UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
----------- -------------
Commission file number 000-21430
RIVIERA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0296885
------------------------------ -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2901 Las Vegas Boulevard South
Las Vegas, Nevada 89109 89109
------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 734-5110
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
---------------------------- -----------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as d
efined in Rule 405 of the Securities Act. YES NO X
----- ---------
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES NO X
----- -----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or amendment to this
Form 10-K. [ ]
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 Non-accelerated filer ___
-----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO X
---------
Based on the closing sale price of the registrant's common stock on the American
Stock Exchange on June 30, 2005, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $206,500,000.
As of April 26, 2006 the number of outstanding shares of the registrant's common
stock was 12,454,755.
Documents incorporated by reference: None.
====================================================================
Page 1 of 19 pages
Exhibit Index Appears on Page 19 hereof.
EXPLANATORY NOTE
The purpose of this amendment is to (i) amend Part III, Items 11, 12, 13 and 14
in their entirety pursuant to General Instruction G.(3) to Form 10-K, (ii)
correct the dates of the Report of Independent Registered Public Accounting Firm
on Internal Controls Over Financial Reporting and the Report of Independent
Registered Public Accounting Firm on the Consolidated Financial Statements
(collectively, the "Accountants' Reports"), which accompanied the financial
statements in the Form 10-K filed on March 15, 2005, and (iii) file additional
exhibits and one corrected exhibit under Item 15. The Accountants' Reports are
being re-filed with no changes other than a corrected date (March 13, 2006
instead of March 14, 2006). For that reason, the accompanying financial
statements are also being re-filed, but they contain no changes from the
financial statements in the Form 10-K filed on March 15, 2006.
PART II
Item 8. Financial Statements and Supplementary Data
See Financial Statements in Part IV; Item 15(a).
PART III
Item 11. Executive Compensation
The following table presents a summary of the compensation we paid in
the years ended December 31, 2005, 2004 and 2003 to our and ROC's CEO, and to
our four other most highly compensated executive officers who received over
$100,000 in compensation from us during 2005 (collectively, the "Named Executive
Officers").
Other
Annual Restricted All Other
Name and Compen- Stock Compen-
Principal Position Year Salary($) Bonus($) sation ($)(1)(4) Awards ($)(7) sation ($)(2)
------------------ ---- --------- -------- ---------- ---------- ----------
William L. Westerman(6) 2005 $1,000,000 $ - $295,293 $ - $ 1,283
Our Chairman of the Board 2004 1,000,000 - 446,178(3) - 1,438
and CEO, CEO of ROC 2003 1,000,000 - 547,591(3) - 1,438
Robert A. Vannucci 2005 300,000 - 103,500(5) 814,998 1,720
President and Chief Operating 2004 300,000 114,000 104,000(5) - 1,720
Officer of ROC 2003 300,000 - 103,000(5) - 1,720
Duane R. Krohn (6) 2005 250,000 54,000 4,500 407,499(8) 1,438
Our Treasurer 2004 250,000 57,000 4,000 - 1,438
and Executive Vice President of 2003 250,000 - 3,500 - 1,438
Finance and Treasurer of ROC
Ronald P. Johnson 2005 250,000 54,000 4,500 407,499 1,438
Executive Vice President of 2004 250,000 90,500 4,000 - 1,438
Gaming Operations of ROC 2003 250,000 - 3,500 - 1,438
Tullio J. Marchionne 2005 188,215 54,000 4,500 214,874 827
Our Secretary and Executive 2004 120,086 12,000 4,000 - 533
Vice President and Secretary 2003 142,732 - 3,000 - 451
of ROC
2
(1) Includes amounts that we contributed under our Profit Sharing and
401(k) Plans. We contributed $4,500 for the account of each of the
Named Executives Officers in 2005, $4,000 for the account of each of
them in 2004 and $3,500 for the account of each of them in 2003.
(2) Includes premiums that we paid for excess life insurance.
(3) Includes the portion of the interest earned on Mr. Westerman's
retirement account that exceeds the interest, which would have been
earned if the interest rate had been 120% of the applicable federal
long-term rate, with compounding, prescribed under Section 1274(d) of
the Internal Revenue Code. Additional interest earned on Mr.
Westerman's retirement account that is not reported in the above table
amounted to $238,632 in 2005, $195,977 in 2004 and $210,095 in 2003.
(4) In addition to the amounts reported in this column, each Named
Executive Officer received perquisites and other personal benefits, the
aggregate amount of which did not exceed the lesser of $50,000 or 10%
of the total of such Named Executive Officer's annual Salary and Bonus
reported in the table.
(5) Includes a $100,000 cash award or award of stock under our Restricted
Stock Plan pursuant to Mr. Vannucci's employment agreement. Mr.
Vannucci has the choice of $25,000 in cash or $25,000 in stock per
quarter. (See "Restricted Stock Plan" below for a summary of our
Restricted Stock Plan.)
(6) Mr. Krohn is retiring, effective May 2, 2006. Upon Mr. Krohn's
retirement, Mr. Westerman will assume Mr. Krohn's positions on an
interim basis, in addition to Mr. Westerman's current positions.
(7) Includes shares of Common Stock granted under our Restricted Stock Plan
in substitution for stock options that we were unable to grant. Mr.
Vannucci received 60,000 shares; Mr. Krohn and Mr. Johnson each
received 30,000 shares; and Mr. Marchionne received 19,500 shares.
These shares are eligible for any dividends that we pay on our Common
Stock, but we do not expect to pay any dividends in the foreseeable
future. The dollar amounts reported in the table are based on the
closing market price of our Common Stock on the date we awarded the
restricted stock. Based on the closing market price of our Common stock
on December 30, 2005, this restricted stock had an aggregate value of
$2,286,405.
(8) Upon Mr. Krohn's retirement on May 2, 2006, $325,999 of the amount
reported in the table (24,000 shares) will be forfeited.
Incentive Stock Option Plans and Stock Grants
We granted no stock options in 2005. The information set forth below is
on an as-adjusted basis, giving effect to our March 11, 2005 three-for-one stock
split.
3
In July 2003, we attempted to grant 385,500 options under our 1993
Employee Stock Option Plan (the "1993 Plan"). Subsequently, however, we
determined that the 1993 Plan had expired prior to those grants, which rendered
them null and void. Two executives to whom we attempted to grant options for a
total of 48,000 shares have since left our employment. On April 6, 2005, we
granted to 19 remaining executives a total of 337,500 shares of our Common Stock
under our Restricted Stock Plan (see "Restricted Stock Plan" below) in
substitution for the stock options that we had attempted to grant to them. Those
shares are subject to a five-year vesting schedule, vesting 20% each March 10,
commencing in 2006. The shares completely vest immediately upon death,
disability, retirement at or after age 62, termination of employment by the
Company other than for cause, events of hardship as approved by our Compensation
Committee or in the event of a change in control of the Company.
Although the 1993 Plan has expired, some options granted under the 1993
Plan are still outstanding.
Effective May 17, 2005, we implemented our 2005 Incentive Stock Option Plan
("Employee Plan"). We have allocated one million shares to the Employee Plan, in
which our officers and key employees are eligible to participate. Our Stock
Option Committee has discretion as to whom Employee Plan Options will be granted
and the number of shares allocated to each option grant. The option exercise
price will be the closing market price of our Common Stock (110% of the closing
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.
Option Exercises and Year-End Options Values
There were no options exercised by directors or executive officers
during 2005. The following table presents information regarding the value at
December 31, 2005 of unexercised, in-the-money options held by the Named
Executive Officers.
Number Value Number of Value of Unexercised,
of Shares Realized Shares Underlying In-The-Money Options(1)
Acquired Unexercised Options
In Exer- Unexer- Exer- Unexer-
Name Exercise cisable cisable cisable cisable
---- -------- -------- ---------- ---------- ----------- --------
Robert A. Vannucci 0 N/A 120,000 0 $1,966,800 $0
Duane R. Krohn 0 N/A 7,500 0 $ 122,925 $0
Ronald P. Johnson 0 N/A 30,000 0 $ 491,700 $0
Tullio J. Marchionne 0 N/A 36,000 0 $ 590,040 $0
(1) The reported value is the difference between the closing market price
of our Common Stock on December 30, 2005 and the exercise price of the
options.
4
Employment Agreements
William L. Westerman serves as our Chairman of the Board, President and
CEO, and as Chairman of the Board and CEO of ROC.
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 by us upon at
least 90 days written notice. Mr. Westerman's base annual compensation is
$1,000,000. Under his amended employment agreement, Mr. Westerman is not
entitled to participate in our Senior Management Compensation Bonus Plan or any
other executive bonus plan.
Mr. Westerman's employment agreement required us to fund a retirement
account for him. Pursuant to that agreement, we make 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 $4,122,703 as of December 31, 2005.
We credit Mr. Westerman's retirement account quarterly with interest on
the first day of each succeeding calendar quarter in an amount equal to the
product of (1) our average borrowing cost for the immediately preceding fiscal
year, as determined by our Chief Financial Officer, and (2) 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 employment with us, Mr. Westerman and we agreed to the following cash
payments to him commencing April 1, 2003, and continuing on the first day of
each quarter thereafter: (1) a distribution of $250,000 from the principal
balance of his retirement account; and (2) the quarterly interest credited to
his retirement account one quarter in arrears. Total interest accrued to Mr.
Westerman's account in 2005 was $529,425; total interest accrued was $638,155 in
2004 and $754,186 in 2003.
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 our Common Stock approving a "Change of
Control" (as discussed directly below), (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 the retirement account, including any amount to be credited to the
retirement account upon a Change of Control.
On February 5, 1998, our stockholders approved a merger agreement that
constituted a Change of Control under Mr. Westerman's employment agreement. 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.
5
If Mr. Westerman ceases to be employed by us (except for termination
for cause, in which case Mr. Westerman would forfeit all rights to monies in the
retirement account), he will be entitled to receive the amount in the retirement
account (principal and current 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.
Mr. Westerman's agreement also provides that for 24 months following
termination of employment for any reason except cause, Mr. Westerman shall not
engage in any activity, which is in competition with us within a 75 mile radius
from the location of any hotel or casino then operated by us. As consideration
for not competing, we will pay Mr. Westerman a total of $500,000 in two equal
annual installments of $250,000. The first installment will be 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
that was last amended on March 24, 2003. Mr. Vannucci's base compensation is
$300,000 in cash and $100,000 in shares of our Common Stock under our Restricted
Stock Plan or cash, at his election.
Mr. Vannucci's agreement provides that he is to receive $25,000 in
Common Stock based on our Common Stock's market value, or cash (at his election)
on the first business day of each quarter, plus Common Stock, based on market
value, or cash (at his election), equal to the amount of the award he receives
under our Incentive Compensation Program. Mr. Vannucci chose to receive $100,000
in cash in 2005 pursuant to these provisions. Mr. Vannucci is presently entitled
to rights of ownership with respect to shares he receives under our Restricted
Stock Plan, including the right to vote and receive dividends. Mr. Vannucci may
not, however, sell, assign, pledge, encumber or otherwise transfer any
restricted shares so long as we employ him, without our written consent. The
restrictions terminate and the shares become fully vested upon a change of
control (as defined) or upon Mr. Vannucci's termination of employment with us,
so long as such termination is not for cause. On December 27, 2002, holdings of
our Common Stock by Donald Trump and his related parties exceeded 10% of our
outstanding Common Stock, which constituted a change of control for purposes of
Mr. Vannucci's restricted shares. This triggered a release of the restrictions
on 164,526 shares held by Mr. Vanucci.
Mr. Vannucci's employment agreement also entitles him to participate in
our Incentive Compensation Program in which he may receive an annual incentive
bonus, as discussed in "Incentive Compensation Program" below. Mr. Vannucci's
agreement further provides for an additional incentive award in his choice of
either Restricted Stock Plan shares or cash in an amount equal to his Incentive
Compensation Program award. Mr. Vannucci did not receive an Incentive
Compensation Program award for 2003 or 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. Mr.
Vannucci's agreement automatically renews annually, subject to 120 days' prior
written notice by him or us.
6
Profit-Sharing and 401(k) Plans
We have profit-sharing and 401(k) plans (the "Profit-Sharing and 401(k)
Plans") for employees who are at least 21 years of age and are not covered by a
collective bargaining agreement after one year of service.
We may contribute to the 401(k) component of the Profit-Sharing and
401(k) Plans an amount not to exceed 25% of the first 8% of each participant's
compensation. We made contributions of $290,200, $302,882 and $220,900 for the
years ended December 31, 2005, 2004 and 2003, respectively. We also pay
administrative costs of the Profit-Sharing and 401(k) Plans, which are not
material.
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 (see "Employee Stock Ownership
Plan," directly below).
Employee Stock Ownership Plan
We have an Employee Stock Ownership Plan ("ESOP"). The ESOP was
established effective January 1, 2000 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 in the plan year who completed
a minimum of 1,000 hours of service in that year, were employed through 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. We make
contributions for the ESOP's participants at our Las Vegas and Black Hawk
properties relative to the economic performance of each property. For Riviera
Las Vegas, we make a contribution equal to 1% of each eligible employee's annual
compensation if a prescribed annual operating results target is attained and an
additional 1% thereof for each $2 million by which that target is exceeded, up
to a maximum of 4% for 2005. For Riviera Black Hawk, we make a contribution
equal to 1% of each eligible employee's annual compensation if a prescribed
annual operating results target is attained, an additional 1% thereof for the
next $1.5 million by which that target is exceeded, and an additional 1% thereof
for each additional $2 million by which operating earnings targets are exceeded,
up to a maximum of 4% for 2005. Our ESOP contributions are made in cash, which
the ESOP trustee uses primarily to buy our Common Stock. For Riviera corporate
participants, we 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 each $2 million by which operating earnings are exceeded,
up to a maximum of 2%. We contributed to the ESOP $125,974 in 2005, $899,253 in
2004 and $348,435 in 2003.
Incentive Compensation Program
Approximately 89 executives and other significant employees participate
in our incentive compensation program. Participants are eligible to receive an
annual incentive bonus based on attainment of predetermined financial targets at
Riviera Las Vegas and Riviera Black Hawk and at an aggregate of both locations
for Riviera corporate employees.
The employment position held by a participant determines the incentive
bonus award level to which that participant would be entitled if our
pre-determined financial targets are achieved. Our Chairman of the Board and CEO
has discretion to change the bonus level associated with any position.
7
We recorded accrued awards of $556,892; $1,085,092; and $302,216 under
our Incentive Compensation Program for 2005, 2004 and 2003, respectively.
Deferred Compensation Plan
We have a Deferred Compensation Plan that gives eligible employees the
opportunity to defer cash compensation. Participation in this plan is limited to
employees who receive annual compensation of at least $100,000. The deferred
funds are maintained on our books as liabilities. All elections to defer the
receipt of compensation must be made by December 1st preceding the plan year to
which the election relates and are irrevocable for the duration of such year.
Five of our executives currently participate in this plan.
Restricted Stock Plan
We have a Restricted Stock Plan 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 are significantly
responsible for our success and future growth and profitability. Awards of
Common Stock are subject to such terms and conditions as we determine are
appropriate at the time of the awards, including restrictions on the sale or
other disposition of such stock, a vesting schedule under which the restrictions
lapse, and provisions for the forfeiture of non-vested (i.e. restricted) stock
upon termination of the participant's employment within specified periods or
under certain conditions.
Salary Continuation Agreements
Approximately 60 executive officers and certain other employees
(excluding Mr. Westerman and Mr. Vannucci) have salary continuation agreements
effective through December 2006, under which they would be entitled to receive
(1) either six months' or one year's salary if their employment with us is
terminated, without cause, within 12 or 24 months of a change of control of the
Company; and (2) group health insurance for periods of either one or two years.
The base salary payments would be made in biweekly installments, subject to the
employee's duty to mitigate by making best efforts to find other employment. In
addition, four officers and significant employees, including Mr. Krohn and Mr.
Marchionne, have salary continuation agreements effective through December 31,
2006, under which each of them would be entitled to receive two 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. Mr. Krohn
is retiring effective May 2, 2006, which will not entitle him to compensation
under his salary continuation agreement. As of April 20, 2006, the total amount
that would be payable under all such agreements if all payment obligations
(excluding obligations to Mr. Krohn) were triggered was approximately $5.9
million, including approximately $1.4 million in benefits.
Compensation of Directors
Messrs. Silver, Harvey and Land are each paid an annual fee of $50,000
for services as a Director. Mr. DiVito is paid an annual fee of $75,000 for
services as a Director and as Chairman of our Audit Committee. Each Director is
also reimbursed for expenses incurred in connection with attendance at meetings
of the Board of Directors.
8
In 1996 we adopted our Nonqualified Stock Option Plan for Non-Employee
Directors (the "1996 Plan"), which was approved by our stockholders and which
expired in 2003. Under the 1996 Plan, each individual elected, re-elected or
continuing as a non-employee Director would automatically receive options for
6,000 shares of our Common Stock (as adjusted for the 2005 stock split), with an
exercise price equal to the fair market value of our Common Stock on the date of
grant. In 2004 before we determined that the 1996 Plan had expired, we attempted
to grant options to our non-employee Directors for a total of 30,000 shares of
our Common Stock. Because of the prior expiration of the 1996 Plan, though,
those options were null and void. At our 2005 annual meeting, stockholders
approved the issuance of 30,000 shares of our Common Stock to our non-employee
Directors as substitute compensation for those options. Messrs Silver, Harvey
and DiVito each received 6,000 shares and Mr. Land received 12,000 shares of our
Common Stock.
Also at our 2005 annual meeting, stockholders approved the 2005 Stock
Option Plan for Non-Employee Directors (the "Director Plan"). The Director Plan
provides that on each anniversary of the effective date of the Director Plan,
each individual elected, reelected or continuing as a non-employee Director will
receive a nonqualified stock option for 6,000 shares of our Common Stock with an
exercise price equal to the fair market value of our Common Stock on the date of
grant. These options vest at the rate of 20% per year commencing on the first
anniversary of the grant.
Upon becoming a Director, Mr. Silver was granted options under the 1996
Plan to purchase 6,000 shares at $2.35 per share on February 26, 2001. Mr.
Silver was subsequently granted options to purchase 6,000 shares at $2.18 per
share on May 10, 2001, options to purchase 6,000 shares at $2.58 per share on
May 10, 2002 and options to purchase 6,000 shares at $1.87 per share on May 12,
2003.
Upon becoming a Director, Mr. Harvey was granted options under the 1996
Plan to purchase 6,000 shares at $2.20 per share on May 18, 2001. Mr. Harvey was
subsequently granted options to purchase 6,000 shares at $2.58 per share on May
10, 2002 and 6,000 shares at $1.87 per share on May 12, 2003.
Upon becoming a Director, Mr. DiVito was granted options under the 1996
Plan to purchase 6,000 shares at $1.87 per share on July 12, 2002. Mr. DiVito
was subsequently granted options to purchase 6,000 shares at $1.87 per share on
May 12, 2003.
Directors who are also our officers or employees do not receive
additional compensation for services as a Director. Mr. Westerman is the only
such Director.
Under our Stock Compensation Plan, our Directors who are members of our
Compensation Committee have the right to receive all or part of their annual
fees in the form of our Common Stock having a fair market value equal to the
amount of their fees. Of the 50,000 shares that we allocated to this plan,
46,020 remain available for issuance.
Compensation Committee Interlocks and Insider Participation
Jeffrey A. Silver, a Director and Chairman of our Compensation
Committee, is a shareholder in the law firm of Gordon & Silver, Ltd., which we
have retained for various legal matters during our last fiscal year and in 2006.
9
Compensation Committee Report on Executive Compensation
Our Compensation Committee endeavors to ensure that the compensation
program for our executive officers is effective in attracting and retaining key
executives responsible for our success and is tailored to promote our and our
stockholders' long-term interests. Our 2005 executive officer compensation
program was principally comprised of base salary, an Incentive Compensation
Program, a 401(k) plan, contributions to the ESOP, the Deferred Compensation
Plan and the Restricted Stock Plan.
Our Compensation Committee takes into account various qualitative and
quantitative indicators of corporate and individual performance in determining
the level and composition of compensation for our CEO and his recommendations
regarding the other executive officers. In particular, the Compensation
Committee considers several financial performance measures, including revenue
growth and net income. However, the Compensation Committee does not apply any
specific quantitative formula in making compensation decisions. The Compensation
Committee also considers achievements that, while difficult to quantify, are
important to our long-term success. The Compensation Committee seeks to create a
mutuality of interest between our officers and our stockholders by increasing
the executive officers' ownership of our Common Stock through the ESOP, Deferred
Compensation Plan and Restricted Stock Plan. On March 10, 2005, due to the
expiration of the 1993 Plan, we adopted a new Employee Plan, to which we have
allocated 1,000,000 shares of our Common Stock and which was approved by our
stockholders at our 2005 Annual Meeting.
Salary levels for our executive officers are significantly influenced
by the need to attract and retain management employees with high levels of
expertise. In each case, we consider personal factors, such as the individual's
experience, responsibilities and work performance, and external factors, such as
salaries paid by comparable companies in the gaming industry. With regard to the
latter, it is important to recognize that because of the opening of new
properties and expansion of existing properties on the Las Vegas Strip coupled
with the growth of riverboat and dockside gaming, Native American gaming
operations and the proliferation of jurisdictions in which gaming is permitted,
we compete with numerous other companies for a limited pool of experienced and
skilled personnel. Therefore, it is critical that we provide base salaries that
are competitive in the casino industry. With respect to the personal factors,
the Compensation Committee makes salary decisions in an annual review based on
the recommendations of our CEO. This annual review considers the decision-making
responsibilities of each position as well as the experience and work performance
of each executive. Our CEO views work performance as the single most important
measurement factor. As a baseline measure, in 2001 the Compensation Committee
engaged the services of an independent CPA firm, other than Deloitte & Touche
LLP, which conducted a compensation survey of comparable Las Vegas resorts. The
CPA firm concluded that compensation of our executives was consistent with other
members of the industry.
The compensation of Mr. Westerman for our last completed fiscal year
was set pursuant to the employment agreement described above in "Employment
Agreements."
Date: April 20, 2006 Jeffrey A. Silver Chairman
Paul A. Harvey Member
Vincent L. DiVito Member
10
The following table compares the annual change in the cumulative total
return, assuming reinvestment of dividends, on our 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 we consider to be our peer industry group. The table assumes an
investment of $100 on December 31, 2000, in each of our Common Stock, the stocks
comprising the NASDAQ Broad Market, the stocks comprising the AMEX Index and the
stocks comprising the NASDAQ 79xx.
The table below 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
12/31/00 111.8 88.7 84.2
12/31/01 66.5 79.2 98.6
12/31/02 67.8 62.9 81.7
12/31/03 84.9 82.9 116.1
12/31/04 651.0 93.1 153.6
12/30/05 690.1 111.3 154.8
(1) Comprised of companies whose stock is traded on the Nasdaq National
Market and whose standard industrial classification is within 7900-7999. We do
not believe that this necessarily is an indication of the value of our Common
Stock.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Our Common Stock is listed on the American Stock Exchange ("Amex"). The
following table contains information regarding the beneficial ownership of our
Common Stock as of April 20, 2006, by (1) each of our directors and executive
officers, (2) all of our directors and executive officers as a group and (3)
each person who, to our knowledge, beneficially owns more than 5% of our
outstanding Common Stock (based on reports filed with the Securities and
Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as
amended, or upon information furnished to us). The percentage of our outstanding
Common Stock represented by each named person's stock ownership assumes the
exercise by such person of all stock options that are exercisable within 60 days
of April 20, 2006, but does not assume the exercise of stock options by any
other persons. The percentage of our outstanding Common Stock represented by the
stock ownership of all executive officers and directors as a group assumes the
exercise by all members of that group of their respective stock options that are
exercisable within 60 days of April 20, 2006, but does not assume the exercise
of options by any persons outside of that group. Except as indicated in the
footnotes to the table, each person listed below has sole voting and investment
power with respect to the shares set forth opposite such person's name.
11
Shares Beneficially Owned
Name Number Percentage
Directors and Executive Officers:
William L. Westerman(1)(2)(16) 1,096,286 8.8%
Jeffrey A. Silver (1)(3) 45,000 *
Paul A. Harvey(1)(4) 24,000 *
Vincent L. DiVito(1)(5) 19,000 *
James N. Land, Jr. (1) 16,000 *
Robert A. Vannucci (1)(6) 390,607 3.1%
Ronald P. Johnson(1)(7) 372,613 3.0%
Duane R. Krohn (1) (8) 333,092 2.7%
Tullio J. Marchionne(1)(9) 60,271 *
All directors and executive officers as a group(10) 2,356,869 18.6%
Beneficial Owners of More Than 5% of Our Common
Stock (other than Mr. Westerman):
D.E. Shaw & Co., L.P. and related parties(11) 1,219,900 9.8%
Plainfield Special Situations Master Fund Limited and
related parties(12) 1,056,800 8.5%
Galleon Management, L.L.C. and related parties(13) 830,000 6.7%
Riviera Holdings Corporation Employee Stock Ownership
Plan (ESOP)(14) 883,314 7.1%
Flag Luxury Properties, LLC, Paul Kanavos and related
parties (collectively, the "Flag Parties")(15)(16) 200,000 1.6%
Brett Torino and related parties (collectively, the
"Torino Parties")(15)(16) 200,000 1.6%
Barry Sternlicht and related parties (collectively, the
"Sternlicht/Starwood Parties")(15)(16) 423,200 3.4%
High Desert Gaming, LLC, Neil Bluhm, Greg Carlin and
related parties (collectively, the "High
Desert/Bluhm/Carlin Parties")(15)(16) 375,300 3.0%
------- ----
Total 1,198,500 9.6%
-------------------------------
o Less than 1%.
(1) The address for each director and executive officer is c/o Riviera
Holdings Corporation, 2901 Las Vegas Boulevard South, Las Vegas,
Nevada 89109.
(2) Includes 4,566 shares held through our ESOP.
(3) Includes 24,000 shares which may be acquired within 60 days of
April 20, 2006 upon the exercise of outstanding options.
(4) Includes 18,000 shares which may be acquired within 60 days of
April 20, 2006 upon the exercise of outstanding options.
(5) Includes 12,000 shares which may be acquired within 60 days of
April 20, 2006 upon the exercise of outstanding options.
12
(6) Includes 120,000 shares which may be acquired within 60 days of April
20, 2006 upon the exercise of outstanding options, 3,776 shares under
our Deferred Compensation Plan and 5,302 shares held through our ESOP.
(7) Includes 30,000 shares which may be acquired within 60 days of April
20, 2006 upon the exercise of outstanding options, 82,470 shares under
our Deferred Compensation Plan and 5,302 shares held through the ESOP.
(8) Includes 5,559 shares under our Deferred Compensation Plan and 5,302
shares held through the ESOP. Upon Mr. Krohn's retirement on May 2,
2006, 24,000 shares of restricted Common Stock that are included in his
stock ownership listing will be canceled.
(9) Includes 36,000 shares which may be acquired within 60 days of
April 20, 2006 upon the exercise of outstanding options and 2,971
shares held through the ESOP.
(10) Includes a total of 240,000 shares which may be acquired by directors
and executive officers as a group within 60 days of April 20, 2006 upon
the exercise of outstanding options, 91,805 shares under our Deferred
Compensation Plan and 23,442 shares held through the ESOP. Upon Mr.
Krohn's retirement on May 2, 2006, 24,000 of his shares that are
included in this listing will be canceled.
(11) D.E. Shaw & Co., L.P. ("DESCO LP") acts as investment adviser to D. E.
Shaw Laminar Portfolios, L.L.C. ("Laminar") and D.E. Shaw Valence
Portfolios, L.L.C. ("Valence"). DESCO LP is also the managing member of
Valence and D. E. Shaw Investment Management, L.L.C. ("DESIM LLC").
D.E. Shaw & Co., L.L.C. ("DESCO LLC") acts as managing member to
Laminar. D. E. Shaw & Co., Inc. ("DESCO Inc.") is the general partner
of DESCO LP. D. E. Shaw & Co. II, Inc. ("DESCO II, Inc.") is the
managing member of DESCO LLC. David E. Shaw is the president and sole
shareholder of DESCO Inc. and DESCO II, Inc. The stock ownership
reported in the table is comprised of 1,194,500 shares held in the name
of Laminar; 25,200 shares held in the name of Valence; and 200 shares
under the management of DESIM LLC. The address of all of the persons
named above in this footnote is 120 West 45th Street, Floor 39, Tower
45, New York, New York 10036. This information is based on information
reported by Laminar, Valence, DESCO LLC, DESCO LP and Mr. Shaw in a
Schedule 13D filed with the SEC on April 11, 2006.
(12) Plainfield Asset Management LLC ("Asset Management") is the Manager of
Plainfield Special Situations Master Fund Limited ("Master Fund"),
which holds 1,056,800 shares. Max Holmes ("Holmes") is the chief
investment officer of Asset Management. Each of Holmes and Asset
Management may therefore be deemed a beneficial owner of the shares
held by Master Fund. The address of Master Fund, Asset Management and
Holmes is 55 Railroad Avenue, Greenwich, CT 06830. This information is
based on information reported by Master Fund, Asset Management and
Holmes in a Schedule 13G filed with the SEC on March 15, 2006.
(13) Pursuant to the partnership agreement of Galleon Captains Partners,
L.P., Galleon Healthcare Partners, L.P., Galleon Technology Partners
II, L.P., Galleon Explorers Partners, L.P., and Galleon Communication
Partners, L.P., Galleon Management, L.P. and Galleon Advisors, L.L.C.
share all investment and voting power with respect to securities held
by Galleon Captains Partners, L.P., Galleon Healthcare Partners, L.P.,
Galleon Technology Partners, L.P., Galleon Explorers Partners, L.P.,
and Galleon Communication Partners, L.P., and pursuant to an investment
management agreement, Galleon Management, L.P. has all investment and
voting power with respect to the securities held by Galleon Captains
Offshore, Ltd., Galleon Healthcare Offshore, Ltd., Galleon Technology
Offshore, Ltd., Galleon Communications Offshore, Ltd., Galleon
Explorers Offshore, Ltd., Galleon Admirals Offshore, Ltd. and Galleon
Buccaneers Offshore, Ltd. Raj Rajaratnam, as the managing member of
Galleon Management, L.L.C., controls Galleon Management, L.L.C., which,
as the general partner of Galleon Management, L.P., controls Galleon
13
Management, L.P. Raj Rajaratnam, as the managing member of Galleon
Advisors, L.L.C., also controls Galleon Advisors, L.L.C. The shares
reported herein by Raj Rajaratnam, Galleon Management, L.P., Galleon
Management, L.L.C., and Galleon Advisors, L.L.C. may be deemed
beneficially owned as a result of the purchase of such shares by
Galleon Captains Partners, L.P., Galleon Captains Offshore, Ltd.,
Galleon Technology Partners II, L.P., Galleon Technology Offshore,
Ltd., Galleon Healthcare Partners, L.P., Galleon Healthcare Offshore,
Ltd., Galleon Explorers Partners, L.P., Galleon Explorers Offshore,
Ltd., Galleon Communication Partners, L.P., Galleon Communication
Offshore, Ltd., Galleon Admirals Offshore, Ltd. and Galleon Buccaneers
Offshore, Ltd., as the case may be. Each of Raj Rajaratnam, Galleon
Management, L.P., Galleon Management, L.L.C., and Galleon Advisors,
L.L.C. disclaims beneficial ownership of the shares reported in the
table, except to the extent of any pecuniary interest therein. The
address of each of the persons named above, other than Galleon
Management, L.P., is c/o Galleon Management, L.P., 135 East 57th
Street, 16th Floor, New York, New York 10022. The address of Galleon
Management, L.P. is 135 East 57th Street, 16th Floor, New York, New
York 10022. This information is based on information reported by the
above parties in Amendment No. 1 to Schedule 13G filed with the SEC on
February 15, 2006.
(14) The trustee of the ESOP (the "Trustee") and its address are Marshall &
Ilsley Trust Company N.A., 1000 North Water Street, Suite 1200,
Milwaukee, Wisconsin 53202. All of the shares held by the ESOP are
voted on each proposal in proportion to the voting instructions
received by the Trustee from all ESOP participants who submit voting
instructions. For example, if (1) the ESOP holds 1,000 shares of our
Common Stock, (2) the Trustee receives voting instructions from
participants on whose behalf the ESOP holds only 500 shares, and (3)
those participants, in the aggregate, instruct the Trustee to vote 300
shares in favor of a proposal and 200 shares against it, then 600
shares held by the ESOP will be voted for the proposal and 400 shares
will be voted against it. Our Common Stock held by the ESOP on behalf
of our executive officers is reported in the ESOP's Common Stock
ownership listing as well as in the Common Stock ownership listings for
the respective executive officers and for executive officers and
directors as a group.
(15) The following is based on information reported in a Schedule 13D and
amendments thereto filed with the SEC, through April 6, 2006, jointly
by the Flag Parties, the Torino Parties, the Sternlicht/Starwood
Parties and the High Desert/Bluhm/Carlin Parties (collectively, the
"Joint Filing Parties"):
The Flag Parties consist of Flag Luxury Riv, LLC; Flag Luxury
Properties, LLC; MJX Flag Associates, LLC; Flag Leisure Group, LLC;
Sillerman Real Estate Ventures, LLC; Robert Sillerman; and Paul
Kanavos. Each of the Flag Parties is deemed a beneficial owner of
200,000 shares. The address of the Flag Parties is 650 Madison Ave.,
New York, NY 10022.
The Torino Parties consist of RH1, LLC; ONIROT Living Trust dated
6/20/2000; and Brett Torino. Each of the Torino Parties is deemed a
beneficial owner of 300,000 shares. The address of the Torino Parties
is 4455 Wagon Trail Ave., Las Vegas NV 89118.
The Sternlicht/Starwood Parties consist of Rivacq LLC; SOF U.S.
Hotel Co-Invest Holdings, L.L.C.; SOF-VII U.S. Hotel Holdings, L.L.C.;
I-1/I-2 U.S. Holdings, L.L.C.; Starwood Global Opportunity Fund VII-A,
L.P.; Starwood Global Opportunity Fund VII-B, L.P.; Starwood U.S.
Opportunity Fund VII-D, L.P.; Starwood U.S. Opportunity VII-D-2, L.P.;
Starwood Capital Hospitality Fund I-1, L.P.; Starwood Capital
Hospitality Fund I-2, L.P.; SCF-VII Management, L.L.C.; SCG Hotel
Management, L.L.C.; Starwood Capital Group Global, LLC; and Barry
Sternlicht. Each of the Sternlicht/Starwood Parties is deemed a
beneficial owner of 300,000 shares, except Barry Sternlicht who
beneficially owns 423,200 shares. The address of the
Sternlicht/Starwood Parties, except Rivacq LLC, is 591 W. Putnam Ave.,
Greenwich, CT 06830. The address of Rivacq LLC is One World Financial
Center, New York, NY 10281.
14
The High Desert/Bluhm/Carlin Parties consist of High Desert
Gaming, LLC; LAMB Partners; LAMB, LLC; ISLE Investors, LLC ("ISLE");
Greg Carlin; and Neil Bluhm. Each of the High Desert/Bluhm/Carlin
Parties, except ISLE and Greg Carlin, is deemed a beneficial owner of
300,000 shares. ISLE beneficially owns 75,300 shares and Greg Carlin
beneficially owns 375,300 shares. The address of the High
Desert/Bluhm/Carlin Parties, except LAMB, LLC, is 900 North Michigan
Ave., Suite 1900, Chicago, IL 60611. The address of LAMB, LLC is 0223
Placer Lane, Aspen, CO 81612, P.O. Box 2147.
(16) Pursuant to a Stock Purchase Agreement, dated as of December 22, 2005
(the "Westerman Agreement"), upon the issuance of the requisite
approvals by Nevada gaming authorities, certain members of the Joint
Filing Parties will have (i) the right or obligation to purchase
substantially all of Mr. Westerman's shares of Common Stock and (ii) a
proxy to vote or direct the voting of Mr. Westerman's shares of Common
Stock in favor of an acquisition of the Company by members of the Joint
Filing Parties (an "Acquisition Transaction"). Mr. Westerman is also
obligated to vote his shares of Common Stock in favor of an Acquisition
Transaction. Those shares are reported as beneficially owned by Mr.
Westerman, not by the Joint Filing Parties. This information is based
on the Westerman Agreement, as contained in an exhibit in a Schedule
13D filed with the SEC by William L. Westerman on December 27, 2005 and
in a Schedule 13D filed with the SEC by the Joint Filing Parties on
December 28, 2005.
Item 13. Certain Relationships and Related Transactions
Jeffrey A. Silver, a Director and Chairman of our Compensation
Committee, is a shareholder in the law firm of Gordon & Silver, Ltd., which we
have retained for various legal matters during our last fiscal year and in 2006.
Item 14. Principal Accountant Fees and Services
Audit Fees
We were billed by our principal accountants, namely Deloitte & Touche
LLP, the member firms of Deloitte Touche, Tohmatsu and their respective
affiliates (collectively "Deloitte"), a total of $748,500 and $217,000 for
fiscal years 2005 and 2004, respectively, for their audit of our annual
consolidated financial statements, their review of our consolidated financial
statements in our quarterly reports on Form 10-Q and Sarbanes-Oxley Act
compliance. The 2005 amount includes $221,500 for audit of our annual
consolidated financial statements including reviews of our Form 10-Q and
$527,000 for Sarbanes-Oxley Act compliance.
Audit-Related Fees
We were billed $37,500 by Deloitte for benefit plan audits for the
fiscal year ended December 31, 2004 and $41,500 by Piercy Bowler Taylor and Kern
for benefit plan audits for the fiscal year ended December 31, 2005.
15
Tax Fees
We were billed $117,000 and $61,000 by Deloitte for income tax services
for the fiscal years 2005 and 2004, respectively. Those services consisted of
preparation of federal and state income tax returns, related tax advice, and
mergers and acquisitions consulting services.
All Other Fees
We were billed by Deloitte $0 and $4,800 for other professional
services in fiscal 2005 and 2004, respectively.
Audit Committee's Pre-Approval of Engagement
Our policy is that before we engage our independent public accountants
annually to render audit or non-audit services, the engagement is reviewed and
approved by our Audit Committee. All of our independent public accountants'
services for which we paid audit-related fees or tax fees for 2005 and 2004, as
described above, were within the scope of the engagement that our Audit
Committee approved before we entered into the engagement.
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:
- 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, 2005 and 2004.
- Consolidated Statements of Operations for the Years Ended December 31,
2005, 2004 and 2003.
- Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 31, 2005, 2004 and 2003.
- Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004 and 2003.
- 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.
16
(a) (3) List of Exhibits
The exhibits that are filed in this Form 10-K amendment are listed in
the Exhibit Index herein, which is incorporated by reference, and are in
addition to the exhibits in the Company's Form 10-K filed on March 15, 2006 (the
"Original Filing"), except for Exhibit Number 21.1 which replaces Exhibit Number
21.1 that was in the Original Filing.
(b) The exhibits required by Item 601 of Regulation S-K are filed as
exhibits to this Form 10-K amendment. Such exhibits are in addition to those
included in the Original Filing, except for Exhibit Number 21.1 which replaces
Exhibit Number 21.1 that was in the Original Filing.
17
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)
April 28, 2006
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 April 28, 2006
------------------------ Executive Officer and President
William L. Westerman
/s/ DUANE R. KROHN Treasurer (Principal Financial April 28, 2006
------------------------ and Accounting Officer)
Duane R. Krohn
/s/ JEFFREY A. SILVER Director April 28, 2006
-----------------------
Jeffrey A. Silver
/s/ PAUL A. HARVEY Director April 28, 2006
-----------------------
Paul A. Harvey
/s/ VINCENT L. DIVITO Director April 28, 2006
-----------------------
Vincent L. DiVito
/s/ JAMES N. LAND, JR. Director April 28, 2006
----------------------
James N. Land, Jr.
18
EXHIBIT INDEX
The exhibits listed below and filed herein are in addition to the
exhibits listed and filed in the Original Filing, except for Exhibit Number 21.1
which replaces Exhibit Number 21.1 that was in the Original Filing.
Exhibit Number Description
10.1(A) Compensation arrangements for non-employee directors
10.2(A) Criteria for Incentive Compensation Program awards
10.3(A) Fourth Amendment to Employment Agreement between the Company
and Robert Vannucci, dated March 24, 2003
10.4 Amendment Numbers Four and Five 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
21.1 Subsidiaries of Riviera Holdings Corporation
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
(A) Management contract or compensatory plan or arrangement.
19
Riviera Holdings Corporation
Consolidated Financial Statements for the Years Ended December 31,
2005, 2004 and 2003 and Reports of Independent Registered Public
Accounting Firm
RIVIERA HOLDINGS CORPORATION
TABLE OF CONTENTS
-------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 2005 and 2004
Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
Statements of Stockholders' Deficiency for the Years Ended
December 31, 2005, 2004 and 2003
Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
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, 2005, 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, 2005, 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, 2005, 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 balance sheets as
of December 31, 2005 and 2004, and the related consolidated statements of
operations, stockholders' deficiency, and cash flows for each of the three years
in the period ended December 31, 2005 of the Company and our report dated March
13, 2006 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 13, 2006
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, 2005 and 2004,
and the related consolidated statements of operations, stockholders' deficiency,
and cash flows for each of the three years in the period ended December 31,
2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
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, 2005, 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 13, 2006, 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 13, 2006
F-3
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(In Thousands)
------------------------------------------------------------------------------
ASSETS 2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 20,571 $ 18,886
Accounts receivable net 3,544 3,898
Inventories 2,485 2,047
Prepaid expenses 4,197 4,101
------ ------
Total current assets 30,797 28,932
PROPERTY AND EQUIPMENT Net 171,130 177,115
OTHER ASSETS 7,396 9,043
DEFERRED INCOME TAXES 2,446 2,446
------- -------
Total assets $ 211,769 $ 217,536
========= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 824 $ 1,441
Current portion of obligation to officers 1,000 1,000
Accounts payable 10,133 8,872
Accrued interest 1,087 1,089
Accrued expenses 12,261 15,197
------ ------
Total current liabilities 25,305 27,599
LONG-TERM DEBT - Net of current portion 214,607 215,026
OBLIGATION TO OFFICERS - Net of current portion 3,126 4,203
------- -------
Total liabilities 243,038 246,828
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, $.001 par value 60,000,000
shares authorized; 17,082,324
and 16,548,324 shares issued at
December 31, 2005 and 2004, respectively 17 16
Additional paid-in capital 20,886 15,692
Deferred compensation - restricted stock (3,585)
Treasury stock, 4,859,091 and 5,047,074
shares at December 31, 2005 and
2004, respectively (10,047) (10,459)
Deficit (38,540) (34,541)
------- --------
Total stockholders' deficiency (31,269) (29,292)
------- --------
Total liabilities and
stockholders' deficiency $ 211,769 $ 217,536
======== =======
See notes to consolidated financial statements.
F-4
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands, Except Per Share Amounts)
------------------------------------------------------------------------------
2005 2004 2003
REVENUES:
Casino $ 108,130 $ 110,461 $ 105,736
Rooms 52,021 46,925 44,312
Food and beverage 34,132 34,123 32,584
Entertainment 17,371 20,767 18,641
Other 8,312 8,243 7,872
------- ------- -------
Total revenues 219,966 220,519 209,145
Less promotional allowances 17,739 19,169 18,986
------- ------- -------
Net revenues 202,227 201,350 190,159
======= ======= =======
COSTS AND EXPENSES:
Direct costs and expenses of operating
departments:
Casino 56,092 54,530 56,273
Rooms 27,133 25,987 24,704
Food and beverage 24,645 23,675 22,220
Entertainment 13,214 14,066 12,160
Other 2,906 2,836 2,761
Other operating expenses:
General and administrative
Equity compensation 1,627
Sarbanes-oxley 1,233
Other general and administrative, 38,211 40,252 40,565
Mergers, acquisitions and development costs, (65) 1,193 2,365
Asset impairment 777
Depreciation and amortization 14,065 13,852 16,211
------- ------- -------
Total costs and expenses 179,838 176,391 177,259
------- ------- -------
INCOME FROM OPERATIONS 22,389 24,959 12,900
------- ------- -------
OTHER (EXPENSE) INCOME:
Interest expense, including related
party interest of $517,929,
$638,154 and $758,686 in 2005,
2004 and 2005, respectively (26,608) (27,079) (27,380)
Interest income 220 34 27
------- ------- -------
Total other expense (26,388) (27,045) (27,353)
------- ------- -------
NET LOSS $ (3,999) $ (2,086)$ (14,453)
======== ======== =========
EARNINGS PER SHARE DATA Loss per share,
basic and diluted $ (0.34) $ (0.20) $ (1.39)
======== ======== =========
Weighted-average common and common
equivalent shares 11,833 10,671 10,422
======== ======== =========
See notes to consolidated financial statements.
F-5
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Deferred
Additional Compensation Retained
Common Stock Paid-In Restricted Earnings Treasury Stock
------------------ Capital Stock (Deficit) -------------------------
Shares Amount -------------------------------- Shares Amount Total
BALANCE January 1, 2003 15,407,319 $ 15 $13,628 - $(18,002) (5,058,762) $(11,313) $(15,672)
Purchase of treasury stock
deferred compensation trust (5,109) (7) (7)
Stock issued under executive
option plan 75,000 - 70 70
Issuance of restricted stock 16,305 - 25 25
Net loss (14,453) (14,453)
--------- -- ----- ------- -------- ----------- -------- ---------
BALANCE December 31, 2003 15,498,624 15 13,723 (32,455) (5,063,871) (11,320) (30,037)
Stock issued under executive
option plan 1,048,500 1 2,167 2,168
Distribution of treasury stock
deferred compensation trust 16,707 37 37
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 Option Expense 60 60
Stock issued under executive
option plan 166,500 1 395 396
Issuance of deferred compensation-
Resticted Stock 367,500 - 5,151 (5,151) -
Amortization of deferred compensation-
Resticted Stock 1,566 1,566
Distribution of treasury stock
- deferred compensation (412) 187,983 412 -
Net loss (3,999) (3,999)
----------- --- ------- -------- --------- ---------- -------- ----------
BALANCE December 31, 2005 17,082,324 $ 17 $20,886 $(3,585) $(38,540) (4,859,091) $(10,047) $(31,269)
========== == ======= ========= ========== ========== ======== ==========
See notes to consolidated financial statements.
F-6
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
-------------------------------------------------------------------------------
2005 2004 2003
OPERATING ACTIVITIES:
Net loss $ (3,999) $ (2,086) $(14,453)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 14,065 13,852 16,211
Write off of development and project cost 1,193 1,667
Amortization of deferred compensation -
restricted stock 1,566
Amortization of deferred compensation -
stock options 60
Provision for bad debts 243 (49) 441
Amortization of deferred loan fees 2,000 2,056 2,161
Increase in operating (assets) and liabilities:
Accounts receivable net 111 (859) 579
Inventories (438) (21) (202)
Prepaid expenses and other assets (96) (1,100) 967
Accounts payable 1,261 800 (266)
Accrued expenses (2,936) 326 (706)
Deferred compensation plan obligation (48) (691) 29
Deferred tax asset 517
Obligation to officers (1,000) (1,000) (750)
------- ------- ------
Net cash provided by operating activities 10,789 12,421 6,195
------- ------ ------
INVESTING ACTIVITIES:
Capital expenditures for property and equipment
Las Vegas (5,240) (7,169) (6,531)
Capital expenditures for property and equipment
Black Hawk (3,038) (3,477) (1,712)
Decrease (increase) in other assets 219 557 (12)
------ ------- ------
Net cash used in investing activities (8,059) (10,089) (8,255)
------ ------- ------
(Continued)
F-7
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
--------------------------------------------------------------------------------
2005 2004 2003
FINANCING ACTIVITIES:
Proceeds from long-term borrowings $ $ 316 $ 2,786
Draw on (repayment) of Foothill line of credit (2,000) 2,000
Repayments on long-term borrowings (1,440) (3,937) (3,690)
Exercise of employee stock options 395 2,168 70
Other 663 18
------- ------ -------
Net cash provided by (used in)
financing activities (1,045) (2,790) 1,184
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,685 (458) (876)
CASH AND CASH EQUIVALENTS Beginning of year 18,886 19,344 20,220
------ ------ ------
CASH AND CASH EQUIVALENTS End of year $ 20,571 $ 18,886 $ 19,344
====== ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property acquired with accounts payable-
Las Vegas, Nevada $ 406 $ 331 $ 191
===== ==== =====
Property acquired with debt Las Vegas, Nevada $ - $ 325 $ 2,786
===== ===== ======
Property acquired with accounts payable-
Black Hawk, Colorado $ 53 $ 354 $ 197
===== ====== ======
Cash interest paid $ 24,608 $ 25,023 $ 25,219
======= ======= =======
See notes to consolidated financial statements. (Concluded)
F-8
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
-------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Riviera Holdings Corporation 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.
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, 2,100 hotel rooms (including 169 luxury
suites) in five towers, three restaurants including a buffet and barbeque,
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 year to ten years and expire over the next five years.
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 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.
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 $4,614,235 and $4,816,748 at December 31, 2005
and 2004, respectively.
F-9
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
primarily 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.
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, 2005, the Company has five
active stock-based compensation plans and two expired stock-based
compensation plans. The effect of stock options in the income statement is
reported in accordance with Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation. as amended by SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. Accordingly, no
compensation cost has been recognized for unissued stock options in the
stock option plan, as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of grant.
Under the non-employee 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 amount of shares issued under
this plan equals the market value of the shares on the normal director
compensation date.
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):
F-10
2005 2004 2003
Net loss as reported $(3,999) $(2,086) $(14,453)
ADD: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) $ (234)
Net loss pro forma $(3,983) $(2,134) $(14,687)
Basic loss per common share as reported $(0.34) $(0.20) $(1.39)
Basic loss per common share pro forma $(0.34) $(0.20) $(1.41)
Diluted loss per common and common
share equivalent as reported $(0.34) $(0.20) $(1.39)
Diluted loss per common and common share
equivalent pro forma $(0.34) $(0.20) $(1.41)
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 2003, respectively:
dividend yield of 0%; expected volatility 52%; risk-free interest rates of
4.49%; and expected lives of 10 years for all years. The weighted fair
value of options granted in 2003 was $1.76. No options were granted in
2004 or 2005.
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.
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, 2005
and 2004 is approximately $231,019,000 and $241,730,000, respectively.
Treasury Stock
Treasury shares are stated at cost. Included as treasury shares at
December 31, 2005 were 191,022 shares held by the deferred compensation
plan trust. These shares are eligible for voting by the plan participants,
but are not considered outstanding for purposes of the financial
statements.
F-11
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 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:
Year Ended December 31
------------------------
(in thousands) 2005 2004 2003
Food and beverage $ 8,510 $ 8,693 $ 8,398
Rooms 1,333 1,096 1,231
Entertainment 632 890 1,641
------- -------- --------
Total costs allocated to
casino departments $10,475 $10,679 $11,270
======= ======= ========
Estimates and Assumptions-The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") 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, and collection allowances for receivables). Actual results may
differ from estimates.
Self-Insurance Reserves-The Company is self-insured for various levels of
general liability, workers' compensation, and non-union employee medical
insurance coverage. Insurance claims and reserves include accruals of
estimated settlements for known claims, as well as accrued estimates of
incurred but not reported claims. In estimating these costs, the Company
considers its historical claims experience and makes judgments about the
expected levels of costs per claim. Changes in health care costs, accident
frequency and severity and other factors can materially affect the
estimate for these liabilities.
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.
F-12
Advertising-The costs of advertising are expensed as incurred and are
allocated to each revenue department based upon content. Advertising
expense was $2,472, $3,338 and $4,070 in 2005, 2004, and 2003,
respectively.
Sarbanes-Oxley Expenses - These costs represent professional fees to
consultants and external auditors for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. They are a significant item, which we feel
should be disclosed to the public.
Recently Issued Accounting Standards-- In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation
cost related to share-based employee compensation transactions be
recognized in the financial statements. Share-based employee compensation
transactions within the scope of SFAS 123R include stock options,
restricted stock plans, stock appreciation rights and employee share
purchase plans. The provisions of SFAS 123R are to be effective for us
beginning January 1, 2006. In December 2005, we accelerated the vesting on
all non-employee directors' options then outstanding (subject to the
non-employee directors' agreements not to exercise the options prior to
the exerisability dates before giving effect to the acceleration), and as
a result, there will be no effect of applying the new standard on future
periods with respect to currently outstanding employee and directors'
options. The effect of the new standard on the accounting for future
option grants cannot be predicted.
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset
Retirement Obligations, an Interpretation of FAS 143. FIN 47 requires
recognition of a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. When sufficient information exists, uncertainty about the
amount and/or timing of future settlement should be factored into the
liability measurement. The interpretation was effective for us for the
year ended December 31, 2005. The adoption of this interpretation did not
have a material impact on our results of operations or financial position.
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. We do not presently expect to enter into any accounting changes
in the foreseeable future that would be affected by adopting SFAS No. 154
when it becomes effective.
F-13
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31 (in
thousands):
2005 2004
Casino $1,454 $1,556
Hotel 3,334 3,556
------ -----
Total 4,788 5,112
Collection allowances (1,244) (1,214)
------- ------
Accounts receivable - net $3,544 $3,898
====== ======
Changes in the collection allowances consist of the following for the
years ended December 31 (in thousands):
2005 2004 2003
Beginning balance $1,214 $1,047 $ 990
Write-offs (229) (68) (316)
Recoveries 16 37 21
Provision for doubtful collection 243 198 352
------ ----- ------
Ending balance $1,244 $1,214 $1,047
====== ====== =======
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.
3. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following at December 31
(in thousands):
2005 2004
Prepaid gaming taxes $1,439 $1,110
Prepaid insurance 814 921
Other 1,944 2,070
----- -----
Total $4,197 $4,101
===== =====
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands):
2005 2004
Land and improvements $ 38,130 $ 38,130
Buildings and improvements 143,417 143,417
Equipment, furniture, and fixtures 143,004 137,690
------- -------
Total cost 324,551 319,237
Accumulated depreciation and amortization (153,421) (142,122)
-------- ---------
Property and equipment-net $171,130 $177,115
======== ========
F-14
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):
2005 2004
Deposits $ 83 $ 140
Bond offering costs and commissions,
net of accumulated amortization
of $5,556 and $3,962 respectively 6,153 7,747
Other 1,160 1,156
----- -----
Total $ 7,396 $ 9,043
===== =====
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable consist of the following at December 31 (in thousands):
2005 2004
Outstanding chip and token liability $ 401 $ 609
Customer loyality liabilities 859 1,002
Progressive jackpot liabilities 654 457
Customer deposits and other 302 220
----- -----
Total customer-related payables 2,216 2,288
Accounts payable vendors 6,077 4,355
Insurance contracts 246 648
Customer deposits, non-gaming 1,159 874
Other 435 707
------ -----
Total $ 10,133 $8,872
======== ======
Accrued expenses consist of the following at December 31 (in thousands):
2005 2004
Payroll and related taxes and benefits $ 9,127 $10,202
Other 3,134 4,995
------ ------
Total $12,261 $15,197
====== ======
7. OBLIGATION TO OFFICERS
Obligation to officers consists of the nonqualified pension plan
obligation to our Chief Executive Officer ("CEO"), payable upon expiration
of his employment contract or a change of control of the Company,
including accrued interest and deferred compensation plan liabilities. See
Note 12 for a description of these plans.
F-15
(in thousands) 2005 2004
Nonqualified pension obligation CEO, unfunded $ 513 $ 1,513
Accrued interest on pension CEO, unfunded 3,610 3,639
Deferred compensation funded 3 51
----- -----
4,126 5,203
----- -----
Less current portion (1,000) (1,000)
Obligation to officers - net of current portion $3,126 $4,203
===== ======
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
2005 2004
11% Senior Secured Notes maturing on June 15, 2010, bearing
interest, payable semiannually on June 15 and December 15 of
each year, redeemable beginning 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 $ 213,196 $ 212,792
5.5% to 5.9% notes collateralized by equipment, payable monthly,
including interest, maturing through February 2007 1,448 2,056
Capitalized lease obligations (Note 9) 252 968
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 535 651
----- -----
Total long-term debt 215,431 216,467
Current maturities by terms of debt (824) (1,441)
------- -------
Total $ 214,607 $ 215,026
======= =======
Maturities of long-term debt for the years ending December 31 are as
follows (in thousands):
2006 $ 824
2007 888
2008 324
2009 199
2010 213,196
---------
Total $215,431
=========
On June 26, 2002, the Company obtained new 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
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
F-16
cash on hand, were used to defease Riviera Las Vegas' 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 Notes from time to time at a premium beginning at
105.5% and declining each subsequent year to par in 2009.
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.
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 Note Indenture contains certain covenants, which limit the ability of
the Company, as defined, 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, 2005,
the Company believes that it is in compliance with the covenants.
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 finance. 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 .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, 2005.
The Company has a credit facility totaling $200,000 for letters of credit
issued periodically to foreign vendors for purchases of merchandise. The
letters require payment upon presentation of a valid voucher.
The 5.5% Special Improvement District Bonds were issued by the City of
Black Hawk, Colorado, prior to 2003 for $2,940,000. The proceeds were used
for road improvements and other infrastructure projects benefiting Riviera
Black Hawk and a nearby casino. The projects were completed prior to 2003
at a cost to the Company of $1,574,000, including interest and reserves.
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. Management estimates 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, 2005 (in thousands):
2006 $ 83
2007 83
2008 83
2009 61
2010
-----
Total minimum lease payments 310
Taxes, maintenance, and insurance (31)
Interest portion of payments (27)
------
Present value of net minimum lease payments $ 252
======
Property and equipment under capital lease as of December 31, 2005 and
2004 were $11.4 and $11.1 million with accumulated amortization of $11.1
million and $10.9 million, respectively.
Rental expense under operating leases for the years ended December 31,
2005, 2004 and 2003 was approximately $1,096,307, $964,166 and $1,596,487,
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, 2005, 2004 and
2003 was approximately $2,205,300, $1,907,400 and $1,835,000 respectively.
Riviera Las Vegas has recently added a buyout/liquidated damages provision
to its standard lease. The modification 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. This provision
or similar wording is included in new leases and renewals.
At December 31, 2005, the Company had future minimum annual rental income
due under noncancelable operating leases as follows (in thousands):
2006 $ 2,376
2007 1,991
2008 979
2009 669
2010 617
-----
Total $ 6,632
======
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):
2005 2004 2003
--------------- ------------------ ------------
Amount Rate Amount Rate Amount Rate
Income taxes benefit
at federal statutory rate $(1,400) (35.0)% $ (730) (35.0)% $(5,054)(35.0)%
Employee Benefits 695 17.4 % 1,555 74.6 % (433) (3.0)%
Other (471) (11.8)% (308) (14.8)%
Valuation allowance 1,176 29.4 % (517) (24.8)% 5,487 38.0 %
----- ------ ----- ------- ----- ------
Benefit for income taxes $ - 0.0 % $ - 0.0 % $ - 0.0 %
===== ====== ===== ======= ===== ======
Comparative analysis of the (benefit) provision for income taxes is as
follows:
2005 2004 2003
Current $ $ $ (517)
Deferred - - 517
------ ------- ------
Total $ - $ - $ -
====== ======= =======
The tax effects of the items composing the Company's net deferred tax
(asset) liability consist of the following at December 31 (in thousands):
F-19
2005 2004
Deferred tax liabilities:
Reserve differential for hospitality and gaming activities $ 1,168 $ 1,015
Difference between book and tax-depreciable property 4,820 4,385
Other 511 511
----- -----
Total 6,499 5,911
===== =====
2005 2004
Deferred tax assets:
Net operating loss carryforward $19,785 $18,279
Reserves not currently deductible 2,536 2,195
Bad debt reserves 474 465
AMT and other credits 3,092 2,622
------- -------
Total 25,887 23,561
------- --------
Valuation allowance (16,942) (15,204)
------- --------
Net deferred tax asset $ 2,446 $ 2,446
======= =======
The Company has $3,092,000 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 $56,530,000
net operating loss carryforwards, which will expire between 2013 and 2026.
. If the Company were to sell certain assets, the gain on sale could be
sheltered from taxes up to approximately $17 million. However, the Company
does not believe that there is sufficient certainty to reduce the
valuation allowance. Accordingly, a valuation allowance has been provided
for substantially all deferred tax assets
The realizability of the net deferred tax asset related to Rivera Las
Vegas is dependent upon future earnings. The Company's net deferred tax
asset approximates its AMT credit carryforwards, which 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. Management does not believe that the
outcome of such litigation, in the aggregate, will have a material adverse
effect on the financial position, results of operations, or cash flows of
the Company.
Employees and Labor Relations-- As of December 31, 2005, the Company had
approximately 1,627 full-time equivalent employees and had collective
bargaining agreements in Las Vegas with eight unions covering
approximately 794 of such employees, including food and beverage
employees, rooms department employees, carpenters, engineers, stagehands,
musicians, electricians, painters and teamsters. The Company's agreement
F-20
with the Carpenters Union expired in 2005 but was extended until July
2006. 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 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,
management 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 the Company.
12. EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS
Chairman-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").
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 Plan 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 makes 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
$4,122,703 as of December 31, 2005.
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 2005 was $517,929 while interest accrued was
$638,154 for 2004 and $757,686 for 2003.
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-21
On February 5, 1998, our stockholders approved a merger agreement(which
subsequently terminated). That approval constituted a change of control
under Mr. Westerman's employment agreement. 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 that
was last amended on March 24, 2003. Mr. Vannucci's base compensation is
$300,000 in cash and $100,000 in shares of stock under our Restricted
Stock Plan (see "Restricted Stock Plan" below or cash, at his election.
Mr. Vannucci's agreement provides that he is to receive $25,000 in stock,
based on our stock's market value, or cash (at his election) on the first
business day of each quarter, plus common stock, based on market value, or
cash (at his election), equal to the amount of the award he receives under
our Incentive Compensation Plan. Mr. Vannucci is presently entitled to
rights of ownership with respect to the shares he receives under our
Restricted Stock Plan, including the right to vote and receive dividends.
Mr. Vannucci may not, however sell, assign, pledge, encumber or otherwise
transfer any of the shares so long as we employ him, without our written
consent. The shares fully vest to Mr. Vannucci upon a change of control
(as defined) or his separation of employment from us, so long as such
separation is not termination for cause. Mr. Vannucci chose to receive
$100,000 in cash in 2005 pursuant to these provisions.
F-22
Mr. Vannucci's employment agreement provides for an Incentive Compensation
Plan entitling him to participate in our Las Vegas Incentive Compensation
Plan, whereby he may share in a portion of such plan's pool. Mr.
Vannucci's agreement also provides for an additional incentive award in
his choice of either Restricted Stock Plan shares or cash in an amount,
equal to his Incentive Compensation Plan award. Mr. Vannucci did not
receive an Incentive Compensation Plan award for 2003 or 2005. For 2004
Mr. Vannucci received an Incentive Compensation Plan award of $57,000
cash, which entitled him to an additional incentive award of $57,000,
which he elected to receive in cash. Mr. Vannucci's agreement
automatically renews annually subject to 120 days prior written notice by
him or us.
Incentive Compensation Plan--We have has an Incentive Compensation Plan
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, 2005, 2004 and 2003, the
Company recorded accrued bonuses of $556,892, $1,085,092 and $302,216
respectively, under this plan.
Pension Plan Contributions--We contribute to multi-employer pension plans
under various union agreements to which we are a party. Contributions,
based on wages paid to covered employees, were approximately $1,759,561,
$1,714,812 and $1,646,000 for the years ended December 31, 2005, 2004 and
2003, respectively. These contributions were for approximately 813
employees, including food, beverage, employees and room department
workers, carpenters, engineers, stagehands, electricians, painters, and
teamsters. 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 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 $290,200, $302,882 and $220,900 for
the years ended December 31, 2005, 2004 and 2003. We also pay
administrative costs of the Profit Sharing and 401K Plans, which are not
material.
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,
F-23
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 2005. 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 2005. 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 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 to the ESOP $125,974 in 2005, $899,253 in 2004 and $348,435 in
2003.
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. Six executives were participating in the DCP as of
December 31, 2005. 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.
Salary Continuation Agreements--Approximately 60 executive officers and
certain other employees (excluding Mr. Westerman and Mr. Vannucci) of ROC
have salary continuation agreements effective through December 2006,
pursuant to which they will be entitled to receive (1) either six months'
or one year's salary if their employment with the Company is terminated,
without cause, within 12 or 24 months of a change of control of the
Company; and (2) group health insurance for periods of either one or two
F-24
years. 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, four officers and significant
employees have salary continuation agreements effective through December
31, 2006, pursuant to which each of them will be entitled to receive two
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 $6.4 million, including $1.5 million in
benefits, as of December 31, 2005.
13. STOCK OPTION PLANS
Stock Compensation Plans--At December 31, 2005, we had two active stock
option plans and two expired stock option plans, which are described
below. We account for the fair value of grants under those plans in
accordance with APB Opinion No. 25. 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). Under the
1993 Option Plan, options vest 25% on the date of grant and 25% each
subsequent year. All options have become vested under the 1996 Option
Plan. Although the 1993 Option Plan and 1996 Option Plan have expired,
some options granted under these plans are still outstanding.
Effective May 17, 2005, we implemented two new stock option plans and
reserved a total of 1,150,000 shares for options issuable under the plans.
We allocated 150,000 shares to a new option plan for non-employee
directors. We will grant options for 6,000 shares to each non-employee
director on each anniversary of the effective date of the plan. Also, we
will grant options for 6,000 shares to each person who becomes a
non-employee director after May 17, 2005. The option exercise price will
be the closing market price of our stock on the date of the option grant.
The options will vest over five years at 20% per year, commencing on the
first anniversary of the grant.
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.
During the third quarter of 2004, we determined that options for 385,500
shares (128,500 prior to the three-for-one split), with an average
exercise price of $1.84 per share ($5.53 prior to the stock split), which
we attempted to grant to 21 executives under the 1993 Option Plan between
July 15, 2003 and May 10, 2004, could not be granted because the plan
expired on June 30, 2003. Prior to this determination, we had reported
those options as being outstanding and unexercised.
F-25
Prior to 2005, two executives to whom we attempted to grant options for
48,000 of those 358,500 shares left our employment. On April 6, 2005, we
granted to the 19 remaining executives a total of 337,500 shares under our
Restricted Stock Plan in substitution for the stock options that we had
attempted to grant to them under the 1993 Option Plan.
Except for accelerated vesting in the event of an executive's death,
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%
Also during the third quarter of 2004, we determined that options for
30,000 shares (10,000 shares prior to the stock split), with an average
exercise price of $2.97 ($8.92 prior to the stock split), which we
attempted to grant to our four non-employee directors in April and May
2004 under the 1996 Option Plan, could not be granted because that plan
expired on June 30, 2003. Prior to this determination, we had reported
those options as being outstanding and unexercised.
On May 27, 2005, we granted a total of 30,000 shares of stock to our
non-employee directors in substitution for the stock options that we had
attempted to grant to them under the 1996 Option Plan. 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).
On December 30, 2005 we accelerated the vesting and exercisability of the
outstanding stock options awarded to our non-employee directors under the
1996 Option Plan (subject to their agreement not to exercise those options
before the earliest date(s) on which they could have been exercised prior
to giving effect to the acceleration). The acceleration resulted in a
$60,000 one-time non-cash charge to expense in the fourth quarter of 2005.
The activity of the 1993 Option Plan and the 1996 Option Plan is as
follows:
F-26
Weighted-
Average
Per Share
Exercise
1993 Option Plan Shares Price
Outstanding, January 1, 2003 1,677,000 $ 2.10
Grants 385,500 $ 1.75
Canceled (223,500) $ 1.76
----------
Outstanding, December 31, 2003 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
----------
1996 Option Plan
Outstanding, January 1, 2003 72,000 $ 2.37
Automatic grant to directors 18,000 $ 1.87
Canceled (18,000) $ 2.56
--------
Outstanding, December 31, 2003 72,000 $ 2.37
Reinstated 12,000 $ 4.46
--------
Outstanding, December 31, 2004 84,000 $ 2.54
-
--------
Outstanding, December 31, 2005 84,000 $ 2.54
========
No grants have been made under the 2005 option plans.
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2005 Life Price 2005 Price
$1.33 to $2.00 54,000 5.9 years $1.89 310,500 $ 2.44
$2.18 to $4.50 256,500 5.0 years $2.56
14. 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. Such antidilutive options
outstanding for the years ended December 31, 2005, 2004 and 2003 were
276,196; 417,777; and 1,677,000, respectively based on the treasury
method.
F-28
15. 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.
(In thousands) 2005 2004 2003
Net revenues:
Riviera Las Vegas $150,688 $147,949 $140,963
Riviera Black Hawk 51,539 53,401 49,196
-------- -------- --------
Total net revenues $202,227 $201,350 $190,159
======== ======== ========
EBITDA(1):
Riviera Las Vegas $ 26,789 $ 27,158 $ 22,678
Riviera Black Hawk 17,282 16,884 13,283
-------- -------- --------
Total property EBITDA $ 44,071 $ 44,042 $ 35,961
======== ======== ========
Other costs and expenses:
Corporate expense
Equity-based compensation 1,627
Sarbanes-oxley 1,233
Other corporate expenses 4,045 4,038 4,485
Depreciation and amortization 14,065 13,852 16,211
Mergers, acquisitions and
development costs, net (65) 1,193 2,365
Asset impairmnet 777
Interest expense 26,608 27,079 27,380
Interest Income (220) (34) (27)
Other-net
------- ------ ------
Total other costs and expenses 48,070 46,128 50,414
------- ------ ------
Net loss $ (3,999) $ (2,086) $(14,453)
======== ========= ========
Interest expense
Riviera Las Vegas $ 18,857 $ 19,140 $ 19,208
Riviera Black Hawk 7,751 7,939 8,172
-------- -------- --------
$ 26,608 $ 27,079 $ 27,380
======== ======== ========
Depreciation and amortization
Riviera Las Vegas $ 9,712 $ 9,839 $ 11,706
Riviera Black Hawk 4,453 4,013 4,505
-------- -------- --------
$14,065 $13,852 $ 16,211
======== ======== ========
Asset impairmnet
Riviera Las Vegas $ 310 $ $
Riviera Black Hawk 467
-------- -------- --------
$ 777 $ $
======== ======== ========
December 31
--------------------------------
2005 2004
Property and equipment (2):
Riviera Las Vegas $111,209 $115,950
Riviera Black Hawk 59,921 61,165
-------- --------
Total $171,130 $177,115
======== ========
F-29
(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 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 and, net of
accumulated depreciation and amortization.
Riviera Las Vegas--The primary marketing of Riviera Las Vegas is not aimed
toward residents of Las Vegas, Nevada. Significantly all revenues derived
from patrons visiting Riviera Las Vegas are from other parts of the United
States and other countries. Revenues for Riviera Las Vegas from a foreign
country or region may exceed 10% of all reported segment revenues;
however, Riviera Las Vegas cannot identify such information, based upon
the nature of our gaming operations.
Riviera Black Hawk-- Riviera Black Hawk primarily serves the residents of
metropolitan Denver, Colorado. As such, we believe that significantly all
revenues are derived from within 250 miles of that geographic area.
16. 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, 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.
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 $137,469, $85,447 and $73,770 in 2005, 2004 and 2003, respectively.
We incurred legal expenses to the firm which are included in other general
and administrative costs of $296,607, $90,729 and $113,764 in 2005, 2004
and 2003, respectively.
F-30
18. SUBSEQUENT EVENTS
On December 22, 2005, Mr. William L. Westerman, Chief Executive Officer, entered
into an agreement with a group of buyers for the sale of 1.0 million of his
shares of the Company's stock at $15.00 per share and the possibility of the
sale of his remaining approximately 1.1 million shares at that same price. On
January 8, 2006, the sale of the 1.0 million shares was consummated, which
resulted in those shares becoming "restricted securities" under Rule 144 of the
Securities and Exchange Commission. In connection with that agreement, it was
publicly reported in Schedule 13D filed with the Securities and Exchange
Commission that the buyers intended to commence negotiations with Riviera to
acquire the Company at a price of not less than $15.00 per share. On March 2,
2006, discussions between the Special Committee of the Company's Board of
Directors and the buyers of Mr. Westerman's shares, concerning the possible
acquisition of the Company, terminated because the buyers and the Special
Committee did not reach agreement on the acquisition price.
19. UNAUDITED QUARTERLY FINANCIAL DATA
RIVIERA HOLDINGS CORPORATION
UNAUDITED QUARTERLY FINANCIAL DATA
(Amounts in Thousands, Except per Share Data)
-------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
Year ended December 31, 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)
Year ended December 31, 2004:
Net revenues $ 50,460 $ 52,794 $ 50,617 $ 47,479
Operating income 7,374 7,563 4,810 5,212
Income (loss) before tax benefit 540 829 (1,988) (1,467)
Net Income (loss) 540 829 (1,988) (1,467)
Income (loss) per share basic &
diluted $ 0.05 $ 0.08 $ (0.19) $ (0.14)
F-31