonds -
issued by the City of Black Hawk, Colorado,
interest and principal payable monthly
over 10 years beginning in 2000 411 535
------ -------
Total long-term debt 215,003 215,431
Less-Current maturities by terms of debt (879) (824)
-------- --------
Total $214,124 $214,607
========= ========
Maturities of long-term debt for the years ending December 31 are as follows
(in thousands):
F-16
2007 $ 879
2008 324
2009 199
2010 213,601
2011 -
Thereafter -
--------
Total $ 215,003
=======
On June 26, 2002, the Company obtained debt in the principal amount of $215
million in the form of 11% Senior Secured Notes with a maturity date of
June 15, 2010, substantially all of which were later exchanged for
virtually identical notes of the Company that were registered under the
Securities Act of 1933, as amended (collectively, the "Notes"). Interest on
the Notes is at the annual rate of 11% paid semiannually on each June 15
and December 15, beginning December 15, 2002. The net proceeds of the
Notes, along with cash on hand, were used to defease our 10% First Mortgage
Notes due 2004 and to defease Riviera Black Hawk's 13% First Mortgage Notes
due 2005 with contingent interest. Cash flow from operations is not
expected to be sufficient to pay 100% of the principal of the Notes at
maturity on June 15, 2010. Accordingly, the ability of the Company to repay
the Notes at maturity will be dependent upon its ability to refinance the
Notes. There can be no assurance that the Company will be able to refinance
the Notes at maturity.
On or after June 15, 2006, the Company may redeem all or part of the Notes
upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and liquidated damages, if any, on the Notes
redeemed, to the applicable redemption date, if redeemed during the
twelve-month period beginning on June 15 of the years indicated below:
Year Percentage
2006 .................................................105.500%
2007..................................................103.667%
2008..................................................101.833%
2009 and thereafter...................................100.000%
The indenture governing the Notes (the "Note Indenture") provides that, in
certain circumstances, the Company must offer to repurchase the Notes upon
the occurrence of a change of control or certain other events. In the event
of such mandatory redemption or repurchase prior to maturity, the Company
would be unable to pay the principal amount of the Notes without a
refinancing.
The Note Indenture contains certain covenants, which limit the ability of
the Company, subject to certain exceptions, to: (i) incur additional
indebtedness; (ii) pay dividends or other distributions, repurchase capital
stock or other equity interests or subordinated indebtedness; (iii) enter
into certain transactions with affiliates; (iv) create certain liens; (v)
sell certain assets; or (vi) enter into certain mergers and consolidations.
As a result of these restrictions, the ability of the Company to incur
additional indebtedness to fund operations or to make capital expenditures
is limited. In the event that cash flow from operations is insufficient to
cover cash requirements, the Company may be required to curtail or defer
certain of its capital expenditure programs, which could have an adverse
effect on operations. At December 31, 2006, the Company believes that it is
in compliance with the covenants.
F-17
On July 26, 2002, the Company entered into a $30 million, five-year secured
credit facility. The credit facility is secured by substantially the same
collateral that secures the Notes. The lien on the collateral securing the
credit facility is senior to the lien on the collateral securing the Notes.
The credit facility contains customary conditions to borrowing and certain
representations and warranties customary in gaming-related financing. The
credit facility also contains financial covenants and restrictions
regarding, among other things, indebtedness, distributions and changes in
control. Under the credit facility, the Company can obtain extensions of
credit in the forms of cash and letters of credit. The Company is 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%. The Company is required to pay a fee on all outstanding
letters of credit equal to their face value times an annual percentage rate
of 2.50%. Additionally, in the event of a default, the credit facility
lender may increase the interest rate and letter of credit fee by an
additional 2.00% per year during the period of default. An annual fee (paid
monthly) of 0.5 percent is charged on the unused portions of the revolver
plus a $3,000 monthly service fee. There were no advances outstanding on
this revolver at December 31, 2006.
The 5.5% Special Improvement District Bonds were issued by the City of
Black Hawk, Colorado. The proceeds were used for road improvements and
other infrastructure projects benefiting Riviera Black Hawk and a nearby
casino. Our share of the debt was $1.2 million payable over a ten-year
period that began in 2000.
9. LEASING ACTIVITIES
The Company leases certain office equipment under capital leases. These
agreements have been capitalized at the present value of the future minimum
lease payments at lease inception and are included with property and
equipment. We estimate that the fair market value of the property and
equipment subject to the leases approximates the net present value of the
leases.
The following is a schedule by year of the minimum rental payments due
under capital leases as of December 31, 2006 (in thousands):
F-18
2007 $ 83
2008 83
2009 61
2010 -
2011 -
Thereafter -
----
Total minimum lease payments 227
Less-Taxes, maintenance, and insurance (23)
Less-Interest portion of payments (15)
-----
Present value of net minimum lease payments $ 189
=====
Property and equipment under capital lease as of December 31, 2006 and 2005
were $325,000 and $11.4 million with accumulated amortization of $135,000
million and $11.1 million, respectively.
Rental expense under operating leases for the years ended December 31,
2006, 2005 and 2004 was approximately $503,000, $1,096,000 and $964,000,
respectively. All are cancelable within a year.
In addition, the Company leases retail space to third parties (primarily
retail shops and fast food vendors) under terms of noncancelable operating
leases that expire in various years through 2011. Rental income, which is
included in other revenue, for the years ended December 31, 2006, 2005 and
2004 was approximately $2,069,000, $2,205,000 and $1,907,000 respectively.
At December 31, 2006, the Company had future minimum annual rental income
due under noncancelable operating leases as follows (in thousands):
2007 $ 2,123
2008 1,188
2009 856
2010 804
2011 122
------
Total $ 5,093
======
Certain lease arrangements at the Riviera Las Vegas contain a
buyout/liquidated damages provision. This provision provides that in the
event of a major renovation or certain other events, the Company has the
right, according to an agreed-upon formula, to buy out any remaining term
of the lease by providing the tenant twelve months written notice.
10. INCOME TAXES
The effective income tax rate of zero differs from the statutory Federal
income tax rates for the years ended December 31 as follows (dollars in
thousands):
F-19
2006 2005 2004
---------------- ------------------ -------------
Amount Rate Amount Rate Amount Rate
---------------- ---------------- --------------
Income taxes benefit
at Federal statutory rate $(117) (35.0)% $ (1,400) (35.0)% $ (730) (35.0)%
Employee Benefits 633 189.0 % 695 17.4 % 1,555 74.6 %
FICA Credit (222) (66.3)% (239) (6.0)% (216) (10.4)%
Other - - (232) (5.8)% (92) (4.4)%
Valuation allowance (294) (87.7)% 1,176 29.4 % (517) (24.8)%
----- ------ ----- ------ ----- ------
Benefit for income taxes $ - 0.0 % $ - 0.0 % $ - 0.0 %
==== ===== ====== ====== ===== =======
Comparative analysis of the provision for income taxes is as follows:
2006 2005 2004
---- ---- ----
Current $ - $ - $ -
Deferred - - -
---- ---- ----
Total $ - $ - $ -
==== ==== ====
The tax effects of the items composing the Company's net deferred tax
asset consist of the following at December 31 (in thousands):
2006 2005
Deferred tax liabilities
Reserve differential for hospitality and gaming activities $ 1,582 $ 1,168
Difference between book and tax-depreciable property 5,955 4,820
Other - 511
------ -----
Total Deferred Tax Liabilities 7,537 6,499
------ -----
Deferred tax assets
Net operating losss carryforward $ 21,985 $ 19,785
Reserves not currently deductible 2,480 2,536
Bad debt reserves 57 474
AMT and other credits 3,315 3,092
------ -------
Total Deferred Tax Assets 27,837 25,887
------ ------
Less - Valuation allowance (17,854) (16,942)
------- ------
Net deffered tax asset $ 2,446 $ 2,446
======= =======
The Company has $3,315,000 of alternative minimum tax ("AMT") credit
and general business credit available to offset future income tax
liabilities. The AMT credits have no expiration date. The general business
credit will not begin to expire until 2010. The Company has approximately
$65,029,000 in net operating loss carryforwards, which includes
approximately $2.5 million in stock based compensation expense not
reflected above. The net operating loss carryforwards will expire between
2013 and 2027. Currently, the Company does not believe that it is more
likely than not that we can utilize our deferred tax assets and
accordingly, a valuation allowance has been provided for substantially all
deferred tax assets.
F-20
The realizability of the net deferred tax asset related to Rivera Las Vegas
is dependent upon future earnings. The Company's net deferred tax asset
approximates its AMT credit carryforwards, as such AMT credits have an
indefinite life.
11. COMMITMENTS AND CONTINGENCIES
The Company is party to routine lawsuits arising from the normal operations
of a casino or hotel. We do not believe that the outcome of such
litigation, in the aggregate, will have a material adverse effect on the
financial position, results of operations, or cash flows of the Company.
Employees and Labor Relations-- As of December 31, 2006, the Company had
approximately 1,500 full-time equivalent employees and had collective
bargaining agreements in Las Vegas with eight unions covering approximately
714 of such employees, including food and beverage employees, rooms
department employees, carpenters, engineers, stagehands, musicians,
electricians, painters and teamsters. The Company's agreement with the
Carpenters Union expired in 2005 but was extended until July 2007. The
Company's agreement with the Painters Union was renegotiated in 2005 and
expires in 2010. Agreements with the Southern Nevada Culinary and
Bartenders Union, covering the majority of the Company's unionized
employees, were renegotiated in 2002 and expire in 2007, as does the
agreement with the Stagehands Union. The agreement with the Teamsters Union
expires in 2008, and while the Operating Engineers and Electrician
agreements expire in 2009. The collective bargaining agreement with the
Musicians Union expired in 1999. The Company is currently in negotiations
with the Musicians Union. Although unions have been active in Las Vegas, we
consider our employee relations to be satisfactory. There can be no
assurance, however, that new agreements will be reached without union
action or on terms satisfactory to the Company.
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, based on a initial submission of costs is $2.8 million.
Accordingly, we have capitalized $2.8 million as a land improvement and 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.
Topping Fee Related to the Merger Agreement - Under our April 5, 2006
Agreement and Plan of Merger ("Merger Agreement"), we agreed to pay Riv
Acquisition Holdings Inc. 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"
as defined in the Merger Agreement (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.
F-21
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.
12. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS
William L. Westerman serves as our Chairman of the Board, President and
CEO, and as Chairman of the Board and CEO of our wholly-owned subsidiary,
Riviera Operating Corporation ("ROC"), and Riviera Black Hawk Inc.
Under Mr. Westerman's employment agreement, which was last amended on July
15, 2003, he is employed for an indefinite period, subject to termination
by either Mr. Westerman upon at least 180 days written notice or the
Company upon at least 90 days written notice. Mr. Westerman's base annual
compensation is $1,000,000. Under his employment agreement, Mr. Westerman
is not entitled to participate in the Incentive Compensation Program or
other executive bonus plan established by the Company.
The employment agreement required the Company to fund a retirement account
for Mr. Westerman. Pursuant to that agreement, the Company has made no
further principal contributions to the retirement account subsequent to
January 1, 2001 but the account continues to accrue interest. The
retirement account had a balance, including accrued interest, of $3,094,000
as of December 31, 2006.
Mr. Westerman's retirement account is credited quarterly with interest on
the first day of each succeeding calendar quarter in an amount equal to the
product of (i) the Company's average borrowing cost for the immediately
preceding fiscal year, as determined by the Company's Chief Financial
Officer, and (ii) the average outstanding balance in the retirement account
during the preceding calendar quarter. At the recommendation of our
Compensation Committee, in order to reduce the amount that would be payable
immediately upon Mr. Westerman's separation from the Company, it was agreed
that commencing April 1, 2003, and continuing the first day of each quarter
thereafter, he be paid the following in cash: (i) a distribution of
$250,000 from the principal balance of his retirement account; and (ii) the
quarterly interest credited to his retirement account one quarter in
arrears. Total interest accrued to Mr. Westerman in 2006 was $400,000 while
interest accrued was $518,000 for 2005 and $638,000 for 2004.
We retain beneficial ownership of Mr. Westerman's retirement account, which
is earmarked to pay his retirement benefits. However, upon (1) the vote of
a majority of the outstanding shares of common stock approving a "change of
control" (as discussed in the next paragraph), (2) the occurrence of a
change of control without Mr. Westerman's consent, (3) a breach by us of a
material term of the employment agreement or (4) the expiration or earlier
termination of the employment agreement for any reason other than cause,
Mr. Westerman has the right to require us to establish a "Rabbi Trust" for
his benefit. He also has the right to require us to fund such trust with
cash equal to the amount then credited to his retirement account, including
any amount to be credited to his retirement account upon a change of
control.
F-22
On February 5, 1998, our stockholders approved a merger agreement that
constituted a change of control under Mr. Westerman's employment agreement.
(That merger agreement was terminated without consummation of the merger.)
On March 5, 1998, Mr. Westerman exercised his right to require us to
establish and fund a Rabbi Trust for his benefit. On March 20, 1998, Mr.
Westerman waived his right to have us fund the Rabbi Trust in exchange for
our agreement to fund it within five business days after notice from him.
In the event that Mr. Westerman ceases to be employed by us (except for
termination for cause, in which case Mr. Westerman would forfeit all rights
to monies in the retirement account), Mr. Westerman will be entitled to
receive the amount in the retirement account (principal and interest) in 20
equal quarterly installments commencing as of the date he ceases to be
employed. In the event that Mr. Westerman's Rabbi Trust has not yet been
funded, the balance of principal and interest of the retirement account
shall be paid directly to Mr. Westerman upon his retirement or termination
(except for cause) or upon a change of control.
The agreement provides that for a period of 24 months following termination
for any reason except cause, Mr. Westerman shall not engage in any
activity, which is in competition with the Company within a 75-mile radius
from the location of any hotel or casino then operated by the Company. As
consideration for not competing, the Company shall pay to Mr. Westerman a
total of $500,000 in two equal annual installments of $250,000. The first
installment is payable within five business days of termination of
employment with the second installment payable on the first anniversary of
termination.
In addition to Mr. Westerman, one other executive, Robert Vannucci, has an
employment agreement with us.
Mr. Vannucci serves as President of ROC under an employment agreement dated
as of September 1, 2006. Mr. Vannucci's base compensation is $400,000.
Mr. Vannucci's employment agreement provides for an annual award of up to
$200,000 under our Incentive Compensation Program if predetermined
financial targets at Riviera Las Vegas are achieved. For 2006, Mr. Vannucci
received an Incentive Compensation Program award of $92,500 cash. Mr.
Vannucci did not receive an Incentive Compensation Program award for 2005.
For 2004, Mr. Vannucci received an Incentive Compensation Program award of
$57,000 cash, which entitled him to an additional incentive award of
$57,000, which he elected to receive in cash per his agreement at the time.
Mr. Vannucci's agreement automatically renews annually; provided, however,
that Mr. Vannucci or we may terminate the employment agreement at any time
upon 30 days prior written notice, but if we terminate it without cause,
then Mr. Vannucci will be entitled to one year's salary, a prorated award
under our Incentive Compensation Program, two years of health insurance
benefits and a one-year automobile allowance of $6,000, plus reimbursement
of all reasonable automobile expenses (excluding lease or loan payments).
F-23
Incentive Compensation Program--We have an Incentive Compensation Program
covering employees who, in the opinion of our Chairman of the Board, either
serve in key executive, administrative, professional, or technical
capacities with us, or who have made a significant contribution to the
successful and profitable operation of the Company. The amount of each
bonus is based upon a sliding targeted scale of earnings established
annually. During the years ended December 31, 2006, 2005 and 2004, the
Company recorded accrued bonuses of $581,000 $555,000 and $1,085,000
respectively, under this program.
Pension Plan Contributions--We contribute to multi-employer pension plans
under various union agreements in Las Vegas to which we are a party.
Contributions, based on wages paid to covered employees, were approximately
$1,952,000, $1,760,000 and $1,715,000 for the years ended December 31,
2006, 2005 and 2004, respectively. Our share of any unfunded liability
related to multi-employer plans, if any, is not determinable.
Profit Sharing and 401(k) Plans--We have profit sharing and 401(k) plans
(the "Profit Sharing and 401(k) Plans") for employees of Riviera Las Vegas
and Riviera Black Hawk who are at least 21 years of age and who are not
covered by a collective bargaining agreement and are eligible after one
year of service.
We may contribute to the 401(k) component of the Profit Sharing and 401(k)
Plans in an amount not to exceed 25% of the first 8% of each participant's
compensation. We made contributions of $276,000, $290,000 and $303,000 for
the years ended December 31, 2006, 2005 and 2004. We also pay
administrative costs of the Profit Sharing and 401(k) Plans, which are not
significant.
Prior to 2003, we suspended contributions to the profit sharing component
of the Profit Sharing and 401(k) Plans and we have substituted
contributions to an Employee Stock Ownership Plan ("ESOP"), (see "Employee
Stock Ownership Plan," directly below).
Employee Stock Ownership Plan--The ESOP was established prior to 2003 to
replace the profit sharing contribution component of the Profit Sharing and
401(k) Plans. The 401(k) component remains unchanged. The ESOP provides
that all employees of Riviera Las Vegas and Riviera Black Hawk who were
employed on and completed a minimum of 1,000 hours of service by, December
31 of that plan year, were at least 21 years of age, and were not covered
by a collective bargaining agreement are eligible to participate in the
ESOP. The ESOP provides that we will make a contribution to the ESOP's
participants at Riviera Las Vegas and Riviera Black Hawk relative to the
economic performance of each property and for the corporate participants
relative to the economic performance of the entire Company. For Riviera Las
Vegas, we will make a contribution equal to 1% of each eligible employee's
annual compensation if a prescribed annual operating earnings target is
attained and an additional 1% thereof for each $2 million by which
operating earnings are exceeded, up to a maximum of 4% for 2006. For
Riviera Black Hawk, we will make a contribution equal to 1% of each
eligible employee's annual compensation if a prescribed annual operating
earnings target is attained, an additional 1% for the next $1.5 million and
an additional 1% thereof for each $2 million by which operating earnings
are exceeded, up to a maximum of 4% for 2006. For Riviera corporate
participants, we will make a contribution equal to 1% of each eligible
employee's annual compensation if a prescribed annual operating earnings
target is attained, and an additional 1% for each $2 million by which
operating earnings are exceeded, up to a maximum of 2%. Under the ESOP, our
contributions are made in cash, which may be used to buy our common stock
and pay participants upon separation of service. We contributed $0 in 2006,
$126,000 in 2005 and $899,000 in 2004, respectively to the ESOP.
F-24
Deferred Compensation Plan--Prior to 2003, we adopted a Deferred
Compensation Plan (the "DCP"). The purpose of the DCP is to provide
eligible employees with the opportunity to defer the receipt of cash
compensation. Participation in the DCP is limited to employees who receive
annual compensation of at least $100,000. The deferred funds other than the
common stock component, are maintained on the Company books as funded
liabilities under Rabbi Trusts for the benefit of the participants. All
elections to defer the receipt of compensation must be made no later than
December 1st preceding the plan year to which the election relates and are
irrevocable for the duration of that plan year. No deferrals have been made
since 2004. Five executives were participating in the DCP as of December
31, 2006. The DCP is distributing common stock to participants under
established schedules. The common stock is included in the Rabbi Trusts for
the participants and is recorded as treasury stock in these financial
statements.
Restricted Stock Plan--Prior to 2003, we adopted a Restricted Stock Plan to
provide incentives, to attract and retain highly competent persons as
officers and key employees. Participants consist of such officers and key
employees as our Compensation Committee determines to be significantly
responsible for our success and future growth and profitability. Awards of
restricted stock are subject to such terms and conditions as we determine
to be appropriate at the time of the grant, including restrictions on the
sale or other disposition of such shares and provisions for the forfeiture
of unvested shares for no consideration upon termination of the
participant's employment within specified periods or under certain
conditions. Please see Note 13.
Salary Continuation Agreements--Approximately 66 executive officers and
certain other employees (excluding Mr. Westerman and Mr. Vannucci) of ROC
and RBH have salary continuation agreements effective through December
2007, pursuant to which they will be entitled to receive (1) six months
salary if their employment with the Company is terminated, without cause,
within 12 months of a change of control of the Company; and (2) group
health insurance for a period of 6 months. The base salary payments are
payable in biweekly installments, subject to the employee's duty to
mitigate by using his or her best efforts to find employment. In addition,
two officers and two significant employees have salary continuation
agreements effective through December 31, 2007, pursuant to which each of
them will be entitled to receive one year's base salary and certain
benefits for two years, if their employment is terminated without cause
within 24 months of a change of control of the Company. These four salary
continuation agreements are not subject to a duty to mitigate. The
estimated total amount payable under all such agreements was approximately
$3.7 million, which includes $760,000 in benefits, as of December 31, 2006.
F-25
13. STOCK OPTION PLANS
Stock Compensation Plans--At December 31, 2006, we had two active stock
option plans and two expired stock option plans, which are described below.
Under the 1993 Employee Stock Option Plan (the "1993 Option Plan"), we were
authorized to grant options to employees for up to one million shares of
our common stock. Under the Non-Qualified Stock Option Plan for
Non-Employee Directors (the "1996 Option Plan"), we were authorized to
grant options to non-employee directors for up to 150,000 shares of common
stock. Under these plans, the exercise price of each option equaled the
market price of our stock on the date of grant (110% of market value in the
case of an incentive option granted to an owner of more than 10% of our
common 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
common stock). All options have become vested under the 1996 Option Plan.
Although the 1993 Option Plan and 1996 Option Plan have expired, some
options granted under these plans are still outstanding.
On January 1, 2006, we adopted SFAS No. 123(R), using the modified
prospective application. Accordingly, prior amounts have not been restated.
In the first quarter of 2006 our adoption of SFAS No. 123(R) resulted in no
incremental stock-based compensation expense, as we had no non-vested
options outstanding at January 1, 2006.
Effective May 17, 2005, we implemented two new stock option plans and
reserved a total of 1,150,000 shares for options issuable under the plans.
We allocated 150,000 shares to a new option plan for non-employee
directors. We will grant options for 6,000 shares to each non-employee
director on each anniversary of the effective date of the plan. Also, we
will grant options for 6,000 shares to each person who becomes a
non-employee director after May 17, 2005. The option exercise price will be
the closing market price of our stock on the date of the option grant. The
options will vest over five years at 20% per year, commencing on the first
anniversary of the grant.
In 2005, we allocated one million shares to a new incentive stock option
plan for our officers and key employees. Our Stock Option Committee will
have discretion as to whom those options will be granted and the number of
shares to be allocated to each option grant. The option exercise price will
be the closing market price of our stock (110% of market value in the case
of an incentive option granted to an owner of more than 10% of our common
stock) on the date of the option grant. The options will vest over four
years, with 20% vesting on the date of grant, and an additional 20% on each
anniversary of the grant.
In March of 2005 we granted 385,500 restricted shares to 21 executives
under our Restricted Stock Plan. On January 1, 2006, 301,500 restricted
shares remained outstanding. As of December 31, 2006, $2,190,000 remained
to be realized as expense related to these shares. This amount will be
recognized straight line over the remaining 4 years. On the 2006
anniversary of the grant, 54,300 shares vested and the restrictions were
lifted.
In May 2006 two executives who had been granted shares under our Restricted
Stock Plan left the Company and forfeited their remaining 48,000 unvested
shares.
F-26
Except for accelerated vesting in the event of an executive's death or
disability, retirement at or after age 62, termination of employment by us
other than for cause, or certain events of hardship, or in the event of a
change in control of the Company, the vesting schedule for the shares is as
follows.
March 10, 2006............20%
March 10, 2007............40%
March 10, 2008............60%
March 10, 2009............80%
March 10, 2010...........100%
On May 27, 2005, we granted a total of 30,000 shares of stock to our
non-employee directors. Those shares are subject to restrictions on
resales, assignments, pledges, encumbrances or other transfers prior to
vesting. The shares vest at the rate of 20% per year on each anniversary of
the grant date. However, accelerated vesting will occur upon death,
disability, a change of control of the Company or under any other
termination of directorship status, except resignation prior to reaching
age 62 or declining to stand for reelection prior to reaching age 62 (which
would result in forfeiture of the non-vested shares).
The activity of the 1993 Option Plan and the two director option plans (the
1996 Option Plan and the 2005 Stock Option Plan for Non-employee Directors)
is as follows:
Weighted-
Average
Per Share
Exercise
1993 Option Plan Shares Price
Outstanding, January 1, 2004 1,839,000 $ 2.21
Exercised (1,048,500) $ 2.07
Canceled (397,500) $ 1.84
Outstanding, December 31, 2004 393,000 $ 2.39
Exercised (166,500) $ 2.38
Outstanding, December 31, 2005 226,500 $ 2.41
Exercised (67,500) $ 2.37
Expired (3,000) $ 2.45
Outstanding, December 31, 2006 156,000 $ 2.42
Director Option Plans
Outstanding, January 1, 2004 72,000 $ 2.37
Reinstated 12,000 $ 4.46
Outstanding, December 31, 2004 84,000 $ 2.54
No activity -
Outstanding, December 31, 2005 84,000 $ 2.54
Automatic grant to directors 24,000 $ 21.60
Exercised (30,000) $ 3.23
Outstanding, December 31, 2006 78,000 $ 8.14
F-27
Number Weighted-
Outstanding Average Weighted-
at Remaining Average
Range of December 31, Contractual Exercise
Exercise Prices 2006 Life Price
--------------------------------------------------------------------------------
$1.33 to $2.00 36,000 5.9 years $ 1.91
$2.18 to $21.60 198,000 4.8 years $ 4.77
Exercise Weighted Average Aggregate Intrinsic
Shares Price Remaining Life Value
Shares exercisable 12/31/06 210,000 $2.35 4.41 years $4,552,800
The total intrinsic value of options exercised during 2006, 2005 and 2004
was $1,614,000 $2,053,000 and $5,037,000 respectively.
Option expense recorded in 2006 and 2005 was $72,000 and $60,000,
respectively. No option expense was recorded in 2004. Restricted stock
expense recorded in 2006 and 2005 was $741,000 and $1.6 million,
respectively. No expense was recorded for restricted stock in 2004. As of
December 31, 2006, $185,757 remains to be recorded as expense for
outstanding options. This amount will be recognized straight line over 4
years.
14. GUARANTOR INFORMATION
The 11% Notes and the $30 million senior secured credit facility are
guaranteed by all of our restricted subsidiaries. These guaranties are
full, unconditional, and joint and several. Riviera Gaming Management of
Missouri, Inc. ("RGMM") and Riviera Gaming Management of New Mexico, Inc.
("RGMNM") are unrestricted subsidiaries of RHC and are not guarantors of
the 11% Notes. RGMM and RGMNM do not have operations and do not
significantly contribute to our financial position or results of
operations.
15. LOSS PER SHARE
Basic loss per share is computed by dividing net loss per share by the
weighted-average number of common shares outstanding for the period.
Diluted loss per share is computed by dividing net income by the weighted
number of common and common-equivalent shares outstanding for the period.
Options to purchase common stock, whose exercise price was greater than the
average market price for the period, have been excluded from the
computation of diluted loss per share as their effect would have been
anti-delutive. Such antidilutive options outstanding for the years ended
December 31, 2006, 2005 and 2004 were 171,353; 276,196; and 417,777,
respectively based on the treasury method.
16. SEGMENT DISCLOSURES
We review our operations by our geographic gaming market segments: Riviera
Las Vegas and Riviera Black Hawk. All inter-segment revenues have been
eliminated.
F-28
(in thousands) 2006 2005 2004
Net revenues:
Riviera Las Vegas $ 149,202 $ 150,688 $ 147,949
Riviera Black Hawk 51,742 51,539 53,401
---------- ------------ ----------
Total net revenues $ 200,944 $ 202,227 $ 201,350
=========== =========== ==========
EBITDA(1)
Riviera Las Vegas 28,075 26,789 27,158
Riviera Black Hawk 16,825 17,282 16,884
Other costs and expenses:
Corporate expense
Equity-based compensation 813 1,627 -
Sarbanes-Oxley Act
professional fees 820 1,233 -
Other corporate expenses 3,823 4,045 4,038
Depreciation and amortization 12,691 14,065 13,852
Mergers, acquisitions and
development costs, net 1,318 (65) 1,193
Asset impairments 19 777 -
Interest Expense 26,366 26,608 27,079
Interest income (615) (220) (34)
---------- ------------ -----------
45,235 48,070 46,128
----------- ------------ -----------
Net loss $ (335) $ (3,999) $ (2,086)
=========== ============ ===========
Interest expense:
Riviera Las Vegas $ 18,643 $ 18,857 $ 19,140
Riviera Black Hawk 7,723 7,751 7,939
---------- ------------ -----------
$ 26,366 $ 26,608 $ 27,079
=========== ============ ============
Depreciation Expense
Riviera Las Vegas $ 9,032 $ 9,712 $ 9,839
Riviera Black Hawk 3,659 4,353 4,013
------------ ------------ ----------
$ 12,691 $ 14,065 $ 13,852
========== ============ ==========
Asset Impairment:
Riviera Las Vegas $ 19 $ 310 $ -
Riviera Black Hawk - 467 -
------------ ----------- ---------
$ 19 $ 777 $ -
============ =========== =========
December 31
---------------------------------
Property and equipment (2): 2006 2005
--------------- ---------------
Riviera Las Vegas $ 108,234 $ 111,209
Riviera Black Hawk 63,086 59,921
------------ ------------
$ 171,320 $ 171,130
============= =============
(1) EBITDA consists of earnings before interest, income taxes, depreciation
and amortization. EBITDA is presented solely as a supplemental disclosure
because we believe that it is a widely used measure of operating performance in
F-29
the gaming industry and a principal basis for valuation of gaming companies by
certain investors. We use property-level EBITDA (EBITDA before corporate
expenses) as the primary measure of operating performance of our properties,
including the evaluation of operating personnel. EBITDA should not be construed
as an alternative to operating income, as an indicator of operating performance,
as an alternative to cash flow from operating activities, as a measure of
liquidity, or as any other measure determined in accordance with accounting
principles generally accepted in the United States of America. We have
significant uses of cash flows, including capital expenditures, interest
payments and debt principal repayments that are not reflected in EBITDA. Also,
other gaming companies that report EBITDA information may calculate EBITDA in a
different manner than we do.
(2) Property and equipment represent property and equipment net of
accumulated depreciation and amortization.
17. RELATED PARTY TRANSACTIONS
Jeffrey A. Silver, a member of our board of directors, is a shareholder in
the law firm of Gordon & Silver, Ltd. ("Gordon & Silver"). We have engaged
Gordon & Silver for various securities issues and other legal matters since
1993. We continue to utilize the services of Gordon & Silver and we believe
that the fee arrangement is substantially equivalent to the arrangements
that would have been made with a comparable law firm where a relationship
of this nature did not exist. We incurred legal expenses to the firm which
are included in mergers, acquisitions and development cost, net of
$495,000, $137,000 and $85,000 in 2006, 2005 and 2004, respectively. We
incurred legal expenses to the firm which are included in other general and
administrative costs of $56,000, $297,000 and $91,000 in 2006, 2005 and
2004, respectively.
18. UNAUDITED QUARTERLY FINANCIAL DATA
RIVIERA HOLDINGS CORPORATION
UNAUDITED QUARTERLY FINANCIAL DATA
(Amounts in Thousands, Except per Share Data)
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
Year ended December 31, 2006
Net revenues $51,689 $52,437 $50,349 $46,469
Operating income 7,789 6,895 5,988 4,744
Income (loss) before tax benefit 1,280 418 (432) (1,601)
Net Income (loss) 1,280 418 (432) (1,601)
Income (loss) per share
basic & diluted $ 0.11 $ 0.03 $ (0.04) $ (0.13)
Year ended December 31, 2005:
Net revenues $52,464 $53,257 $50,337 $46,169
Operating income 8,757 5,607 5,320 2,705
Income (loss) before tax benefit 2,138 (1,003) (1,273) (3,861)
Net Income (loss) 2,138 (1,003) (1,273) (3,861)
Income (loss) per share basic
& diluted $ 0.18 $ (0.08) $ (0.11) $ (0.33)
F-30