UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| 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 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________________
Commission file number 000-32987
COLONY RIH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | |
| DELAWARE | | 95-4849060 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
(Exact name of registrant as specified in its charter)
| | |
| DELAWARE | | 95-4828297 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
1133 Boardwalk Atlantic City, NJ | |
08401 |
| (Address of principal executive offices) | | (Zip Code) |
Registrants’ telephone number, including area code:
(609) 344-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COLONY RIH HOLDINGS, INC.
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes x No ¨
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 any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ¨ No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of Colony RIH Holdings, Inc. and Resorts International Hotel and Casino, Inc. as of March 30, 2006, was $0.
As of March 30, 2006, 38,295 shares of class A common stock and 774,982 shares of class B common stock of Colony RIH Holdings, Inc. were outstanding.
As of March 30, 2006, 100 shares of common stock of Resorts International Hotel and Casino, Inc. were outstanding.
Documents incorporated by reference
Portions of the registrant’s definitive proxy statement for its 2006 annual meeting of stockholders, which will be filed within 120 days after the end of the registrants’ fiscal year ended December 31, 2005, are incorporated by reference into Part III of this Annual Report.
COLONY RIH HOLDINGS, INC.
AND
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
Annual Report on Form 10-K
TABLE OF CONTENTS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
This Annual Report contains statements that are, or may be considered to be, ‘forward-looking statements’ within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements containing expressions such as “believes,” “anticipates,” “expects” “seeks,” “estimates,” “plans,” “intends” and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Although the registrants believe their expectations are based upon reasonable assumptions within the bounds of their knowledge of their business and operations, there can be no assurances that actual results will not materially differ from expected results. The registrants caution that these and similar statements included in this report and in previously filed periodic reports, including reports filed on Form 10-Q, are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, without limitation, the following: increased competition in existing markets or the opening of new gaming jurisdictions, a decline in the public acceptance of gaming, the limitation, conditioning or suspension of any of the registrants’ gaming licenses, increases in or new taxes imposed on gaming revenues or gaming devices, a finding of unsuitability by regulatory authorities with respect to the registrants’ officers, directors or key employees, loss or retirement of key executives, adverse economic conditions in the registrants’ key markets, severe and unusual weather in Atlantic City, and leverage and debt service. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. The registrants undertake no obligation to publicly release any revision to such forward-looking statements to reflect events or circumstances after the date thereof.
PART I
Item 1. Business.
Colony RIH Holdings, Inc., a Delaware corporation (“CRH”, or the “Company”), owns 100% of the outstanding common stock of Resorts International Hotel and Casino, Inc. (“RIHC”). RIHC, through its wholly-owned subsidiary, Resorts International Hotel, Inc., a New Jersey corporation (“RIH”), owns and operates Resorts Atlantic City (“Resorts”), a casino hotel located in Atlantic City, New Jersey. CRH also owns 100% of the common stock of Resorts Real Estate Holdings, Inc. (“RREH”), a New Jersey corporation formed on April 1, 2003 to acquire certain land subject to an option agreement (“Option Agreement”) between Kerzner International North America, Inc. (“KINA”) and RIHC. RIHC also owns 100% of the common stock of New Pier Operating Company, Inc., a New Jersey corporation (“New Pier”). Colony RIH Holdings, Inc., Resorts International Hotel and Casino, Inc., and Resorts International Hotel, Inc. are referred to collectively as the “Companies.”
RIHC and KINA, formerly Sun International North America, Inc., a Delaware corporation, and GGRI, Inc. (“GGRI”), a Delaware corporation, entered into a purchase agreement, dated as of October 30, 2000, as amended, (the “Purchase Agreement”). Pursuant to the Purchase Agreement, RIHC acquired all of the capital stock of RIH, the Warehouse Assets (as defined in the Purchase Agreement) and all of the capital stock of New Pier Operating Company, Inc. (“New Pier”), a New Jersey corporation, (collectively, the “Acquisition”), on April 25, 2001 for approximately $144.8 million. In conjunction with the Acquisition, RIHC borrowed $82.0 million under an Amended and Restated Credit Agreement, dated April 25, 2001, from the lenders named therein (the “Credit Facility”) and CRH issued a $17.5 million note to KINA (the “Seller Note”). These debts were retired in March 2002 in conjunction with the issuance of $180 million of first mortgage notes (see “The Expansion”).
On March 27, 2006, Audrey S. Oswell resigned, effective May 1, 2006, from her positions as President and Chief Executive Officer of CRH, RIHC and RIH.
The Company’s executive offices are located at 1133 Boardwalk, Atlantic City, New Jersey 08401. The telephone number is (609) 344-6000. The Company’s website is www.Resortsac.com.
In addition to this annual report on Form 10-K, the Companies file periodic and current reports, proxy statements and other information with the SEC. A copy of these documents may be obtained free of charge upon written request to: Resorts International Hotel and Casino, Inc., 1133 Boardwalk, Atlantic City, New Jersey 08401. You may also read and copy any document the Companies file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at (800) SEC-0330. These documents also may be accessed through the SEC’s home page on the Internet, www.sec.gov.
Overview
RIHC, through its ownership of RIH, owns and operates Resorts, a casino hotel in Atlantic City, New Jersey, which offers casino gaming and other amenities.
In May 1978, Resorts commenced operations as the first casino hotel in Atlantic City. This was accomplished by the conversion of the former Haddon Hall Hotel, a classic hotel structure originally built in the early 1900’s, into a casino hotel. Resorts Atlantic City has set the standard for casino gaming and entertainment since opening as the East Coast’s first casino on May 26, 1978.
Resorts Atlantic City is situated on 11 acres of land with approximately 310 feet of Boardwalk frontage overlooking the Atlantic Ocean. Resorts offers guests 878 hotel rooms and suites in two hotel towers: the oceanfront 15-story Ocean Tower, and the 27-story luxury Rendezvous Tower. On September 4, 2002, RIHC decommissioned the 166-room Atlantic City Tower to begin construction in November 2002 of a 27-story hotel tower on the same site. The expansion was substantially completed on June 16, 2004. The 27-story Rendezvous Tower opened on July 2, 2004, adding 399 hotel rooms, including 42 suites and the new Grand Lobby to the property. The new tower expanded on Resorts’ existing décor, a style that embraces the elegance, class and sophistication of Atlantic City’s heritage. Guest rooms range in size from 512 to 576 square feet, making them the largest standard rooms in Atlantic City by almost 100 square feet. The 42 suites range in size from 1,090 – 1,150 square feet and are situated on the top six floors offering spectacular panoramic ocean views. All guest rooms feature oversized bathrooms accented with imported marble, walk-in showers, double vanities, make-up tables, and additional amenities.
3
With the completion of the new luxury Rendezvous Tower, Resorts also added 26,043 square feet of additional gaming space for a total of 99,951 square feet. Approximately, 2,870 slot machines include multi-coin video games, video poker, classic reel machines, and EZ Cash, an easy ticket-in/ticket-out way to play. Resorts also offers premium players a semi-private gaming experience in the Platinum Place, where they can try their luck at their favorite machines ranging from $1 to $100.
Resorts Atlantic City is located at the northern end of the famed Boardwalk in Atlantic City. Neighboring Trump Taj Mahal Casino Resort and Showboat Hotel and Casino are connected to Resorts via enclosed pedestrian bridges, making it easy for guests to walk from property to property without going outdoors. The remaining nine Atlantic City casino hotels are located approximately one-half mile to one and one-half miles to the south on the Boardwalk or, to the west, in the Marina District of Atlantic City.
Facilities Overview
Gaming. The gaming floor has been greatly enhanced with the opening of the New Tower and related additional gaming space and gaming positions. As of December 31, 2005, Resorts contained 2,872 slot machines, and 80 table games, which include thirty-six blackjack tables, ten roulette tables, six craps tables, and other specialty games such as Caribbean Stud, Baccarat, Mini-Baccarat, Big Six, Let It Ride, Three-Card Poker, Four-Card Poker, Texas Hold’em Bonus Poker, Double Attack Blackjack, Pai Gow, Pai Gow Poker, and Spanish Twenty-One. The Simulcast Casino gives players the opportunity to wager on horse racing action throughout the country. Resorts also features the comforts and exclusivity of two high-limit table game areas for those who enjoy higher stakes. Additionally, there are six poker tables on the casino floor.
The redesign of the gaming floor affords customers more space to enhance their gaming experience. In addition to the space, Resorts added newer themed slots based on customer preference and multi-denomination slots for ease of customer play. The Company is committed to meeting the demands of its customers and will continue to proactively enhance gaming options to retain and attract customers. Additionally, the amount and type of table games on the gaming floor will continually be adjusted for seasonal changes or special events.
Meeting Rooms, Restaurants and Other Amenities. Resorts’ meeting room facilities consist of a large banquet room with five breakout rooms. In the aggregate, these rooms have the ability to accommodate approximately 2,600 people in 39,100 square feet of space. Meeting rooms range in size from 450 to 12,028 square feet.
Management believes the quality of its restaurants gives Resorts a competitive advantage over other casinos in Atlantic City, as it features several restaurants catering to differing customer tastes and price points. Resorts-owned restaurants include: Capriccio, Asian Spice, Camelot Steakhouse, Beach Ball Deli, Breadsticks, the Boardwalk Buffet, an all-you-can-eat buffet, and Boardwalk Perks, a coffee and pastry shop.
With a capacity to seat 1,400 patrons in approximately 18,000 square feet of space, the primary purpose of Resorts’ Superstar Theater is to attract patrons to the casino. The theater is used to enhance the casino’s image as an entertainment facility offering some of the best entertainment in Atlantic City. Recent acts which we believe target our core customer base include: Tom Jones, Smokey Robinson, Don Rickles, Jerry Seinfield and Kathy Griffin. During 2005, Resorts also operated two additional entertainment venues, the 300-seat Screening Room, used for off-Broadway-style shows, and a 200-seat room which was used to present a comedy club.
New projects completed since the opening of the Rendezvous Tower include the addition of the 25 Hours casino bar. Located on the casino floor, just steps away from the hotel lobby, 25 Hours delivers a supple European vibe, wildly shaken martini classics as well as innovative concoctions.
In late 2005, Resorts welcomed the arrival of Gallagher’s Steakhouse and the Luna Lounge. Gallagher’s features traditional dry-aged steaks and seafood favorites prepared on their famous open flame mesquite grill. Founded in 1927 on West 52 Street in New York City, Gallagher’s brought a new dimension to American cuisine: Broadway’s first steakhouse and where the “New York Strip” steak was first served. Gallagher’s Steakhouse at Resorts is part of the Ark Restaurant family, which operates distinctively designed restaurants in New York City, Las Vegas, and Washington, D.C.
4
Located across from Gallagher’s Steakhouse is the Luna Lounge, a modern interpretation of a lounge with a sophisticated atmosphere. The bar is lined in exotic palm trees, features an illuminated onyx counter, plush couches and chairs, with bar and table seating.
Other amenities include a full service salon and spa which offers an array of beauty and body treatments from massages to makeovers, as well as a gym facility and indoor/outdoor pool which is open year-round.
Parking. A multi-level parking garage that is connected to Resorts is used for patrons’ self-parking and accommodates approximately 700 vehicles. Additional adjacent properties, consisting of approximately 7.9 acres, which are owned by RREH, provide parking for approximately 700 vehicles and valet parking for approximately 450 vehicles. See “Option Land” and “Item 2. Properties.”
5
The Expansion
On March 22, 2002, RIHC sold $180.0 million aggregate principal amount of 11 1/2% first mortgage notes (the “First Mortgage Notes”) at a price of 97.686% yielding $175.8 million. Concurrent with the sale of the First Mortgage Notes, CRH issued 17,295 shares of class A common stock at a cash price of $0.0475 and 349,992 shares of class B common stock at a price of $100 to its existing shareholders for a total price of approximately $35.0 million. The proceeds from the sale of the First Mortgage Notes and issuance of stock were used to retire existing debt and to finance a portion of the cost to develop, construct, and equip the New Tower.
On September 4, 2002, CRH decommissioned the 166-room Atlantic City Tower and began construction in November 2002 of the New Tower. From the proceeds of the sale of the First Mortgage Notes, $89.4 million was deposited in a construction disbursement account for use in construction of the New Tower. Additionally, the New Jersey Casino Reinvestment Development Authority (“CRDA”) agreed to reimburse RIHC for certain costs for the construction of the New Tower totaling approximately $12.3 million through 2008, of which $9.2 million was received in 2003, $0.8 million was received in 2004, $0.5 million was received in 2005 and approximately $1.8 million is expected to be received in the aggregate from 2006 through 2008. The CRDA will also make an additional $1.5 million available for expenses incurred in connection with public improvements relating to the construction of the New Tower. In June 2002, RIH entered into a $20.0 million credit facility, the proceeds of which were used for the acquisition of furniture, fixtures and equipment. RIHC has guaranteed the obligations of RIH under this equipment credit facility. As of December 31, 2005, the Companies had used $14.7 million of the equipment credit facility to purchase furniture, fixtures and equipment for the New Tower and $4.5 million to purchase additional slot machines. In November 2002, RIHC also entered into a $10.0 million revolving credit facility (the “Commerce Facility”). There was no outstanding balance on the Commerce Facility at December 31, 2005. However, $5.4 million of standby letters of credit have been issued against the Commerce Facility related to insurance obligations of the Company, leaving an availability of $4.6 million as of December 31, 2005.
The expansion is a key component in continuing the Company’s strategy of growing its core customer base. Prior to the opening of the New Tower, management believed that there existed a significant disparity in the quality of amenities offered by the two existing hotel towers, which constrained its ability to attract and retain higher-margin; mid-level slot players and mid-level table game players (see “Business Strategy and Marketing Overview”).
Hotel rooms and suites in the new Rendezvous Tower are among the largest in Atlantic City. Rooms in the Ocean Tower, a classic hotel structure constructed in the 1920’s, were completely renovated in 1999.
Option Land
In conjunction with the purchase of RIH from KINA in April 2001 by CRH and RIHC, CRH obtained an option to purchase approximately 10.0 acres of real property immediately adjacent to the Resorts site and approximately 2.0 acres of real property located in the Atlantic City metropolitan area, pursuant to an option agreement (“Option Agreement”) for a total purchase price of $40.0 million. Portions of the option property (the “Option Land”) are zoned for casino hotel use and are available for future expansion. Some of the option property was leased from KINA by RIH for use as a surface parking lot under a lease agreement with terms running contemporaneous with the terms of the Option Agreement.
The Option Agreement had a two-year term, which could be extended for two additional one-year terms upon the payment of a $2.5 million extension fee payable upon each extension. The initial term of the Option Agreement was to expire in April 2003. The expiration date of the initial term of the Option Agreement was initially extended to June 15, 2003, as negotiations between the Companies and KINA for the purchase of the Option Land commenced. Subsequently, the expiration date of the initial term was further extended, upon the payment by RIH of one-half of the $2.5 million extension fee.
In March 2004, the Option Land was acquired by RREH in exchange for the issuance of a $40 million note by RREH to KINA. This $40 million note will mature immediately following the maturity, acceleration or refinancing (other than permitted refinancing) of the First Mortgage Notes which are due March 22, 2009. No principal payments are required on the $40 million note until it reaches maturity. Interest on the $40 million note is payable semi-annually, and calculated at the following annual rates: 0% through September 2004, 4% from October 2004 through March 2006, 6% from April 2006 through March 2008, and 9% from April 2008 through March 2009. The note payable to KINA is guaranteed by CRH, RIHC and RIH,
6
provided, however that the guarantee of RIHC and RIH does not become effective until either the First Mortgage Notes have been paid in full or the fixed charge coverage ratio of RIHC is at least 2.0 to 1.0. In addition, the amount guaranteed is initially limited to $20 million increasing by $5 million each year.
In conjunction with the option land purchase transaction, the Option Agreement between RIHC and KINA was terminated. With the termination of the Option Agreement, the lease agreement between KINA and RIH converted to a month-to-month fair market value lease. As part of the option land purchase transaction, the lease was amended to be a triple-net lease and was assigned by KINA to RREH. The amended agreement calls for the following payments: $1.3 million security deposit paid upon closing, offset against lease payments of $205,000 per month through September 2004; $135,833 per month from October 2004 through March 2006; $202,500 per month from April 2006 through March 2008; $302,500 per month from April 2008 through March 2009 and $402,500 per month thereafter. The lease agreement may be terminated by either party upon 30 days notice, with any security deposit remaining upon termination to be refunded to RIH.
Business Strategy and Marketing Overview
Resorts offers its customers a full range of table games and slot machines. During the construction of the New Tower and in the months following, the mix of table games and slot machines had been modified and expanded. Resorts remains committed to offering a wide variety of slot machine denominations and up-to-date themes. In conjunction with the construction of the New Tower, additional slot machines were installed and the existing floor was redesigned and substantially replaced with new themed slots and multi-denominations that offer Ticket-In/Ticket-Out and EFT (Electronic Funds Transfer) compatibility. Management of the Company believes that having the correct slot machine mix is critical to retaining the mid- to high-level slot player.
Resorts classifies its customers according to their gaming budget. A low-level slot player is defined as a customer who is willing to gamble less than $400 per sitting, a mid-level slot player as a customer who is willing to gamble $400 to $1,000 per sitting and a high-level slot player as a customer who is willing to gamble more than $1,000 per sitting. A low-level table game player is defined as a customer who is willing to gamble less than $5,000 per visit, a mid-level table game player as a customer who is willing to gamble $5,000 to $25,000 per visit, a high-level table game player as a customer who is willing to gamble $25,000 to $100,000 per visit and a premium table game player as a customer who is willing to gamble more than $100,000 per visit.
Resorts’ marketing programs target middle- and higher-income customers who have the propensity to gamble. Management uses its customer database to identify and target value-added, high-income repeat gaming customers and uses player tracking systems to determine the value of customers and provide programs conducive to their level of play.
Resorts’ marketing programs are focused to maintaining its loyal customer base, through the efficient use of player information. Additionally, Resorts continually looks to expand its core customer base through its marketing programs. The New Tower has positioned Resorts to offer high quality hotel rooms and suites to attract new customers. In addition, the development of supplemental services, such as Gallagher’s Steakhouse, 25 Hours Bar, Luna Lounge and increased entertainment options are used to attract new customers to the property.
In order to supplement the casino and hotel amenities offered, Resorts remains committed to providing customer service that is superior to other casino properties. Resorts achieves this level of excellence by investing in its employees through on-going training programs that emphasize the importance of providing outstanding customer service.
Resorts is highly promoted through radio, outdoor, print advertising and direct mailings. With the opening of the New Tower, marketing efforts were focused on increasing Resorts’ market share of drive-in slot players. It is believed by management that drive-in players tend to be higher income slot customers than customers who travel by bus. Additionally, it is believed that drive-in players tend to spend more time in the casino where they are staying.
Resorts’ primary market is the 200-mile radius of Atlantic City, which includes all of New Jersey, New York City, Philadelphia, and Baltimore. Its secondary market is the 200 plus-mile radius of Atlantic City, which includes Washington, D.C. The primary market receives the greatest allocation of Resorts’ marketing resources, with strategically targeted efforts in key outer market areas.
7
Atlantic City Market
Atlantic City’s strategic location, combined with its core demographics and steady market growth, makes it a viable gaming market. Atlantic City is located along the most densely populated area of the United States, the New York-Philadelphia-Baltimore-Washington D.C. corridor. In addition, its beaches remain an attractive draw to many tourists and Resorts will continue to capitalize on and attract this customer base.
The Atlantic City market has demonstrated continued and steady growth, despite several recessions and the recent proliferation of new gaming jurisdictions, including those in Delaware and Connecticut. Atlantic City gaming revenues in 2005 increased 4.4% over 2004 levels, with casino revenues reaching a record $5.02 billion for 2005. Resorts competes directly with 11 other casino hotels in Atlantic City. The Atlantic City casino market, as of December 31, 2005, contained approximately 15,250 hotel rooms and suites and 1.49 million square feet of gaming area, including simulcast betting and poker rooms.
The Atlantic City market has a strong “locals” component, which includes gaming patrons that generally live within 200 miles of Atlantic City. As a result, management believes the Atlantic City customers tend to frequent the casinos in the market more often than customers in destination-based markets such as Las Vegas. Management believes the Atlantic City customer tends to be more sophisticated and sensitive to changes in slot hold percentage than customers in other gaming jurisdictions.
Table games have grown in popularity with an increase in poker and other types of table games. This trend is evidenced by a 383-unit (31.3%) increase in table game units in the Atlantic City market from 1,223 units in 2004 to 1,277 units in 2005. Slot play continues to be popular with Atlantic City gaming patrons. This popularity is partially due to technological improvements such as “coinless” slot machines, bill and coupon acceptors, video poker, and themed slot machines that have increased convenience and entertainment value. Additionally, slot machines tend to generate higher margins than table games, and Atlantic City gaming operators have correspondingly, over the years, increased the number of slot machines. However, the number of slot machines actually declined from 2004 levels by approximately 374 units (.9%), to 41,231 units in 2005 due to the efficiencies noted above.
Atlantic City gaming operators, including Resorts, have become increasingly focused on improving the quality of revenues in recent years. This trend is evidenced by the market’s reduced reliance on promotional expenses and allowances, such as bus packages and customer give-away promotions. Although such promotions can drive top-line growth, management believes they result in lower operating margins as they are generally matched by competitors.
Significant private and public investment in the Atlantic City market has been made over the past few years. In 1984, the New Jersey State Legislature created the CRDA, the state agency that levies a 1.25% tax on gross gaming revenues and oversees the expenditure of such funds to rebuild Atlantic City through an organized master plan (see “Regulation and Gaming Taxes and Fees—License Fees, Taxes and Investment Obligations”). Some of the most significant improvements to Atlantic City as a result of this initiative include:
| | • | | the construction of the $268.0 million Atlantic City Convention Center; |
| | • | | the $84.0 million renovation of the entrance to the Atlantic City Expressway; |
| | • | | the $330.0 million Atlantic City Tunnel project connecting the Atlantic City Expressway to the Marina District; |
| | • | | $225.0 million in CRDA housing; |
| | • | | the construction of a $14.5 million minor league baseball stadium; |
| | • | | the $90.0 million refurbishment of the Boardwalk Convention Center Hall into a special events venue; and |
8
| | • | | the $76.0 million, 300,000 square foot retail and entertainment complex, “The Walk”, located adjacent to the Atlantic City Convention Center. |
Several gaming operators have announced new development or expansion projects which management believes will continue to attract new, higher-margin customers and alleviate hotel room and suite inventory constraints. The most significant addition to the Atlantic City market was the completion by Boyd Gaming Corporation and MGM Mirage, Inc. of a resort complex located in the Marina District, the Borgata Hotel Casino and Spa (the “Borgata”), which opened in July 2003. The Borgata has helped attract a younger gaming customer and is expected to increase the size and profitability of the overall market in the long term. Additionally, several other Atlantic City properties have recently completed, are currently undergoing renovations, or have recently announced projects including:
| | • | | The Atlantic City Tropicana’s $285.0 million expansion included construction of an additional 502 hotel rooms and a 200,000 square foot retail, dining and entertainment complex, named “The Quarter”, which opened for business in the fourth quarter of 2004. In October 2005, Aztar Corp. announced a two phase expansion plan for the Tropicana. Phase one includes refurbishing rooms, and 750 new slot machines to be completed in June 2006. The second phase features more room improvements and upgrading table games. The second phase is slated for completion in the spring of 2007 |
| | • | | The Showboat Atlantic City and the House of Blues completed a $65 million project that included its complete renovation of the Boardwalk façade. The project also included a 2,200 seat concert venue, House of Blues-themed casino and poker areas, a House of Blues restaurant, a House of Blues night club, a House of Blues beach bar, a House of Blues retail store, and private House of Blues Foundation Room club, and two floors of House of Blues-themed suites. The House of Blues opened in June 2005. |
| | • | | Caesars Entertainment completed the construction of a $75 million, 3,200-space parking garage to serve The Walk, Caesars Bally’s casino, Caesars casino, the Pier at Caesars, and the Atlantic City Medical Center. This garage opened in June 2005. There are preliminary plans to construct a 1,000 room hotel tower on top of the garage, however, no timetable is set for the hotel tower. |
| | • | | Caesars Entertainment is also proceeding with the construction of a $175 million upscale retail, dining and attractions complex will be known as The Forum Shops at Caesars. The Forum Shops at Caesars are scheduled to open in the spring of 2006. |
| | • | | The first phase of Borgata’s $525 million expansion is scheduled to open in the spring of 2006. The $200 million first phase includes additional casino space with 500 slot machines, 36 table games and an 85 table poker room. The $325 million second phase will include a hotel tower which will be called The Water Club at Borgata. The Water Club is scheduled to open during the fourth quarter of 2007 and will include 800 guest rooms and suites, a two story 36,000 square foot spa in the sky, 18,000 square feet of meeting space and six retail shops. The Water Club will have two indoor pools and two outdoor heated pools open year round. |
| | • | | Harrah’s Entertainment has begun their expansion project at Harrah’s Atlantic City. The $550 million upgrade is expected to include a 964 room hotel tower. The new tower will also feature 183 suites and 13 exclusive high roller suites. The expansion will increase Harrah’s room inventory to close to 2,600. The expansion will also include a 172,000 square foot retail and entertainment complex. The entertainment and retail center is expected to open by the end of 2006, while the new hotel tower is scheduled to open in the second quarter of 2008. |
| | • | | $110 million upgrade has been announced by Trump Entertainment Resorts for its three Atlantic City properties. The plans include the construction of an 800 room hotel tower at Taj Mahal. The project is scheduled to be completed in 2008. |
9
Competition
Competition in the Atlantic City market remains intense. At the present time, there are 12 casino hotels located in Atlantic City, including Resorts, all of which compete for gaming patrons. Competition in the Atlantic City market centers on hotel and casino facilities and related amenities; ease of access and parking facilities; services and promotions provided to patrons; and entertainment. Substantial new expansion and development activity in Atlantic City, as discussed above, continues to intensify the competitive pressure in the Atlantic City market.
Resorts also competes, or will compete, with facilities in the northeastern and mid-Atlantic regions of the United States at which casino gaming or other forms of wagering are currently, or in the future may be authorized. Minimally, Resorts faces competition from gaming facilities nationwide. Moreover, Resorts also faces competition from various forms of internet gambling.
Resorts will face competition from gaming in Pennsylvania which approved legislation permitting 61,000 slots at 14 locations, seven being horse tracks. As of the end of 2005, several gaming companies have submitted applications to run slot parlors or racetracks with slots in Pennsylvania. The awarding of licenses is scheduled to take place sometime in summer or early fall, 2006.
| | • | | Harrah’s Entertainment is developing a horse track and slot facility in Chester, near Philadelphia, which is tentatively scheduled to open in 2007. |
| | • | | Trump Entertainment is proposing a $350 million facility to be located in the Nicetown section of Philadelphia. |
| | • | | Planet Hollywood is also interested in Philadelphia as a location. |
| | • | | Boyd Gaming has plans for a $325 million slot parlor in Limerick, Pa., which is outside of Philadelphia. |
| | • | | Aztar Corp. is considering a $325 million slot parlor in Allentown |
Resorts also faces competition from casino facilities in a number of states operated by federally recognized Native American tribes. Pursuant to the Indian Gaming Regulatory Act of 1988, (“IGRA”), any state that permits casino-style gaming (even if only for limited charity purposes) is required to negotiate gaming compacts with federally recognized Native American tribes. Under the IGRA, Native American tribes enjoy comparative freedom from regulation and taxation of gaming operations, which provides them with an advantage over their competitors, including Resorts.
Two Native American-owned gaming properties in Connecticut that compete directly with Atlantic City for gaming patrons are the Foxwoods Resort and Casino and the Mohegan Sun Resort. In addition, the Seneca Niagara Casino opened on December 31, 2002 in Niagara Falls, New York. Plans for another Seneca casino in Buffalo, New York are being discussed. Other Native American nations are seeking, or have received federal recognition and land and are negotiating gaming compacts in New York, Rhode Island, Connecticut and other states on the Eastern seaboard, which could further increase competition for gaming customers.
In addition to Native American casinos, a major competitive threat to the Atlantic City gaming market has been expansion of gaming in the states surrounding New Jersey, including the “racinos” (slot machine facilities located at existing racetracks) in Delaware and New York, and the development of gaming facilities in Pennsylvania and potentially Maryland. In 2004, the Pennsylvania legislature passed a bill legalizing slots at a number of facilities around the state, including at least four in the Philadelphia region, which are scheduled to begin operations in 2007. In addition, there are recent indications that the New Jersey legislature is pursuing the approval of the installation of video lottery terminals (“VLT’s”) at the Meadowlands race track in northern New Jersey.
Competition in Atlantic City also extends to the employment market. The demand for qualified and experienced gaming personnel was especially evident in 2004, as the opening of the Borgata in mid-2003 created thousands more jobs in the industry. The surplus of positions, many of which are required to be licensed by the New Jersey Casino Control Commission (the “NJCCC”), results in increased labor costs as companies compete for the most qualified personnel.
10
Gaming Credit Policy
Resorts extends credit to selected gaming customers, primarily in order to compete with other casino hotels in Atlantic City that also extend credit to customers. Credit play represented approximately 22% of table game volume at Resorts in 2005, 21% in 2004 and 22% in 2003.RIH’s gaming receivables, net of allowance for uncollectible amounts, were $5.1 million as of December 31, 2005, $3.9 million as of December 31, 2004 and $3.7 million as of December 31, 2003. The collectibility of gaming receivables has an effect on results of operations and management believes that overall collections have been satisfactory. Atlantic City gaming debts are enforceable under the laws of New Jersey and certain other states, although it is not clear whether other states will honor this policy or enforce judgments rendered by the courts of New Jersey with respect to such debts.
Security Controls
Gaming at Resorts is conducted by trained personnel and supervised by RIH. Prior to employment, all casino personnel must be licensed under the New Jersey Casino Control Act (“NJCCA”). Security checks are made to determine, among other matters, that job applicants for key positions have had no criminal ties or associations. RIH employs extensive security and internal controls at its casino. Security at Resorts utilizes closed circuit video cameras to monitor the casino floor and money counting areas. The count is observed daily by representatives of NJCCC.
Seasonal Factors
RIH’s business activities are affected by seasonal factors that influence New Jersey tourism. Higher revenues and earnings are typically realized during the middle third of the year.
Employees
As of December 31, 2005, Resorts had approximately 2,800 employees, including approximately 700 casino employees, 700 food and beverage employees, 170 security employees, 350 administrative support employees, 400 hotel employees, 350 marketing and entertainment employees, 100 facilities employees, 50 parking employees and a senior management team of approximately 12 members. All employees have completed the Company’s customer service program which reinforces high level of service and professionalism within their respective areas.
Management believes that its employee relations are satisfactory. Approximately 1,200 of the employees are represented by unions. Of these employees, approximately 900 are represented by the Hotel Employees and Restaurant Employees International Union Local 54, whose contract was renewed in November 2004, after a month-long strike, for a term of five years. There are several union contracts covering other union employees, and three contracts are in current negotiation, representing 128 members in operating engineers, painters and carpenters.
All casino employees and certain hotel employees must be licensed under the NJCCA. Casino employees are those employees whose work requires access to the casino, the casino simulcasting facility or restricted casino areas.
Regulation and Gaming Taxes and Fees
General. Resorts’ operations in Atlantic City are subject to regulation under the NJCCA, which authorizes the establishment of casinos in Atlantic City, provides for licensing, regulation and taxation of casinos and created the NJCCC, and the Division of Gaming Enforcement to administer the NJCCA. In general, the provisions of the NJCCA concern:
| | • | | the ability, character and financial stability and integrity of casino operators, their officers, directors and employees and others financially interested in a casino; |
| | • | | the nature and suitability of hotel and casino facilities, operating methods and conditions; and |
11
| | • | | financial and accounting practices. |
Gaming operations are subject to a number of restrictions relating to the rules of games, type of games, credit play, size of hotel and casino operations, hours of operation, persons who may be employed, companies which may do business with casinos, the maintenance of accounting and cash control procedures, security and other aspects of the business.
There were significant regulatory changes in recent years. In addition to the approval of new games, the NJCCA was amended to allow casinos to expand their casino floors before building the requisite number of hotel rooms, subject to approval of the NJCCC. This amendment was designed to encourage hotel room construction by giving casino licensees an incentive and an added ability to generate cash flow to finance hotel construction. Prior law only allowed for casino expansion if a casino built new hotel rooms first. In addition, the maximum casino square footage was increased from 50,000 square feet to 60,000 square feet for the first 500 qualifying rooms and the current law allows for an additional 10,000 square feet for each additional 100 qualifying rooms over 500, up to a maximum of 200,000 square feet. Future costs of regulation have been reduced as new legislation no longer requires hotel employees to be registered, extends the term for casino and casino key employee license renewals from two years to four years and allows greater efficiency by either reducing or eliminating the time required by the NJCCC to approve internal controls, patron complimentary programs and the movement of gaming equipment.
Casino License. A casino license is initially issued for a term of one year. The license period for a casino license renewed after April 30, 2004, shall be up to five years, but the NJCCC may reopen licensing hearings at any time. The NJCCC shall act upon any such application prior to the date of expiration of the current license. A license is not transferable and may be conditioned, revoked or suspended at any time upon proper action by the NJCCC. Upon renewal of any license the commission shall issue an appropriate renewal certificate or validating device or sticker which shall be attached to each casino license.
In January 2004, the casino license of RIH was renewed for the four-year period ending January 31, 2008, in accordance with renewals issued prior to May 2004.
Restrictions on Ownership of Equity and Debt Securities. The NJCCA imposes certain restrictions upon the ownership of securities issued by a corporation that holds a casino license or is a holding, intermediary or subsidiary company of a corporate licensee, or collectively, a Holding Company. For example, the sale, assignment, transfer, pledge or other disposition of any security issued by a corporation, which holds a casino license, is conditional, and shall be ineffective if disapproved by the NJCCC. If the NJCCC finds that an individual owner or holder of any securities of a corporate licensee or its Holding Company must be qualified, and such owner or holder is not qualified under the NJCCA, the NJCCC has the right to propose any necessary remedial action. In the case of corporate holding companies and affiliates whose securities are publicly traded, the NJCCC may require divestiture of the security held by any disqualified holder who is required to be qualified under the NJCCA.
In the event that entities or persons required to be qualified refuse or fail to qualify and fail to divest themselves of such security interest, the NJCCC has the right to take any necessary action, including the revocation or suspension of the casino license. If any security holder of the licensee or its holding company or affiliate who is required to be qualified is found disqualified, it will be unlawful for the security holder to:
| | • | | receive any dividends or interest upon any such securities; |
| | • | | exercise, directly or through any trustee or nominee, any right conferred by such securities; or |
| | • | | receive any remuneration in any form from the corporate licensee for services rendered or otherwise. |
CRH’s amended and restated certificate of incorporation and RIHC’s certificate of incorporation provide that all securities of CRH and securities of RIHC are held subject to the condition that if the holder thereof is found to be disqualified by the NJCCC pursuant to the provisions of the NJCCA, then CRH or RIHC, as the case may be, has the absolute right to repurchase at the lesser of the market price or the purchase price, any security, share or other interest in the corporation.
The indenture governing the First Mortgage Notes (the “Indenture”) provides that if any holder of First Mortgage Notes is found to be disqualified by the NJCCC, then RIHC has the right to redeem such holder’s First Mortgage Notes at a redemption price equal to the lesser of the principal amount plus accrued interest, the purchase price plus accrued interest or the fair market value of the First Mortgage Notes.
12
Remedies. In the event that it is determined that a licensee has violated the NJCCA, or if a security holder of the licensee required to be qualified is found disqualified but does not dispose of his securities in the licensee or holding company, under certain circumstances the licensee could be subject to fines or have its license suspended or revoked.
The NJCCA provides for the mandatory appointment of a conservator to operate the casino and hotel facility if a license is revoked or not renewed, and permits the appointment of a conservator if a license is suspended for a period in excess of 120 days. If a conservator is appointed, the suspended or former licensee is entitled to a “fair rate of return out of net earnings, if any, during the period of the conservatorship, taking into consideration that which amounts to a fair rate of return in the casino or hotel industry.” Under certain circumstances, upon the revocation of a license or failure to renew, the conservator, after approval by the NJCCC and consultation with the former licensee, may sell, assign, convey or otherwise dispose of all of the property of the casino hotel. In such cases, the former licensee is entitled to a summary review of such proposed sale by the NJCCC and creditors of the former licensee and other parties in interest are entitled to prior written notice of the sale.
License Fees, Taxes and Investment Obligations. The NJCCA provides for casino license renewal fees, other fees based upon the cost of maintaining control and regulatory activities, and various license fees for the various classes of employees. In addition, a casino licensee is subject annually to a tax of 8% of gross revenue, as defined under the NJCCA, and license fees of $500 for every slot machine for use or in use in a casino as of the first of July each year. Also, the NJCCA was amended in 1995 to create an Atlantic City fund, (the “AC Fund”), for economic development projects other than the construction and renovation of casino hotels. Beginning with fiscal year 1999/2000 and for the following three fiscal years, an amount equal to the average amount paid into the AC Fund for the previous four fiscal years was contributed to the AC Fund. Each licensee’s share of the amount contributed to the AC Fund was based upon its percentage of the total industry gross revenue for the relevant fiscal year. After eight years, the casino licensee’s requirement to contribute to this fund ceases. Resorts requirement to contribute to the Atlantic City Fund ceased in 2003.
On June 30, 2003 the NJCCA was amended, effective July 1, 2003, to impose or increase certain taxes and fees on the Atlantic City casino industry. These taxes and fees, which were imposed in an effort to reduce the state’s budget deficit, included: (1) a 7.5% tax on casino net profits subject to a minimum tax of $350,000 per licensee per year through June 30, 2006; (2) a 4.25% tax on rooms, food, drinks and entertainment admissions provided to customers at no cost or reduced cost; (3) a $3.00 occupied room fee; (4) an increase in the parking fee from $1.50 per car per day to $3.00 per car per day; and (5) a revision in the calculation of the 8% tax on gross gaming revenues, to eliminate the deduction for uncollectible debts.
The following table summarizes, for the periods shown, the cost to RIH of the various fees, taxes and contributions assessed by the NJCCC:
| | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| | | ($ in thousands) |
Gaming tax | | $ | 21,809 | | $ | 20,251 | | $ | 18,608 |
Investigation, inspection, and other fees | | | 3,211 | | | 2,907 | | | 3,476 |
Slot license fees | | | 1,488 | | | 1,425 | | | 1,275 |
Casino net profits tax | | | 350 | | | 350 | | | 175 |
New Jersey race track subsidy | | | 373 | | | 173 | | | — |
Other taxes and fees | | | 1,027 | | | 1,018 | | | 850 |
| | | | | | | | | |
Total | | $ | 28,258 | | $ | 26,124 | | $ | 24,384 |
| | | | | | | | | |
The amended NJCCA requires a licensee to satisfy its investment obligation by purchasing bonds to be issued by the CRDA or by making other investments authorized by the CRDA, in an amount equal to 1.25% of a licensee’s gross revenue. If the investment obligation is not satisfied, then the licensee will be subject to an investment alternative tax of 2.5% of gross revenue. Licensees are required to make quarterly deposits with the CRDA against their current year investment obligations. RIH’s investment obligations amounted to $3.3 million for 2005, $3.2 million for 2004, $3.0 million for 2003 and have been satisfied by deposits made with the CRDA.At December 31, 2005, RIH held $6.9 million face amount of bonds issued by the
13
CRDA and had $8.6 million on deposit with the CRDA, the majority of which has been pledged for specific projects. The CRDA bonds issued through 2005 have interest rates ranging from 3.5% to 7.0% and have repayment terms between 20 and 50 years.
CRDA Funds. The CRDA is a public body of the State of New Jersey established pursuant to P.L. 1984, c218, as amended and supplemented (the “CRDA Act”). Resorts has entered into a Credit Agreement with the CRDA pursuant to the CRDA Act for funding pursuant to NJAC 19:65-1.1 et seq. Pursuant to Resolution 97-90, adopted on April 15, 1997, the hotel expansion was determined to be an approved project in accordance with the CRDA Act. As such, through 2008, Resorts will receive funds from the CRDA’s AC Fund and South Jersey Fund of approximately $12.3 million in reimbursement payments for approved invoices resulting from the construction of the New Tower.
Additionally, in exchange for pledging a portion of the proceeds from Resorts’ South Jersey Fund to enhance the credit on recently issued CRDA Bonds, the CRDA has agreed to make an additional amount of up to $1.5 million available to Resorts to fund public improvements, as approved by the CRDA. RIHC intends to dedicate these funds, as approved by the CRDA, to public improvement in and around the hotel expansion project.
Item 1A. Risk Factors
The Company is subject to extensive governmental regulation and taxation policies, the enforcement of which could have an adverse impact our business, financial condition and results of operations.
The Company is subject to extensive gaming regulations and political and regulatory uncertainty. Regulatory authorities in New Jersey have broad powers with respect to the licensing of casino operations and may revoke, suspend, condition or limit our gaming or other licenses, impose substantial fines and take other actions, any one of which could adversely impact our business, financial condition and results of operations. From time to time, individual jurisdictions have also considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities, which could adversely impact our operations. The likelihood or outcome of similar legislation and referendums in the future cannot be predicted.
From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of such laws, including increases in tax rates, which would affect the industry. If adopted, such changes could adversely impact our business, financial condition and results of operations.
Servicing our indebtedness will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. CRH is a holding company and RIHC conducts substantially all of its operations through its subsidiaries. As a result, our ability to meet our debt service obligations substantially depends upon our subsidiaries’ cash flows and payments of funds to us by our subsidiaries. This ability, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Concentration of our cash flow in one property exposes us to certain risks that certain competitors may be in a better situation to control, due to their geographic and market diversity.
Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our Line of Credit will be adequate to meet our liquidity needs for the foreseeable future. There can be no assurances, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our Line of Credit in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
The terms of the Company’s CIT Facility and Commerce Facility require the Company to maintain certain financial covenants calculated on a quarterly basis as defined in the respective loan agreements. The CIT Facility was amended on March 30, 2005 and September 28, 2005 and the Commerce Facility was amended on June 28, 2005. Absent these amendments, we would have been in violation of certain of these financial covenants contained in each of these facilities. During March 2006, the CIT Facility and Commerce Facility were further amended. Without the amendments, we would have not been in compliance with the financial covenants in each of the respective facilities at December 31, 2005. In connection with the amendments, the financial covenants were modified on a prospective basis.
14
The indenture on our First Mortgage Notes contains cross-default provisions whereby the acceleration of any indebtedness in an aggregate of $5.0 million or more prior to its scheduled maturity constitutes an event of default under the First Mortgage Notes Indenture.
There can be no assurances that we will be successful in meeting our financial covenants on a prospective basis or obtaining waivers and amendments in the future if we were not in compliance with the terms of our CIT Facility and Commerce Facility.
Acts of terrorism and war and natural disasters may have a negative impact our future profits.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. We cannot predict the extent to which terrorism, security alerts or war, or hostilities in Iraq will continue to directly or indirectly impact our business and operating results. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, the Company is predominately uninsured for losses and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we would likely be adversely impacted.
In addition, natural disasters could also have an adverse impact our business and operating results In most cases, we have insurance that covers portions of any losses from a natural disaster, but it is subject to deductibles and maximum payouts in many cases. Although we may be covered by insurance from a natural disaster, the timing of our receipt of insurance proceeds, if any, is out of our control as well as the ability to obtain insurance coverage in the future, which may adversely affect our financial position.
Work stoppages and other labor problems could have a negative impact our future profits.
Some of our employees are represented by labor unions. A lengthy strike or other work stoppage at our casino could have an adverse effect on our business and results of operations. From time to time, we have also experienced attempts to unionize certain of our non-union employees. While these efforts have achieved only limited success to date, we cannot provide any assurance that we will not experience additional and more successful union activity in the future.
If The Company is unable to effectively compete against our competitors, our profits will decline.
The gaming industry is highly competitive and our competitors vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. We also compete with other non-gaming resorts and vacation areas, and with various other entertainment businesses.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties.
Casino, Hotel and Related Properties. RIHC’s core real estate assets consist of developed land and land available for development in Atlantic City which RIHC either owns or leases.
Land used in the operation of the casino hotel consists of approximately 11.0 acres and is owned in fee simple, except for approximately 1.2 acres of the Resorts site which are leased pursuant to four ground leases expiring from 2056 through 2067. The 11.0 acres include approximately 6.0 acres under the Resorts building complex, approximately 3.5 acres of parking lots available for future expansion and approximately 1.0 acre in front of the casino hotel which is utilized for patron valet and related services.
RIHC also owns an approximate 5.5 acre Atlantic Ocean pier site, 2.0 acres of which contained the former Steeplechase Pier. The pier has been removed and RIHC possesses current federal and state permits to construct a new pier on a portion of the 5.5 acre site, although no decision has been made at this time to develop this location. Current Atlantic City zoning ordinances permit casinos, hotel rooms and ancillary amusements on five of the City’s pier sites, including this site.
15
In conjunction with the purchase of RIH from KINA in April 2001 by CRH and RIHC, CRH obtained an option to purchase approximately 10.0 acres of real property immediately adjacent to the Resorts site and approximately 2.0 acres of real property located in the Atlantic City metropolitan area, pursuant to the Option Agreement for a total purchase price of $40.0 million. Portions of the Option Land are zoned for casino hotel use and are available for future expansion. Some of the property was leased from KINA by RIH for use as a surface parking lot under a lease agreement with terms running contemporaneous with the terms of the Option Agreement. In March 2004, the Option Land was acquired by RREH in exchange for the issuance of a $40 million note by RREH to KINA. See “Item 1-Business: Option Land”.
Other Properties. RIHC also owns land in Egg Harbor Township, New Jersey which is utilized for a warehouse operation servicing Resorts.
Mortgaged Properties. All property currently held or leased by RIHC is mortgaged for the benefit of Deutsche Bank Trust Company (formerly known as Bankers Trust Company) as collateral for RIHC’s $180.0 million aggregate principal amount of 11 1/2% First Mortgage Notes due 2009.
Item 3. Legal Proceedings.
Various legal proceedings are now pending against the Company. Management considers all such proceedings to be ordinary litigation incident to the operation of its business. Management believes that the resolution of these claims will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
No established public trading market exists for either CRH’s or RIHC’s common equity. There are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in either of CRH’s or RIHC’s common equity.
As of March 30, 2006, CRH has two holders of record of each of its class A common stock, par value $.01 per share, and class B common stock, par value $.01 per share. RIHC is a wholly owned subsidiary of CRH.
Neither CRH nor RIHC has ever paid a dividend on its common stock, nor do they anticipate paying any dividends in the foreseeable future. Certain funds received upon issuance of the First Mortgage Notes were deposited into a construction disbursement account for use in connection with construction of the New Tower. Under the terms of the Disbursement Agreement, dated March 22, 2002, funds remaining in the liquidity disbursement account after the final Test Period (as defined in the Indenture, the four fiscal quarter periods ending December 31, 2004) , and upon certification by RIHC of certain conditions, would be returned to RIHC and could be distributed as a dividend to CRH. This certification was delivered by RIHC, and accordingly on January 20, 2005 the $9.7 million remaining in the liquidity disbursement account was delivered to RIHC. As of March 30, 2006, the remaining $4.0 million of funds have not been distributed as a dividend to CRH. The Indenture contains restrictions on the payment of dividends or other distributions by RIHC and its restricted subsidiaries. In addition, Section 1.05 of the NJCCA prohibits CRH from paying dividends to any person who is disqualified by the NJCCC.
Neither CRH nor RIHC repurchased any shares of its common equity in 2005.
16
Item 6. Selected Financial Data.
The following table sets forth the selected financial data of CRH and its Predecessor, RIH, as of and for each of the periods indicated. The selected financial data of RIH for the period from January 1, 2001 to April 24, 2001 (pre-acquisition period) are derived from RIH’s financial statements, which have been audited by Ernst & Young LLP. The selected financial data of CRH as of December 31, 2005, 2004, 2003, 2002, and 2001 and for the years ended December 31, 2005, 2004, 2003, and 2002 and for the period from April 25, 2001 to December 31, 2001 (post-acquisition period) are derived from CRH’s financial statements, which have also been audited by Ernst & Young LLP.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | Period from
April 25,
2001 to
December 31,
2001 | | | Period from
January 1,
2001 to
April 24,
2001 | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | |
| | | (Successor) | | | (Successor) | | | (Successor) | | | (Successor) | | | (Successor) | | | (Predecessor) | |
| | | ($ in thousands) | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Casino | | $ | 268,074 | | | $ | 247,842 | | | $ | 230,135 | | | $ | 259,208 | | | $ | 168,687 | | | $ | 72,417 | |
Lodging | | | 23,352 | | | | 18,341 | | | | 11,163 | | | | 13,031 | | | | 10,083 | | | | 3,996 | |
Food and beverage | | | 24,282 | | | | 23,387 | | | | 22,079 | | | | 24,649 | | | | 17,880 | | | | 6,977 | |
Other | | | 6,021 | | | | 8,439 | | | | 6,496 | | | | 6,488 | | | | 4,169 | | | | 1,523 | |
Less: promotional allowances | | | (75,372 | ) | | | (67,123 | ) | | | (54,426 | ) | | | (66,664 | ) | | | (42,564 | ) | | | (17,995 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total net revenues | | | 246,357 | | | | 230,886 | | | | 215,447 | | | | 236,712 | | | | 158,255 | | | | 66,918 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Casino | | | 127,636 | | | | 117,425 | | | | 117,156 | | | | 123,616 | | | | 84,620 | | | | 35,987 | |
Lodging | | | 4,813 | | | | 3,360 | | | | 1,318 | | | | 1,672 | | | | 1,970 | | | | 913 | |
Food and beverage | | | 9,327 | | | | 10,743 | | | | 11,721 | | | | 12,564 | | | | 9,228 | | | | 3,639 | |
Other operating | | | 30,613 | | | | 28,585 | | | | 25,686 | | | | 25,557 | | | | 16,683 | | | | 8,292 | |
Selling, general and administrative | | | 40,728 | | | | 39,085 | | | | 30,983 | | | | 36,769 | | | | 21,526 | | | | 10,492 | |
Depreciation and amortization | | | 20,657 | | | | 16,837 | | | | 9,993 | | | | 10,160 | | | | 5,412 | | | | 5,325 | |
Pre-opening | | | — | | | | 2,722 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses | | | 233,774 | | | | 218,757 | | | | 196,857 | | | | 210,338 | | | | 139,439 | | | | 64,648 | |
Operating income | | | 12,583 | | | | 12,129 | | | | 18,590 | | | | 26,374 | | | | 18,816 | | | | 2,270 | |
Interest expense, net | | | (25,049 | ) | | | (19,073 | ) | | | (17,838 | ) | | | (17,104 | ) | | | (5,625 | ) | | | (7,163 | ) |
Other income (expenses), net | | | 28 | | | | 1,255 | | | | (281 | ) | | | 182 | | | | (408 | ) | | | — | |
Loss on extinguishment of debt | | | — | | | | — | | | | — | | | | (3,378 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | | (12,438 | ) | | | (5,689 | ) | | | 471 | | | | 6,074 | | | | 12,783 | | | | (4,893 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Benefit) provision for income taxes | | | (2,167 | ) | | | (1,551 | ) | | | 1,727 | | | | 3,197 | | | | 5,046 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (10,271 | ) | | $ | (4,138 | ) | | $ | (1,256 | ) | | $ | 2,877 | | | $ | 7,737 | | | $ | (4,893 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | December 31, | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | |
| | | ($ in thousands) | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 25,830 | | | $ | 31,975 | | | $ | 28,417 | | | $ | 32,989 | | | $ | 15,363 | | | | | |
Total assets | | | 354,208 | | | | 363,157 | | | | 302,686 | | | | 309,354 | | | | 179,144 | | | | | |
Long-term debt, less current portion | | | 234,224 | | | | 233,951 | | | | 183,281 | | | | 183,008 | | | | 88,502 | | | | | |
Shareholders’ equity | | | 68,747 | | | | 79,018 | | | | 83,156 | | | | 84,435 | | | | 48,429 | | | | | |
17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis of the Company’s financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.
The preparation of these financial statements requires management to make estimates and judgments that offset the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following discussion and analysis as well as the associated tables are based on the financial statements of RIHC. The financial statements of CRH and RIHC are materially similar with certain differences related to the following:
| | • | | the financial statements of CRH include the financial statements of RREH, which acquired the Option Land on March 18, 2004 and issued a $40 million note to KINA in payment thereof; |
| | • | | the financial statements of CRH classify certain equity instruments separately from shareholders’ equity as redeemable common stock in the balance sheet to reflect the rights granted to a shareholder to require CRH to repurchase his shares under certain circumstances; and |
| | • | | the financial statements of RIHC include intercompany rent for the Option Land properties that RIHC pays to RREH. The intercompany rent is eliminated in the consolidation of RIHC and RREH into CRH’s financial statements. |
A reconciliation of selected financial information between RIHC and CRH is as follows:
Assets
| | | | | | | |
| | | December 31, | |
| | | 2005 | | 2004 | |
| | | ($ in thousands) | |
Total assets of RIHC | | $ | 312,506 | | $ | 321,696 | |
Basis of Option Land acquired | | | 41,458 | | | 41,616 | |
Other | | | 244 | | | (155 | ) |
| | | | | | | |
Total assets of CRH | | $ | 354,208 | | $ | 363,157 | |
| | | | | | | |
Liabilities
| | | | | | |
| | | December 31, |
| | | 2005 | | 2004 |
| | | ($ in thousands) |
Total liabilities of RIHC | | $ | 240,667 | | $ | 239,503 |
Note payable, plus accrued interest | | | 40,468 | | | 40,400 |
Income taxes payable | | | 451 | | | 361 |
Redeemable common stock | | | 3,875 | | | 3,875 |
| | | | | | |
Total liabilities of CRH | | $ | 285,461 | | $ | 284,139 |
| | | | | | |
18
Equity
| | | | | | | | |
| | | December 31, | |
| | | 2005 | | | 2004 | |
| | | ($ in thousands) | |
Total shareholder’s equity of RIHC | | $ | 71,839 | | | $ | 82,193 | |
Redeemable common stock | | | (3,875 | ) | | | (3,875 | ) |
Intercompany rent | | | 3,312 | | | | 1,461 | |
Interest expense | | | (2,168 | ) | | | (400 | ) |
Income tax expense | | | (361 | ) | | | (361 | ) |
| | | | | | | | |
Total shareholders’ equity of CRH | | $ | 68,747 | | | $ | 79,018 | |
| | | | | | | | |
Net loss
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | ($ in thousands) | |
Net loss of RIHC | | $ | (10,354 | ) | | $ | (4,838 | ) | | $ | (1,256 | ) |
Intercompany rent | | | 1,851 | | | | 1,461 | | | | — | |
Interest expense | | | (1,768 | ) | | | (400 | ) | | | — | |
Income tax expense | | | — | | | | (361 | ) | | | — | |
| | | | | | | | | | | | |
Net loss of CRH | | $ | (10,271 | ) | | $ | (4,138 | ) | | $ | (1,256 | ) |
| | | | | | | | | | | | |
Executive Overview
CRH was formed at the direction of Colony Investors IV, L.P. (“Colony IV”), an affiliate of Colony Capital, LLC (“Colony Capital”) of Los Angeles, California, on March 7, 2001. CRH is owned by Colony IV, Colony RIH Voteco, LLC (“Voteco”), another affiliate of Colony Capital, and Nicholas L. Ribis, a Director and executive officer of both CRH and RIHC. RIHC is a wholly-owned subsidiary of CRH and was formed at the direction of Colony IV on October 24, 2000. RIH is RIHC’s wholly-owned subsidiary. RIH owns and operates Resorts Atlantic City, a casino hotel in Atlantic City, New Jersey.
On September 4, 2002, RIHC decommissioned the 166-room Atlantic City Tower to begin construction in November 2002 of a 27-story hotel tower on the same site. The expansion was substantially completed on June 16, 2004. The expansion added 399 hotel rooms and suites in the Rendezvous Tower, the Grand Lobby (which replaced the former hotel lobby), 25,000 square feet of additional gaming space (collectively, the “New Tower”) and increased the number of slot machines and table games by 840 machines and 11 tables, as compared to December 31, 2003 levels. RIHC opened the expanded gaming space on May 28, 2004, and began opening hotel rooms in the New Tower to the public on June 16, 2004. The grand opening ceremony for the New Tower was held over the July 4, 2004 weekend.
Although significant improvement was reflected in the Company’s operating results beginning in the third quarter of 2000 and continuing through the end of 2002, operating results for 2003 were unfavorably impacted by many factors, most notably the disruption resulting from construction of the New Tower and the resulting loss of hotel rooms and gaming capacity during the construction. However, with the opening of the New Tower, operating results for 2004 were positively impacted. Operating income increased $1.4 million, from $12.1 million in 2004 to $13.5 million in 2005. Management is focused on continuing efforts to position the Company to capitalize on that impact going forward.
19
Key Performance Indicators
The Companies generate the majority of their net revenues from gaming operations, therefore many of the key performance indicators that management uses to manage its business are related to the casino. The key indicators related to gaming revenue are as follows:
| | • | | Table games drop (the dollar amount of chips purchased) and slot handle (the dollar amounts wagered in slot machines), which are indicators of volume; |
| | • | | The hold percentage (the percentage of win to drop or handle); Resorts typical table games hold percentage is approximately 15% of table games drop, and its typical slot hold percentage averages 8% of slot handle. |
Key performance indicators related to non-gaming revenues include hotel occupancy, an indicator of volume in the hotel, and restaurant covers (number of meals served), also a volume indicator.
RIHC also considers “EBITDA” to be a key indicator of its performance. EBITDA represents RIHC’s earnings before interest expense, taxes, depreciation and amortization costs, pre-opening costs incurred in connection with the New Tower, and other non-cash items. Management believes that EBITDA is a commonly used measure of performance in the gaming industry, and uses it as the primary measurement in evaluating management’s operating performance. EBITDA should not be considered as an alternative to operating income (as determined in accordance with generally accepted accounting principles, or “GAAP”) as an indicator of operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity, or to other consolidated income or cash flow statement data, as are determined in accordance with GAAP. Not all companies calculate EBITDA in the same manner. The following table reflects a reconciliation of RIHC’s EBITDA, as defined in the Indenture, to net income as determined in accordance with GAAP for the periods noted:
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | ($ in thousands) | |
Net loss | | $ | (10,354 | ) | | $ | (4,838 | ) | | $ | (1,256 | ) |
Add: Interest expense | | | 23,944 | | | | 19,195 | | | | 19,133 | |
Provision (benefit) for income taxes | | | (2,167 | ) | | | (1,912 | ) | | | 1,727 | |
Depreciation and amortization | | | 20,657 | | | | 16,837 | | | | 9,993 | |
Pre-opening expense | | | — | | | | 2,722 | | | | — | |
(Gain) loss on disposal of assets | | | (28 | ) | | | (1,255 | ) | | | 61 | |
Non-cash value of stock compensation | | | — | | | | — | | | | (23 | ) |
| | | | | | | | | | | | |
EBITDA | | $ | 32,052 | | | $ | 30,749 | | | $ | 29,635 | |
| | | | | | | | | | | | |
20
Operating Results
Various events have had a significant impact on Resorts’ operations over the last three years. The most notable of these are as follows:
| | • | | The decommissioning of the 166-room Atlantic City Tower in September 2002 for the construction of the new 27-story hotel tower. The loss of hotel rooms and associated decrease in gaming space had a significant negative impact on operations during 2003; |
| | • | | Certain regional and national events, including severe weather conditions, the war in Iraq, and the general economic conditions impacted results during 2003, and a 33-day labor strike during the fourth quarter of 2004; and |
| | • | | Resorts construction and opening of the New Tower was successfully completed in the second quarter of 2004. |
| | • | | Continued construction on the retail corridor which connects the new lobby with the Ocean Tower and which opened in January 2006. |
Revenues
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | %
change | | | 2004 | | | %
change | | | 2003 | |
| | | ($ in thousands) | |
Casino revenues: | | | | | | | | | | | | | | | | | | |
Slots | | $ | 197,767 | | | 8.3 | % | | $ | 182,552 | | | 7.2 | % | | $ | 170,307 | |
Table games | | | 69,052 | | | 8.1 | % | | | 63,868 | | | 9.5 | % | | | 58,307 | |
Other | | | 1,255 | | | (11.7 | %) | | | 1,422 | | | (6.5 | %) | | | 1,521 | |
| | | | | | | | | | | | | | | | | | |
Total casino revenues | | | 268,074 | | | 8.2 | % | | | 247,842 | | | 7.7 | % | | | 230,135 | |
Non-casino revenue: | | | | | | | | | | | | | | | | | | |
Lodging | | | 23,352 | | | 27.3 | % | | | 18,341 | | | 64.3 | % | | | 11,163 | |
Food and beverage | | | 24,282 | | | 3.8 | % | | | 23,387 | | | 5.9 | % | | | 22,079 | |
Entertainment, retail and other | | | 6,021 | | | (28.7 | %) | | | 8,439 | | | 29.9 | % | | | 6,496 | |
| | | | | | | | | | | | | | | | | | |
Total non-casino revenues | | | 53,655 | | | 7.0 | % | | | 50,167 | | | 26.2 | % | | | 39,738 | |
Less: promotional allowances | | | (75,372 | ) | | 12.3 | % | | | (67,123 | ) | | 23.3 | % | | | (54,426 | ) |
| | | | | | | | | | | | | | | | | | |
Total net revenues | | $ | 246,357 | | | 6.7 | % | | $ | 230,886 | | | 7.2 | % | | $ | 215,447 | |
| | | | | | | | | | | | | | | | | | |
Net Revenues in 2005, increased 6.7%, or $15.5 million, compared to 2004, primarily as a result of an increase in gaming and hotel volumes offset by a decrease in entertainment revenues and an increase in promotional expenses related to the increase in gaming and hotel volumes. These increases were a direct result of the full year of operations with the New Tower and related gaming space, which opened June 2, 2004.
Net Revenues in 2004, increased 7.2%, or $15.4 million, compared to 2003, primarily as a result of an increase in gaming, entertainment, and hotel volumes offset by an increase in promotional expenses related to the increase in gaming, entertainment and hotel volumes. These increases were a direct result of the opening of the New Tower and related gaming space in June, 2004, and the addition of 399 hotel rooms.
21
The increase in slot revenue for 2005 compared to 2004 was a result of an increase in the slot handle of $106 million to $ 2.4 billion and an increase in the slot hold percentage to 8.2% from 7.8% in 2004. The increase in volume was related to a full year of operations of the New Tower in 2005, compared to a half year of operations in 2004. The increase in the slot hold percentage was a direct result of the increase in play of low denomination new slot games which have become popular with casino customers. Our low denomination slot games generally have a higher hold percentage than other slot games.
The increase in slot revenue for 2004 compared to 2003 was a result of the increase in the slot handle of $122 million to $2.3 billion. The increase in volume was related to the opening of the New Tower and related gaming space in June 2004, and the direct result of the new games and improved slot technology, including “coinless” slots.
The increase in table games revenue for 2005 compared to 2004, was a result of the increase in the table drop of $ 56.5 million to $ 470 million, offset by a decrease in the table hold percentage to 14.5% from 15.4% in 2004. The increase in volume was related to a full year operations of the New Tower in 2005, compared to a half year of operations in 2004, the introduction of an Asian Bus program during the year, and the continued increase in the number of table games throughout the year due to the resurgence of table game play.
The increase in table games revenue for 2004 compared to 2003 was a result of an increase in the table drop of $30 million to $414 million, and a slight increase in the table hold percentage to 15.4% from 15.2% in 2004. The increase in volume was related to opening of the New Tower in June 2004.
The decrease in Other Gaming Revenues, which are simulcast racing revenues, was a result of the relocation and down sizing of the simulcast area in 2002 and less emphasis placed on this gaming venue.
The increase in lodging revenues for 2005, compared to 2004, was a result of the increase in occupied rooms, to 261,000 rooms from 205,000 rooms in 2004, as a result of the full year of operations from the New Tower. Also contributing to the increase in lodging revenues was a slight increase in the average room rate to $89.55 from $89.35.
The increase in lodging revenues for 2004, compared to 2003, was a result of the increase in occupied rooms, to 205,000 rooms from 163,000 rooms in 2003, as a result of the opening of New Tower in June of 2004.
The increase in food and beverage revenues for 2005, compared to 2004, was a result of the increase in the average check to $15.87 from $14.77, offset by the reduction in the number of covers. The reduction in the number of covers resulted from the closing of the buffet in December of 2004, through May of 2005, and weekends only in June 2005, and returning to a full lunch/dinner schedule in July of 2005. Additionally, our Deli was closed in September 2005.
The increase in the food and beverage revenues for 2004, compared to 2003, was a result of the increased traffic in the property with the opening of the New Tower in June 2004.
The decrease in entertainment, retail and other revenue for 2005, compared to 2004, of 28.7%, or $2.4 million, was a result of the replacement of the nightly comedy club with a “four-wall” operation, a reduction in the number of headliner acts and outsourcing of our gift shop in late 2004.
The increase in retail and other revenue for 2004, compared to 2003, was a result of an increase in the number of headliner acts, miscellaneous income from ATM commissions and parking revenues, due to increased volumes to the property.
Promotional allowances are expenses incurred by Resorts for complimentary services, which includes hotel rooms, food, beverage, admissions, cash and free slot play provided to the customers at no cost. Promotional allowances increased 12.3% or $8.2 million, in 2005, compared to 2004, as a result of the increase in gaming and hotel volumes. In addition, the competitive pressures during the spring and early summer of 2005 required us to increase “bonus cash” offerings and increase our bus package and promotional programs to customers, which resulted in a 10.8% or $4.0 million increase over 2004 amounts.
22
The following table presents the detail of the RIHC’s operating results for the periods noted:
| | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2005 | | % change | | | 2004 | | % change | | | 2003 |
| | | ($ in thousands) |
Total net revenues | | $ | 246,357 | | 6.70 | % | | $ | 230,886 | | 7.20 | % | | $ | 215,447 |
Costs and expenses: | | | | | | | | | | | | | | | |
Casino and hotel operations | | | 172,389 | | 7.67 | % | | | 160,113 | | 2.70 | % | | | 155,881 |
Selling, general and administrative | | | 42,579 | | 5.01 | % | | | 40,546 | | 30.90 | % | | | 30,983 |
Pre-opening expenses | | | — | | (100. | %) | | | 2,722 | | 100.00 | % | | | — |
Depreciation and amortization | | | 20,657 | | 22.69 | % | | | 16,837 | | 68.50 | % | | | 9,993 |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 235,625 | | 7.00 | % | | | 220,218 | | 11.90 | % | | | 196,857 |
| | | | | | | | | | | | | | | |
Income from operations | | $ | 10,732 | | 0.60 | % | | $ | 10,668 | | (42.6 | %) | | $ | 18,590 |
| | | | | | | | | | | | | | | |
Net Revenues in 2005 increased 6.7%, or $15.5 million, compared to 2004, primarily as a result of an increase in gaming and hotel volumes offset by a decrease in entertainment revenues and an increase in promotional expenses related to the increase in gaming and hotel volumes. These increases were a direct result of the full year of operations with the New Tower, which opened in June 2004.
Casino and hotel expenses increased 7.7%, or $12.3 million in 2005 compared to 2004, primarily as a result of the increase in payroll and benefits and operating supplies in connection with a full year of operations in the New Tower.
The increase in casino and hotel expenses for 2004 compared to 2003 was a result of the New Tower opening in June of 2004, and the increase in gaming and hotel volumes in the second half of 2004.
Selling, general and administrative expenses increased 5.0%, or $2.0 million in 2005 compared to 2004, as a result of an increase in real state taxes and utilities, offset by the allocation of certain salaries and benefits of executives pursuant to a shared services agreement with an affiliate.
The increase in selling, general and administrative expenses in 2004 of 30.9%, or $9.6 million, compared to 2003 was primarily a result of an increase in real state taxes of $3.5 million and the increase in utilities expense as a result of the opening of the New Tower in June 2004.
Pre-opening expenses amounted to $2.7 million in 2004 related to the opening of the New Tower, consisting of advertising and marketing. There were no such expenses for 2005.
The increase in depreciation and amortization for 2005 compared to 2004 of $3.8 million was related to a full year of service of the New Tower in 2005 compared to approximately a half year in 2004. The increase in 2004 compared to 2003, related to a $2 million increase in depreciation in 2004 and a $3.0 million credit in 2003 related to the reversal of amortization expense of previously booked reserves on the Casino Reinvestment Development Authority (“CRDA”) investments which were used as reimbursements to fund construction costs.
23
Non Operating Results
The following table presents information related to RIHC’s non-operating income and expenses for the periods noted:
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | 2004 | | | 2003 | |
| | | ($ in thousands) | |
Interest income | | $ | 663 | | $ | 522 | | | $ | 1,295 | |
Interest expense: | | | | | | | | | | | |
Total interest cost | | $ | 23,944 | | $ | 23,255 | | | $ | 22,755 | |
Less: capitalized interest | | | — | | | (4,060 | ) | | | (3,622 | ) |
| | | | | | | | | | | |
Interest expense, net | | $ | 23,944 | | $ | 19,195 | | | $ | 19,133 | |
Other income (expense), net | | $ | 28 | | $ | 1,255 | | | $ | (281 | ) |
The increase in interest expense in 2005 compared to 2004 was primarily a result of no longer capitalizing interest cost related to the New Tower following its opening in June of 2004.
Other income and expense, net, in 2004 included the gain on the sale of a warehouse in Atlantic City, billboards and certain slot machines in connection with updating the slot floor.
Income Taxes
The following table presents information related to the RIHC’s income tax expense (benefit) for the years noted:
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | ($ in thousands) | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | (3,681 | ) | | $ | (369 | ) |
State | | | 1,335 | | | | 1,288 | | | | 1,079 | |
| | | | | | | | | | | | |
| | | 1,335 | | | | (2,393 | ) | | | 710 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (2,516 | ) | | | 2,337 | | | | 1,017 | |
State | | | (986 | ) | | | (1,856 | ) | | | — | |
| | | | | | | | | | | | |
| | | (3,502 | ) | | | 481 | | | | 1,017 | |
| | | | | | | | | | | | |
| | $ | (2,167 | ) | | $ | (1,912 | ) | | $ | 1,727 | |
| | | | | | | | | | | | |
On June 30, 2003, the State of New Jersey amended the NJCCA, effective July 1, 2003, to impose or increase certain taxes and fees, including a tax at the rate of 7.5% on the adjusted net income of casino licenses in calendar year 2002, payable in the state’s fiscal years 2004 though 2006. The amount of this tax for each licensee is limited to a maximum of $10.0 million annually and a minimum of $350,000 annually. For the years ended December 31, 2005, 2004 and 2003, RIHC recorded provisions of $350,000, $350,000 and $175,000 for this tax, respectively.
On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act which, among other things, requires the suspension of the use of the New Jersey net operating loss carryforwards for two years and the introduction of an alternative minimum assessment (“NJAMA”) under the New Jersey corporate business tax based on gross receipts or gross profits, as defined. This tax was retroactive to January 1, 2002.
24
At December 31, 2005, the Company has a net operating loss carryforward for Federal purposes of $18.3 million and will begin expiring in the year 2024 and forward. A valuation allowance has been provided against the Company’s net Federal deferred tax asset including the net operating loss carryforwards.
At December 31, 2005, the Company has a state net operating loss carryforward of approximately $112.1 million. The carryforward will expire as follows: 2006, $2.4 million; 2007, $40.2 million; 2008, $20.7 million and 2009, $48.8. The Company has reported a full valuation allowance against the carryforward because it does not expect to realize the tax benefit, primarily due to the limited expiration period. However, the Company has approximately $2.9 million of state tax credits resulting from the NJAMA which may be applied to offset future taxable income without expiration; these credits have been recorded, net of Federal taxes of approximately $1.0 million, within non-current other assets on the Company’s balance sheet at December 31, 2005.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has determined that the realization of certain of the Company’s deferred tax assets is not more likely than not and, as such, has provided a valuation allowance against those deferred tax assets at December 31, 2005 and 2004.
Liquidity and Capital Resources
RIHC’s cash flows consisted of the following:
Cash flows from Operating Activities
Cash flow from operations decreased $1.1 million to $10.3 million in 2005 from $14.6 million in 2004. At December 31, 2005, RIHC had cash and cash equivalents of $25.3 million, as compared to $31.5 million at December 31, 2004. Included in this balance at December 31, 2005 and 2004 was approximately $18.0 million and $20.0 million, respectively, representing cash on hand, which is needed to operate the business.
Cash Flows from Investing Activities
During the year ended December 31, 2005, the Company expended $12.0 million for the purchase of property and equipment.
During the year ended December 31, 2004, the Company expended $67.9 million for the purchase of property and equipment, which included $60.1 million for the construction of the new hotel tower (which included $4.1 million of capitalized interest related to the construction of the new hotel tower) and $7.8 million for other expenditures, including the purchase of new slot machines and related equipment, computer upgrades, and other facility improvements.
During the year ended December 31, 2003, the Company expended $53.5 million for the hotel expansion and other capital improvements and replacements, including purchases of slot machines and related equipment, computer upgrades and facility improvements. Of the total, $41.1 million was expended for the construction of the new hotel tower, which includes $3.6 million of capitalized interest.
At December 31, 2005, RIHC had a restricted cash balance of $0.1 million, which is included in other assets on RIHC’s Consolidated Balance Sheet. The restricted cash consists of the unexpended portion of the proceeds of an asset sale, as required by the Indenture. Under the terms of the Disbursement Agreement, dated March 22, 2002, funds remaining in the liquidity disbursement account after the final Test Period (as defined in the Indenture, the four fiscal quarter period ending December 31, 2004) , and upon certification by RIHC of certain conditions, would be returned to RIHC and could be distributed as a dividend to CRH. This certification was delivered by RIHC, and accordingly on January 20, 2005 the $9.7 million remaining in the liquidity disbursement account was delivered to RIHC.
The CRDA agreed to reimburse certain costs associated with the hotel tower construction, totaling approximately $12.3 million through 2008. Approximately $0.5 million of these reimbursements was received by RIHC in 2005, $0.8 million was received in 2004 and $9.2 million in 2003.
25
Cash Flows from Financing Activities
During the year ended December 31, 2005, the Company repaid $1.6 million in long-term debt. There were no net proceeds from borrowings during the year ended December 31, 2005. Borrowings during 2004 amounted to $10.2 million principally for equipment purchases for the Company’s new tower.
Other Factors Affecting Liquidity
In June 2002, RIH entered into a $20.0 million credit facility, the proceeds of which were intended to be used for the acquisition of furniture, fixtures, and equipment. RIHC has guaranteed the obligations of RIH under this equipment credit facility. As of December 31, 2004, RIHC had borrowed $14.7 million of the equipment credit facility to purchase furniture, fixtures, and equipment for the New Tower and $3.1 million to purchase additional slot machines to replace existing equipment. In March 2005, this credit facility was amended to provide for the suspension of principal payments for one year, commencing April 1, 2005; the outstanding principal balance as of March 31, 2005 will be paid in equal monthly installments commencing April 2006 and ending February 2009. The outstanding balance due under this credit facility at December 31, 2005 was $16.0 million.
In November 2002, RIHC also entered into a $10.0 million revolving credit facility (the “Commerce Facility”). There was no outstanding balance on the Commerce Facility at December 31, 2005. However, $5.1 million of standby letters of credit have been issued against the Commerce Facility related to insurance obligations of the Company, leaving an availability of $4.9 million as of December 31, 2005. There was no outstanding balance due under this credit facility at December 31, 2005.
In June 2002, RIHC entered into a Thermal Energy Services Agreement (the “Agreement”) with an energy supplier. The initial term of the Agreement is 20 years, renewable at the Companies’ option for two additional five year terms. The Agreement has three components: a monthly charge for operation and maintenance of the thermal energy facilities; a capital lease component for capital improvements whose value is estimated at $6.2 million, for which payments during 2004 were $124,900, including interest, with the total payments over the 20 year initial term estimated at $9.6 million including interest, and; a usage fee for steam and chilled water, whose usage and rate will vary by month of the year.
In March 2004, the Option Land was acquired by RREH in exchange for the issuance of a $40 million note by RREH to KINA. No principal payments are required on the $40 million note until it reaches maturity. The note payable to KINA is guaranteed by CRH, RIHC and RIH, provided, however that the guarantee of RIHC and RIH does not become effective until either the First Mortgage Notes have been paid in full or the fixed charge coverage ratio of RIHC is at least 2.0 to 1.0. In addition, the amount guaranteed is initially limited to $20 million increasing by $5 million each year. As of December 31, 2005 the fixed charge coverage ratio of RIHC was 1.0 to 1.0.
In conjunction with the option land purchase transaction, the Option Agreement between RIHC and KINA was terminated. With the termination of the Option Agreement, the lease agreement between KINA and RIH converted to a month-to-month fair market value lease. As part of the option land purchase transaction, the lease was amended to be a triple-net lease and was assigned by KINA to RREH. The amended agreement calls for the following payments: $1.3 million security deposit paid upon closing, offset against lease payments of $205,000 per month through September 2004; $135,833 per month from October 2004 through March 2006; $202,500 per month from April 2006 through March 2008; $302,500 per month from April 2008 through March 2009 and $402,500 per month thereafter. The lease agreement may be terminated by either party upon 30 days notice, with any security deposit remaining upon termination to be refunded to RIH. Lease payments during the year ended December 31, 2005 totaled $1.6 million.
The CIT Facility contains a fixed charge coverage ratio and a senior leverage ratio financial covenant. In March 2006, the Company entered into an amendment of the CIT Facility which modified the financial covenants as of December 31, 2005 and amended further the covenants on a prospective basis. Absent the amendment, we would not have been in compliance with the financial covenants at December 31, 2005 on the CIT Facility.
The CIT amendment required, among other things, the Company to pay an additional $1.0 million of the outstanding principal amount of the CIT Facility by March 31, 2006. Accordingly, this amount has been recorded in the current maturities of long-term debt on the accompanying balance sheets as of December 31, 2005.
26
The Commerce Facility contains an interest coverage ratio and a minimum net worth covenant. In March 2006, the Company entered into an amendment of the Commerce Facility which modified the financial covenants as of December 31, 2005 and amended the covenants on a prospective basis. Absent the amendment, we would not have been in compliance with the financial covenants at December 31, 2005 on the Commerce Facility.
The indenture on our First Mortgage Notes contains cross-default provisions whereby the acceleration of any indebtedness in an aggregate amount of $5 million or more prior to its scheduled maturity constitutes an event of default under the First Mortgage Notes Indenture.
There can be no assurances that we will be able to meet our financial covenants on the CIT facility and Commerce Facility in the future or if we do not meet these covenants, if we will be able to obtain a waiver or amendments.
Commitments and Contractual Obligations
The following table summarizes the Companies’ contractual commitments as of December 31, 2005:
| | | | | | | | | | | | | | | |
| | | Total | | Less than 1
year | | 1-3
years | | 4- 5
years | | After 5
years |
| | | ($ in thousands) |
Long-term debt: | | | | | | | | | | | | | | | |
Principal | | $ | 196,206 | | $ | 5,353 | | $ | 190,853 | | $ | — | | $ | — |
Interest | | | 67,952 | | | 21,202 | | | 46,750 | | | — | | | — |
Capital leases | | | 8,134 | | | 498 | | | 1,494 | | | 996 | | | 5,146 |
Operating leases | | | 23,150 | | | 2,633 | | | 7,341 | | | 3,403 | | | 9,773 |
| | | | | | | | | | | | | | | |
| | $ | 295,442 | | $ | 29,686 | | $ | 246,438 | | $ | 4,399 | | $ | 14,919 |
| | | | | | | | | | | | | | | |
Construction commitments represent the balance due on the contract for the construction of the New Tower. Purchase obligations represent agreements to purchase goods or services that are enforceable and legally binding on the Company.
Resorts plans to fund contractual obligations through operating cash flows and available borrowings under the Commerce Facility.
Off Balance Sheet Arrangements
The Companies do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Companies’ financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect the amounts reported. The Companies’ significant accounting policies are more fully described in Note 2 (“Summary of Significant Accounting Policies”) to the Companies’ consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of the Companies’ consolidated financial statements, and requires management to make difficult, subjective, or complex judgments that could have a material effect on the Companies’ financial condition and results of operations. Specifically, an accounting estimate is defined as critical if 1) it would require the Company to make assumptions about matters that were highly uncertain at the time the estimate was made, and 2) different estimates that the Company could reasonably have used, or changes in the estimates that are reasonably likely to occur, would have a material effect on the Company’s financial condition or results of operations.
27
Management believes that following are critical accounting estimates:
Allowances for Doubtful Accounts—Casino. Allowances for doubtful accounts arising from casino receivables are based upon a review of specific estimated uncollectible accounts. The methodology used to evaluate uncollectibility of accounts is based on historical collection rates over the past five years, applied based on the aging of the receivable, as well as consideration of other factors, including information related to specific larger accounts, an appraisal of current economic conditions, a change in the character of the receivables, a change in the Companies’ collection policy, and the judgment and expertise of management. Management believes that past experience has indicated that the Companies’ estimates are reasonable.
Cashback Liability. The Company awards incentives to its casino customers, based on their levels of gaming activity, through its “Cashback” marketing program. The incentives awarded are in the form of points which may be redeemed for coin to wager on slot machines. The Company records a liability for outstanding Cashback incentives (those incentives which have been earned, but not yet redeemed by the customer), adjusted for an estimated redemption factor based on historical results. The amount of expense resulting from this marketing program could vary from the liability recorded based on actual redemption rates; however, management believes the historical actual redemptions have been materially consistent with the original estimates.
Litigation/Loss Reserves. Various legal proceedings, considered by management to be ordinary litigation incident to the operation of its business, may be pending at any time against the Company. The Company records a liability for these items, which liability is estimated based on a review and analysis of each individual event, and periodically reviewed for adequacy. Although management estimates that none of these proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations, no assurances can be given as to the eventual outcome of these issues. Management believes that past experience has indicated that the Companies’ estimates are reasonable.
Income Taxes. The Companies record an income tax liability in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes”. Accordingly, deferred tax assets and liabilities are calculated as the difference between the financial statement carrying amounts and the tax bases of assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. The Companies have provided a full valuation allowance against the amount of its New Jersey net operating loss carryforwards, because it does not expect to realize the tax benefit.
Long-lived Assets. Management has determined that the Companies’ policy associated with its long-lived assets and the related estimates is critical to the preparation of the consolidated financial statements. The Company has a significant investment in long-lived property and equipment. Management estimates that the undiscounted future cash flows expected to result from the use of these assets exceed the current carrying value of these assets. Any adverse change to the estimate of these undiscounted cash flows could necessitate an impairment charge that would adversely affect operating results. Management estimates the useful lives for the Company’s assets based on historical experience and the estimates of assets’ commercial lives. Should the actual useful life of a class of assets differ from the estimated useful life, an impairment charge would be recorded. Management reviews useful lives and obsolescence and assesses commercial viability of the Companies’ assets periodically.
Self Insured Health Insurance. Effective June 2005, the company changed its medical coverages for its non union employees. Such employees are now covered under a self-insured medical plan, administered by an affiliate of the Company, up to a maximum of $200,000 per year for each insured person. Amounts in excess of these thresholds are covered by the company’s insurance programs subject to customary policy limits.
28
Quarterly Results of Operations
The following table sets forth certain of the CRH’s unaudited financial information on a quarterly basis:
| | | | | | | | | | | | | | | |
| | | First
Quarter | | | Second
Quarter | | Third
Quarter | | | Fourth
Quarter | |
| | | ($ in thousands) | |
2005 | | | | | | | | | | | | | | | |
Revenues | | $ | 56,391 | | | $ | 62,761 | | $ | 69,531 | | | $ | 57,674 | |
Operating income (loss) | | | 1,808 | | | | 8,598 | | | 6,681 | | | | (4,504 | ) |
Net income (loss) | | $ | (3,107 | ) | | $ | 1,222 | | $ | (154 | ) | | $ | (8,232 | ) |
| | | | |
| | | First
Quarter | | | Second
Quarter | | Third
Quarter | | | Fourth
Quarter | |
| | | ($ in thousands) | |
2004 | | | | | | | | | | | | | | | |
Revenues | | $ | 51,160 | | | $ | 58,071 | | $ | 71,048 | | | $ | 50,607 | |
Operating income (loss) | | | 1,875 | | | | 3,143 | | | 8,362 | | | | (1,253 | ) |
Net income (loss) | | $ | (1,567 | ) | | $ | 34 | | $ | 1,742 | | | $ | (4,347 | ) |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company has exposure to interest rate risk from its short-term and long-term debt. In general, the Companies’ long-term debt is fixed rate. See Note 8 of the Notes to the Consolidated Financial Statements of the Companies for the components of long term debt. The Company believes that the market risk from changes in interest rates would not be material to the fair value of these financial instruments, or the related cash flows, or future results of operations.
29
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
| | |
Colony RIH Holdings, Inc. | | |
| |
Report of Independent Registered Public Accounting Firm | | 30 |
| |
Consolidated Balance Sheets at December 31, 2005 and 2004 | | 31 |
| |
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 | | 32 |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | 33 |
| |
Consolidated Statements of Changes of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 | | 35 |
| |
Notes to Consolidated Financial Statements | | 36 |
| |
Financial Statement Schedule—Schedule II Valuation and Qualifying Accounts | | 47 |
| |
Resorts International Hotel and Casino, Inc. | | |
| |
Report of Independent Registered Public Accounting Firm | | 48 |
| |
Consolidated Balance Sheets at December 31, 2005 and 2004 | | 49 |
| |
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 | | 50 |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | 51 |
| |
Consolidated Statements of Changes of Shareholder’s Equity for the years ended December 31, 2005, 2004 and 2003 | | 53 |
| |
Notes to Consolidated Financial Statements | | 54 |
| |
Financial Statement Schedule—Schedule II Valuation and Qualifying Accounts | | 65 |
All other schedules called for under Regulation S-X are not submitted because they are not applicable, not required, or because the required information is not material, or is included in the financial statements or notes thereto.
30
Report of Independent Registered Public Accounting Firm
Board of Directors
Colony RIH Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Colony RIH Holdings, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and shareholder’s equity for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index to Financial Statements. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Colony RIH Holdings, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 10, 2006, except for Note 7
and the fifth paragraph of Note 1 as
to which the date is March 29, 2006
Philadelphia, Pennsylvania
31
COLONY RIH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| | | | | | | |
| | | December 31, |
| | | 2005 | | | 2004 |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 25,830 | | | $ | 31,975 |
Receivables, net | | | 6,607 | | | | 5,530 |
Inventories | | | 2,467 | | | | 2,332 |
Prepaid expenses and other current assets | | | 2,787 | | | | 3,060 |
Deferred income taxes, net | | | — | | | | 4,804 |
| | | | | | | |
Total current assets | | | 37,691 | | | | 47,701 |
Property and equipment, net | | | 298,154 | | | | 297,859 |
Other assets (including $103 and $500 of restricted cash and cash equivalents in 2005 and 2004, respectively) | | | 18,363 | | | | 17,597 |
| | | | | | | |
Total assets | | $ | 354,208 | | | $ | 363,157 |
| | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | |
Current liabilities | | | | | | | |
Current maturities of long-term debt | | $ | 5,617 | | | $ | 5,525 |
Accounts payable | | | 8,010 | | | | 10,957 |
Accrued interest payable | | | 6,518 | | | | 6,439 |
Accrued expenses and other current liabilities | | | 24,110 | | | | 16,901 |
Due to affiliates, net | | | 3,107 | | | | — |
| | | | | | | |
Total current liabilities | | | 47,362 | | | | 39,822 |
Long-term debt, less current portion | | | 234,224 | | | | 233,951 |
Deferred income taxes, net | | | — | | | | 6,491 |
Redeemable common stock | | | 3,875 | | | | 3,875 |
| | | | | | | |
Total liabilities | | | 285,461 | | | | 284,139 |
Shareholders’ equity | | | | | | | |
Common stock: | | | | | | | |
Class A—$.01 par value, 900,000 shares authorized, 38,295 shares issued and outstanding | | | — | | | | — |
Class B—$.01 par value, 1,600,000 shares authorized, 774,982 shares issued and outstanding | | | 8 | | | | 8 |
Capital in excess of par | | | 73,790 | | | | 73,790 |
Retained earnings (accumulated deficit) | | | (5,051 | ) | | | 5,220 |
| | | | | | | |
Total shareholders’ equity | | | 68,747 | | | | 79,018 |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 354,208 | | | $ | 363,157 |
| | | | | | | |
See accompanying notes.
32
COLONY RIH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Revenues: | | | | | | | | | | | | |
Casino | | $ | 268,074 | | | $ | 247,842 | | | $ | 230,135 | |
Lodging | | | 23,352 | | | | 18,341 | | | | 11,163 | |
Food and beverage | | | 24,282 | | | | 23,387 | | | | 22,079 | |
Other | | | 6,021 | | | | 8,439 | | | | 6,496 | |
Less: promotional allowances | | | (75,372 | ) | | | (67,123 | ) | | | (54,426 | ) |
| | | | | | | | | | | | |
Total net revenue | | | 246,357 | | | | 230,886 | | | | 215,447 | |
Costs and expenses: | | | | | | | | | | | | |
Casino | | | 127,636 | | | | 117,425 | | | | 117,156 | |
Lodging | | | 4,813 | | | | 3,360 | | | | 1,318 | |
Food and beverage | | | 9,327 | | | | 10,743 | | | | 11,721 | |
Other operating | | | 30,613 | | | | 28,585 | | | | 25,686 | |
Selling, general, and administrative | | | 40,728 | | | | 39,085 | | | | 30,983 | |
Depreciation and amortization | | | 20,657 | | | | 16,837 | | | | 9,993 | |
Pre-opening | | | — | | | | 2,722 | | | | — | |
| | | | | | | | | | | | |
Total costs and expenses | | | 233,774 | | | | 218,757 | | | | 196,857 | |
| | | | | | | | | | | | |
Income from operations | | | 12,583 | | | | 12,129 | | | | 18,590 | |
Interest income | | | 663 | | | | 522 | | | | 1,295 | |
Interest expense | | | (25,712 | ) | | | (19,595 | ) | | | (19,133 | ) |
Other income (expense), net | | | 28 | | | | 1,255 | | | | (281 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (12,438 | ) | | | (5,689 | ) | | | 471 | |
Provision (benefit) for income taxes | | | (2,167 | ) | | | (1,551 | ) | | | 1,727 | |
| | | | | | | | | | | | |
Net loss | | $ | (10,271 | ) | | $ | (4,138 | ) | | $ | (1,256 | ) |
| | | | | | | | | | | | |
See accompanying notes.
33
COLONY RIH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Cash Flows from Operating Activities: | | | | | | | | | | | | |
Net loss | | $ | (10,271 | ) | | $ | (4,138 | ) | | $ | (1,256 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 19,694 | | | | 15,328 | | | | 12,273 | |
Amortization of debt premiums, discounts and issuance costs | | | 1,807 | | | | 1,858 | | | | 1,733 | |
Provision for doubtful receivables | | | 508 | | | | 138 | | | | 468 | |
Gain on disposal of fixed assets | | | (186 | ) | | | (1,255 | ) | | | — | |
Provision for discount on CRDA obligations, net of amortization | | | 963 | | | | 1,510 | | | | (2,280 | ) |
Deferred income tax | | | (3,669 | ) | | | 390 | | | | 1,017 | |
Other | | | — | | | | — | | | | 38 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Net increase in receivables | | | (1,585 | ) | | | (493 | ) | | | (545 | ) |
Net (increase) decrease in inventories, prepaid expenses and other current assets | | | 138 | | | | (1,123 | ) | | | 360 | |
Net decrease (increase) in other assets | | | 430 | | | | 1,150 | | | | (1,309 | ) |
Net increase in due to affiliates | | | 3,107 | | | | — | | | | — | |
Net decrease in accounts payable and accrued expense | | | (993 | ) | | | 2,873 | | | | (6,321 | ) |
Net increase in interest payable | | | 79 | | | | 401 | | | | — | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 10,022 | | | | 16,639 | | | | 4,178 | |
| | | | | | | | | | | | |
Cash Flow from Investing Activities: | | | | | | | | | | | | |
Purchases of cash and cash equivalents—restricted, net of releases | | | 398 | | | | 49,910 | | | | 39,613 | |
Proceeds from sale of fixed assets | | | 191 | | | | 1,724 | | | | — | |
Purchase of property and equipment | | | (11,803 | ) | | | (69,553 | ) | | | (53,490 | ) |
CRDA deposits | | | (3,292 | ) | | | (3,051 | ) | | | (3,021 | ) |
CRDA refunds | | | 63 | | | | 756 | | | | 9,189 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | $ | (14,443 | ) | | $ | (20,214 | ) | | $ | (7,709 | ) |
| | | | | | | | | | | | |
34
COLONY RIH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
Cash Flows from Financing Activities: | | | | | | | | | | | | |
Proceeds of borrowings | | $ | — | | | $ | 10,160 | | | $ | — | |
Payments to secure borrowings | | | (118 | ) | | | (135 | ) | | | (62 | ) |
Debt repayments | | | (1,606 | ) | | | (2,892 | ) | | | (979 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (1,724 | ) | | | 7,133 | | | | (1,041 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (6,145 | ) | | | 3,558 | | | | (4,572 | ) |
Cash and cash equivalents at beginning of year | | | 31,975 | | | | 28,417 | | | | 32,989 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 25,830 | | | $ | 31,975 | | | $ | 28,417 | |
| | | | | | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | |
Interest | | $ | 22,126 | | | $ | 21,395 | | | $ | 21,023 | |
Income taxes paid (refunded), net | | $ | (353 | ) | | $ | (519 | ) | | $ | (609 | ) |
Non-cash investment and financing transactions: | | | | | | | | | | | | |
Obligations incurred for the purchase of property and equipment | | $ | 1,405 | | | $ | 7,577 | | | $ | 645 | |
Notes payable issued in connection with option land purchase | | $ | — | | | $ | 40,000 | | | $ | — | |
See accompanying notes.
35
COLONY RIH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Dollars in thousands)
| | | | | | | | | | | | | | | |
| | | Common
Stock | | Capital in
Excess of
Par | | | Retained
Earnings
(Deficit)
Accumulated | | | Total
Shareholders’
Equity | |
Balance at January 1, 2003 | | $ | 8 | | $ | 73,813 | | | $ | 10,614 | | | $ | 84,435 | |
Change in value of stock options granted to employees and consultants | | | — | | | (23 | ) | | | — | | | | (23 | ) |
Net loss | | | — | | | — | | | | (1,256 | ) | | | (1,256 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2003 | | | 8 | | | 73,790 | | | | 9,358 | | | | 83,156 | |
| | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | | (4,138 | ) | | | (4,138 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2004 | | | 8 | | | 73,790 | | | | 5,220 | | | | 79,018 | |
| | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | | (10,271 | ) | | | (10,271 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | $ | 8 | | $ | 73,790 | | | $ | (5,051 | ) | | $ | 68,747 | |
| | | | | | | | | | | | | | | |
See accompanying notes.
36
COLONY RIH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Consolidation
Colony RIH Holdings, Inc., a Delaware corporation (“CRH” or the “Company”), owns 100% of the outstanding common stock of Resorts International Hotel and Casino, Inc., also a Delaware corporation (“RIHC”). RIHC, through its wholly-owned subsidiary, Resorts International Hotel, Inc., a New Jersey corporation (“RIH”), owns and operates Resorts Atlantic City (“Resorts”), a casino/hotel located in Atlantic City, NJ. On April 1, 2003, Resorts Real Estate Holdings, Inc. (“RREH”) was formed as a wholly-owned subsidiary of CRH. RREH, which was incorporated as a New Jersey corporation, was formed to acquire certain land. RREH had no substantive business operations prior to January 2004 (see Note 14). Colony RIH Holdings, Inc., Resorts International Hotel and Casino, Inc., and Resorts International Hotels, Inc. are referred to collectively as the “Companies”.
CRH was formed at the direction of Colony Investors IV, L.P. (“Colony IV”), a Delaware limited partnership, under the laws of the State of Delaware on March 7, 2001. RIHC was formed at the direction of Colony IV on October 24, 2000.
RIHC, Kerzner International North America, Inc., a Delaware corporation (“KINA”), formerly Sun International North America, Inc., and GGRI, Inc., a Delaware corporation (“GGRI”), entered into a purchase agreement, dated October 30, 2000, as amended (the “Purchase Agreement”). Pursuant to the Purchase Agreement, RIHC acquired all of the capital stock of RIH, the Warehouse Assets (as defined in the Purchase Agreement) and all of the capital stock of New Pier Operating Company, Inc. (“New Pier”), a New Jersey corporation (collectively, the “Acquisition”) on April 25, 2001 for approximately $144.8 million.
The consolidated financial statements include the accounts of CRH and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
As discussed in Note 7, absent amendments to the Commerce Facility and the CIT Facility, the Company would not have been in compliance with financial covenants contained in its CIT Facility and Commerce Facility as of December 31, 2005. Management has also renegotiated the financial covenants with CIT and Commerce for periods subsequent to December 31, 2005. Management believes, based on the information currently available, that the results of its operations will allow the Company to meet these financial covenants. However, there can be no assurances that management will be successful in this regard.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Allowances for doubtful accounts arising from casino, hotel and other services, are based upon a specific review of certain outstanding receivables. In determining the amounts of the allowances, certain estimates and assumptions are made, and actual results may differ from those assumptions.
Cash Equivalents
Short-term money market securities purchased with original maturities of three months or less are considered to be cash equivalents. These securities are classified as available-for-sale, which are carried at fair value with unrealized gains and losses, net of tax, reported in other comprehensive income. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these instruments.
37
2. Summary of Significant Accounting Policies (continued)
Under the terms of the Disbursement Agreement, dated March 22, 2002, funds remaining in the liquidity disbursement account after the final Test Period (as defined in the Indenture, the four fiscal quarter period ending December 31, 2004) , and upon certification by RIHC of certain conditions, would be returned to RIHC and could be distributed as a dividend to CRH. This certification was delivered by RIHC, and accordingly on January 20, 2005 the $9.7 million remaining in the liquidity disbursement account was delivered to RIHC.
Inventories
Inventories of provisions, supplies and spare parts are valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives reported below using the straight-line method. Interest costs incurred during the construction period are capitalized in accordance with Statement of Financial Accounting Standards No. 34, “Capitalization of Interest Costs.” Interest expense of $4.1 million and $3.6 million was capitalized for the years ended December 31, 2004 and 2003, respectively. No interest costs were capitalized for the year ended December 31, 2005.
| | |
Hotels and other buildings | | 35 – 40 years |
Furniture fixtures and equipment | | 2 – 5 years |
The provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) requires, among other things, that an entity review its long-lived assets and certain intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. SFAS No. 144 requires an impairment loss to be recognized only if the carrying amounts of long-lived assets to be held and used are not recoverable from their expected undiscounted future cash flows.
Income Taxes
The Company follows the provisions of SFAS No. 109, “Accounting for Income Taxes”. Accordingly, deferred tax assets and liabilities are calculated as the difference between the financial statement carrying amounts and tax bases of assets and liabilities. These differences are affected by the tax rate for the year in which they are expected to be recovered or settled. A valuation allowance is recognized, if necessary, to account for the likelihood that these differences will not be realized in the future. Note 10 further addresses the components of the deferred tax assets and liabilities.
Revenue Recognition
Gaming revenue is recorded as the net win from gaming activities, which represents the difference between amounts wagered and amounts won by patrons. Revenues from hotel and related services and from theater ticket sales are recognized at the time the related service is performed.
Self Insured Health Insurance
Effective June 2005, the company changed its medical coverages for its non union employees. Such employees are now covered under a self-insured medical plan up to a maximum of $200,000 per year for each insured person. Amounts in excess of these thresholds are covered by the company’s insurance programs subject to customary policy limits.
38
2. Summary of Significant Accounting Policies (continued)
Promotional Allowances
The retail value of hotel accommodations, food, beverage and other services provided to customers without charge is included in gross revenues and deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances are included in gaming costs and expenses as follows (in thousands):
| | | | | | | | | |
| | | Year ended December 31, |
| | | 2005 | | 2004 | | 2003 |
Rooms | | $ | 8,352 | | $ | 9,849 | | $ | 10,363 |
Food and beverage | | | 20,988 | | | 16,115 | | | 15,729 |
Entertainment and other | | | 3,681 | | | 3,678 | | | 3,390 |
| | | | | | | | | |
| | $ | 33,021 | | $ | 29,642 | | $ | 29,482 |
| | | | | | | | | |
Cash discounts based upon a negotiated amount with each customer are recognized as a promotional allowance on the date the related revenues are recorded. Cash-back awards given to a customer based upon earning points for future awards are accrued as the customer earns the points. The amount is recorded as a promotional allowance in the statement of operations. When estimating the amount of the accrual, the company calculates a redemption rate based on historical redemption rates.
The Company offers other incentive programs. These are gifts and other promotional items, the type and distribution of which are predetermined by management. Since these awards are not cash awards, the Company records them as gaming expenses in the statement of operations. Such amounts are expensed on the date the award can be utilized by the customer.
Advertising
The Company expenses advertising costs as incurred. For the years ended December 31, 2005, 2004 and 2003 these costs amounted to $8.1 million, $6.9 million and $6.3 million, respectively and are included in Selling, General and Administrative costs on the Company’s Consolidated Statements of Operations.
Pre-Opening Expenses
For the year ended December 31, 2004, the Company recorded $2.7 million of pre-opening expenses, primarily advertising and related costs, to promote the opening of the New Tower.
Stock Based Compensation
As allowed under the provisions of Financial Accounting Standards Board Statement Number 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” the Company applies the provisions of Accounting Principles Board Opinion Number 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for employee stock options, and accordingly, do not recognize compensation expense. Had compensation expense for the employee stock option plan been determined in accordance with SFAS No. 123, pro forma results of operations would not have been materially different from reported results of operations.
39
Equity instruments issued to non-employees in exchange for goods or services are accounted for using the fair value method and expense is recorded based on the value determined.
New Accounting Pronouncement
In December 2004, the FASB issued Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires stock-based employee compensation to be measured based on the grant-date fair value of the award and the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS 123(R) eliminates the alternative use of APB No. 25’s intrinsic value method of accounting for stock options granted to employees.
As a result of the provisions of SFAS 123R, the Company expects to incur compensation charges that will not be material to the Company’s financial statements for the year ending December 31, 2006. However, the estimated compensation charges can be affected by a number of variables, including the Company’s stock price and the timing of 2006 employee stock option grants. The Company has not yet determined the method of adoptions under SFAS 123(R) as permitted under the Statement.
3. Receivables
Components of receivables were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Gaming | | $ | 6,413 | | | $ | 5,315 | |
Less: allowance for doubtful accounts | | | (1,307 | ) | | | (1,415 | ) |
| | | | | | | | |
| | | 5,106 | | | | 3,900 | |
Non-gaming: | | | | | | | | |
Hotel and related | | | 492 | | | | 642 | |
Other | | | 1,036 | | | | 1,020 | |
| | | | | | | | |
| | | 1,528 | | | | 1,662 | |
Less: allowance for doubtful accounts | | | (27 | ) | | | (32 | ) |
| | | | | | | | |
| | | 1,501 | | | | 1,630 | |
| | | | | | | | |
Receivables, net | | $ | 6,607 | | | $ | 5,530 | |
| | | | | | | | |
4. Property and Equipment
Components of property and equipment were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Land and land rights | | $ | 76,156 | | | $ | 76,314 | |
Hotels and other buildings | | | 204,867 | | | | 193,306 | |
Furniture, fixtures and equipment | | | 67,009 | | | | 62,582 | |
Construction in progress | | | 3,383 | | | | 1,816 | |
| | | | | | | | |
| | | 351,415 | | | | 334,018 | |
Less: accumulated depreciation | | | (53,261 | ) | | | (36,159 | ) |
| | | | | | | | |
Net property and equipment | | $ | 298,154 | | | $ | 297,859 | |
| | | | | | | | |
40
5. Other Assets
Components of other assets were as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
CRDA deposits, bonds and other investments, net | | $ | 11,649 | | $ | 11,085 |
Debt issuance costs, net | | | 3,982 | | | 5,104 |
Other | | | 2,629 | | | 908 |
Restricted cash | | | 103 | | | 500 |
| | | | | | |
| | $ | 18,363 | | $ | 17,597 |
| | | | | | |
The New Jersey Casino Control Act, as amended, requires RIH to purchase bonds issued by the Casino Reinvestment Development Authority (“CRDA”) or make other investments authorized by the CRDA, in an amount equal to 1.25% of RIH’s gross gaming revenue, as defined.
The CRDA bonds have interest rates ranging from 3.5% to 7.0% and have repayment terms of between 20 and 50 years. The Company records charges to expense to reflect the below-market interest rate payable on the bonds it may have to purchase to fulfill its investment obligation at the date the obligation arises. The charges (credits) for the years 2005, 2004 and 2003 for discounts on obligations arising in those years were $963,000, $1.5 million, and ($2.3 million), respectively. The 2003 credit is due to the reversal of approximately $3.0 million of amortization expense related to discounts on funds previously deposited with the CRDA in below-market bearing instruments. This reversal resulted from the receipt from the CRDA of $9,189,000 of previously deposited funds as reimbursement for costs incurred for the construction of the New Tower. The discount on CRDA bonds purchased is amortized to interest income over the life of the bonds using the effective interest method.
From time to time RIH has donated certain funds it has had on deposit with the CRDA in return for either relief from its obligation to purchase CRDA bonds or credits against future CRDA deposits. At December 31, 2005 and 2004, RIH owned $6.9 million and $7.0 million face value of bonds, respectively, issued by the CRDA and had $8.6 million and $7.2 million, respectively, on deposit with the CRDA. The majority of the Company’s deposits have been pledged for specific projects.
Debt issuance costs consist of amounts incurred in connection with obtaining long-term debt. The costs are amortized on a straight-line basis over the contractual life of the loan and amortization of such costs are included in interest expense.
Restricted cash in 2005 and 2004 represents proceeds from an asset sale which must be used to purchase “Replacement Assets” in accordance with the terms of the First Mortgage Notes Indenture.
6. Accrued Expenses and Other Current Liabilities
Components of accrued expenses and other current liabilities were as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
Payroll | | $ | 9,637 | | $ | 7,655 |
Insurance and related costs | | | 1,313 | | | 1,799 |
Unredeemed chip liability | | | 1,219 | | | 1,091 |
Liability for unredeemed cash incentives | | | 990 | | | 2,011 |
Other | | | 10,951 | | | 4,345 |
| | | | | | |
| | $ | 24,110 | | $ | 16,901 |
| | | | | | |
41
7. Long-Term Debt
Long-term debt is summarized as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
First Mortgage Notes, net of unamortized discount | | $ | 177,669 | | $ | 177,103 |
Thermal Energy capital lease | | | 5,966 | | | 6,280 |
CIT/FF&E Financing | | | 15,956 | | | 15,543 |
KINA Note | | | 40,000 | | | 40,000 |
Other notes payable | | | 250 | | | 550 |
| | | | | | |
| | | 239,841 | | | 239,476 |
Less: current portion | | | 5,617 | | | 5,525 |
| | | | | | |
| | $ | 234,224 | | $ | 233,951 |
| | | | | | |
On March 22, 2002, RIHC sold $180.0 million aggregate principal amount of First Mortgage Notes (the “First Mortgage Notes”) at a price of 97.686% yielding $175.8 million. Interest on the First Mortgage Notes is payable on March 15 and September 15 of each year, and the First Mortgage Notes are due in full on March 15, 2009. Beginning March 15, 2007, the Company may redeem all or a part of the First Mortgage Notes at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest: March 15, 2007 through March 14, 2008, 106.0%; March 15, 2008 through March 14, 2009, 103.0%; and on or after March 15, 2009, 100.0%.
The First Mortgage Notes contain certain covenants that, among other things, limit RIHC’s ability and the ability of its subsidiaries to pay dividends on, redeem or repurchase its or their capital stock, make investments, incur additional indebtedness, permit payment of or restrict dividends by certain of its subsidiaries, enter into sale leaseback transactions, sell assets, guarantee indebtedness, create certain liens, engage in transactions with affiliates, and consolidate, merge or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis. The First Mortgage Notes also contain cross-default provisions whereby the acceleration of any indebtedness in an aggregate amount of $5.0 million prior to its scheduled maturity constitutes an event of default under the First Mortgage Notes Indenture.
In June 2002, RIH entered into a Thermal Energy Services Agreement (the “Thermal Agreement”). The initial term of the Thermal Agreement is 20 years, renewable at RIH’s option for two additional five-year terms. The Thermal Agreement has three components: a monthly charge for operation and maintenance of the thermal energy facilities; a capital lease component for capital improvements whose value was estimated at $6.5 million on the date the Thermal Agreement was executed, and; a usage fee for steam and chilled water, whose usage and rate will vary by month of the year. The outstanding balance of the capital lease was $6.0 million at December 31, 2005.
In June 2002, RIH entered into a Restated Loan and Security Agreement with CIT Group/Equipment Financing, Inc (“CIT Facility”). The CIT Facility permits RIH to borrow up to $20 million for the purchase of machinery, furniture, or equipment. Loans pursuant to the CIT Facility are repayable in up to a sixty-month amortization period from the date the loan is made. The outstanding loans associated with the CIT Facility bear interest at the rate of LIBOR plus three and one-half percent. RIH is required to pay an annual fee equal to one-half percent of the unused portion of the CIT Facility. The outstanding balance due to CIT at December 31, 2005 was $16.0 million. The CIT Facility contains a fixed charge coverage ratio and a senior leverage financial covenant as defined in the Credit Facility. On March 29, 2006, the CIT Facility was amended to modify the required covenant calculations at December 31, 2005 and on a prospective basis. Absent this amendment, the Company would not have been in compliance with the financial covenants. As a part of the amendment, the Company was required to pay $1 million of the outstanding principal prior to March 31, 2006 and a fee of $80,000. The amendment also redefined the interest rate on the facility based on a sliding scale on operating results (as defined). The $1 million of outstanding principal has been reflected as a current liability at December 31, 2005.
In November 2002, RIH entered into a Loan and Security Agreement with Commerce Bank, N.A (“Commerce Facility”). The Commerce Facility provides for working capital borrowings and letters of credit up to $10 million. The Commerce Facility expires on June 30, 2006. There was no outstanding balance on the Commerce Facility at December 31,
42
7. Long-Term Debt (continued)
2005; however, $5.1 million of standby letters of credit have been issued against the Commerce Facility, leaving an availability of $4.9 million as of December 31, 2005. The Commerce Facility contains an interest coverage ratio and a minimum net worth requirement as defined in the Commerce Facility. On March 29, 2006, the CIT Facility was amended to modify the required covenant calculations at December 31, 2005 and on a prospective basis. Absent this amendment, the Company would not have been in compliance with the financial covenants.
During 2004, RREH purchased 2.0 acres of land adjacent to the Resorts site (see Note 14). The land was acquired in exchange for the issuance of a $40 million note by RREH to KINA. This $40 million note will mature immediately following the maturity, acceleration or refinancing (other than permitted refinancing) of the First Mortgage Notes which are due March 15, 2009. Interest on the $40 million note will be payable semi-annually, and will be calculated at the following annual rates: 0% through September 2004, 4% from October 2004 through March 2006, 6% from April 2006 through March 2008, and 9% from April 2008 through March 2009. The note payable to KINA is guaranteed by CRH, RIHC and RIH, provided, however that the guarantee of RIHC and RIH does not become effective until either the First Mortgage Notes have been paid in full or the fixed charge coverage ratio of RIHC is at least 2.0 to 1.0. At December 31, 2005 the fixed charge coverage ratio was 1.0 to 1.0. In addition, the amount guaranteed is initially limited to $20 million increasing by $5 million each year. The KINA Note contains cross-default provisions whereby the acceleration of the scheduled maturity of the First Mortgage Notes constitutes an event of default under the KINA Note.
The aggregate amount of principal payments on all long-term indebtedness, by year is as follows (in thousands):
| | | |
2006 | | $ | 5,617 |
2007 | | | 5,746 |
2008 | | | 5,669 |
2009 | | | 220,298 |
2010 | | | 310 |
Thereafter | | | 4,533 |
| | | |
Total | | $ | 242,173 |
| | | |
8. Related Party Transactions
For the years ended December 31, 2005, 2004 and 2003, the Company incurred expenses of approximately $297,000, $380,000 and $105,000, respectively, for fees and expenses incurred by affiliates of Colony Capital, the Company’s principal shareholder, and the Company’s directors.
In June 2004, RIHC and RIH entered into agreements with Colony Resorts LVH Acquisitions, LLC (“LVH”) which owns and operates the Las Vegas Hilton. Under the terms of the agreements, if either company incurs costs in excess of its direct share or any expenses which are directly allocable to or incurred on behalf of the other company, such excess costs will be reimbursed. In April 2005, this agreement was amended to include Resorts International Holdings, LLC (“RIH LLC”), which owns and operates Resorts East Chicago, Resorts Tunica, Bally’s Tunica, and Atlantic City Hilton.
The charges pursuant to the agreements are discretionary in nature and are agreed to by the parties to the agreements. During the year ended December 31, 2005, the Company charged to its affiliates $6.9 million as a result of these agreements and had a receivable recorded in the amount of $4.2 million for the amount due. Additionally, during the year ended December 31, 2005, the Company received charges of $ 7.3 million from its affiliates as a result of these agreements. The charge from the affiliate includes charges for medical and other insurance costs related to employees of the Company under a self-insured program managed by an affiliate of the Company which totaled $5.2 million for the year ended December 31, 2005. At December 31, 2005, the Company had a payable of $7.3 million to its affiliates. The operating results of the Company may be different if the Company operated autonomously and without these transactions with its affiliates.
43
9. Retirement Plans
RIH has a defined contribution plan in which substantially all non-union employees are eligible to participate. Employees of certain other affiliated companies are also eligible to participate in this plan. Contributions are made to the plan based on a percentage of eligible employee contributions. Contribution expense for this plan was $582,000, $592,000, and $609,000, for the years ended December 31, 2005, 2004, and 2003 respectively.
Union employees are covered by various multi-employer pension plans to which contributions are made by RIH and other unrelated employers. RIH’s pension expense for these plans was $2,168,000, $1,919,000, and $1,709,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
10. Income Taxes
Income tax expense (benefit) is comprised of the following for the year ended December 31 (in thousands):
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | (3,229 | ) | | $ | (369 | ) |
State | | | 1,502 | | | | 1,288 | | | | 1,079 | |
| | | | | | | | | | | | |
| | | 1,502 | | | | (1,941 | ) | | | 710 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (2,516 | ) | | | 2,246 | | | | 1,017 | |
State | | | (1,153 | ) | | | (1,856 | ) | | | — | |
| | | | | | | | | | | | |
| | | (3,669 | ) | | | 390 | | | | 1,017 | |
| | | | | | | | | | | | |
| | $ | (2,167 | ) | | $ | (1,551 | ) | | $ | 1,727 | |
| | | | | | | | | | | | |
The components of the deferred tax assets and liabilities were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Deferred tax assets (liabilities): | | | | | | | | |
Basis differences on property and equipment | | $ | (10,135 | ) | | $ | (12,725 | ) |
Other | | | (1,066 | ) | | | (1,443 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (11,201 | ) | | | (14,168 | ) |
Deferred tax assets: | | | | | | | | |
NOL and capital loss carryforwards | | | 12,900 | | | | 12,671 | |
Book reserves not yet deductible for tax | | | 2,769 | | | | 3,174 | |
Tax credit carryforwards | | | 1,890 | | | | 1,225 | |
Other | | | 3,464 | | | | 2,629 | |
| | | | | | | | |
Total deferred tax assets | | | 21,023 | | | | 19,699 | |
Valuation allowance for deferred tax assets | | | (7,932 | ) | | | (7,219 | ) |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | | 13,091 | | | | 12,480 | |
| | | | | | | | |
Net deferred tax assets (liabilities) | | $ | 1,890 | | | $ | (1,688 | ) |
| | | | | | | | |
44
10. Income Taxes (continued)
The effective income tax rate varies from the statutory Federal income tax rate as a result of the following factors:
| | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Statutory Federal income tax rate | | (34.0 | %) | | (34.0 | %) | | 34.0 | % |
Change in Federal income tax rate for deferred taxes | | — | | | (1.4 | %) | | — | |
Change in valuation allowance | | 5.9 | % | | — | | | | |
State taxes, net of Federal benefit | | 1.9 | % | | (6.6 | %) | | 10.3 | % |
Non-deductible provisions and expenses | | 8.3 | % | | 14.7 | % | | 8.3 | % |
| | | | | | | | | |
Effective tax rate | | (17.9 | %) | | (27.3 | %) | | 52.6 | % |
| | | | | | | | | |
On June 30, 2003, the State of New Jersey amended the New Jersey Casino Control Act, effective July 1, 2003, to impose or increase certain taxes and fees, including a tax at the rate of 7.5% on the adjusted net income of casino licensees in calendar year 2002, payable in the state’s fiscal years 2004 though 2006. The amount of this tax for each licensee is limited to a maximum of $10.0 million annually and a minimum of $350,000 annually. For the years ended December 31, 2005, 2004 and 2003, the Company recorded a provision of $350,000, $350,000 and $175,000, respectively, for this tax.
On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act which, among other things, required the suspension of the use of the New Jersey net operating loss carryforwards for two years and introduced an alternative minimum assessment (“NJAMA”) under the New Jersey corporate business tax based on gross receipts or gross profits, as defined. The Tax Act was retroactive to January 1, 2002. In accordance with the Tax Act, the Company recorded a provision for current income tax of $665,000, $619,000 and $597,000, net of Federal benefit, for the years ended December 31, 2005, 2004 and 2003, respectively. Due to the unlimited expiration period of future tax credits associated with taxes paid under the NJAMA, the Company has a deferred tax asset recorded (in other long-term assets) of $1.8 million as of December 31, 2005.
At December 31, 2005, the Company has a net operating loss carryforward for Federal purposes of $18.3 million, which will begin expiring in the year 2024 and forward. A valuation allowance has been provided against the Company’s net Federal deferred tax asset including the net operating loss carryforwards.
At December 31, 2005, the Company has a state net operating loss carryforward of approximately $112.1 million. The carryforward will expire as follows: 2006, $2.4 million; 2007, $40.2 million; 2008, $20.7 million and 2009, $48.8 million. The Company has reported a full valuation allowance against the carryforward because it does not expect to realize the tax benefit, primarily due to the limited expiration period.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has determined that the realization of certain of the Company’s deferred tax assets is not more likely than not and, as such, has provided a valuation allowance against those deferred tax assets at December 31, 2005 and 2004.
11. Common Stock and Stock Based Compensation
The proceeds from the sale of 1,915 shares of Class A Common Stock and 38,750 shares of Class B Common Stock have been classified separately from shareholders’ equity as “Redeemable Common Stock” in the balance sheet to reflect the rights granted to a shareholder to require CRH to repurchase his shares under certain circumstances.
Under the Colony RIH Holdings, Inc. 2001 Omnibus Stock Incentive Plan, as amended, (the “Plan”), awards denominated or payable in shares or options to purchase shares of CRH’s common stock may be granted to officers and other key employees and consultants of CRH and its subsidiaries. The Plan permits the granting of up to 2,131 shares of Class A Common Stock and 43,122 shares of Class B Common Stock. The Board of Directors has sole discretion concerning administration of the Plan,
45
11. Common Stock and Stock Based Compensation (continued)
including the determination of award goals, individuals to receive awards, types of awards, the terms and conditions of the awards, and the time at which awards will be granted. The Board of Directors may terminate the Plan at any time.
The exercise price for awards issued under the Plan is determined by the Board of Directors and is generally equal to the fair market value of CRH’s common stock at the date of the grant. All of these options may be called by the Company in certain circumstances as defined in the agreement. For financial accounting purposes, these awards are re-measured at the end of each reporting period using the intrinsic value method and changes in intrinsic value are recorded as compensation expense at the end of each reporting period until the options are exercised.
Except for 555 Class A options and 11,188 Class B options which were granted to an independent contractor in 2001, and were immediately vested, the options have various terms from three to five years, and are exercisable in annual installments.
A summary of the status of the CRH’s stock option plan is presented below—
| | | | | | | | | | | | |
| | | A Shares Total | | | B Shares Total | |
| | | Granted | | | Vested | | | Granted | | | Vested | |
Balance at December 31, 2002 | | 1,789 | | | 801 | | | 36,204 | | | 16,191 | |
Granted | | 77 | | | — | | | 1,556 | | | — | |
Vested | | — | | | 181 | | | — | | | 4,000 | |
Forfeited | | (325 | ) | | (65 | ) | | (6,571 | ) | | (1,314 | ) |
| | | | | | | | | | | | |
Balance at December 31, 2003 | | 1,541 | | | 917 | | | 31,189 | | | 18,877 | |
| | | | | | | | | | | | |
Granted | | — | | | — | | | — | | | — | |
Vested | | — | | | 196 | | | — | | | 4,000 | |
Forfeited | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Balance at December 31, 2004 | | 1,541 | | | 1,113 | | | 31,189 | | | 22,877 | |
| | | | | | | | | | | | |
Granted | | 479 | | | — | | | 9,687 | | | — | |
Vested | | — | | | 516 | | | — | | | 10,458 | |
Forfeited | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Balance at December 31, 2005 | | 2,020 | | | 1,629 | | | 40,876 | | | 33,335 | |
| | | | | | | | | | | | |
Compensation valuation credits recognized on all stock option awards for the years ended December 31, 2005, 2004 and 2003 was approximately $0, $0, and $(23,000), respectively.
The exercise price of all outstanding Class B options is $100 per share.
12. Commitments and Contingencies
Litigation
The Company is a defendant in certain litigation. In the opinion of management, based upon advice of counsel, the aggregate liability, if any, arising from such litigation will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
License Renewal
On January 21, 2004, the New Jersey Casino Control Commission (the “NJCCC”) renewed RIH’s license to operate its casino hotel complex in Atlantic City for the four-year period ending January 31, 2008. The license period for a casino license renewed after April 30, 2004, shall be up to five years, but the NJCCC may reopen licensing hearings at any time. The NJCCC shall act upon any such application prior to the date of expiration of the current license. A casino license is not transferable.
46
Commitments
The Company leases land, office space and certain equipment under non-cancelable operating lease arrangements. These leases expire in various years. Rent expense under these lease agreements for the years ended December 31, 2005, 2004 and 2003 was approximately $2.9 million, $3.1 million and $3.5 million, respectively. Future minimum lease payments under non-cancelable operating leases consist of the following at December 31, 2005 (in thousands):
| | | |
2006 | | $ | 2,323 |
2007 | | | 1,932 |
2008 | | | 1,932 |
2009 | | | 1,932 |
2010 and thereafter | | $ | 12,375 |
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, and restricted cash in other assets, are reasonable estimates of fair values because of the short term maturities of these investments. The carrying values of the capital leases and other notes payable approximate the fair market value of these instruments based on their terms and rates. CRDA deposits, bonds, and other investments are stated net of a valuation allowance reflecting the below-market interest rates associated with these investments, therefore the carrying values approximate their fair values. The fair value of the Company’s First Mortgage Notes is estimated to be $199,080,000 as of December 31, 2005, based on the trading price as of that date, compared to the carrying value of $177,669,000.
47
SCHEDULE II
COLONY RIH HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
| | | | | | | | | | | | | | |
| | | Balance at
Beginning of
Year | | Charged to
Costs and
Expenses | | | Other Changes (Deductions) | | | Balance at
End of Year |
Year ended December 31, 2003 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 4,202 | | $ | 468 | | | $ | (2,618 | )(a) | | $ | 2,052 |
Valuation allowance for CRDA investments | | $ | 10,443 | | $ | (2,280 | )(b) | | $ | 154 | (c) | | $ | 8,317 |
Year ended December 31, 2004 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 2,052 | | $ | 138 | | | $ | (743 | )(a) | | $ | 1,447 |
Valuation allowance for CRDA investments | | $ | 8,317 | | $ | 1,510 | | | $ | (1,242 | )(d) | | $ | 8,585 |
Year ended December 31, 2005 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 1,447 | | $ | 508 | | | $ | (621 | )(a) | | $ | 1,334 |
Valuation allowance for CRDA investments | | $ | 8,585 | | $ | 963 | | | $ | (281 | ) | | $ | 9,267 |
| (a) | Write-off uncollectible amounts. |
| (b) | Includes a $3.1 million reversal of discount. |
| (c) | CRDA administration charge related to reimbursement. |
| (d) | Includes write-off of funds donated. |
48
Report of Independent Registered Public Accounting Firm
Board of Directors
Resorts International Hotel and Casino, Inc.
We have audited the accompanying consolidated balance sheets of Resorts International Hotel and Casino, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and shareholder’s equity for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index to Financial Statements. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Resorts International Hotel and Casino, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 10, 2006, except for Note 7
and the fifth paragraph of Note 1 as
to which the date is March 29, 2006
Philadelphia, Pennsylvania
49
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| | | | | | | |
| | | December 31, |
| | | 2005 | | | 2004 |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 25,280 | | | $ | 31,512 |
Receivables, net | | | 6,607 | | | | 5,530 |
Inventories | | | 2,467 | | | | 2,332 |
Prepaid expenses and other current assets | | | 3,137 | | | | 3,060 |
Deferred income taxes, net | | | — | | | | 4,804 |
| | | | | | | |
Total current assets | | | 37,491 | | | | 47,238 |
Property and equipment, net | | | 256,696 | | | | 256,243 |
Other assets (including $103 and $500 of restricted cash and cash equivalents in 2005 and 2004, respectively) | | | 18,319 | | | | 18,215 |
| | | | | | | |
Total assets | | $ | 312,506 | | | $ | 321,696 |
| | | | | | | |
Liabilities and Shareholder’s Equity | | | | | | | |
Current liabilities | | | | | | | |
Current maturities of long-term debt | | $ | 5,617 | | | $ | 5,525 |
Accounts payable | | | 8,010 | | | | 10,957 |
Accrued interest payable | | | 6,050 | | | | 6,039 |
Accrued expenses and other current liabilities | | | 23,659 | | | | 16,449 |
Due to affiliates | | | 3,107 | | | | — |
| | | | | | | |
Total current liabilities | | | 46,443 | | | | 38,970 |
Long-term debt, less current portion | | | 194,224 | | | | 193,951 |
Deferred income taxes, net | | | — | | | | 6,582 |
| | | | | | | |
Total liabilities | | | 240,667 | | | | 239,503 |
Shareholder’s equity | | | | | | | |
Common stock—$0.01 par value, 10,000 shares authorized issued and outstanding | | | — | | | | — |
Capital in excess of par | | | 77,673 | | | | 77,673 |
Retained earnings (accumulated deficit) | | | (5,834 | ) | | | 4,520 |
| | | | | | | |
Total shareholder’s equity | | | 71,839 | | | | 82,193 |
| | | | | | | |
Total liabilities and shareholder’s equity | | $ | 312,506 | | | $ | 321,696 |
| | | | | | | |
See accompanying notes.
50
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Revenues: | | | | | | | | | | | | |
Casino | | $ | 268,074 | | | $ | 247,842 | | | $ | 230,135 | |
Lodging | | | 23,352 | | | | 18,341 | | | | 11,163 | |
Food and beverage | | | 24,282 | | | | 23,387 | | | | 22,079 | |
Other | | | 6,021 | | | | 8,439 | | | | 6,496 | |
Less: promotional allowances | | | (75,372 | ) | | | (67,123 | ) | | | (54,426 | ) |
| | | | | | | | | | | | |
Total net revenue | | | 246,357 | | | | 230,886 | | | | 215,447 | |
Costs and expenses: | | | | | | | | | | | | |
Casino | | | 127,636 | | | | 117,425 | | | | 117,156 | |
Lodging | | | 4,813 | | | | 3,360 | | | | 1,318 | |
Food and beverage | | | 9,327 | | | | 10,743 | | | | 11,721 | |
Other operating | | | 30,613 | | | | 28,585 | | | | 25,686 | |
Selling, general, and administrative | | | 42,579 | | | | 40,546 | | | | 30,983 | |
Depreciation and amortization | | | 20,657 | | | | 16,837 | | | | 9,993 | |
Pre-opening | | | — | | | | 2,722 | | | | — | |
| | | | | | | | | | | | |
Total costs and expenses | | | 235,625 | | | | 220,218 | | | | 196,857 | |
| | | | | | | | | | | | |
Income from operations | | | 10,732 | | | | 10,668 | | | | 18,590 | |
Interest income | | | 663 | | | | 522 | | | | 1,295 | |
Interest expense | | | (23,944 | ) | | | (19,195 | ) | | | (19,133 | ) |
Other income (expense), net | | | 28 | | | | 1,255 | | | | (281 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (12,521 | ) | | | (6,750 | ) | | | 471 | |
Provision (benefit) for income taxes | | | (2,167 | ) | | | (1,912 | ) | | | 1,727 | |
| | | | | | | | | | | | |
Net loss | | $ | (10,354 | ) | | $ | (4,838 | ) | | $ | (1,256 | ) |
| | | | | | | | | | | | |
See accompanying notes.
51
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Cash Flows from Operating Activities: | | | | | | | | | | | | |
Net loss | | $ | (10,354 | ) | | $ | (4,838 | ) | | $ | (1,256 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 19,694 | | | | 15,328 | | | | 12,273 | |
Amortization of debt premiums, discounts and issuance costs | | | 1,807 | | | | 1,858 | | | | 1,733 | |
Provision for doubtful receivables | | | 508 | | | | 138 | | | | 468 | |
Gain on disposal of fixed assets | | | (28 | ) | | | (1,255 | ) | | | — | |
Provision for discount on CRDA obligations, net of amortization | | | 963 | | | | 1,510 | | | | (2,280 | ) |
Deferred income tax | | | (3,669 | ) | | | 481 | | | | 1,017 | |
Other | | | — | | | | — | | | | 38 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Net increase in receivables | | | (1,585 | ) | | | (493 | ) | | | (545 | ) |
Net (increase) decrease in inventories, prepaid expenses and other current assets | | | (212 | ) | | | (1,123 | ) | | | 360 | |
Net decrease (increase) in deferred charges and other assets | | | 1,001 | | | | 532 | | | | (1,309 | ) |
Net increase in due to affiliates | | | 3,107 | | | | — | | | | — | |
Net decrease in accounts payable and accrued expense | | | (981 | ) | | | 2,422 | | | | (6,321 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 10,251 | | | | 14,560 | | | | 4,178 | |
| | | | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | | |
Purchases of cash and cash equivalents—restricted, net of releases | | | 398 | | | | 49,910 | | | | 39,613 | |
Proceeds from sale of fixed assets | | | 28 | | | | 1,724 | | | | — | |
Purchase of property and equipment | | | (11,966 | ) | | | (67,937 | ) | | | (53,490 | ) |
CRDA deposits | | | (3,292 | ) | | | (3,051 | ) | | | (3,021 | ) |
CRDA refunds | | | 63 | | | | 756 | | | | 9,189 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | $ | (14,769 | ) | | $ | (18,598 | ) | | $ | (7,709 | ) |
| | | | | | | | | | | | |
Continued
52
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Cash Flows from Financing Activities: | | | | | | | | | | | | |
Proceeds of borrowings | | $ | — | | | $ | 10,160 | | | $ | — | |
Payments to secure borrowings | | | (118 | ) | | | (135 | ) | | | (62 | ) |
Debt repayments | | | (1,606 | ) | | | (2,892 | ) | | | (979 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (1,724 | ) | | | 7,133 | | | | (1,041 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (6,242 | ) | | | 3,095 | | | | (4,572 | ) |
Cash and cash equivalents at beginning of year | | | 31,512 | | | | 28,417 | | | | 32,989 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 25,270 | | | $ | 31,512 | | | $ | 28,417 | |
| | | | | | | | | | | | |
Supplemental Cash Flow Disclosures: | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | |
Interest | | $ | 22,126 | | | $ | 21,395 | | | $ | 21,023 | |
Income taxes refunded, net | | $ | (353 | ) | | $ | (519 | ) | | $ | (609 | ) |
Non-cash investment and financing transactions: | | | | | | | | | | | | |
Obligations incurred for the purchase of property and equipment | | $ | 1,405 | | | $ | 7,577 | | | $ | 645 | |
See accompanying notes.
53
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Dollars in thousands)
| | | | | | | | | | | | | | | |
| | | Common
Stock | | Capital in
Excess of
Par | | | Retained
Earnings
Accumulated | | | Total
Shareholders’
Equity | |
Balance at January 1, 2003 | | $ | — | | $ | 77,696 | | | $ | 10,614 | | | $ | 88,310 | |
Change in value of stock options granted to employees and consultants | | | — | | | (23 | ) | | | — | | | | (23 | ) |
Net loss | | | — | | | — | | | | (1,256 | ) | | | (1,256 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2003 | | | — | | | 77,673 | | | | 9,358 | | | | 87,031 | |
| | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | | (4,838 | ) | | | (4,838 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2004 | | | — | | | 77,673 | | | | 4,520 | | | | 82,193 | |
| | | | | | | | | | | | | | | |
Net loss | | | — | | | — | | | | (10,354 | ) | | | (10,354 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | $ | — | | $ | 77,673 | | | $ | (5,834 | ) | | $ | 71,839 | |
| | | | | | | | | | | | | | | |
See accompanying notes.
54
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Consolidation
Colony RIH Holdings, Inc., a Delaware corporation (“CRH”), owns 100% of the outstanding common stock of Resorts International Hotel and Casino, Inc., a Delaware corporation (“RIHC” or the “Company”). RIHC, through its wholly-owned subsidiary, Resorts International Hotel, Inc., a New Jersey corporation (“RIH”), owns and operates Resorts Atlantic City (“Resorts”), a casino/hotel located in Atlantic City, NJ. Colony RIH Holdings, Inc, Resorts International Hotel and Casino, Inc. and Resorts International Hotels, Inc. are referred to collectively as the “Companies”.
CRH was formed at the direction of Colony Investors IV, L.P. (“Colony IV”), a Delaware limited partnership, under the laws of the State of Delaware on March 7, 2001. RIHC was formed at the direction of Colony IV on October 24, 2000.
RIHC, Kerzner International North America, Inc., a Delaware corporation (“KINA”), formerly Sun International North America, Inc., and GGRI, Inc., a Delaware corporation (“GGRI”), entered into a purchase agreement, dated October 30, 2000, as amended (the “Purchase Agreement”). Pursuant to the Purchase Agreement, RIHC acquired all of the capital stock of RIH, the Warehouse Assets (as defined in the Purchase Agreement) and all of the capital stock of New Pier Operating Company, Inc. (“New Pier”), a New Jersey corporation (collectively, the “Acquisition”) on April 25, 2001 for approximately $144.8 million.
The consolidated financial statements include the accounts of RIHC and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
As discussed in Note 7, absent amendments to the Commerce Facility and the CIT Facility, the Company would not have been in compliance with financial covenants contained in its CIT Facility and Commerce Facility as of December 31, 2005. Management has also renegotiated the financial covenants with CIT and Commerce for periods subsequent to December 31, 2005. Management believes, based on the information currently available, that the results of its operations will allow the Company to meet these financial covenants. However, there can be no assurances that management will be successful in this regard.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Allowances for doubtful accounts arising from casino, hotel and other services, are based upon a specific review of certain outstanding receivables. In determining the amounts of the allowances, certain estimates and assumptions are made, and actual results may differ from those assumptions.
Cash Equivalents
Short-term money market securities purchased with original maturities of three months or less are considered to be cash equivalents. These securities are classified as available-for-sale, which are carried at fair value with unrealized gains and losses, net of tax, reported in other comprehensive income. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these instruments.
Under the terms of the Disbursement Agreement, dated March 22, 2002, funds remaining in the liquidity disbursement account after the final Test Period (as defined in the Indenture, the four fiscal quarter period ending December 31, 2004) , and upon certification by RIHC of certain conditions, would be returned to RIHC and could be distributed as a dividend to CRH. This certification was delivered by RIHC, and accordingly on January 20, 2005 the $9.7 million remaining in the liquidity disbursement account was delivered to RIHC.
55
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories of provisions, supplies and spare parts are valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives reported below using the straight-line method. Interest costs incurred during the construction period are capitalized in accordance with Statement of Financial Accounting Standards No. 34, “Capitalization of Interest Costs” (“SFAS No. 34”). No interest expense was capitalized during 2005 since the capital projects and construction periods did not meet the standards of SFAS No. 34. Interest expense of $4.1 million and $3.6 million was capitalized for the years ended December 31, 2004 and 2003, respectively. No interest costs were capitalized for the year ended December 31, 2005.
| | |
Hotels and other buildings | | 35 – 40 years |
Furniture fixtures and equipment | | 2 – 5 years |
The provisions of Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) requires, among other things, that an entity review its long-lived assets and certain intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. SFAS No. 144 requires an impairment loss to be recognized only if the carrying amounts of long-lived assets to be held and used are not recoverable from their expected undiscounted future cash flows.
Income Taxes
The Company follows the provisions of SFAS No. 109, “Accounting for Income Taxes”. Accordingly, deferred tax assets and liabilities are calculated as the difference between the financial statement carrying amounts and tax bases of assets and liabilities. These differences are affected by the tax rate for the year in which they are expected to be recovered or settled. A valuation allowance is recognized, if necessary, to account for the likelihood that these differences will not be realized in the future. Note 10 further addresses the components of the deferred tax assets and liabilities.
Revenue Recognition
Gaming revenue is recorded as the net win from gaming activities, which represents the difference between amounts wagered and amounts won by patrons. Revenues from hotel and related services and from theater ticket sales are recognized at the time the related service is performed.
Self Insured Health Insurance
Effective June 2005, the company changed its medical coverages for its non union employees. Such employees are now covered under a self-insured medical plan up to a maximum of $200,000 per year for each insured person. Amounts in excess of these thresholds are covered by the company’s insurance programs subject to customary policy limits.
56
2. Summary of Significant Accounting Policies (continued)
Promotional Allowances
The retail value of hotel accommodations, food, beverage and other services provided to customers without charge is included in gross revenues and deducted as promotional allowances. The estimated departmental costs of providing such promotional allowances are included in gaming costs and expenses as follows (in thousands):
| | | | | | | | | |
| | | Year ended December 31, |
| | | 2005 | | 2004 | | 2003 |
Rooms | | $ | 8,352 | | $ | 9,849 | | $ | 10,363 |
Food and beverage | | | 20,988 | | | 16,115 | | | 15,729 |
Entertainment and other | | | 3,681 | | | 3,678 | | | 3,390 |
| | | | | | | | | |
| | $ | 33,021 | | $ | 29,642 | | $ | 29,482 |
| | | | | | | | | |
Cash discounts based upon a negotiated amount with each customer are recognized as a promotional allowance on the date the related revenues are recorded. Cash-back awards given to a customer based upon earning points for future awards are accrued as the customer earns the points. The amount is recorded as a promotional allowance in the statement of operations. When estimating the amount of the accrual, the company calculates a redemption rate based on historical redemption rates.
The Company offers other incentive programs. These are gifts and other promotional items, the type and distribution of which is determined by management. Since these awards are not cash awards, the Company records them as gaming expenses in the statement of operations. Such amounts are expensed on the date the award can be utilized by the customer.
Advertising
The Company expenses advertising costs as incurred. For the years ended December 31, 2005, 2004 and 2003 these costs amounted to $8.1 million, $6.9 million and $6.3 million, respectively and are included in Selling, General and Administrative costs on the Company’s Consolidated Statements of Operations.
Pre-Opening Expenses
For the year ended December 31, 2004, the Company recorded $2.7 million of pre-opening expenses, primarily advertising and related costs, to promote the opening of the New Tower.
Stock Based Compensation
As allowed under the provisions of Financial Accounting Standards Board Statement Number 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” the Company applies the provisions of Accounting Principles Board Opinion Number 25, “Accounting for Stock Issued to Employees,” and a related interpretation in accounting for employee stock options, and accordingly, does not recognize compensation expense. Had compensation expense for the employee stock option plan been determined in accordance with SFAS No. 123, pro forma results of operations would not have been materially different from reported results of operations.
57
2. Summary of Significant Accounting Policies (continued)
Equity instruments issued to non-employees in exchange for goods or services are accounted for using the fair value method and expense is recorded based on the value determined.
New Accounting Pronouncement
In December 2004, the FASB issued Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires stock-based employee compensation to be measured based on the grant-date fair value of the award and the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS 123(R) eliminates the alternative use of APB No. 25’s intrinsic value method of accounting for stock options granted to employees.
The Company adopted the provisions of SFAS No. 123R on January 1, 2006 using the modified prospective transition method and the Black-Scholes valuation model to value the stock options. As a result of the provisions of SFAS 123R, the Company expects to incur compensation charges that will not be material to the Company’s financial statements for the year ending December 31, 2006. However, the estimated compensation charges can be affected by a number of variables, including the Company’s stock price and the timing of 2006 employee stock option grants. The Company will recognize compensation cost for stock-based awards issued after December 31, 2005, on a straight-line basis over the requisite service period of the award.
3. Receivables
Components of receivables were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Gaming | | $ | 6,413 | | | $ | 5,315 | |
Less: allowance for doubtful accounts | | | (1,307 | ) | | | (1,415 | ) |
| | | | | | | | |
| | | 5,106 | | | | 3,900 | |
Non-gaming: | | | | | | | | |
Hotel and related | | | 492 | | | | 642 | |
Other | | | 1,036 | | | | 1,020 | |
| | | | | | | | |
| | | 1,528 | | | | 1,662 | |
Less: allowance for doubtful accounts | | | (27 | ) | | | (32 | ) |
| | | | | | | | |
| | | 1,501 | | | | 1,630 | |
| | | | | | | | |
Receivables, net | | $ | 6,607 | | | $ | 5,530 | |
| | | | | | | | |
58
4. Property and Equipment
Components of property and equipment were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Land and land rights | | $ | 34,698 | | | $ | 34,698 | |
Hotels and other buildings | | | 204,867 | | | | 193,306 | |
Furniture, fixtures and equipment | | | 67,009 | | | | 62,582 | |
Construction in progress | | | 3,383 | | | | 1,816 | |
| | | | | | | | |
| | | 309,957 | | | | 292,402 | |
Less: accumulated depreciation | | | (53,261 | ) | | | (36,159 | ) |
| | | | | | | | |
Net property and equipment | | $ | 256,696 | | | $ | 256,243 | |
| | | | | | | | |
5. Other Assets
Components of deferred charges and other assets were as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
CRDA deposits, bonds and other investments, net | | $ | 11,649 | | $ | 11,085 |
Debt issuance costs, net | | | 3,982 | | | 5,104 |
Other | | | 2,585 | | | 1,526 |
Restricted cash | | | 103 | | | 500 |
| | | | | | |
| | $ | 18,319 | | $ | 18,215 |
| | | | | | |
The New Jersey Casino Control Act, as amended, requires RIH to purchase bonds issued by the Casino Reinvestment Development Authority (“CRDA”) or make other investments authorized by the CRDA, in an amount equal to 1.25% of RIH’s gross gaming revenue, as defined.
The CRDA bonds have interest rates ranging from 3.5% to 7.0% and have repayment terms of between 20 and 50 years. RIH records charges to expense to reflect the below-market interest rate payable on the bonds it may have to purchase to fulfill its investment obligation at the date the obligation arises. The charges (credits) for the years 2005, 2004 and 2003 for discounts on obligations arising in those years were $963,000, $1.5 million, and ($2.3 million), respectively. The 2003 credit is due to the reversal of approximately $3.0 million of amortization expense related to discounts on funds previously deposited with the CRDA in below-market bearing instruments. This reversal resulted from the receipt from the CRDA of $9,189,000 of previously deposited funds as reimbursement for costs incurred for the construction of the New Tower. The discount on CRDA bonds purchased is amortized to interest income over the life of the bonds using the effective interest method.
From time to time RIH has donated certain funds it has had on deposit with the CRDA in return for either relief from its obligation to purchase CRDA bonds or credits against future CRDA deposits. At December 31, 2005 and 2004, RIH owned $6.9 million and $7.0 million face value of bonds, respectively, issued by the CRDA and had $8.6 million and $7.2 million, respectively, on deposit with the CRDA. The majority of the Company’s deposits have been pledged for specific projects.
Debt issuance costs consist of amounts incurred in connection with obtaining long-term debt. The costs are amortized on a straight-line basis over the contractual life of the loan and amortization of such costs are included in interest expense.
Restricted cash in 2005 and 2004 represents proceeds from an asset sale which must be used to purchase “Replacement Assets” in accordance with the terms of the First Mortgage Notes Indenture.
59
6. Accrued Expenses and Other Current Liabilities
Components of accrued expenses and other current liabilities were as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
Payroll | | $ | 9,637 | | $ | 7,655 |
Insurance and related costs | | | 1,313 | | | 1,799 |
Unredeemed chip liability | | | 1,219 | | | 1,091 |
Liability for unredeemed cash incentives | | | 990 | | | 2,011 |
Other | | | 10,500 | | | 3,893 |
| | | | | | |
| | $ | 23,659 | | $ | 16,449 |
| | | | | | |
7. Long-Term Debt
Long-term debt is summarized as follows at December 31 (in thousands):
| | | | | | |
| | | 2005 | | 2004 |
First Mortgage Notes, net of unamortized discount | | $ | 177,669 | | $ | 177,103 |
Thermal Energy capital lease | | | 5,966 | | | 6,280 |
CIT/FF&E Financing | | | 15,956 | | | 15,543 |
Other notes payable | | | 250 | | | 550 |
| | | | | | |
| | | 199,841 | | | 199,476 |
Less: current portion | | | 5,617 | | | 5,525 |
| | | | | | |
| | $ | 194,224 | | $ | 193,951 |
| | | | | | |
On March 22, 2002, RIHC sold $180.0 million aggregate principal amount of First Mortgage Notes (the “First Mortgage Notes”) at a price of 97.686% yielding $175.8 million. Interest on the First Mortgage Notes is payable on March 15 and September 15 of each year, and the First Mortgage Notes are due in full on March 15, 2009. Beginning March 15, 2007, the Company may redeem all or a part of the First Mortgage Notes at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest: March 15, 2007 through March 14, 2008, 106.0%; March 15, 2008 through March 14, 2009, 103.0%; and on or after March 15, 2009, 100.0%.
The First Mortgage Notes contain certain covenants that, among other things, limit RIHC’s ability and the ability of its subsidiaries to pay dividends on, redeem or repurchase its or their capital stock, make investments, incur additional indebtedness, permit payment of or restrict dividends by certain of its subsidiaries, enter into sale leaseback transactions, sell assets, guarantee indebtedness, create certain liens, engage in transactions with affiliates, and consolidate, merge or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis. The First Mortgage Notes also contain cross-default provisions whereby the acceleration of any indebtedness in an aggregate amount of $5.0 million prior to its scheduled maturity constitutes an event of default under the First Mortgage Notes Indenture.
In June 2002, RIH entered into a Thermal Energy Services Agreement (the “Thermal Agreement”). The initial term of the Thermal Agreement is 20 years, renewable at RIH’s option for two additional five-year terms. The Thermal Agreement has three components: a monthly charge for operation and maintenance of the thermal energy facilities; a capital lease component for capital improvements whose value was estimated at $6.5 million on the date the Thermal Agreement was executed, and; a usage fee for steam and chilled water, whose usage and rate will vary by month of the year. The outstanding balance of the capital lease was $6.0 million at December 31, 2005.
In June 2002, RIH entered into a Restated Loan and Security Agreement with CIT Group/Equipment Financing, Inc (“CIT Facility”). The CIT Facility permits RIH to borrow up to $20 million for the purchase of machinery, furniture, or equipment. Loans pursuant to the CIT Facility are repayable in up to a sixty-month amortization period from the date the loan is made. The outstanding loans associated with the CIT Facility bear interest at the rate of LIBOR plus three and one-half percent.
60
7. Long-Term Debt (continued)
RIH is required to pay an annual fee equal to one-half percent of the unused portion of the CIT Facility. The outstanding balance due to CIT at December 31, 2005 was $16.0 million. The CIT Facility contains a fixed charge coverage ratio and a senior leverage financial covenant as defined in the Credit Facility. On March 29, 2006, the CIT Facility was amended to modify the required covenant calculations at December 31, 2005 and on a prospective basis. Absent this amendment, the Company would not have been in compliance with the financial covenants. As a part of the amendment, the Company was required to pay $1 million of the outstanding principal prior to March 31, 2006 and a fee of $80,000. The amendment also redefined the interest rate on the facility based on a sliding scale on operating results (as defined). The $1 million of outstanding principal has been reflected as a current liability at December 31, 2005.
In November 2002, RIH entered into a Loan and Security Agreement with Commerce Bank, N.A (“Commerce Facility”). The Commerce Facility provides for working capital borrowings and letters of credit up to $10 million. The Commerce Facility expires on June 30, 2006. There was no outstanding balance on the Commerce Facility at December 31, 2005; however, $5.1 million of standby letters of credit have been issued against the Commerce Facility, leaving an availability of $4.9 million as of December 31, 2005. The Commerce Facility contains an interest coverage ratio and a minimum net worth requirement as defined in the Commerce Facility. On March 29, 2006, the CIT Facility was amended to modify the required covenant calculations at December 31, 2005 and on a prospective basis. Absent this amendment, the Company would not have been in compliance with the financial covenants.
During 2004, RREH purchased 2.0 acres of land adjacent to the Resorts site (see Note 14). The land was acquired in exchange for the issuance of a $40 million note by RREH to KINA. This $40 million note will mature immediately following the maturity, acceleration or refinancing (other than permitted refinancing) of the First Mortgage Notes which are due March 15, 2009.
Interest on the $40 million note will be payable semi-annually, and will be calculated at the following annual rates: 0% through September 2004, 4% from October 2004 through March 2006, 6% from April 2006 through March 2008, and 9% from April 2008 through March 2009. The note payable to KINA is guaranteed by CRH, RIHC and RIH, provided, however that the guarantee of RIHC and RIH does not become effective until either the First Mortgage Notes have been paid in full or the fixed charge coverage ratio of RIHC is at least 2.0 to 1.0. At December 31, 2005 the fixed charge coverage ratio was 1.0 to 1.0. In addition, the amount guaranteed is initially limited to $20 million increasing by $5 million each year. The KINA Note contains cross-default provisions whereby the acceleration of the scheduled maturity of the First Mortgage Notes constitutes an event of default under the KINA Note.
The aggregate amount of principal payments on all long–term indebtedness, by year is as follows (in thousands):
| | | |
2006 | | $ | 5,617 |
2007 | | | 5,746 |
2008 | | | 5,669 |
2009 | | | 180,298 |
2010 | | | 310 |
Thereafter | | | 4,533 |
| | | |
Total | | $ | 202,173 |
| | | |
8. Related Party Transactions
For the years ended December 31, 2005, 2004 and 2003, the Company incurred expenses of approximately $297,000, $380,000 and $105,000, respectively, for fees and expenses incurred by affiliates of Colony Capital, the Company’s principal shareholder, and the Company’s directors.
In June 2004, RIHC and RIH entered into agreements with Colony Resorts LVH Acquisitions, LLC (“LVH”), which operates the Las Vegas Hilton. Under the terms of the agreements, if either company incurs costs in excess of its direct share or any expenses which are directly allocable to or incurred on behalf of the other company those costs will be reimbursed by that
61
8. Related Party Transactions (continued)
company. In April 2005, this agreement was amended to include Resorts International Holdings, LLC (“RIH LLC”), which operates Resorts East Chicago, Resorts Tunica, Bally’s Tunica and the Atlantic City Hilton.
The charges pursuant to the agreements are discretionary in nature and are agreed to by the parties to the agreements. During the year ended December 31, 2005, the Company charged to its affiliates $6.9 million as a result of these agreements and had a receivable recorded in the amount of $4.2 million for the amount due. Additionally, during the year ended December 31, 2005, the Company received charges of $7.3 million from its affiliates as a result of these agreements. The charge from the affiliate includes charges for medical and other insurance costs related to employees of the Company under a self-insured program managed by an affiliate of the Company which totaled $5.2 million for the year ended December 31, 2005. At December 31, 2005, the Company had a payable of $7.3 million to its affiliates. The operating results of the Company may be different if the Company operated autonomously and without these transactions with its affiliates.
9. Retirement Plans
RIH has a defined contribution plan in which substantially all non-union employees are eligible to participate. Employees of certain other affiliated companies are also eligible to participate in this plan. Contributions are made to the plan based on a percentage of eligible employee contributions. Contribution expense for this plan was $582,000, $592,000, and $609,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
Union employees are covered by various multi-employer pension plans to which contributions are made by RIH and other unrelated employers. RIH’s pension expense for these plans was $2,168,000, $1,919,000, and $1,709,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
10. Income Taxes
Income tax expense (benefit) is comprised of the following for the year ended December 31 (in thousands):
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | (3,681 | ) | | $ | (369 | ) |
State | | | 1,502 | | | | 1,288 | | | | 1,079 | |
| | | | | | | | | | | | |
| | | 1,502 | | | | (2,393 | ) | | | 710 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (2,516 | ) | | | 2,337 | | | | 1,017 | |
State | | | (1,153 | ) | | | (1,856 | ) | | | — | |
| | | | | | | | | | | | |
| | | (3,669 | ) | | | 481 | | | | 1,017 | |
| | | | | | | | | | | | |
| | $ | (2,167 | ) | | $ | (1,912 | ) | | $ | 1,727 | |
| | | | | | | | | | | | |
62
10. Income Taxes (continued)
The components of the deferred tax assets and liabilities were as follows at December 31 (in thousands):
| | | | | | | | |
| | | 2005 | | | 2004 | |
Deferred tax assets (liabilities): | | | | | | | | |
Basis differences on property and equipment | | $ | (10,135 | ) | | $ | (12,725 | ) |
Other | | | (1,066 | ) | | | (1,443 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (11,201 | ) | | | (14,168 | ) |
Deferred tax assets: | | | | | | | | |
NOL and capital loss carryforwards | | | 12,833 | | | | 12,671 | |
Book reserves not yet deductible for tax | | | 2,769 | | | | 3,174 | |
Tax credit carryforwards | | | 1,890 | | | | 1,225 | |
Other | | | 3,464 | | | | 2,538 | |
| | | | | | | | |
Total deferred tax assets | | | 20,956 | | | | 19,608 | |
Valuation allowance for deferred tax assets | | | (7,865 | ) | | | (7,219 | ) |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | | 13,091 | | | | 12,389 | |
| | | | | | | | |
Net deferred tax assets (liabilities) | | $ | 1,890 | | | $ | (1,779 | ) |
| | | | | | | | |
The effective income tax rate varies from the statutory Federal income tax rate as a result of the following factors:
| | | | | | | | | |
| | | Year ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
Statutory Federal income tax rate | | (34.0 | %) | | (34.0 | %) | | 34.0 | % |
Change in Federal income tax rate for deferred taxes | | — | | | (1.4 | %) | | — | |
Change in valuation allowance | | 5.9 | % | | (1.2 | %) | | 0.0 | % |
State taxes, net of Federal benefit | | 1.9 | % | | (5.5 | %) | | 151.3 | % |
Non-deductible provisions and expenses | | 8.3 | % | | 12.4 | % | | 181.7 | % |
| | | | | | | | | |
Effective tax rate | | (17.9 | %) | | (28.3 | %) | | 367.0 | % |
| | | | | | | | | |
On June 30, 2003, the State of New Jersey amended the New Jersey Casino Control Act, effective July 1, 2003, to impose or increase certain taxes and fees, including a tax at the rate of 7.5% on the adjusted net income of casino licensees in calendar year 2002, payable in the state’s fiscal years 2004 though 2006. The amount of this tax for each licensee is limited to a maximum of $10.0 million annually and a minimum of $350,000 annually. For the years ended December 31, 2005, 2004 and 2003, the Company recorded a provision of $350,000, $350,000 and $175,000, respectively
On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act which, among other things, required the suspension of the use of the New Jersey net operating loss carryforwards for two years and introduced an alternative minimum assessment (“NJAMA”) under the New Jersey corporate business tax based on gross receipts or gross profits, as defined. The Tax Act was retroactive to January 1, 2002. In accordance with the Tax Act, the Company recorded a provision for current income tax of $665,000, $619,000 and $597,000, net of Federal benefit, for the years ended December 31, 2005, 2004 and 2003, respectively. Due to the unlimited expiration period of future tax credits associated with taxes paid under the NJAMA, the Company has a deferred tax asset recorded (in other long-term assets) of $1.8 million as of December 31, 2005.
At December 31, 2005, the Company has a net operating loss carryforward for Federal purposes of $18.3 million, which will begin expiring in the year 2024 and forward. A valuation allowance has been provided against the Company’s net Federal deferred tax asset including the net operating loss carryforwards.
63
10. Income Taxes (continued)
At December 31, 2005, the Company has a state net operating loss carryforward of approximately $112.1 million. The carryforward will expire as follows: 2006, $2.4 million; 2007, $40.2 million; 2008, $20.7 million and 2009, $48.8 million. The Company has reported a full valuation allowance against the carryforward because it does not expect to realize the tax benefit, primarily due to the limited expiration period.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has determined that the realization of certain of the Company’s deferred tax assets is not more likely than not and, as such, has provided a valuation allowance against those deferred tax assets at December 31, 2005 and 2004.
11. Common Stock and Stock Based Compensation
Under the Colony RIH Holdings, Inc. 2001 Omnibus Stock Incentive Plan, as amended, (the “Plan”), awards denominated or payable in shares or options to purchase shares of CRH’s common stock may be granted to officers and other key employees and consultants of CRH and its subsidiaries. The Plan permits the granting of up to 2,131 shares of Class A Common Stock and 43,122 shares of Class B Common Stock. The Board of Directors has sole discretion concerning administration of the Plan, including the determination of award goals, individuals to receive awards, types of awards, the terms and conditions of the awards, and the time at which awards will be granted. The Board of Directors may terminate the Plan at any time.
The exercise price for awards issued under the Plan is determined by the Board of Directors and is generally equal to the fair market value of CRH’s common stock at the date of the grant All of these options may be called by the Company in certain circumstances as defined in the agreement. For financial accounting purposes, these awards are re-measured at the end of each reporting period using the intrinsic value method and changes in intrinsic value are recorded as compensation expense at the end of each reporting period until the options are exercised.
Except for 555 Class A options and 11,188 Class B options which were granted to an independent contractor in 2001, and were immediately vested, the options have various terms from three to five years, and are excerisable in annual installments.
A summary of the status of the CRH’s stock option plan is presented below—
| | | | | | | | | | | | |
| | | Total A Shares | | | Total B Shares | |
| | | Granted | | | Vested | | | Granted | | | Vested | |
Balance at December 31, 2002 | | 1,789 | | | 801 | | | 36,204 | | | 16,191 | |
Granted | | 77 | | | — | | | 1,556 | | | — | |
Vested | | — | | | 181 | | | — | | | 4,000 | |
Forfeited | | (325 | ) | | (65 | ) | | (6,571 | ) | | (1,314 | ) |
| | | | | | | | | | | | |
Balance at December 31, 2003 | | 1,541 | | | 917 | | | 31,189 | | | 18,877 | |
| | | | | | | | | | | | |
Granted | | — | | | — | | | — | | | — | |
Vested | | — | | | 196 | | | — | | | 4,000 | |
Forfeited | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Balance at December 31, 2004 | | 1,541 | | | 1,113 | | | 31,189 | | | 22,877 | |
| | | | | | | | | | | | |
Granted | | 479 | | | — | | | 9,687 | | | — | |
Vested | | — | | | 516 | | | — | | | 10,458 | |
Forfeited | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Balance at December 31, 2005 | | 2,020 | | | 1,629 | | | 40,876 | | | 33,335 | |
| | | | | | | | | | | | |
Compensation valuation credits recognized on all stock option awards for the years ended December 31, 2005, 2004 and 2003 was approximately $0, $0, and $(23,000), respectively.
The exercise price of outstanding Class B options is $100 per share.
64
12. Commitments and Contingencies
Litigation
The Company is a defendant in certain litigation. In the opinion of management, based upon advice of counsel, the aggregate liability, if any, arising from such litigation will not have a material adverse effect on the financial position, results of operations, or liquidity of RIHC.
License Renewal
On January 21, 2004, the New Jersey Casino Control Commission (the “NJCCC”) renewed RIH’s license to operate its casino hotel complex in Atlantic City for the four-year period ending January 31, 2008. The license period for a casino license renewed after April 30, 2004, shall be up to five years, but the NJCCC may reopen licensing hearings at any time. The NJCCC shall act upon any such application prior to the date of expiration of the current license. A casino license is not transferable.
Commitments
The Company leases land, office space and certain equipment under non-cancelable operating lease arrangements. These leases expire in various years. Rent expense under these lease agreements for the years ended December 31, 2005, 2004 and 2003 were approximately $3.0 million, $5.4 million and $3.5 million, respectively. Future minimum lease payments under noncancelable operating leases consist of the following at December 31, 2005 (in thousands):
| | | |
2006 | | $ | 2,633 |
2007 | | | 2,447 |
2008 | | | 2,447 |
2009 | | | 2,447 |
2010 and thereafter | | $ | 13,175 |
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, and restricted cash in other assets, are reasonable estimates of fair values because of the short term maturities of these investments. The carrying values of the capital leases and other notes payable approximate the fair market value of these instruments based on their terms and rates. CRDA deposits, bonds, and other investments are stated net of a valuation allowance reflecting the below-market interest rates associated with these investments, therefore the carrying values approximate their fair values. The fair value of the Company’s First Mortgage Notes is estimated to be $199,080,000 as of December 31, 2005, based on the trading price as of that date, compared to the carrying value of $177,669,000.
65
SCHEDULE II
RESORTS INTERNATIONAL HOTEL AND CASINO, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
| | | | | | | | | | | | | | |
| | | Balance at
Beginning of
Year | | Charged to
Costs and
Expenses | | | Other Changes (Deductions) | | | Balance at
End of Year |
Year ended December 31, 2003 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 4,202 | | $ | 468 | | | $ | (2,618 | )(a) | | $ | 2,052 |
Valuation allowance for CRDA investments | | $ | 10,443 | | $ | (2,280 | )(b) | | $ | 154 | (c) | | $ | 8,317 |
Year ended December 31, 2004 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 2,052 | | $ | 138 | | | $ | (743 | )(a) | | $ | 1,447 |
Valuation allowance for CRDA investments | | $ | 8,317 | | $ | 1,510 | | | $ | (1,242 | )(d) | | $ | 8,585 |
Year ended December 31, 2005 | | | | | | | | | | | | | | |
Allowances for doubtful accounts | | $ | 1,447 | | $ | 508 | | | $ | (621 | )(a) | | $ | 1,334 |
| | | | | | | | | | | | | | |
Valuation allowance for CRDA investments | | $ | 8,585 | | $ | 963 | | | $ | (281 | ) | | $ | 9,267 |
| | | | | | | | | | | | | | |
| (a) | Write-off uncollectible amounts. |
| (b) | Includes a $3.1 million reversal of discount. |
| (c) | CRDA administration charge related to reimbursement. |
| (d) | Includes the write-off of donated funds. |
66
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
CRH’s management, including the Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2005. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be included in the periodic reports to be filed with the Securities and Exchange Commission is made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date of this evaluation.
During the year ended December 31, 2005, there were no changes in CRH’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, CRH’s internal controls over financial reporting.
Item 9B.Other Information.
Not Applicable
PART III
Item 10.Directors and Executive Officers of the Registrant.
Incorporated herein by reference to Colony RIH Holdings, Inc.’s and Resorts International Hotel and Casino, Inc.’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2006.
The Company has adopted a code of ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officers, and other financial professionals. A printed copy of the Company’s code of ethics is available at no cost if requested in writing to: Chief Financial Officer, Resorts International Hotel and Casino, Inc., 1133 Boardwalk, Atlantic City, New Jersey 08401.
Item 11.Executive Compensation.
Incorporated herein by reference to Colony RIH Holdings, Inc.’s and Resorts International Hotel and Casino, Inc.’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2006.
Item 12.Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference to Colony RIH Holdings, Inc.’s and Resorts International Hotel and Casino, Inc.’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2006.
Item 13.Certain Relationships and Related Transactions.
Incorporated herein by reference to Colony RIH Holdings, Inc.’s and Resorts International Hotel and Casino, Inc.’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2006.
Item 14.Principal Accountant Fees and Services.
Incorporated herein by reference to Colony RIH Holdings, Inc.’s and Resorts International Hotel and Casino, Inc.’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2006.
67
PART IV
Item 15. Exhibits, and Financial Statement Schedules.
The following documents are filed as part of this Form 10-K.
(a) Consolidated Financial Statements filed as part of this report are contained in Part II, Item 8.
(b) The exhibits listed below are filed with this report or incorporated by reference as set forth below.
| | |
Exhibit Number | | Exhibit |
| |
| 3.1 | | Amended and Restated Certificate of Incorporation of Colony RIH Holdings, Inc.* |
| |
| 3.2 | | By-Laws of Colony RIH Holdings, Inc.* |
| |
| 3.3 | | Certificate of Incorporation of Resorts International Hotel and Casino, Inc.* |
| |
| 3.4 | | Certificate of Amendment of Certificate of Incorporation of Resorts International Hotel and Casino, Inc.* |
| |
| 3.5 | | By-Laws of Colony Resorts International Hotel and Casino, Inc.* |
| |
| 3.6 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Colony RIH Holdings, Inc. Incorporated by reference to Exhibit 3.6 of Form 10-K for the year ended December 31, 2002. |
| |
| 3.7 | | Certificate of Second Amendment of Amended and Restated Certificate of Incorporation of Colony RIH Holdings, Inc. Incorporated by reference to Exhibit 3.7 of Form 10-K for the year ended December 21, 2004. |
| |
| 4.1 | | Form of Colony RIH Holdings, Inc. Stock Certificate.* |
| |
| 4.2 | | Form of Resorts International Hotel and Casino, Inc. Stock Certificate.* |
| |
| 10.1 | | Purchase Agreement, dated October 30, 2000, by and among Colony RIH Acquisitions, Inc., Sun International North America, Inc. and GGRI, Inc.* |
| |
| 10.2 | | First Amendment to the Purchase Agreement, dated February 28, 2001, among Colony RIH Acquisitions, Inc., Sun International North America, Inc. and GGRI, Inc.* |
| |
| 10.3 | | Second Amendment to the Purchase Agreement, dated April 5, 2001, among Colony RIH Acquisitions, Inc., Sun International North America, Inc. and GGRI, Inc.* |
| |
| 10.4 | | Third Amendment to the Purchase Agreement, dated April 24, 2001, among Colony RIH Acquisitions, Inc., Sun International North America, Inc, and GGRI, Inc.* |
| |
| 10.5 | | Second Amended and Restated Credit Agreement, dated May 18, 2001, among Colony RIH Acquisitions, Inc., the guarantors named therein, the lenders named therein, Merrill Lynch & Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bankers Trust Company.* |
| |
| 10.6 | | Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated June 27, 2001, among Colony RIH Acquisitions, Inc., the guarantors named therein, the lenders named therein, Merrill Lynch & Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bankers Trust Company.* |
68
| | |
| |
| 10.7 | | Security Agreement, dated April 25, 2001, by Colony RIH Acquisitions, Inc., Colony RIH Holdings, Inc., Resorts International Hotel, Inc., New Pier Operating Company, Inc., the guarantors named therein and Bankers Trust Company.* |
| |
| 10.8 | | Option Agreement, dated April 25, 2001, by and between Colony RIH Acquisitions, Inc. and Sun International North America, Inc.* |
| |
| 10.9 | | Lease Agreement, dated April 25, 2001, by and between Sun International North America, Inc. and Colony RIH Acquisitions, Inc.* |
| |
| 10.10 | | Form of Note.* |
| |
| 10.11 | | Form of Indemnification Agreement.* |
| |
| 10.12 | | Securities Purchase Agreement, dated April 25, 2001, between Nicholas L. Ribis and Colony RIH Holdings, Inc.* |
| |
| 10.13 | | Securities Purchase Agreement, dated April 25, 2001, between Colony RIH Voteco, LLC and Colony RIH Holdings, Inc.* |
| |
| 10.14 | | Securities Purchase Agreement, dated April 25, 2001, between Colony Investors IV, L.P. and Colony RIH Holdings, Inc.* |
| |
| 10.15 | | Stockholders Agreement, dated April 25, 2001, by and among Colony RIH Holdings, Inc., Colony RIH Voteco, LLC, Colony Investors IV, L.P. and Nicholas L. Ribis.* |
| |
| 10.16+ | | Vice Chairman Agreement, dated April 25, 2001, by and among Nicholas L. Ribis and Colony RIH Acquisitions, Inc.* |
| |
| 10.17+ | | 2001 Omnibus Stock Incentive Plan, dated April 25, 2001, by and between Colony RIH Holdings, Inc. and Nicholas L. Ribis.** |
| |
| 10.18+ | | Employment Agreement, dated October 1, 2001, by and between Resorts International Hotel, Inc. and Audrey S. Oswell.** |
| |
| 10.20+ | | Employment Agreement, dated October 1, 2001, by and between Resorts International Hotel, Inc. and Nicholas Amato.** |
| |
| 10.23+ | | Employment Agreement, dated October 1, 2001, by and between Resorts International Hotel, Inc. and Alan J. Rivin.** |
| |
| 10.25+ | | 2001 Omnibus Stock Incentive Plan.** |
| |
| 10.26+ | | 2001 Omnibus Stock Incentive Plan, dated October 1, 2001, by and between Colony RIH Holdings, Inc. and Audrey S. Oswell.** |
| |
| 10.28+ | | 2001 Omnibus Stock Incentive Plan, dated October 1, 2001, by and between Colony RIH Holdings, Inc. and Nicholas Amato.** |
| |
| 10.31+ | | 2001 Omnibus Stock Incentive Plan, dated October 1, 2001, by and between Colony RIH Holdings, Inc. and Alan J. Rivin.** |
| |
| 10.32 | | Amended and Restated Loan and Security Agreement, dated June 24, 2002, between CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 2002. |
| |
| 10.33 | | Guaranty and Suretyship Agreement, dated June 24, 2002, by Resorts International Hotel and Casino, Inc. for the benefit of CIT Group/ Financing Inc. Incorporated by reference to Exhibit 10.2 of Form 10-Q for the quarter ended June 30, 2002. |
69
| | |
| |
| 10.34 | | Thermal Energy Services Agreement, dated June 16, 2002, between Marina Energy, LLC and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.3 of Form 10-Q for the quarter ended June 30, 2002. |
| |
| 10.35 | | Loan and Security Agreement, dated November 4, 2002, between Resorts International Hotel, Inc. and Commerce Bank, N.A. Incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended September 30, 2002. |
| |
| 10.36 | | [Intentionally omitted] |
| |
| 10.37 | | Amendment No. 1 to Amended and Restated Loan and Security Agreement, dated September 22, 2003, between CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.37 of Form 10-Q for the quarter ended September 30, 2003. |
| |
| 10.38 | | Amendment No. 2 to Amended and Restated Loan and Security Agreement, dated January 16, 2004, between CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.38 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.39 | | Amendment No. 3 to Amended and Restated Loan and Security Agreement, dated March 17, 2004, between CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.38 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.40 | | Master Agreement Among Kerzner International North America, Inc., Colony RIH Holdings, Inc., Resorts International Hotel and Casino, Inc., Resorts real Estate Holdings, Inc. Resorts International Hotel, Inc. and New Pier Operating Company, Inc., dated March 18, 2004. Incorporated by reference to Exhibit 10.40 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.41 | | Secured Promissory Note, dated March 18, 2004, between Resorts Real Estate Holdings, Inc. and Kerzner International North America, Inc. Incorporated by reference to Exhibit 10.41 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.42 | | Purchase and Sale Agreement, dated March 18, 2004, between Kerzner International North America, Inc. as Seller and Resorts Real Estate Holdings, Inc. as Purchaser. Incorporated by reference to Exhibit 10.42 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.43 | | Security Agreement, dated March 18, 2004, between Resorts Real Estate Holdings, Inc, Colony RIH Holdings, Inc. as Grantors and Kerzner International North America, Inc. as Lender. Incorporated by reference to Exhibit 10.43 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.44 | | Second Amendment to Lease Agreement, dated March 18, 2004, between Resorts Real Estate Holdings, Inc. (successor in interest to Kerzner International North America, Inc.) and Resorts International Hotel and Casino, Inc. 31, 2003. Incorporated by reference to Exhibit 10.44 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.45 | | Guaranty, dated March 18, 2004, by Colony RIH Holdings, Inc. in favor of Kerzner International North America, Inc. Incorporated by reference to Exhibit 10.45 of Form 10-K for the year ended December 31, 2003. |
70
| | |
| |
| 10.46 | | Guaranty, dated March 18, 2004, by Resorts International Hotel and Casino, Inc., Resorts International Hotel, Inc. and New Pier Operating Company, Inc. in favor of Kerzner International North America, Inc. Incorporated by reference to Exhibit 10.46 of Form 10-K for the year ended December 31, 2003. |
| |
| 10.47+ | | Employment Agreement, dated May 26, 2004, by and between Resorts International Hotel, Inc. and Mark B. Lefever. Incorporated by reference to Exhibit 10.47 of Form 10-Q for the three months ended June 30, 2004. |
| |
| 10.48+ | | First Amendment to Vice Chairman Agreement, dated June 18, 2004, by and among Nicholas L. Ribis and Resorts International Hotel and Casino, Inc. Incorporated by reference to Exhibit 10.48 of Form 10-Q for the three months ended June 30, 2004. |
| |
| 10.49 | | [Intentionally omitted] |
| |
| 10.50 | | Amendment No. 4 to Amended and Restated Loan and Security Agreement, dated September 14, 2004, between CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.50 of Form 8-K, Current Report, filed September 17, 2004. |
| |
| 10.51 | | Amendment No. 1 to Loan and Security Agreement, dated September 24, 2004, between Commerce Bank, N.A. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.51 of Form 8-K, Current Report, filed September 27, 2004. |
| |
| 10.52 | | Amendment No. 1 to Employment Agreement, dated June 17, 2004, by and between Resorts International Hotel, Inc. and Audrey S. Oswell. Incorporated by reference to Exhibit 10.52 of Form 8-K, Current Report, filed October 5, 2004. |
| |
| 10.53 | | Amendment No. 2 to Loan and Security Agreement, dated September 30, 2004, between Commerce Bank, N.A. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.53 of Form 8-K, Current Report, filed November 1, 2004. |
| |
| 10.54 | | Incorporated by reference to Exhibit 10.54 of Form 10-K for the year ended December 31, 2004. |
| |
| 10.55+ | | Employment Agreement dated as of January 27, 2005, by and between Resorts International Hotel, Inc. and Joseph Weis. Incorporated by reference to Exhibit 10.55 of Form 10-Q for the three months ended March 31, 2005. |
| |
| 10.56 | | Amended and Restated Services Agreement dated as of April 26, 2005, by and among Resorts International Hotel, Inc., Colony Resorts LVH Acquisitions, LLC and Resorts International Holdings, LLC. Incorporated by reference to Exhibit 10.56 of Form 10-Q for the three months ended March 31, 2005. |
| |
| 10.57 | | Amended and Restated Joint Marketing Agreement dated as of April 26, 2005, by and among Resorts International Hotel, Inc., Colony Resorts LVH Acquisitions, LLC and Resorts International Holdings, LLC. Incorporated by reference to Exhibit 10.57 of Form 10-Q for the three months ended March 31, 2005. |
| |
| 10.58 | | Third Amendment to Loan and Security Agreement dated as of June 28, 2005, by and between Resorts International Hotel, Inc. and Commerce Bank, N.A. Incorporated by reference to Exhibit 10.58 of Form 8-K, Current Report, filed June 30, 2005. |
| |
| 10.59 | | Amendment No. 6 to Amended and Restated Loan and Security Agreement dated as of September 28, 2005, between the CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. Incorporated by reference to Exhibit 10.59 of Form 8-K, Current Report, filed October 3, 2005. |
| |
| 10.60 | | Amendment No. 7 to Amended and Restated Loan and Security Agreement dated as of March 29, 2006, between the CIT Group/Equipment Financing, Inc. and Resorts International Hotel, Inc. |
| |
| 10.61 | | Letter Amendment to Loan and Security Agreement dated March 29, 2006, between Commerce Bank, N.A. and Resorts International Hotel, Inc. |
| |
| | |
71
| | |
| |
| 16.1 | | Acknowledgment of Arthur Andersen, LLP.* |
| |
| 21.1 | | Subsidiaries of the registrant. |
| |
| 31.1 | | Certification of Audrey Oswell, President and Chief Executive Officer of CRH, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | | Certification of Mark B. Lefever, Senior Vice President/CFO and Principal Financial Officer of CRH, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.3 | | Certification of Audrey Oswell, President and Chief Executive Officer of RIHC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.4 | | Certification of Mark B. Lefever, Senior Vice President/CFO and Principal Financial Officer of RIHC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 | | Certification of Audrey S. Oswell, President and Chief Executive Officer of CRH and RIHC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Certification of Mark B. Lefever, Senior Vice President/CFO and Principal Financial Officer of CRH and RIHC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Incorporated by reference to the Registrants’ Form 10 filed July 13, 2001 (File No. 0-32987), as amended by Amendment No. 1, filed August 24, 2001. |
| ** | Incorporated by reference to the Registrants’ Form 10-Q filed December 14, 2001, as amended by Amendment No. 1, filed February 20, 2002 (File No. 000-32987). |
| + | Management contract or compensatory plan or arrangement. |
72
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.
March 30, 2006
| | |
| COLONY RIH HOLDINGS, INC. |
| |
| By: | | /s/ Mark B. Lefever |
| | Name: Mark B. Lefever |
| | Title: Senior Vice President |
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.
| | | | |
Name | | Title | | Date |
| | |
/s/ Audrey S. Oswell Audrey S. Oswell | | President and Chief Executive Officer
(Principal Executive Officer) | | March 30, 2006 |
| | |
/s/ Thomas J. Barrack, Jr Thomas J. Barrack, Jr | | Director, Treasurer | | March 30, 2006 |
| | |
/s/ Nicholas L. Ribis Nicholas L. Ribis | | Director, Executive Vice President | | March 30, 2006 |
| | |
/s/ Mark M. Hedstrom Mark M. Hedstrom | | Director | | March 30, 2006 |
| | |
/s/ Mark B. Lefever Mark B. Lefever | | Senior Vice President
(Principal Financial Officer) | | March 30, 2006 |
73
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.
March 30, 2006
| | |
| RESORTS INTERNATIONAL HOTEL AND CASINO, INC. |
| |
| By: | | /s/ Mark B. Lefever |
| | Name: Mark B. Lefever |
| | Title: Senior Vice President |
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.
| | | | |
Name | | Title | | Date |
| | |
/s/ Audrey S. Oswell Audrey S. Oswell | | President and Chief Executive Officer
(Principal Executive Officer) | | March 30, 2006 |
| | |
/s/ Thomas J. Barrack, Jr Thomas J. Barrack, Jr | | Director, Treasurer | | March 30, 2006 |
| | |
/s/ Nicholas L. Ribis Nicholas L. Ribis | | Director, Executive Vice President | | March 30, 2006 |
| | |
/s/ Mark M. Hedstrom Mark M. Hedstrom | | Director | | March 30, 2006 |
| | |
/s/ Mark B. Lefever Mark B. Lefever | | Senior Vice President
(Principal Financial Officer) | | March 30, 2006 |
74
