FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 000-21430
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Riviera Holdings Corporation
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(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
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(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, including area code) (702)794-9527
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer ___ Accelerated filer _X_ Non-accelerated filer
(Do not check if
smaller reporting company)
Smaller reporting company ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO _X__
As of August 4, 2008, there were 12,498,555 shares of Common Stock, $.001 par
value per share, outstanding.
RIVIERA HOLDINGS CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2008 (Unaudited) and
December 31, 2007 3
Condensed Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits 27
Signature Page 28
Exhibits 29
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements of
Riviera Holdings Corporation have been prepared in accordance with the
instructions to Form 10-Q, and therefore, do not include all information and
notes necessary for complete financial statements in conformity with generally
accepted accounting principles in the United States. The results from the
periods indicated are unaudited, but reflect all adjustments (consisting only of
normal recurring adjustments) that management considers necessary for a fair
presentation of operating results.
The results of operations for the three and six months ended June 30, 2008 and
2007 are not necessarily indicative of the results for the entire year. These
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2007,
included in our Annual Report on Form 10-K.
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts) June 30 December 31
------------------------------------------------------------------ ------------
2008 2007
ASSETS (unaudited)
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 23,289 $ 28,819
Restricted cash and investments 2,772 2,772
Accounts receivable, net of allowances
of $209 and $437, respectively 2,455 3,563
Inventories 1,188 1,455
Prepaid expenses and other assets 3,728 3,602
----------- ------------
Total current assets 33,432 40,211
PROPERTY AND EQUIPMENT, Net 178,627 172,865
OTHER ASSETS, Net 2,755 2,940
DEFERRED INCOME TAXES, Net 2,446 2,446
----------- ------------
TOTAL $ 217,260 $ 218,462
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 281 $ 226
Current portion of obligation to officers 1,000 1,000
Accounts payable 10,711 10,972
Accrued interest 80 188
Accrued expenses 10,024 14,279
----------- ------------
Total current liabilities 22,096 26,665
OBLIGATIONS TO OFFICERS - Net of current portion 540 1,063
OBLIGATION UNDER SWAP AGREEMENT 12,270 13,272
LONG-TERM DEBT - Net of current portion 225,358 225,288
----------- ------------
Total Liabilities 260,264 266,288
----------- ------------
COMMITMENTS and CONTINGENCIES (Note 6)
SHAREHOLDERS' DEFICIENCY:
Common stock ($.001 par value; 60,000,000 shares
authorized, 17,166,624 and 17,124,624 shares
issued at June 30, 2008 and December 31, 2007, 17 17
respectively, and 12,498,555 and 12,456,555
shares outstanding at June 30, 2008 and
December 31, 2007, respectively)
Additional paid-in capital 19,457 18,925
Treasury stock (4,668,069 shares at June 30, 2008
and December 31, 2007, respectively) (9,635) (9,635)
Accumulated Deficit (52,843) (57,133)
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Total shareholders' deficiency (43,004) (47,826)
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TOTAL $ 217,260 $ 218,462
=========== ============
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2008 AND 2007 Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
-----------------------------------------------------------------------------------------
REVENUES: 2008 2007 2008 2007
---------- --------- ---------- ---------
Casino $ 25,580 $ 30,887 $ 49,546 $ 59,006
Rooms 13,553 15,150 29,423 31,464
Food and beverage 7,503 8,773 15,548 16,961
Entertainment 3,256 3,451 6,633 5,857
Other 1,603 1,645 3,479 3,357
---------- --------- ---------- ---------
Total revenues 51,495 59,906 104,629 116,645
Less - promotional allowances (5,880) (6,241) (11,052) (10,953)
---------- --------- ---------- ---------
Net revenues 45,615 53,665 93,577 105,692
---------- --------- ---------- ---------
COSTS AND EXPENSES:
Direct costs and expenses of operating
departments:
Casino 12,418 14,359 24,839 28,611
Rooms 6,404 7,048 13,268 14,099
Food and beverage 5,516 6,338 11,342 12,479
Entertainment 2,078 2,043 4,361 3,669
Other 328 338 656 675
Other operating expenses:
General and administrative:
Share-based compensation 249 354 432 553
Selling, general and adminstrative 10,019 10,274 19,930 20,428
Mergers, acquisitions and development costs 22 238 45 288
Depreciation and amortization 3,537 3,234 6,960 6,490
---------- --------- ---------- ---------
Total costs and expenses 40,571 44,226 81,833 87,292
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INCOME FROM OPERATIONS 5,044 9,439 11,744 18,400
---------- --------- ---------- ---------
OTHER INCOME (EXPENSE)
Unrealized gain on derivatives 9,309 827 1,002 827
Interest expense, net (4,280) (6,692) (8,456) (13,091)
---------- --------- ---------- ---------
Other income (expense), net 5,029 (5,865) (7,454) (12,264)
---------- --------- ---------- ---------
NET INCOME $ 10,073 $ 3,574 $ 4,290 $ 6,136
========== ========= ========== =========
INCOME PER SHARE DATA:
Income per share:
Basic $ 0.81 $ 0.29 $ 0.35 $ 0.50
---------- --------- ---------- ---------
Diluted $ 0.80 $ 0.28 $ 0.34 $ 0.49
---------- --------- ---------- ---------
Weighted-average common shares outstanding 12,408 12,322 12,375 12,291
---------- --------- ---------- ---------
Weighted-average common and common
equivalent shares 12,570 12,605 12,551 12,557
---------- --------- ---------- ---------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 Six Months Ended
(in thousands) June 30,
--------------------------------------------------------------------------------
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,290 $ 6,136
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,960 6,490
Provision for bad debts, net 166 67
Stock Compensation - Restricted Stock 308 428
Stock Compensation - Stock Options 124 125
Amortization of deferred loan fees 171 784
Increase on swap fair value (1,002) (827)
Changes in operating (assets) and liabilities:
Accounts receivable 942 (351)
Inventories 267 64
Prepaid expenses and other assets (113) (56)
Accounts payable (2,794) (457)
Accrued interest (108) 88
Accrued expenses (4,255) (470)
Deferred compensation plan liability (23) (17)
Obligation to officers (500) (500)
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Net cash provided by operating activities 4,433 11,504
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (8,649) (2,563)
Capital expenditures - Black Hawk, Colorado (1,310) (389)
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Net cash used in investing activities (9,959) (2,952)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (105) (897)
Increase in deferred loan costs - (1,902)
Proceeds from exercise of stock options 100 -
Restricted cash and investments - (224,477)
Proceeds from issuance of long-term debt - 225,000
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Net cash (used in) provided by financing activities (5) (2,276)
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(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (5,531) 6,276
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,820 25,285
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,289 $ 31,561
========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $ 2,763 $ 171
Cash paid for interest $ 8,510 $ 12,811
See notes to condensed consolidated financial statements
5
RIVIERA HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
Riviera Holdings Corporation ("RHC") and its wholly-owned subsidiary, Riviera
Operating Corporation ("ROC") (together with their wholly-owned subsidiaries,
the "Company"), were incorporated on January 27, 1993, in order to acquire all
assets and liabilities of Riviera, Inc. Casino-Hotel Division on June 30, 1993,
pursuant to a plan of reorganization. The Company operates the Riviera Hotel &
Casino (the "Riviera Las Vegas") on the Strip in Las Vegas, Nevada.
In February 2000, the Company opened its casino in Black Hawk, Colorado, which
is owned through Riviera Black Hawk, Inc. ("RBH"), a wholly-owned subsidiary of
ROC.
Casino operations are subject to extensive regulation in the states of Nevada
and Colorado by the respective Gaming Control Boards and various other state and
local regulatory agencies. Our management believes that the Company's procedures
comply, in all material respects, with the applicable regulations for
supervising casino operations, recording casino and other revenues, and granting
credit.
Principles of Consolidation
The consolidated financial statements include the accounts of the RHC and its
direct and indirect wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Reclassifications
Certain reclassifications, having no effect on net income have been made to the
previously issued condensed consolidated financial statements to conform to the
current period's presentation of the Company's condensed consolidated financial
statements.
Earnings Per Share
Basic per-share amounts are computed by dividing net income by weighted average
shares outstanding during the period. Diluted net income per share amounts are
computed by dividing net income by weighted average shares outstanding plus the
dilutive effect of common share equivalents. There were 24,000 and 72,000
potentially dilutive non-employee director options excluded from the calculation
for the three and six months ended June 30, 2007 and June 30, 2008,
respectively.
Income Taxes
The income tax provision, if any, for the three and six months ended June 30,
2008 and 2007, were fully offset by the utilization of loss carryforwards for
which a valuation allowance had been previously provided. Based on the history
of net operating losses, and current year losses, it is more likely than not
that the Company will be able to recognize the deferred assets. As such, a
valuation allowance has been established and the current year tax benefit has
not been recognized.
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") on
January 1, 2007. There was no effect on our financial condition or results of
operations as a result of implementing FIN 48. The Company does not believe
there will be any material changes in our unrecognized tax positions over the
next 12 months. The Company does not have any accrued interest or penalties
associated with any unrecognized tax benefits.
6
Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
the Company include estimated useful lives for depreciable and amortizable
assets, certain accrued liabilities and the estimated allowances for
receivables, estimated fair value for stock-based compensation, estimated fair
value of derivative instrument and deferred tax assets. Actual results may
differ from estimates.
Mergers, Acquisitions and Development Costs
Mergers, acquisitions and development costs consist of legal fees and other
expenses associated with the on-going potential sale of the Company.
Derivative Instruments
The Company accounts for derivative instruments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and all amendments and interpretations
thereto. SFAS No. 133 requires that all derivative instruments be recognized in
the financial statements at fair value. Any changes in fair value are recorded
in the statements of income, depending on whether the derivative is designated
and qualifies for hedge accounting, the type of hedge transaction and the
effectiveness of the hedge. The estimated fair value of our derivative
instruments is based on Level 2 market prices obtained from dealer quotes. Such
quotes represent the estimated amounts we would receive or pay to terminate the
contracts. The Company uses an interest rate swap to manage the mix of our debt
between fixed and variable rate instruments, which were entered into on June 8,
2007. As of June 30, 2008, the Company has one interest rate swap agreement for
the notional amount of $220 million. The Company has determined that the
interest rate swap does not meet the requirements to qualify for hedge
accounting and have therefore recorded a $9.3 million and $1.0 million gain for
the change in fair value of this derivative instrument in the condensed
consolidated statements of income for the three and six month period ended June
30, 2008, respectively.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board ("FASB") released
("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging
Activities." SFAS No. 161 requires additional disclosures related to the use of
derivative instruments, the accounting for derivatives and the financial
statement impact of derivatives. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. The Company is currently assessing the impact
the adoption of SFAS No. 161 will have on the condensed consolidated financial
statements.
7
In December 2007, FASB released SFAS No. 141(R), "Business Combinations," to
establish accounting and reporting standards to improve the relevance,
comparability and transparency of financial information that an acquirer would
provide in its consolidated financial statements from a business combination.
SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008.
The Company is currently assessing the impact the adoption of SFAS No. 141(R)
will have on the Company's consolidated financial position and results of
operations.
In December 2007, FASB also released SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of Accounting Research
Bulletin No. 51," to improve the relevance, comparability and transparency of
the financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. The Company is currently assessing the impact the adoption of SFAS No.
160 will have on the Company's consolidated financial position and results of
operations and does not believe it will have a material impact.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities". SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by SFAS No. 159 permits
all companies to choose to measure eligible items at fair value at specified
election dates. At each subsequent reporting date, a company shall report in
earnings any unrealized gains and losses on items for which the fair value
option has been elected. As of January 1, 2008 the Company adopted the fair
value option under SFAS No. 159 and such adoption has no material impact on the
condensed consolidated financial statements.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" which
defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS No. 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. However, on February 12, 2008,
the FASB issued proposed FASB Staff Position ("FSP") SFAS No. 157-2, "Effective
Date of FASB Statement No. 157," which defers the effective date for adoption of
fair value measurements for nonfinancial assets and liabilities to fiscal years
beginning after November 15, 2008. The Company adopted SFAS No. 157 on January
1, 2008, except as it applies to those non-financial assets and non-financial
liabilities as noted in proposed FSP No. 157-2. The adoption of SFAS No. 157 did
not have a material impact on the Company's financial position, results of
operations or cash flows.
2. OTHER ASSETS
Other assets included deferred loan fees of $1.5 million and $1.7 million as of
June 30, 2008 and December 31, 2007, respectively. The deferred loan fees were
associated with refinancing our debt on June 8, 2007. The Company is amortizing
the deferred loan fees over the term of the loan.
8
3. LONG TERM DEBT AND COMMITMENTS
On June 8, 2007, RHC and its restricted subsidiaries, namely ROC, Riviera Gaming
Management of Colorado, Inc. and RBH (collectively, the "Subsidiaries") entered
into a $245 million Credit Agreement, the "New Credit Facility") with Wachovia
Bank, National Association ("Wachovia"), as administrative agent.
The New Credit Facility includes a $225 million seven-year term loan ("Term
Loan"), with no amortization for the first three years, a one percent
amortization for each of years four through six, and a full payoff in year
seven, in addition to an annual mandatory pay down of 50% of excess cash flows,
as defined. The New Credit Facility also includes a $20 million five-year
revolving credit facility ("Revolving Credit Facility") under which RHC can
obtain extensions of credit in the form of cash loans or standby letters of
credit ("Standby L/Cs"). RHC is permitted to prepay the New Credit Facility
without premium or penalties except for payment of any funding losses resulting
from prepayment of any LIBOR rate loans. The rate for the Term Loan was LIBOR
plus 2.0%. Pursuant to a floating rate to fixed rate swap agreement that became
effective June 29, 2007 that RHC entered into under the New Credit Facilities,
substantially the entire Term Loan, with quarterly step-downs, bears interest at
an effective fixed rate of 7.485% (7.405% for 2008) per annum (2.0% above the
LIBOR Rate in effect on the lock-in date of the swap agreement). The New Credit
Facility is guaranteed by the Subsidiaries and is secured by a first priority
lien on substantially all of the Company's assets.
The Company used substantially all of the proceeds of the Term Loan to discharge
its obligations under the Indenture, dated June 26, 2002 (the "Indenture"), with
The Bank of New York as trustee (the "Trustee"), governing the 11% Notes. On
June 8, 2007 RHC deposited these funds with the Trustee and issued to the
Trustee a notice of redemption of the 11% Notes, which was executed on July 9,
2007.
The interest rate on loans under the Revolving Credit Facility will depend on
whether they are in the form of revolving loans or swing line loans. For each
revolving loan, the interest rate will depend on whether RHC elects to treat the
loan as an "Alternate Base Rate" loan ("ABR Loan") or a LIBOR Rate loan. Swing
line loans will bear interest at a per annum rate equal to the Alternative Base
Rate plus the Applicable Percentage for revolving loans that are ABR Loans. The
applicable percentage for swing line loans ranges from 0.50% to 1% depending on
the Consolidated Leverage Ratio as defined in our New Credit Facility Credit
Agreement.
RHC will also pay fees under the Revolving Credit Facility as follows: (i) a
commitment fee in an amount equal to either .50% or 0.375% (depending on the
Consolidated Leverage Ratio) per annum on the average daily unused amount of the
Revolving Credit Facility; (ii) Standby L/C fees equal to between 2.00% and
1.50% (depending on the Consolidated Leverage Ratio) per annum on the average
daily maximum amount available to be drawn under each Standby L/C issued and
outstanding from the date of issuance to the date of expiration; and (iii) a
Standby L/C facing fee in the amount of 0.25% per annum on the average daily
maximum amount available to be drawn under each Standby L/C. In addition to the
Revolving Credit Facility fees, RHC will pay an annual administrative fee of
$35,000.
The New Credit Facility contains affirmative and negative covenants customary
for financings of this nature including, but not limited to, restrictions on
RHC's incurrence of other indebtedness.
9
The New Credit Facility contains events of default customary for financings of
this nature including, but not limited to, nonpayment of principal, interest,
fees or other amounts when due; violation of covenants; failure of any
representation or warranty to be true in all material respects; cross-default
and cross-acceleration under RHC's other indebtedness or certain other material
obligations; certain events under federal law governing employee benefit plans;
a "change of control" of RHC; dissolution; insolvency; bankruptcy events;
material judgments; uninsured losses; actual or asserted invalidity of the
guarantees or the security documents; and loss of any gaming licenses. Some of
these events of default provide for grace periods and materiality thresholds.
For purposes of these default provisions, a "change in control" of RHC includes:
a person's acquisition of beneficial ownership of 35% or more of RHC's stock
coupled with a gaming license and/or approval to direct any of RHC's gaming
operations, a change in a majority of the members of RHC's board of directors
other than as a result of changes supported by RHC's current board members or by
successors who did not stand for election in opposition to RHC's current board,
or RHC's failure to maintain 100% ownership of the Subsidiaries.
4. STOCK REPURCHASES
There were no shares of RHC common stock purchased by the Deferred Compensation
Plan for the three months ended June 30, 2008 or 2007. The Deferred Compensation
Plan distributed to participants 94,324 shares for the six months ended June 30,
2007. No distribution was made for the six months ended June 30, 2008.
5. SHARE-BASED PAYMENTS
The Company recorded $249,000 and $432,000 in share based compensation for the
three and six months ended June 30, 2008, respectively. The Company recorded
$354,000 and $553,000 in share based compensation for the three and six months
ended June 30, 2007, respectively. The Company granted 24,000 options to
non-employee directors during each of the three months ending June 30, 2008 and
June 30, 2007.
The activities of all stock option plans are as follows:
Weighted
Average Aggregate
Shares Share ExerciseS Remaining Intrinsic
Price Life Value
------ ------------ -------- ----------
Outstanding, March 31, 2008 216,000 $ 8.28
Issued 24,000 $ 15.35
----------
Outstanding, June 30, 2008 240,000 $ 8.99 7.00 years $2,788,660
==========
Exercisable June 30, 2008 168,000 $ 2.34 3.82 years $3,069,360
==========
The Company estimated the fair value of each director option grant on the date
of grant using the Black-Scholes option pricing model. We valued the options for
each director independently. The following weighted-average assumptions were
used for grants in 2008: dividend yield of 0%; options for three of the
directors, whom have reached the age of 62, had an expected life of one year,
and a risk expected volatility of 55% and a risk-free interest rate of 2% and
options for one director, who had an expected life of 6.75 years, a risk
expected volatility of 66% and a risk free interest rate of 3.23%.
10
6. COMMITMENTS AND CONTINGENCIES
Salary Continuation Agreements
On May 27, 2008, RHC, ROC and RBH, entered into Salary Continuation Agreements
(the "2008 Agreements") with two named executive officers and 59 other
significant employees. The 2008 Agreements entitle such officers and employees
certain compensation and benefits if ROC or RBH, as applicable, terminates their
employment without cause (a "Company Termination") within a specified time
period after a change in control of RHC, as follows:
(i)The Agreements ROC and RHC entered into with 53 significant ROC
employees entitle 51 such employees to six months of base salary and health
insurance benefits, subject to such employees' duty to mitigate by obtaining
similar employment elsewhere, in the event of a Company Termination within 12
months after a change in control. Two employees are entitled to 12 months of
base salary and 24 months of health insurance benefits in the event of a Company
Termination within 24 months after a change in control of RHC, with no duty to
mitigate. Substantially similar Agreements were also entered into with 7 RBH
employees, which include in such Agreements' definition of a "change in control"
the sale of RBH by RHC and/or ROC to a non-affiliate of either the Company or
ROC.
(ii)The Agreement ROC and RHC entered into with Tullio J. Marchionne,
RHC's Secretary and General Counsel and ROC's Secretary and Executive Vice
President, entitles Mr. Marchionne to 24 months of base salary and 24 months of
health insurance benefits in the event of a Company Termination within 24 months
after a change in control of RHC. The Agreement ROC and RHC entered into with
Mr. Simons, RHC's Treasurer and CFO and ROC's Vice President of Finance,
entitles Mr. Simons to 12 months of base salary and 24 months of health
insurance benefits in the event of a Company Termination within 24 months after
a change in control of RHC.
The estimated total amount payable under all such agreements was approximately
$3.4 million, which includes $680,000 in benefits, as of June 30, 2008.
Legal Proceedings and Related Events
The Company is party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on the Company's financial position or results of the operations.
Guarantor Information
The New Credit Facility is guaranteed by the Subsidiaries, which are all of the
restricted subsidiaries. These guaranties are full, unconditional, and joint and
several. RHC's unrestricted subsidiaries, which have no operations and do not
significantly contribute to the financial position or results of operations, are
not guarantors of the New Credit Facility.
11
7. SEGMENT DISCLOSURES
The Company determines our segments based upon the review process of the
Company's Chief Financial Officer who reviews by geographic gaming market
segments: Riviera Las Vegas and Riviera Black Hawk. The key indicator reviewed
by the Company's Chief Financial Officer is "property EBITDA", as defined below.
All intersegment revenues and expenses have been eliminated.
Three months ended Six months ended
June 30, June 30,
------------------------- -----------------------
(Dollars in thousands) 2008 2007 2008 2007
------------ ----------- ---------- -----------
Net Revenues:
Riviera Las Vegas $ 34,525 $ 40,185 $ 70,975 $ 78,657
Riviera Black Hawk 11,090 13,480 22,602 27,035
------------ ----------- ---------- -----------
Total net revenues $ 45,615 $ 53,665 $ 93,577 $ 105,692
============ =========== ========== ===========
Property EBITDA (1):
Riviera Las Vegas $ 6,249 $ 9,405 $ 13,620 $ 18,012
Riviera Black Hawk 3,530 4,877 7,433 9,692
Other Costs and Expenses
Corporate Expenses
Equity-based compensation 249 354 432 553
Other corporate expenses 927 1,017 1,872 1,973
Depreciation and amortization 3,537 3,234 6,960 6,490
Mergers, acquitions and development costs 22 238 45 288
Interest Expense, net 4,280 6,692 8,456 13,091
Increase in value of deriviatives (9,309) (827) (1,002) (827)
------------ ----------- ---------- -----------
Total Other Costs and Expenses (294) 10,708 16,763 21,568
------------ ----------- ---------- -----------
Net Income $ 10,073 $ 3,574 $ 4,290 $ 6,136
============ =========== ========== ===========
June 30 December 31
------------ -----------
Property and Equipment, net 2008 2007
------------ -----------
Las Vegas $ 116,164 $ 109,885
Black Hawk 62,463 62,980
------------ -----------
Total Property and Equipment, net $ 178,627 $ 172,865
============ ===========
Capital Expenditures
Las Vegas $ 11,104
Black Hawk 1,618
------------
Total Capital Expenditures $ 12,722
============
(1)Property EBITDA consists of earnings before interest, income taxes,
depreciation, and amortization. Property EBITDA is presented solely as a
supplemental disclosure because we believe that it is 1) a widely used measure
of operating performance in the gaming industry, and 2) a principal basis for
valuation of gaming companies by certain analysts and investors. We use
property-level EBITDA (property EBITDA before corporate expense) as the primary
measure of our business segment properties' performance, including the
evaluation of operating personnel. Property EBITDA should not be construed as an
alternative to operating income, as an indicator of our operating performance,
as an alternative to cash flows from operating activities, as a measure of
liquidity, or as any other measure determined in accordance with generally
accepted accounting principles. We have significant uses of cash flows,
including capital expenditures, interest payments and debt principal repayments,
which are not reflected in property EBITDA. Also, other companies that report
property EBITDA information may calculate property EBITDA in a different manner
than we do. A reconcillation of property EBITDA to net income is included in
these financial schedules.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overall Outlook and Recent Developments
General
We own and operate the Riviera Hotel and Casino on the Strip in Las Vegas,
Nevada ("Riviera Las Vegas"), and the Riviera Black Hawk Casino in Black Hawk,
Colorado ("Riviera Black Hawk").
Our capital expenditures for Riviera Las Vegas are geared to maintain the hotel
rooms and amenities in sufficient condition to compete for customers in the
convention market and the mature adult customer. Room rental rates and slot
revenues are the primary factors driving our operating margins. We use
technology to maintain labor costs at a reasonable level, including kiosks for
hotel check-in, slot club activities and slot ticket redemptions.
In Black Hawk, the $5 maximum bet restricts our ability to generate table games
revenue, and the area is basically a "locals" slot customer market. Our capital
expenditures in Black Hawk are geared toward maintaining competitive slot
machines in comparison to the market.
Results of Operations
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Income from operations does
not include intercompany management fees.
Second Quarter Incr/ Incr/
(In Thousands) 2008 2007 (Decr) (Decr)%
---- ---- ------ -------
Net Revenues:
Riviera Las Vegas $34,525 $40,185 $(5,660) -14.1%
Riviera Black Hawk 11,090 13,480 (2,390) -17.7%
------ ------ -------
Total Net Revenues $45,615 $53,665 $(8,050) -15.0%
======= ======= =========
Income from Operations
Riviera Las Vegas $4,215 $7,795 $(3,580) -45.9%
Riviera Black Hawk 2,027 3,253 (1,226) -37.7%
----- ----- ---------
Property Income from Operations 6,242 11,048 (4,806) -43.5%
Corporate Expenses
Equity Compensation (249) (354) 105 29.7%
Other Corporate Expense (926) (1,017) 91 8.9%
Mergers, Acquisitions and
Development Costs (22) (238) 216 90.8%
---- ----- ---
Total Income form Operations $5,044 $9,439 $(4,394) -46.6%
====== ======= ========
Operating Margins (1)
Riviera Las Vegas 12.2% 19.4% -7.2%
Riviera Black Hawk 18.3% 24.1% -5.8%
13
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues for the three months ended June 30, 2008 were $34.5
million, a decrease of $5.7 million, or 14.1%, from $40.2 million for the
comparable period in the prior year.
Casino revenues for the three months ended June 30, 2008 were $14.8
million, a decrease of $3.0 million, or 17.0%, from $17.8 million for the
comparable period in the prior year. Casino revenues are comprised mainly of
slot machine and table game revenues. In comparison to the same period in the
prior year, slot machine revenue was $11.4 million, a decrease of $2.3 million,
or 10.7%, from $13.7 million and table game revenue was $3.0 million, a decrease
of $0.6 million, or 18.6% from $3.6 million. Slot machine and table game
revenues decreased primarily due to lower slot machine and table game amounts
wagered as a result of less hotel occupancy, the effects of the slow economy on
consumer spending and encumbered access due to construction at neighboring
projects. Additionally, table game revenue decreased due to a lower percentage
of table game win on amounts wagered.
Room rental revenue for the three months ended June 30, 2008 were $13.6
million, a decrease of $1.6 million, or 10.5%, from $15.2 million for the
comparable period in the prior year. The decrease in room rental revenue was
primarily due to lower leisure segment occupancy due primarily to less travel as
a result of higher fuel costs and the weaker economy. Hotel occupancy was 84.6%
in comparison to 95.3% for the comparable period in the prior year. During the
second quarter of 2008, on average, approximately 10% of the hotel rooms were
out of order due to construction related to our room renovations project.
Occupancy, based on total rooms, was 75.0% for the three months ended June 30,
2008. Average daily room rental rate, or ADR, was $90.53, an increase of $9.78,
or 12.1%, from $80.75 for the comparable period in the prior year. The increase
in ADR was due primarily to higher contracted convention room rates and stronger
leisure segment room rates. Revenue per available room, or RevPar, was $76.63, a
decrease of $0.31, or 0.4%, from $76.94 for the comparable period in the prior
year. The decrease in RevPar was due to the decrease in occupancy as described
above. RevPar, based on total rooms, was $71.77 for the three months ended June
30, 2008.
Food and beverage revenue for the three months ended June 30, 2008 were
$6.3 million, a decrease of $1.2 million, or 15.6%, from $7.5 million for the
comparable period in the prior year. The decrease is food and beverage revenue
was due to $672,000 decrease in food revenue and a $492,000 decrease in beverage
revenue. Food covers decreased 15.2% and beverage drinks served decrease 12.3%
from the comparable period in the prior year primarily due to less banquet
events and lower hotel occupancy. Food and beverage revenues include items
offered high-value guests on a complimentary basis.
Entertainment revenue for the three months ended June 30, 2008 were
$3.3 million, a decrease of $0.2 million, or 5.4%, from $3.4 million for the
comparable period in the prior year. The decrease in entertainment revenue is
due to lower ticket sales in all our entertainment venues except our show in the
Versailles Theater ("ICE") which showed a 25.5% increase in ticket sales. The
ICE show opened April 23, 2007.
14
Promotional allowances for the three months ended June 30, 2008 were
$4.9 million, a decrease of $0.3 million, or 6.0%, from $5.2 million for the
comparable period in the prior year. Promotional allowances are comprised of
food, beverage, hotel room nights and other items provided on a complimentary
basis primarily to our most valued casino players. The decrease in promotional
allowances is due to less customer redemptions of our promotional offers due to
higher fuel prices and the slower economy.
Costs and Expenses
Casino expenses for the three months ended June 30, 2008 were $7.5
million, a decrease of $1.2 million, or 13.1%, from $8.7 million for the
comparable period in the prior year. The decrease in casino expenses is
primarily due to a reduction in slot and table game payroll and related costs
which offset the $3.0 million decrease in casino revenue.
Room rental expenses for the three months ended June 30, 2008 were $6.4
million, a decrease of $0.6 million, or 9.1%, from $7.0 million for the
comparable period in the prior year. The decrease in room rental expenses was
due primarily to reduced payroll and related costs in conjunction with a 20.2%
decrease in occupied rooms partially offset by wage and benefit increases
associated with new union contracts.
Food and Beverage departmental costs and expenses for the three months
ended June 30, 2008 were $5.2 million, a decrease of $0.7 million, or 12.0%,
from $5.9 million for the comparable period in the prior year. The decrease in
food and beverage costs and expenses was due to reduced food and beverage cost
of sales, less payroll and related and less food and beverage operating expenses
in conjunction with the15.2% decrease in food covers and 12.3% decrease in
drinks served.
Income from Operations
Income from operations for the three months ended June 30, 2008 were
$4.2 million, a decrease of $3.6 million, or 45.9%, from $7.8 million for the
comparable period in the prior year. The decrease is principally due to
decreased slot machine, room rental and food and beverage revenues as described
above.
Operating margins were 12.2% for the three months ended June 30, 2008
in comparison to 19.4% for the comparable period in the prior year. Operating
margins decreased primarily due to a $1.9 million decrease in slot machine
revenues and a decrease in the percentage of table game win compared to amounts
wagered. The slot machine revenue decrease impacted our operating margins as
slot operations are a high operating margin profit center.
Riviera Black Hawk
Revenues
Net revenues for the three months ended June 30, 2008 were $11.1
million, a decrease of $2.4 million, or 17.8%, from $13.5 million for the
comparable period in the prior year. The decrease was primarily due to slot
machines revenue decrease of $2.3 million, or 17.6%, for the three months ended
June 30, 2008 to $10.5 million from $12.8 million for the comparable period in
the prior year. Slot machine revenue per unit per day was $162.85, a decrease of
15
$25.14, or 13.4%, from $187.99 for the comparable period in the prior year. The
decrease in slot machine revenue was primarily the result of less slot machine
wagering due to higher fuel costs which deterred customers from traveling to
Blackhawk, deteriorating economic conditions and the effects of the smoking ban
in Colorado which went into effect January 1, 2008.
Food and beverage revenues for the three months ended June 30, 2008
were $1.2 million, a decrease of $0.1 million, or 7.9%, from $1.3 million for
the comparable period in the prior year. The decrease was due primarily to less
customer redemption of player points earned and coupons for complimentary food
and beverage items correlating with less casino revenues.
Casino expenses for the three months ended June 30, 2008 were $5.0
million, a decrease of $0.8 million, or 13.2%, from $5.8 million for the
comparable period in the prior year. The decrease in casino expenses is due
primarily to a reduction in slot related labor costs to offset the $2.3 million
decrease in slot machine revenue.
Income from Operations
Income from operations for the three months ended June 30, 2008 were
$2.0 million, a decrease of $1.2 million, or 37.7%, from $3.2 million for the
comparable period in the prior year. The decrease is related to the decreased
slot revenues as described above.
Operating margins were 18.3% for the three months ended June 30, 2008
in comparison to 24.1% for the comparable period in the prior year. Operating
margins decreased primarily due to a $2.3 million decrease in slot machine
revenues within our high operating margin slot operation.
Consolidated Operations
Other Income (Expense)
Other income and expenses for the three months ended June 30,
2008 was income of $5.0 million, an increase of $10.9 million, from expense of
$5.6 million for the comparable period in the prior year. The increase is
primarily due to a $9.3 million unrealized gain on derivatives and a decrease of
$2.4 million in net interest expense during the three months ended June 30,
2008. The unrealized gain is the result of a decrease in our cost of terminating
our interest rate swap agreement described in Note 3 to the Condensed
Consolidated Financial Statements in this Form 10-Q. The decrease in net
interest expense is primarily due to lower borrowing costs associated with our
New Credit Facility executed June 2007.
Net Income
Net income for the three months ended June 30, 2008 was $10.1
million, an increase of $6.5 million, from $3.6 million for the comparable
period in the prior year. The increase is primarily due to the unrealized gain
on derivatives as described above partially offset by lower income from
operations.
16
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Income from operations does
not include intercompany management fees.
Six Months
Incr/ Incr/
(In Thousands) 2008 2007 (Decr) (Decr)%
---- ---- ------ -------
Net Revenues:
Riviera Las Vegas $70,975 $78,657 $(7,682) -9.8%
Riviera Black Hawk 22,602 27,035 (4,433) -16.4%
------ ------ -------
Total Net Revenues $93,577 $105,692 $(12,115) -11.5%
======= ======== =========
Income from Operations
Riviera Las Vegas $9,754 $14,705 $(4,951) -33.7%
Riviera Black Hawk 4,339 6,509 (2,170) -33.3%
----- ----- --------
Property Income from Operations 14,093 21,214 (7,121) -33.6%
Corporate Expenses
Equity Compensation 432 553 121 21.9%
Other Corporate Expenses 1,872 1,973 101 5.1%
Mergers, Acquisitions and
Development Costs 45 288 243 84.4%
-- --- ----
Total Income from Operations $11,744 $18,400 $(6,656) -36.2%
======= ======= ========
Operating Margins (1)
Riviera Las Vegas 13.7% 18.7% -5.0%
Riviera Black Hawk 19.2% 24.1% -4.9%
(1) Operating margins represent income from operations as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues for the six months ended June 30, 2008 were $71.0 million,
a decrease of $7.7 million, or 9.8%, from $78.7 million for the comparable
period in the prior year.
Casino revenue for the six months ended June 30, 2008 were $26.9
million, a decrease of $4.6 million, or 14.7%, from $31.5 million for the
comparable period in the prior year. Casino revenues are comprised primarily of
slot machine and table game revenues. In comparison to the same period in the
prior year, slot machine revenue was $20.4 million, a decrease of $3.3 million,
or 13.7%, from $23.7 million and table game revenue was $5.8 million, a decrease
of $1.2 million, or 17.4% from $7.0 million. Slot machine and table game
revenues decreased primarily due to lower slot machine and table game amounts
wagered as a result of less hotel occupancy, the effects of the slowing economy
on consumer spending and encumbered access due to construction at neighboring
projects. Additionally, table game revenue decreased due to a lower percentage
of table game win on amounts wagered.
17
Room rental revenue for the six months ended June 30, 2008 were $29.4
million, a decrease of $2.0 million, or 6.5%, from $31.4 million for the
comparable period in the prior year. The decrease in room rental revenue was
primarily due to a 30.7% decrease in leisure segment occupied rooms due
primarily to less travel as a result of higher fuel costs and the weaker
economy. Hotel occupancy was 83.0% in comparison to 94.3% for the comparable
period in the prior year. During the six months ending June 30, 2008, on
average, approximately 5% of the hotel rooms were out of order due to
construction related to our room renovations project. Occupancy, based on total
rooms, was 77.0% for the six months ended June 30, 2008. Average daily room
rental rate, or ADR, was $95.17, an increase of $10.02, or 11.8%, from $85.15
for the comparable period in the prior year. The increase in ADR was due
primarily to higher contracted convention room rates and stronger leisure
segment room rates. Revenue per available room, or RevPar, was $79.05, a
decrease of $1.20, or 1.5%, from $80.25 for the comparable period in the prior
year. The decrease in RevPar was due to the decrease in occupancy as described
above. RevPar, based on total rooms, was $77.91 for the six months ended June
30, 2008.
Food and beverage revenues for the six months ended June 30, 2008 were
$13.0 million, a decrease of $1.4 million, or 9.9%, from $14.4 million for the
comparable period in the prior year. The decrease is due to a $1.0 million food
revenue and $0.4 million beverage revenue reduction primarily as a result of
lower hotel occupancy, less convention business and fewer gaming patrons. Food
covers decreased primarily in the buffet, coffee shop and the sports book
delicatessen and drinks served decreased primarily in banquets and the casino
bar. Food and beverage revenues include items offered high-value guests on a
complimentary basis.
Entertainment revenues for the six months ended June 30, 2008 were $6.6
million, an increase of $0.7 million, or 13.4%, from $5.9 million for the
comparable period in the prior year. The increase is due primarily to an
increase in ticket sales associated with our show in the Versailles Theater
("ICE") which opened April 23, 2007.
Costs and Expenses
Casino expenses for the six months ended June 30, 2008 were $14.9
million, a decrease of $2.3 million, or 13.1%, from $17.2 million for the
comparable period in the prior year. The decrease in casino expenses is due
primarily to a reduction in slot and table game payroll and related costs in
order to offset the $4.6 million decrease in casino revenue.
Room expenses for the six months ended June 30, 2008 were $13.3
million, a decrease of $0.8 million, or 5.9%, from $14.1 million for the
comparable period in the prior year. The decrease in room rental expenses was
due primarily to reduced payroll and related costs and operating expenses in
order to offset a 17.1% decrease in occupied rooms.
Food and beverage expenses for the six months ended June 30, 2008 were
$10.7 million, a decrease of $1.0 million, or 8.8%, from $11.7 million for the
comparable period in the prior year. The decrease is a result of reductions
of11.9% and 13.3% in food covers and drinks served, respectively.
Entertainment costs for the six months ended June 30, 2008 were $4.4
million, an increase of $0.7 million, or 18.9%, from $3.7 million for the
comparable period in the prior year. The increase is primarily due to increased
ticket sales associated with our show in the Versailles Theater ("ICE") which
opened April 23, 2007.
18
Income from Operations
Income from operations for the six months ended June 30, 2008 was $9.8
million, a decrease of $4.9 million, or 33.7%, from $14.7 million for the
comparable period in the prior year. The decrease is primarily due to lower
casino, room rental and food and beverage revenues as described above.
Operating margins were 13.7% for the three months ended June 30, 2008 in
comparison to 18.7% for the comparable period in the prior year. Operating
margins decreased primarily due to a $3.3 million decrease in slot machine
revenues and a decrease in the percentage of table game win compared to amounts
wagered. The slot machine revenue decrease impacted our operating margins as
slot operations are a high operating margin profit center.
Riviera Black Hawk
Revenues
Net revenues for the six months ended June 30, 2008 were $22.6 million,
a decrease of $4.4 million, or 16.4%, from $27.0 million for the comparable
period in the prior year.
Casino revenues for the six months ended June 30, 2008 were $22.0
million, a decrease of $4.3 million, or 16.2%, from $26.3 million for the
comparable period in the prior year. The decrease was primarily due slot
machines revenue decrease of $4.2 million, or 16.3%, for the six months ended
June 30, 2008 to $21.4 million from $25.6 million for the comparable period in
the prior year. Slot machine revenue per unit per day was $166.41, a decrease of
$23.51, or 12.4%, from $189.92 for the comparable period in the prior year. The
decrease in slot machine revenue was primarily the result of less slot machine
wagering due to higher fuel costs which deterred customers from traveling to
Blackhawk, deteriorating economic conditions and the effects of the smoking ban
in Colorado which went into effect January 1, 2008.
General and administrative expenses for the six months ended June 30,
2008 were $4.6 million, a decrease of $0.5 million, or 10.6%, from $5.1 million
for the comparable period in the prior year. The decrease in general and
administrative expenses was primarily due to a credit adjustment of $0.3 million
for employee benefits and a reduction in accrued management incentives of $0.2
million.
Income from Operations
Income from operations for the six months ended June 30, 2008 were
$4.3 million, a decrease of $2.2 million, or 33.3%, from $7.8 million for the
comparable period in the prior year. The decrease is primarily due to the
decrease slot revenue as described above.
Operating margins were 19.2% for the six months ended June 30, 2008 in
comparison to 24.1% for the comparable period in the prior year. Operating
margins decreased primarily due to a $4.2 million decrease in slot machine
revenues within our high operating margin slot operation.
19
Consolidated Operations
Other Income (Expense)
Other income and expenses for the six months ended June 30,
2008 were $7.5 million, a decrease of $4.8 million, or 39.2%, from $12.3 million
for the comparable period in the prior year. The decrease is primarily due to
lower net interest expense as a result of a reduced borrowing costs associated
with our New Credit Facility executed June 2007.
Net Income
Net income for the six months ended June 30, 2008 were $4.3 million,
a decrease of $1.8 million, or 30.1%, from $6.1 million for the comparable
period in the prior year. The decrease is due primarily to the decreased
consolidated income from operations of $6.7 million partially offset by reduced
net interest expense of $4.8.
Liquidity and Capital Resources
At June 30, 2008 we had cash and cash equivalents of $23.3 million. Our
cash and cash equivalents decreased by $5.5 million during the six months ended
June 30, 2008 primarily due to $10.0 million in net cash used in investing
activities partially offset by $4.4 million in net cash provided by operating
activities. Net cash used in investing activities included $8.6 million in
capital expenditures primarily for the Las Vegas hotel room renovation project.
Net cash provided by operating activities was $4.4 million for the six months
ended June 30, 2008, a decrease of $6.8 million, from $11.5 million for the
comparable period in the prior year. The decrease in net cash provided by
operating activities was primarily due to a $1.8 million decrease in net income
and a $7.0 million increase in payments against our accrued expense and accounts
payables. The increase in payments against our accrued expense was primarily due
to payments for management incentives and for our employee stock ownership plan
during March 2008. The decrease in accounts payable was primarily due to
additional capital expenditure payments associated with our Las Vegas hotel room
renovation project, which were not offset by additional operating expense
accounts payable accruals due to reduced business levels during the six months
ending June 30, 2008. For the six months ended June 30, 2007, net cash used in
investing activities included $224.4 million held to retire our 11% Notes and
net cash provided by financing activities included $225.0 million from our New
Credit Facility which was executed on July 9, 2007.
Our cash balances include amounts that could be required, upon five
days' notice, to fund our CEO's (Mr. Westerman's) pension obligation in a rabbi
trust. We pay Mr. Westerman $250,000 per quarter from his pension plan. In
exchange for these payments, Mr. Westerman has agreed to forbear on his right to
receive full transfer of his pension fund balance to the rabbi trust. This does
not limit his ability to give the five-day notice at any time. Although Mr.
Westerman has expressed no current intention to require this funding, under
certain circumstances, we may be required to disburse approximately $1.5 million
for this purpose in a short period.
We believe that our cash flow from operations, combined with our $23.3
million cash and cash equivalents, will be sufficient to cover our current debt
service requirements and capital expenditures.
20
On June 8, 2007, RHC and the Subsidiaries entered into the New Credit
Facility. The New Credit Facility includes a $225 million seven-year term loan
("Term Loan"), and has no amortization for the first three years, and a one
percent amortization for years four through six, and a full payoff in year
seven, in addition to an annual mandatory pay down during the term of 50% of
excess cash flows, as defined. The New Credit Facility also includes a $20
million five-year revolving credit facility ("Revolving Credit Facility") under
which we can obtain extensions of credit in the form of cash loans or standby
letters of credit ("Standby L/Cs"). We are permitted to prepay the New Credit
Facility without premium or penalties except for payment of any funding losses
resulting from prepayment of LIBOR rate loans. The rate for the Term Loan and
revolving Credit Facility is LIBOR plus 2.0%. Pursuant to a floating rate to
fixed rate swap agreement that became effective June 29, 2007 that we entered
into under the New Credit Facility, substantially the entire Term Loan portion
of the New Credit facility, with quarterly step-downs, bears interest at an
effective fixed rate of 7.485% per annum (2.0% above the LIBOR Rate in effect on
the lock-in date of the swap agreement). The New Credit Facility is guaranteed
by the Subsidiaries and is secured by a first priority lien on substantially all
of our assets.
We used substantially all of the proceeds of the Term Loan to discharge
our obligations under the Indenture, dated June 26, 2002 (the "Indenture"), with
The Bank of New York as trustee (the "Trustee"), governing the 11% Notes. On
June 8, 2007 we deposited these funds with the Trustee and issued to the Trustee
a notice of redemption of the 11% Notes, which was finalized on July 9, 2007.
We utilize derivative instruments for a substantial portion of our Term
Loan to manage certain interest rate risk. Our interest rate swap agreement has
a rate of 5.41% compared to the one month LIBOR rate of 2.38% effective through
June 30, 2008. In addition, we pay 2.0% above the LIBOR Rate for a total cost of
borrowing.
The interest rate on loans under the Revolving Credit Facility will
depend on whether they are in the form of revolving loans or swing line loans.
For each revolving loan, the interest rate will depend on whether we elect to
treat the loan as an "Alternate Base Rate" loan ("ABR Loan") or a LIBOR Rate
loan. Swing line loans will bear interest at a per annum rate equal to the
Alternative Base Rate plus the Applicable Percentage for revolving loans that
are ABR Loans. The applicable percentage for swing line loans ranges from 0.50%
to 1% depending on the consolidated leverage ratio.
We will also pay fees under the Revolving Credit Facility as follows:
(i) a commitment fee in an amount equal to either .50% or 0.375% (depending on
the Consolidated Leverage Ratio) per annum on the average daily unused amount of
the Revolving Credit Facility; (ii) Standby L/C fees equal to between 2.00% and
1.50% (depending on the Consolidated Leverage Ratio) per annum on the average
daily maximum amount available to be drawn under each Standby L/C issued and
outstanding from the date of issuance to the date of expiration; and (iii) a
Standby L/C facing fee in the amount of 0.25% per annum on the average daily
maximum amount available to be drawn under each Standby L/C. In addition to the
Revolving Credit Facility fees, we will pay an annual administrative fee of
$35,000.
The New Credit Facility contains affirmative and negative covenants
customary for financings of this nature including, but not limited to,
restrictions on our incurrence of other indebtedness.
21
The New Credit Facility contains events of default customary for
financings of this nature including, but not limited to, nonpayment of
principal, interest, fees or other amounts when due; violation of covenants;
failure of any representation or warranty to be true in all material respects;
cross-default and cross-acceleration under our other indebtedness or certain
other material obligations; certain events under federal law governing employee
benefit plans; a "change of control"; dissolution; insolvency; bankruptcy
events; material judgments; uninsured losses; actual or asserted invalidity of
the guarantees or the security documents; and loss of any gaming licenses. Some
of these events of default provide for grace periods and materiality thresholds.
For purposes of these default provisions, a "change in control" includes: a
person's acquisition of beneficial ownership of 35% or more of our stock coupled
with a gaming license and/or approval to direct any of our gaming operations, a
change in a majority of the members of our board of directors other than as a
result of changes supported by our current board members or by successors who
did not stand for election in opposition to our current board, or our failure to
maintain 100% ownership of the Subsidiaries.
As of June 30, 2008, we believe that we are in compliance with the covenants of
the $225 million Term Loan and all of our credit facilities. Our Consolidated
Leverage Ratio was 5.8 for the four quarters ending June 30, 2008. The maximum
allowable Consolidated Leverage Ratio pursuant to the Revolving Credit Facility
is 6.5. However, the maximum Consolidated Leverage Ratio of 6.5 is only
applicable if RHC has outstanding borrowings against its Revolving Credit
Facility exceeding $2.5 million as of the end of the applicable quarter. As of
June 30, 2008, RHC had no outstanding amounts due on our Revolving Credit
Facility.
Off-Balance Sheet Arrangements
It is not our usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, we have no
off-balance sheet arrangements.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our Form 10-K for the year ended December 31, 2007. For a further
discussion of our accounting policies, see Note 1, Summary of Significant
Accounting Policies, in the Notes to the Condensed Consolidated Financial
Statements in this Form 10-Q.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements include the words "may," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and similar words as well as our acquisition, development and expansion plans,
objectives or expectations and our liquidity projections. These forward-looking
statements generally relate to our plans, objectives, prospects and expectations
for future operations and results and are based upon what we consider to be
reasonable future estimates. Although we believe that our plans, objectives,
prospects and expectations reflected in, or suggested by, such forward-looking
statements are reasonable at the present time, we may not achieve or we may
modify them from time to time. Furthermore, there is no assurance that any
positive trends suggested or referred to in this report will continue. You
should read this report thoroughly and with the understanding that actual future
results may be materially different from what we expect. We do not plan to
update forward-looking statements even though our situation or plans may change
in the future, unless applicable law requires us to do so.
22
Specific factors that might cause our actual results to differ from our plans,
objectives or expectations, might cause us to modify them, or might affect our
ability to achieve them, include, but are not limited to:
o the effect of the termination of our previously announced
strategic process to explore alternatives for maximizing
shareholder value, and the possible resulting fluctuations in our
stock price that will affect other parties' willingness to make a
proposal to acquire us;
o fluctuations in the value of our real estate, particularly in Las
Vegas;
o the availability and adequacy of our cash flow to meet our
requirements, including payment of amounts due under our debt
instruments;
o our substantial indebtedness, debt service requirements and
liquidity constraints;
o the smoking ban in Colorado on our Riviera Black Hawk property
which became effective on January 1, 2008;
o the availability of additional capital to support capital
improvements and development;
o the ability to renegotiate union contracts in Las Vegas;
o competition in the gaming industry, including the availability and
success of alternative gaming venues and other entertainment
attractions; and the approval of an initiative that would allow
slot machines in Colorado race tracks;
o retirement or other loss of any of our senior officers;
o economic, competitive, demographic, business and other conditions
in our local and regional markets;
o changes or developments in laws, regulations or taxes in the
gaming industry; specifically in Nevada where initiatives have
been proposed to raise the gaming tax;
o actions taken or not taken by third parties, such as our
customers, suppliers, and competitors, as well as legislative,
regulatory, judicial and other governmental authorities;
o changes in our personnel or their compensation, including those
resulting from changes in federal or state minimum wage
requirements;
o our failure to obtain, delays in obtaining, or the loss of, any
licenses, permits or approvals, including gaming and liquor
licenses, or the limitation, conditioning, suspension or
revocation of any such licenses, permits or approvals, or our
failure to obtain an unconditional renewal of any of our licenses,
permits or approvals on a timely basis;
o the loss of any of our casino, hotel or convention facilities due
to terrorist acts, casualty, weather, mechanical failure or any
extended or extraordinary maintenance or inspection that may be
required;
23
o other adverse conditions, such as further economic downturns,
changes in general customer confidence or spending, increased
transportation costs, travel concerns or weather-related factors,
that may adversely affect the economy in general or the casino
industry in particular;
o changes in our business strategy, capital improvements or
development plans;
o the consequences of the war in Iraq and other military conflicts
in the Middle East and any future security alerts or terrorist
attacks such as the attacks that occurred on September 11, 2001;
o other risk factors discussed elsewhere in this report and;
o a decline in the public acceptance of gaming.
All future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. In light of
these and other risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of June 30, 2008, we had $225.6 million in borrowings. The borrowings include
a $225 million Term Loan maturing in 2014 and three capital leases which mature
in 2009, 2012 and 2013. The equipment leases have a fixed interest rate of 5.5%.
The borrowings also include $215,000 in a special improvement district ("SID")
bond offering with the City of Black Hawk. Our share of the debt on the SID
bonds of $1.2 million, is payable over ten years beginning in 2000. The SID
bonds bear interest at 5.5%. We are not susceptible to interest rate risk
because our outstanding debt is at fixed rates. As of June 30, 2008, we had no
borrowing outstanding under our Revolving Credit Facility. As of June 30, 2008,
we have one interest rate swap arrangement to hedge the underlying interest rate
risk on a total of $225 million of borrowings under the Term Loan, which bears
interest at LIBOR plus 2%. Under this interest rate swap agreement, we receive
payments at a variable rate of LIBOR and pay a fixed rate of 5.405% on the $220
million notional amount, which expires on June 8, 2014. In addition we pay 2.0%
above the LIBOR Rate for a total cost of borrowing. The interest rate swap
arrangement has periodic step-downs beginning in 2008 and expires on June 8,
2014. Although this interest rate swap agreement is highly effective
economically in fixing the interest rate on this borrowing under the Term Loan
at approximately 7.405%, changes in fair value of our interest rate swap for
each reporting period are, and will continue to be, recorded as an increase
/(decrease) in swap fair value as the swap does not qualify for hedge
accounting.
A hypothetical one percent change in interest rate would not have a material
effect on our financial statements, as the interest rate swap we currently have
effectively locks our debt at 7.405%.
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Interest Rate Sensitivity
Principal (Notional Amount by Expected Maturity)
Average Interest Rate
(Dollars in Fair Value
thousands) 2008 2009 2010 2011 2012 Thereafter Total at 6/30/08
Long-Term Debt Including
Current Portions
Equipment loans and
capital leases-Las Vegas $ 51 $ 76 $ 23 $ 24 $ 19 $ 193 $ 193
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5%
$225 million Term Loan $ 1,125 $ 2,250 $2,250 $219,375 $ 225,000 $ 225,000
Average interest rate 7.5% 7.5% 7.5% 7.5%
Equipment loans and
capital leases-Black Hawk 29 43 44 44 45 26 231 231
Average interest rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
SID Bonds -
Black Hawk, Colorado $ 70 $ 145 $ 215 $ 215
Average interest rate 5.5% 5.5%
Total all long-term debt,
including current portions $ 150 $ 264 $ 1,192 $ 2,318 $2,314 $219,401 $ 225,639 $ 225,639
Other Long-Term Liabilities
including Current Portion
CEO pension plan obligation $ 500 $ 1,040 $ 1,540 $ 1,540
Average interest rate 9.7% 9.7%
Interest rate derivatives
Derivative instrument
Pay fixed $220,265 $ 12,270
Average receivable rate 2.4
Average payable rate 5.4
ITEM 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to our management, including our chief executive officer ("CEO")
and chief financial officer ("CFO"), as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of June 30, 2008, we carried out an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our CEO and CFO concluded that our
disclosure controls and procedures were effective.
During our last fiscal quarter there were no changes in our internal control
over financial reporting, (as defined in Exchange Act Rules 13a-15(f) and 15(d)
- 15(f)), that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to routine lawsuits, either as plaintiff or as defendant, arising
from the normal operations of a hotel or casino. We do not believe that the
outcome of such litigation, in the aggregate, will have a material adverse
effect on The Company's financial position or results of our operations.
Item 1A. Risk Factors.
Our annual report on Form 10-K for the fiscal year ended December 31, 2007 (our
"2007 Form 10-K") contains a detailed discussion of our risk factors. The
information below updates and should be read in conjunction with the risk
factors and other information disclosed in our 2007 Form 10-K.
* Those same uncertainties about our future prospects might add to
our difficulties in finding suitable replacements for any of our
executives or other key personnel if we lose their services.
* We are subject to Potential Exposure to Envirionmental Liabilities
Generally, we are subject to various federal, state and local
governmental laws and regulations relating to the use, storage,
discharge, emission and disposal of hazardous materials. Failure to
comply could result in the imposition of severe penalties or
restrictions on our operations by governmental agencies or courts. We
have experienced a diesel leak at our Las Vegas property. Our
continuing efforts to monitor and remediate the effects of this leak,
which occurred in 2002, have been affected by construction at
neighboring projects. We are continuing to monitor this matter. In
order to come to final resolution regarding this issue with the Nevada
Department of Environmental Protection, we may be required to take
remediation steps, including the excavation of the effected area. We
are unable to estimate the cost of remediation at the present time.
Riviera Black Hawk is located within a 400-square mile area that in
1983 was designated as the Clear Creek Central/City National Priorities
List Site Study Area under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended. Although Riviera
Black Hawk is not within any of the specific areas currently identified
for investigation or remediation under that statute, environmental
problems may subsequently be discovered, including in connection with
any future construction on our property. Furthermore, governmental
authorities could broaden their investigations and identify areas of
concern within the site, we could be identified as a "potentially
responsible party" and any related liability could have a material
adverse effect on us. We do not have insurance to cover environmental
liabilities, if we incur any.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of shareholders on May 28, 2008, shareholders
elected our board of directors.
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The number of votes cast for each director nominee, the number of votes
cast against or withheld, and the number of abstentions or broker non-votes were
as follows:
Against or Abstentions or
For Withheld Broker Nonvotes
--------- --------- ----------------
William L. Westerman 6,499,373 5,506,142 -0-
Jeffrey A. Silver 6,400,293 5,605,222 -0-
Paul A. Harvey 9,685,068 2,320,447 -0-
Vincent L. DiVito 9,685,276 2,320,239 -0-
James N. Land, Jr. 9,674,396 2,331,119 -0-
Shareholders also voted to ratify Ernst & Young as our independent auditors. The
results were 11,571,204 votes for ratification, 338,884 against and 95,427
abstained.
Item 5. Other Information
None
Item 6. Exhibits.
See list of exhibits on page 29.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By: /s/ William L. Westerman
William L. Westerman
Chairman of the Board and
Chief Executive Officer
By: /s/ Phillip B. Simons
Phillip B. Simons
Treasurer and
Chief Financial Officer
Date: August 7, 2008
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Exhibits
Exhibits:
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
29