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, 2007
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 000-21430
Riviera Holdings Corporation
(Exact name of registrant as specified in its charter)
Nevada 88-0296885
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (702) 794-9527
____________________________________________
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check One)
Large accelerated filer ___ Accelerated filer _X_ Non-accelerated filer ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO _X__
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documentation and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSURERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 3, 2007, there
were 12,463,755 shares of Common Stock, $.001 par value per share, outstanding.
RIVIERA HOLDINGS CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at June 30, 2007 and
December 31, 2006 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2007 and 2006 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 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 27
Signature Page 28
Exhibits 29
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, 2007 and
2006 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, 2006,
included in our Annual Report on Form 10-K.
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share amounts) June 30 December 31
---------------------------------------------------------------------------------
2007 2006
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,561 $ 25,285
Restricted cash and investments 224,477 -
Accounts receivable, net of allowance for
doubtful accounts of $214 and $163 3,347 3,063
Inventories 1,728 1,792
Prepaid expenses and other assets 4,237 4,002
------------- -----------
Total current assets 265,350 34,142
PROPERTY AND EQUIPMENT, Net 167,953 171,320
OTHER ASSETS, Net 7,742 5,774
DEFERRED INCOME TAXES, net of valuation
allowance of $17,081 2,446 2,446
------------- -----------
TOTAL $ 443,491 $ 213,682
============= ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 214,003 $ 879
Current portion of obligation to officers 1,000 1,000
Accounts payable 8,840 9,126
Accrued interest 1,151 1,063
Accrued expenses 12,697 13,167
------------- -----------
Total current liabilities 237,691 25,235
------------- -----------
OBLIGATIONS TO OFFICERS - Net of current portion 1,577 2,094
------------- -----------
OTHER LONG-TERM DEBT 2,763 2,763
------------- -----------
LONG-TERM DEBT - Net of current portion 225,305 214,124
------------- -----------
Commitments & Contingencies (Note 6)
SHAREHOLDERS' DEFICIENCY:
Common stock ($.001 par value; 60,000,000
shares authorized, 17,131,824 and
17,131,824 shares issued at June 30,
2007 and December 31, 2006, respectively,and 17 17
12,463,755 and 12,369,431 shares outstanding
at June 30, 2007 and December 31, 2007,
respectively)
Additional paid-in capital 18,512 18,165
Treasury stock (4,668,069 and 4,762,393 shares at
June 30, 2007 and December 31, 2006, respectively) (9,635) (9,841)
Accumulated Deficit (32,739) (38,875)
------------- -----------
Total shareholders' deficiency (23,845) (30,534)
------------- -----------
TOTAL $ 443,491 $ 213,682
============= ===========
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2007 AND 2006 Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30, June 30,
--------------------------------------------------------------------------------
REVENUES: 2007 2006 2007 2006
--------- --------- --------- --------
Casino $ 30,887 $ 29,862 $59,006 $56,944
Rooms 15,150 14,246 31,464 29,089
Food and beverage 8,773 8,746 16,961 17,644
Entertainment 3,451 3,860 5,857 7,541
Other 1,645 1,733 3,357 3,436
--------- --------- --------- ---------
Total revenues 59,906 58,447 116,645 114,654
Less - promotional allowances (6,241) (6,010) (10,953) (10,528)
--------- --------- --------- ---------
Net revenues 53,665 52,437 105,692 104,126
--------- --------- --------- ---------
COSTS AND EXPENSES:
Direct costs and expenses of
operating departments:
Casino 14,359 14,902 28,611 28,722
Rooms 7,048 6,832 14,099 13,621
Food and beverage 6,338 6,120 12,479 12,452
Entertainment 2,043 2,700 3,669 5,342
Other 338 333 675 799
Other operating expenses:
General and administrative:
Equity compensation 354 190 553 406
Other general and administrative 10,274 10,542 20,428 20,787
Mergers, acquisitions and development
costs, net 238 761 288 878
Asset impairment - 3 - 16
Depreciation and amortization 3,234 3,159 6,490 6,419
--------- --------- -------- --------
Total costs and expenses 44,226 45,542 87,292 89,442
--------- --------- --------- ---------
INCOME FROM OPERATIONS 9,439 6,895 18,400 14,684
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense, net (6,692) (6,477) (13,091) (12,986)
Unrealized gain on derivatives 827 - 827 -
--------- --------- --------- ---------
Other expense, net (5,865) (6,477) (12,264) (12,986)
--------- --------- --------- ---------
NET INCOME $ 3,574 $ 418 $ 6,136 $ 1,698
========= ========= ========= =========
INCOME PER SHARE DATA:
Income per share:
Basic $ 0.29 $ 0.03 $ 0.50 $ 0.14
--------- --------- --------- ---------
Diluted $ 0.28 $ 0.03 $ 0.49 $ 0.14
--------- --------- --------- ---------
Weighted-average common shares outstanding 12,322 12,040 12,291 12,001
--------- --------- --------- ---------
Weighted-average common and common
equivalent shares 12,605 12,326 12,557 12,271
--------- --------- --------- ---------
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, 2007 AND 2006 Six Months Ended
(in thousands) June 30,
---------------------------------------------------------------------------------
2007 2006
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,136 $1,698
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,490 6,419
Provision for bad debts, net 67 221
Stock Compensation - Restricted Stock 428 392
Stock Compensation - Stock Options 125 14
Asset Impairment - 16
Amortization of deferred loan fees 784 798
Increase on swap fair value (827) -
Changes in operating (assets) and liabilities:
Accounts receivable (351) 938
Inventories 64 632
Prepaid expenses (235) 746
Other assets 179 212
Accounts payable (457) (1,438)
Accrued interest 88 (22)
Accrued liabilities (470) (178)
Deferred compensation plan liability (17) (2)
Obligation to officers (500) (500)
---------- ---------
Net cash provided by operating activities 11,504 9,946
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Las Vegas, Nevada (2,563) (2,481)
Capital expenditures - Black Hawk, Colorado (389) (2,621)
Restricted cash and investments (224,477) -
---------- ---------
Net cash used in investing activities (227,429) (5,102)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (897) (412)
Increase in deferred loan costs (1,902) -
Proceeds from exercise of stock options - 257
Proceeds from issuance of long-term debt 225,000 -
---------- ---------
Net cash provided by (used in)
financing activities 222,201 (155)
---------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 6,276 4,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 25,285 $ 20,571
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,561 $ 25,260
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $ 171 $ 21
Cash paid for interest $ 12,811 $ 12,212
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 Company and
its direct and indirect wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Restricted Cash and Investments
Restricted cash consists of cash proceeds from our New Credit Facility deposited
with the Bank of New York as trustee to fund the notice of redemption of our 11%
Notes (Note 3).
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 potentially
dilutive options excluded from the calculation for the three and six months
ended June 30, 2006 and 2007, respectively.
Income Taxes
The income tax provisions for the three and six months ended June 30, 2007 and
2006, were fully offset by the utilization of loss carryforwards for which a
valuation allowance had been previously provided. The estimates used to
determine the remaining valuation allowance are based upon recent operating
results. These estimates are made using assumptions about the economic, social
and regulatory environments in which we operate. These estimates may be impacted
by numerous unforeseen events including changes to regulations affecting how we
operate the business, changes in the labor market or economic downturns in the
areas where we operate.
6
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. We do not believe there will be
any material changes in our unrecognized tax positions over the next 12 months.
We do not have any accrued interest or penalties associated with any
unrecognized tax benefits.
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
We account 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 income
statement or in other comprehensive 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 market prices obtained from dealer quotes. Such quotes
represent the estimated amounts we would receive or pay to terminate the
contracts. We use 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, 2007, we have one interest rate swap agreement for a notional amount
of $223 million. We have determined that the interest rate swap does not meet
the requirements to qualify for hedge accounting and have therefore recorded a
$827,000 gain for the change in fair value of this derivative instrument in our
condensed consolidated statements of operations for the three-month period ended
June 30, 2007.
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty in income taxes recognized
in the financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We 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. We do not believe there will be
any material changes in our unrecognized tax positions over the next 12 months.
We do not have any accrued interest or penalties associated with any
unrecognized tax benefits.
7
2. OTHER ASSETS
Other assets at June 30, 2007 and December 31, 2006 include deferred loan fees
of approximately $5.7 million and $4.6 million respectively, associated with the
refinancing of our debt in 2002 and 2007. The $3.8 million remaining on our 2002
refinancing debt at June 30, 2007 will be written-off in July 2007, once our 11%
Senior Secured Notes due June 15, 2010 in the original principal amount of $215
million (the "11% Notes") are redeemed. Other assets also includes approximately
$1.9 million of deferred loan fees associated with our new $225 million term
loan which will be amortized over seven years, which is the life of the loan.
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% 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 RHC's and the Subsidiaries' assets.
RHC 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 finalized on July 9, 2007.
8
The interest rate on loans under the Revolving Credit Facility will depend on
whether they are in the form of revolving loans or swingline 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.
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.
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 our common stock purchased by our Deferred Compensation
Plan for the six months ended June 30, 2007 or 2006. The Deferred Compensation
Plan distributed to participants 94,324 and 96,698 shares for the six months
ended June 30, 2007 and 2006, respectively.
5. SHARE-BASED PAYMENTS
During the three months ended June 30, 2007, we recorded share-based
compensation of $354,000 compared to $190,000 in 2006 and for the six months
ended June 30, 2007 we recorded share-based compensation of $553,000 compared to
$406,000 in 2006. No options were exercised during the three and six months
ended June 30, 2007. We granted 24,000 options to non-employee directors during
the three and six months ended June 30, 2007. The following table summarizes
information about options outstanding as of June 30, 2007.
9
The activities of all stock option plans are as follows:
Weighted Average
Share Remaining Aggregate
Shares Exercise Life Intrinsic
Price Value
Outstanding, March 31, 2007 234,000 $ 4.33
Issued 24,000 36.56
--------------
Outstanding, June 30, 2007 258,000 $ 7.33 5.92 years $7,487,000
==============
Exercisable June 30, 2007 214,800 $ 2.78 5.08 years $7,211,000
We 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 2007: dividend yield of 0%; risk-free interest rate of 4.97%; options
for two of the directors who have reached the age of 62 had an expected life of
one year and an expected volatility of 29%, options for one director who will
reach the age of 62 in 2008, had an expected life of two years and a risk
expected volatility of 43%; and options for one director had an expected life of
6.75 years and a risk expected volatility of 64%.As two of the directors had
reached the age of 62 at the grant date, these options were deemed fully vested,
and the related compensation expense was recognized in full on the date of
grant. Additionally, as one director will reach age 62 in 2008, these options
were deemed to have a shorter vesting purpose for expense recognition and the
related compensation expense is being recognized over an accelerated period.
6. COMMITMENTS AND CONTINGENCIES
Salary Continuation Agreements
Approximately 60 executive officers and certain other employees (excluding Mr.
Westerman and Mr. Vannucci) of ROC and RBH have salary continuation agreements
effective through December 2008, pursuant to which they will be entitled to
receive (1) six months salary if their employment with the Company is
terminated, without cause, within 12 months of a change of control of the
Company; and (2) group health insurance for a period of 6 months. The base
salary payments are payable in biweekly installments, subject to the employee's
duty to mitigate by using his or her best efforts to find employment. In
addition, two executive officers and two significant employees have salary
continuation agreements effective through December 31, 2008, pursuant to which
each of them will be entitled to receive one year's base salary and health
insurance benefits for two years, if their employment is terminated without
cause within 24 months of a change of control of the Company. These four salary
continuation agreements are not subject to a duty to mitigate. The estimated
total amount payable under all such agreements was approximately $3.5 million,
which includes $670,000 in benefits, as of June 30, 2007.
Topping Fee Related to the Merger Agreement
Under our April 5, 2006 Agreement and Plan of Merger ("the Merger Agreement"),
we agreed to pay Riv Acquisition Holdings Inc. ("RAH") a "Topping Fee" of
approximately $7.9 million if: (i) the Merger Agreement is terminated because
our shareholders did not approve it; (ii) prior to such termination, a competing
"Takeover Proposal" (which includes a proposal for the acquisition of 30% or
more of the Company's assets or more than 30% of the outstanding stock of RHC or
any RHC subsidiary or for the acquisition of RHC or any RHC subsidiary through a
merger or other business combination) had been announced and had not been
withdrawn; and (iii) within 12 months after such termination (which occurred on
August 29, 2006), we enter into a definitive agreement with a third party with
respect to the consummation of a Takeover Proposal or any such Takeover Proposal
is consummated.
10
On August 8, 2006, we announced that we had received a competing proposal to
acquire all of RHC's outstanding stock through a merger. Prior to our
termination of the Merger Agreement on August 29, 2006 due to disapproval by our
shareholders, the competing proposal had not been withdrawn. Thereafter, our
board of directors rejected the proposal.
Legal Proceedings and Related Events
Between January 2, 2007 and February 26, 2007, there were a series of meetings
between representatives of the Company and Riviera Acquisition Holdings ("RAH")
which was a group then comprised of Flag Luxury Properties, LLC ("Flag"), High
Desert Gaming, LLC ("High Desert"), Barry Sternlicht and Brett Torino and their
respective affiliates (collectively, the "Buying Group") (High Desert has since
left the Buying Group) regarding the acquisition of Company shares held by
Triple Five Investco LLC ("T5") and the potential acquisition of all other
Company shares. The Company advised RAH that the Company would not grant RAH a
waiver of the Nevada Business Combination Law Statute ("BCL") or the voting
limitations provided in the Company Articles of Incorporation (the "Company
Charter") if RAH obtained the right to acquire the T5 shares. The Company also
advised RAH during the course of these meetings that its preferred method of any
potential transaction to acquire the Company was through a tender offer for all
outstanding Company shares.
Between March 15, 2007 and March 20, 2007, RAH representatives met with Company
representatives and proposed an acquisition of the Company via a merger, subject
to numerous conditions. RAH also expressed its desire to purchase and/or lock up
the right to acquire the T5 Shares. The Company advised RAH that it would not
grant a waiver of the BCL or Company Charter to either purchase or lock up the
right to acquire the T5 shares.
On March 21, 2007, RAH and T5 entered into an option and lock up agreement for
the T5 shares in favor of RAH ("T5 Option Agreement"). On March 26, 2007, RAH
faxed a proposed merger agreement to the Company for the acquisition of all
Company shares through a merger agreement at $27 per share in cash subject to
numerous conditions including all regulatory approvals and all necessary
financing (the "Proposal"). On March 28, 2007, the Company rejected the $27
offer and determined that as a result of entering into the T5 Option Agreement
RAH had violated the BCL and was therefore precluded under Nevada law from any
proposed business combination to acquire the Company for a period of three
years. The Company also determined that the T5 Option Agreement would trigger a
provision of the Company Charter that would result in reduced voting rights
associated with the T5 shares when obtained by RAH to 1/100 of one vote per
share.
On April 17, 2007, a complaint for Declaratory Relief (the "Complaint") was
filed by RAH (the "Plaintiffs") in the District Court of Clark County, Nevada
(the "Court") (Case No. A539614). On May 2, 2007, the Complaint was amended and
filed with the Court (the "Amended Complaint") and was subsequently served upon
the Company and its directors (collectively, the "Defendants"). The Amended
Complaint seeks relief from the Defendants' determination that Plaintiffs are
prevented from engaging in any business combination with the Company for the
three-year disqualification period due to Plaintiffs entering into the T5 Option
Agreement.
11
The Amended Complaint requests the Court to do the following, among other
things: (i) declare that the three-year disqualification period provided in NRS
78.438 does not apply to the Plaintiffs or the Proposal; (ii) declare that the
Defendants may not invoke NRS 78.438 as an impediment to consider the Proposal;
(iii) declare that the voting limitation in the Company Charter does not apply
to the Plaintiffs, and interests acquired under the T5 Option Agreement or the
Proposal; and (iv) declare that the Defendants may not invoke the Company
Charter as an impediment to considering the Proposal.
On April 26, 2007, RAH announced it was presenting an opposition slate of Board
of Directors for consideration at the Company Annual Meeting of Shareholders on
May 15, 2007.
On May 11, 2007, the Company announced that it had retained Jefferies & Company
to explore a range of strategic and financial alternatives, including, but not
limited to, a sale of the Company, in order to enhance shareholder value. The
Company also announced that it had received a proposed merger agreement in
connection with a bid of $30 per share in cash, subject to numerous conditions,
from Ian Bruce Eichner and Dune Capital Management L.P. On May 14, 2007, RAH
withdrew its opposition slate of directors. At the Company's Annual Meeting of
Shareholders on May 15, 2007, the Company's slate of directors was re-elected by
a favorable vote of approximately 90% of the Company's outstanding shares. On
May 16, 2007, RAH submitted a proposed merger agreement in connection with a bid
to acquire the Company at $34 per share in cash subject to numerous conditions.
The Board of Directors of the Company has not at the present time determined to
pursue any strategies or financial alternatives regarding this $34 per share
proposed merger and there is no assurance that the Board of Directors will
recommend any alternatives or that any such alternatives could be successfully
completed.
On May 23, 2007, the Company filed its answer and a counter claim to the Amended
Complaint. This matter is scheduled for hearing on August 10, 2007.
Neither the Eichner $30 Proposal nor the RAH $34 Proposal has been withdrawn.
Our position has not changed regarding the ineligibility of RAH and its
investment group to proceed with the RAH $34 Proposal due to their triggering of
the BCL and Article III. We are continuing to work with Jefferies on our
strategic process to maximize shareholder value, and the lawsuit filed by RAH
and related parties is still pending.
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
Guarantor Information
The New Credit Facility is guaranteed by the Subsidiaries, which are all of our
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 our financial position or results of operations, are
not guarantors of the New Credit Facility.
7. SUBSEQUENT EVENTS
We redeemed all of our 11% Notes on July 9, 2007, in connection with our
refinancing and accordingly we will record a loss on extinguishment of debt in
the third quarter of 2007 of approximately $12.9 million related to the call
premium, remaining deferred financing costs and the unamortized discount.
12
8. SEGMENT DISCLOSURES
We determine our segments based upon the review process of our chief decision
maker who reviews by geographic gaming market segments: Riviera Las Vegas and
Riviera Black Hawk. The key indicator reviewed by our chief decision maker is
"property EBITDA", as defined below. All intersegment revenues have been
eliminated.
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
(Dollars in thousands) 2007 2006 2007 2006
---------- --------- ----------- --------
Net Revenues:
Riviera Las Vegas $40,185 $39,662 $78,657 $78,088
Riviera Black Hawk 13,480 12,775 27,035 26,038
--------- --------- ----------- ---------
Total net revenues $53,665 $ 52,437 $105,692 $ 104,126
========= ========= =========== =========
Property EBITDA (1):
Riviera Las Vegas $9,405 $8,350 $18,012 $16,817
Riviera Black Hawk 4,877 3,716 9,692 7,904
Other Costs and Expenses
Corporate Expenses
Equity compensation 354 190 553 406
Other corporate expenses 1,017 1,058 1,973 2,318
Depreciation and amortization 3,234 3,159 6,490 6,419
Mergers, acquitions and
development costs 238 761 288 878
Asset impairment - 3 - 16
Interest Expense, net 5,865 6,477 12,264 12,986
--------- --------- ----------- ---------
Total Other Costs
and Expenses 10,708 11,648 21,568 23,023
--------- --------- ----------- ---------
Net Income $ 3,574 $ 418 $ 6,136 $ 1,698
========= ========= =========== =========
(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 the
following financial schedules.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overall Outlook and Recent Developments
13
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 Colorado
("Riviera Black Hawk").
Our capital expenditures for Riviera Las Vegas are geared to maintain the hotel
rooms and amenities in sufficient condition to compete for customers in the
convention market and the mature adult customer. Room rates and slot revenues
are the primary factors driving our operating margins. We use technology to
maintain labor costs at a reasonable level, including kiosks for hotel check-in,
slot club and slot ticket redemptions.
In Black Hawk, the $5 maximum bet restricts table games to a minimum, and the
area is basically a "locals" slot customer market. Our capital expenditures in
Black Hawk are geared to maintain competitive slot machines compared to the
market.
Refinancing
On June 8, 2007, we and certain of our restricted subsidiaries, namely Riviera
Operating Corporation, Riviera Gaming Management of Colorado, Inc. and Riviera
Black Hawk, Inc. (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 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 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% 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 intend to use 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 our 11% Senior
Secured Notes due June 15, 2010 in the original principal amount of $215 million
(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 use an interest rate swap to manage the mix of our debt between fixed and
variable rate instruments entered into on June 8, 2007. As of June 30, 2007, we
have one interest rate swap agreement for a notional amount of $223 million. We
have determined that the interest rate swap does not meet the requirements to
qualify for hedge accounting and have therefore recorded a $827,000 gain for the
change in fair value of this derivative instrument in our condensed consolidated
statements of operations for the three-month period ended June 30, 2007.
14
For further information about the New Credit Facility, see "Liquidity and
Capital Resources" below in this Item 2, and Item 1.01 of the Form 8-K that we
filed on June 14, 2007.
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Property EBITDA does not
include intercompany management fees.
Second Quarter Incr Incr %
(In Thousands) 2007 2006
Net Revenues:
Riviera Las Vegas $40,185 $39,662 $523 1.3%
Riviera Black Hawk 13,480 12,775 705 5.5%
Total Net Revenues $53,665 $52,437 $1,228 2.3%
Property EBITDA
Riviera Las Vegas $9,405 $8,350 $1,055 12.6%
Riviera Black Hawk 4,877 3,716 1,161 31.2%
Property EBITDA $14,282 $12,066 $2,216 18.4%
Property EBITDA Margins (1)
Riviera Las Vegas 23.4% 21.1% 2.3%
Riviera Black Hawk 36.2% 29.1% 7.1%
(1) Property EBITDA margins represent property EBITDA as a percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues increased $523,000 or 1.3% in the second quarter 2007
compared to the same period last year.
Casino revenues increased $256,000 or 1.5% due to an increase in
slot revenue, driven by increased coin-in as a result of new slot machines and
a revised floor layout.
Room revenue increased $904,000, or 6.3%, from $14.2 million in 2006 to $15.1
million in 2007 due mainly to an increase in average daily rate. Average daily
room rate increased $4.76 or 6.3% from $75.99 in 2006 to $80.75 in 2007. Hotel
occupancy decreased slightly to 95.3%, down from last year's 96.0%. Rev Par
(revenue per available room) increased 5.4% or $3.97 to $76.94 for the three
months ended June 30, 2007.
Food and beverage revenue increased $87,000, or 1.2%, from $7.4 million in 2006
to $7.5 million mainly due to increase covers in our buffet offset by lower
banquet revenue resulting from fewer events.
15
Entertainment revenue decreased $416,000, or 10.8%, from $3.9 million in 2006 to
$3.5 million in 2007 primarily due to lower ticket sales in our Versailles
Theater and other entertainment venues.
Promotional allowances increased by approximately $299,000, or 6.1%, from $4.9
million during 2006 to $5.2 million during 2007 primarily due to increases in
the number of complimentary rooms related to increased casino activity.
Costs and Expenses
Hotel expenses increased $216,000, or 3.2% due to payroll and benefit cost
increases primarily associated with union contract increases.
Entertainment departmental costs and expenses decreased by $646,000, or 24.0% in
the quarter, primarily due to lower ticket sales, which resulted in reduced
payments to producers and other cost reductions for other entertainment venues.
Property EBITDA
Property EBITDA in Las Vegas increased $1.1 million, or 12.6%, from $8.3 million
in 2006 to $9.4 million in 2007 due principally to increased slot and room
revenues as discussed above. EBITDA margins increased from 21.1% in 2006 to 23.4
% in 2007.
Riviera Black Hawk
Revenues
Net revenues increased $705,000 or 5.5% from $12.8 million in 2006 to $13.5
million in 2007. The increase was related to an increase in slot revenue as a
result of an increase in the slot hold percentage as the slot volumes in the
lower denomination slot machines continued to increase on the newer machines.
These new machines were installed in 2006.
Food and beverage revenues were approximately $1.3 million in 2007, of which
$1.1 million was complimentary (promotional allowance).
Property EBITDA
Property EBITDA at Riviera Black Hawk increased $1.2 million, or 31.2%, from
$3.7 million in 2006 to $4.9 million in 2007, primarily due to the increased
slot revenues, reduced payroll and marketing expenses. Our EBITDA margins
increased from 29.1% in the second quarter of 2006 to 36.2% in the second
quarter of 2007.
Consolidated Operations
Other Income (Expense)
Other income and expenses decreased $612,000 due primarily to our recording an
unrealized gain on the fair value of our interest rate swap of $827,000, which
was entered into in June 2007, offset by an increase in net interest expense as
we had both the 11% Notes and our New Credit Facility outstanding for 23 days in
June.
16
Net Income
Net income increased $3.2 million from $418,000 in 2006 to $3.6 million in 2007
due primarily to the factors described above, reduced expenses in 2007
associated with mergers, acquisitions and development costs, offset by increased
equity-based compensation expense.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Property EBITDA does not
include intercompany management fees.
Six Months
(In Thousands) 2007 2006 Incr Incr %
Net Revenues:
Riviera Las Vegas $78,657 $78,088 $569 0.7%
Riviera Black Hawk 27,035 26,038 997 3.8%
Total Net Revenues $105,692 $104,126 $1,566 1.5%
Property EBITDA
Riviera Las Vegas $18,012 $16,817 $1,195 7.1%
Riviera Black Hawk 9,692 7,904 1,788 22.6%
Property EBITDA 27,704 24,721 2,983 12.1%
Property EBITDA Margins (1)
Riviera Las Vegas 22.9% 21.5% 1.4%
Riviera Black Hawk 35.8% 30.4% 5.4%
(1) Property EBITDA margins represent EBITDA as a percentage of net revenues by
property.
Riviera Las Vegas
Revenues
Net revenues increased $569,000, or 0.7%, from $78.1 million in 2006 to $78.7
million in 2007 due primarily to increased hotel and slot revenues.
Slot revenue increased $1.3 million (5.2%) over the prior year due to increased
coin-in and slot hold percentage brought about by increased marketing programs,
which provided additional complimentary hotel rooms and cash back to slot
players. Room revenue increased $2.4 million, or 8.2%, from $29.1 million in
2006 to $31.5 million in 2007 due to an increase in slot player complimentary
room revenue and an overall increase in average room rate. Hotel occupancy
increased to 94.3%, from last year's 93.5% and the average daily room rate
increased $5.45 to $85.15 in 2007 from $79.70 in 2006. Rev Par (revenue per
available room) increased 7.7% or $5.77 to $80.25.
17
Food and beverage revenues decreased $522,000, or 3.5%, from $15.0 million in
2006 to $14.5 million in 2007, due to the decrease in banquets covers, which
were down 13.9%.
Entertainment revenues decreased by approximately $1.7 million, or 22.4%, from
$7.5 million during 2006 to $5.9 million during 2007 due primarily to a decrease
in ticket sales associated with our show in Versailles Theater and other
entertainment venues.
Promotional allowances increased by approximately $541,000 or 6.5%, from $8.4
million during 2006 to $8.9 million during 2007 primarily due to increases in
complimentary room revenue as a result of an increase in slot marketing
activity.
Costs and Expenses
Casino expenses increased $297,000 or 1.8% from $16.9 million in 2006 to $17.2
million in 2007 due to increased costs of complimentary room nights.
Entertainment costs decreased $1.7 million, or 31.2%, primarily due to lower
ticket sales, which resulted in reduced payments to producers other cost
reductions for our entertainment venues.
Property EBITDA
EBITDA in Las Vegas increased $1.2 million, or 7.1%, from $16.8 million in 2006
to $18.0 million in 2007 due to increased room and slot revenue as discussed
above. EBITDA margins in Las Vegas increased from 21.5% in 2006 to 22.9% in 2007
as a result of the factors described above.
Riviera Black Hawk
Revenues
Net revenues increased by approximately $997,000, or 3.8%, from $26.0 million in
2006 to $27.0 million in 2007. Casino revenues increased $1.1 million, or 4.4%,
from $25.2 million in 2006 and $26.3 million in 2007. The increase was primarily
related to an increase in slot revenue as a result of improved hold percentage
on lower denomination slot machines. These new machines were installed in 2006.
Property EBITDA
Property EBITDA in Black Hawk increased $1.8 million, or 22.6%, from $7.9
million in 2006 to $9.7 million in 2007 primarily due to the increase slot
revenue discussed above and reduced casino and general and administrative
expenses. EBITDA margins in Black Hawk increased from 30.4% in 2006 to 35.8% in
2007 as a result of more targeted marketing promotions.
Consolidated Operations
Other Income (Expense)
Other income and expenses decreased $612,000 due primarily to our recording an
unrealized gain on the fair value of our interest rate swap of $827,000, which
was entered into in June 2007, offset by an increase in net interest expense as
we had both the 11% Notes and our New Credit Facility outstanding for 23 days in
June.
18
Net Income
Net income increased $4.4 million from $1.7 million in 2006 to $6.1 million in
2007 due primarily to the increase income from operations of $3.7 million and
the gain of fair value of the swap.
Liquidity and Capital Resources
At June 30, 2007, we had cash and cash equivalents of $31.6 million. Our cash
and cash equivalents increased $6.3 million during the first six months of 2007,
as a result of $11.5 million of cash provided by operations, $227.4 million of
cash outflow for investing activities including $224.4 million of restricted
cash held to retire our 11% Notes and $222.2 million increase for financing
activities including proceeds from of our $225 million Term Loan. 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 $2.6 million for this
purpose in a short period.
We believe that cash flow from operations, combined with the $31.6 million cash
and cash equivalents and the $20 million Revolving Credit Facility, will be
sufficient to cover our current debt service and enable investment in budgeted
capital expenditures of $12.5 million for 2007 for both Riviera Las Vegas and
Riviera Black Hawk including planned capital improvements and assessments for
the Main Street expansion in Black Hawk.
On June 8, 2007, we 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.
19
We intend to use 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 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
5.48% compared to the three month LIBOR rate of 5.36% as of June 30, 2007.
The interest rate on loans under the Revolving Credit Facility will depend on
whether they are in the form of revolving loans or swingline 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.
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.
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.
For a further description of the New Credit Facility, see Item 1.01 of the Form
8-K that we filed on June 14, 2007.
At June 30, 2007, we are in compliance with the covenants of the 11% Notes and
the $225 million Term Loan.
20
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, 2006. For a further
discussion of our accounting policies, see Note 1, Summary of Significant
Accounting Policies, in the Notes to the Condensed Consolidated Financial
Statements in this Form 10-Q.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements include the words "may," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and similar words as well as our acquisition, development and expansion plans,
objectives or expectations and our liquidity projections. These forward-looking
statements generally relate to our plans, objectives, prospects and expectations
for future operations and results and are based upon what we consider to be
reasonable future estimates. Although we believe that our plans, objectives,
prospects and expectations reflected in, or suggested by, such forward-looking
statements are reasonable at the present time, we may not achieve or we may
modify them from time to time. Furthermore, there is no assurance that any
positive trends suggested or referred to in this report will continue. You
should read this report thoroughly and with the understanding that actual future
results may be materially different from what we expect. We do not plan to
update forward-looking statements even though our situation or plans may change
in the future, unless applicable law requires us to do so.
Specific factors that might cause our actual results to differ from our plans,
objectives or expectations, might cause us to modify them, or might affect our
ability to achieve them, include, but are not limited to:
o the results of our previously announced strategic process to explore
alternatives for maximizing shareholder value, and the possible effect
that the pending lawsuit against us by RAH and related parties and the
fluctuations in our stock price will have on 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,
funding and debt obligations;
o our substantial indebtedness, debt service requirements and liquidity
constraints;
o the smoking ban in Colorado on our Riviera Black Hawk property which becomes
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;
21
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;
o actions taken or not taken by third parties, such as our customers,
suppliers, and competitors, as well as legislative, regulatory, judicial and
other governmental authorities;
o changes in our personnel or their compensation, including those resulting
from changes in minimum wage requirements;
o our failure to obtain, delays in obtaining, or the loss of, any licenses,
permits or approvals, including gaming and liquor licenses, or the
limitation, conditioning, suspension or revocation of any such licenses,
permits or approvals, or our failure to obtain an unconditional renewal of
any of our licenses, permits or approvals on a timely basis;
o the loss of any of our casino, hotel or convention facilities due to
terrorist acts, casualty, weather, mechanical failure or any extended or
extraordinary maintenance or inspection that may be required;
o other adverse conditions, such as economic downturns, changes in general
customer confidence or spending, increased transportation costs, travel
concerns or weather-related factors, that may adversely affect the economy
in general or the casino industry in particular;
o changes in our business strategy, capital improvements or development plans;
o the consequences of the war in Iraq and other military conflicts in the
Middle East and any future security alerts or terrorist attacks such as the
attacks that occurred on September 11, 2001; and
o other risk factors and uncertainties discussed elsewhere in this report.
All future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. In light of
these and other risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
22
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of June 30, 2007, we had $439 million in borrowings. The borrowings include
$215 million in 11% Notes, which have been called and were redeemed on July 9,
2007, $225 million Term Loan maturing in 2014 and a capital lease maturing in
2009. Interest on the 11% Notes is based on a fixed rate of 11%. The equipment
capital lease has a fixed interest rates of 5.5%. The borrowings also include
$348,000 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 susecptible to interest rate risk because our outstanding debt is at
fixed rates. As of June 30, 2007, we had no borrowing outstanding under our
Revoling Credit Facility. As of June 30, 2007, 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
2.0%. Under this interest rate swap arrangement, we receive payments at a
variable rate of LIBOR and pay a fixed rate of 5.485% on the $225 million
notional amount which expires on June 8, 2014. Although this interest rate swap
is highly effective economically in fixing the interest rate on this borrowing
under the Term Loan at approximately 7.485%, 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 have an immaterial effect on our financial statements as of June 30, 2007.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate Fair Value
(Dollars in thousands) 2007 2008 2009 2010 2011 Thereafter Total at 6/30/07
Long-Term Debt,
Including Current Portion
Equipment loans and
capital leases - Las Vegas $ 33 $ 69 $ 55 $ 157 $ 157
Average interest rate 5.5% 5.5% 5.5%
$225 Term Loan $1,125 $ 2,250 $221,625 $225,000 $ 225,000
Average interest rate 7.5% 7.5% 7.5%
11% Notes $ 215,000 $215,000 $ 222,906
Less unamortized Discount $ (1,197) $ (1,197) $ (1,197)
Average interest rate 11.8%
SID Bonds -
Black Hawk, Colorado $ 66 $ 137 $ 145 $ 348 $ 348
Average interest rate 5.5% 5.5% 5.5%
Total long-term debt,
including current portions $ 213,902 $ 206 $ 200 $1,125 $ 2,250 $221,625 $439,308 $ 447,214
Other Long-Term Liabilities,
Including Current Portions
CEO pension plan obligation $500 $1,000 $1,000 $ 77 $ 2,577 $ 2,577
11.8% 11.8% 11.8% 11.8%
------------------------------------------------------- ---------------------
Total long-term obligations $ 214,402 $1,206 $1,200 $1,202 $ 2,250 $221,625 $441,885 $ 449,791
======================================================= =====================
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ITEM 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and that such information is accumulated and communicated to our
management, including our 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, 2007, we carried out an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our CEO and CFO concluded that our
disclosure controls and procedures were effective.
During our last fiscal quarter there were no changes in our internal control
over financial reporting, (as defined in Exchange Act Rules 13a-15(f) and 15(d)-
15(f)), that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Between January 2, 2007 and February 26, 2007, there were a series of meetings
between representatives of the Company and Riviera Acquisition Holdings ("RAH")
which was a group then comprised of Flag Luxury Properties, LLC ("Flag"), High
Desert Gaming, LLC ("High Desert"), Barry Sternlicht and Brett Torino and their
respective affiliates (collectively, the "Buying Group") (High Desert has since
left the Buying Group) regarding the acquisition of Company shares held by
Triple Five Investco LLC ("T5") and the potential acquisition of all other
Company shares. The Company advised RAH that the Company would not grant RAH a
waiver of the Nevada Business Combination Law Statute ("BCL") or the voting
limitations provided in the Company Articles of Incorporation (the "Company
Charter") if RAH obtained the right to acquire the T5 shares. The Company also
advised RAH during the course of these meetings that its preferred method of any
potential transaction to acquire the Company was through a tender offer for all
outstanding Company shares.
Between March 15, 2007 and March 20, 2007, RAH representatives met with Company
representatives and proposed an acquisition of the Company via a merger, subject
to numerous conditions. RAH also expressed its desire to purchase and/or lock up
the right to acquire the T5 Shares. The Company advised RAH that it would not
grant a waiver of the BCL or Company Charter to either purchase or lock up the
right to acquire the T5 shares.
24
On March 21, 2007, RAH and T5 entered into an option and lock up agreement for
the T5 shares in favor of RAH ("T5 Option Agreement"). On March 26, 2007, RAH
faxed a proposed merger agreement to the Company for the acquisition of all
Company shares through a merger agreement at $27 per share in cash subject to
numerous conditions including all regulatory approvals and all necessary
financing (the "Proposal"). On March 28, 2007, the Company rejected the $27
offer and determined that as a result of entering into the T5 Option Agreement
RAH had violated the BCL and was therefore precluded under Nevada law from any
proposed business combination to acquire the Company for a period of three
years. The Company also determined that the T5 Option Agreement would trigger a
provision of the Company Charter that would result in reduced voting rights
associated with the T5 shares when obtained by RAH to 1/100 of one vote per
share.
On April 17, 2007, a complaint for Declaratory Relief (the "Complaint") was
filed by RAH (the "Plaintiffs") in the District Court of Clark County, Nevada
(the "Court") (Case No. A539614). On May 2, 2007, the Complaint was amended and
filed with the Court (the "Amended Complaint") and was subsequently served upon
the Company and its directors (collectively, the "Defendants"). The Amended
Complaint seeks relief from the Defendants' determination that Plaintiffs are
prevented from engaging in any business combination with the Company for the
three-year disqualification period due to Plaintiffs entering into the T5 Option
Agreement.
The Amended Complaint requests the Court to do the following, among other
things: (i) declare that the three-year disqualification period provided in NRS
78.438 does not apply to the Plaintiffs or the Proposal; (ii) declare that the
Defendants may not invoke NRS 78.438 as an impediment to consider the Proposal;
(iii) declare that the voting limitation in the Company Charter does not apply
to the Plaintiffs, and interests acquired under the T5 Option Agreement or the
Proposal; and (iv) declare that the Defendants may not invoke the Company
Charter as an impediment to considering the Proposal.
On April 26, 2007, RAH announced it was presenting an opposition slate of Board
of Directors for consideration at the Company Annual Meeting of Shareholders on
May 15, 2007.
On May 11, 2007, the Company announced that it had retained Jefferies & Company
to explore a range of strategic and financial alternatives, including, but not
limited to, a sale of the Company, in order to enhance shareholder value. The
Company also announced that it had received a proposed merger agreement in
connection with a bid of $30 per share in cash, subject to numerous conditions,
from Ian Bruce Eichner and Dune Capital Management L.P. On May 14, 2007, RAH
withdrew its opposition slate of directors. At the Company's Annual Meeting of
Shareholders on May 15, 2007, the Company's slate of directors was re-elected by
a favorable vote of approximately 90% of the Company's outstanding shares. On
May 16, 2007, RAH submitted a proposed merger agreement in connection with a bid
to acquire the Company at $34 per share in cash subject to numerous conditions.
The Board of Directors of the Company has not at the present time determined to
pursue any strategies or financial alternatives regarding this $34 per share
proposed merger and there is no assurance that the Board of Directors will
recommend any alternatives or that any such alternatives could be successfully
completed.
On May 23, 2007, the Company filed its answer and a counter claim to the Amended
Complaint. This matter is scheduled for hearing on August 10, 2007.
Neither the Eichner $30 Proposal nor the RAH $34 Proposal has been withdrawn.
Our position has not changed regarding the ineligibility of RAH and its
investment group to proceed with the RAH $34 Proposal due to their triggering of
the BCL and Article III. We are continuing to work with Jefferies on our
strategic process to maximize shareholder value, and the lawsuit filed by RAH
and related parties is still pending.
25
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
Item 1A. Risk Factors.
Our annual report on Form 10-K for the fiscal year ended December 31, 2006 (our
"2006 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 2006 Form 10-K.
The Strategic Process That We Announced On May 11, 2007 Provides
No Assurance Of Success, Especially In Light Of Other Recent Events.
Although we are working with Jefferies on our strategic process to explore
alternatives for maximizing shareholder value, including a possible sale of our
entire company, there is substantial uncertainty as to whether we will be
successful in this process and how long the process will take. That uncertainty
has been heightened by at least two recent events. First, the lawsuit by RAH and
its related parties (collectively, the "RAH Parties") might make other parties
unwilling to bid for our company while the RAH Parties, which we believe
beneficially own approximately 18.4% of our stock and are our largest
shareholders, are seeking an unrestricted right to acquire our shares in the
open market or to lock up those shares against takeover bids by other parties.
Second, the trading price of our stock, which has been volatile in recent years,
has declined materially in recent weeks. This might cause prospective bidders to
defer or withdraw takeover proposals or to make proposals at prices below the
$30 and $34 per share proposals that were announced in May 2007.
If The RAH Parties Prevail In Their Lawsuit, They Might Be Able To
Corner The Market For Our Shares.
The RAH Parties are seeking, among other things, a judgment that they can
acquire our shares or obtain lock-up rights to our shares without our permission
under the BCL and Article III. If they succeed, they may be able to acquire
control over so much of our stock as to preclude competitive bidding or other
strategic plans for our company that conflict with their own objective of
acquiring our company at the lowest possible price.
Uncertainties Concerning The Results Of Our Strategic Process And The
RAH Parties' Lawsuit And Takeover Efforts Might Make It More
Difficult For Us To Replace Any Key Personnel If We Lose Them.
These uncertainties might add to the difficulties that we discussed in the Risk
Factors section (Part I, Item 1A) of our 2006 Form 10-K concerning replacement
of any key personnel if we lose them.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders on May 15, 2007, stockholders elected our
board of directors.
The number of votes cast for each director nominee, the number of votes cast
against or withheld, and the number of abstentions or broker non-votes were as
follows:
26
Against or Abstentions or
For Withheld Broker Nonvotes
William L. Westerman 7,227,221 843,410 -0-
Jeffrey A. Silver 7,194,951 875,680 -0-
Paul A. Harvey 7,849,815 220,816 -0-
Vincent L. DiVito 7,720,456 350,175 -0-
James N. Land, Jr. 7,723,097 347,534 -0-
Item 6. Exhibits.
See list of exhibits on page 29.
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By:/s/ William L. Westerman
William L. Westerman
Chairman of the Board and
Chief Executive Officer
By: /s/ Mark Lefever
Mark Lefever
Treasurer and
Chief Financial Officer
Date: August 3, 2007
28
Exhibits
Exhibits:
10.1(A) Forms of Salary Continuation Agreements with Riviera Operating
Corporation and Riviera Black Hawk, Inc. dated May 15, 2007.
10.2 Credit Agreement, dated June 8, 2007, among the Company, the Company's
restricted subsidiaries, Wachovia Bank, National Association and the
Lenders that are parties thereto.
10.3 Commitment letter agreement dated April 27, 2007 between the Company and
Wachovia Bank, National Association and Wachovia Capital Markets, LLC.
10.4 Deed of Trust, Assignment of Leases, Rents, Security Agreement, and
Fixture Filing dated June 8, 2007, executed by the Company in favor of
First American Title Insurance Company as Trustee.
10.5 Deed of Trust, Assignment of Leases, Rents, Security Agreement, and
Fixture Filing dated June 8, 2007, executed by Riviera Black Hawk, Inc.
in favor of The Public Trustee For Gilpin County, Colorado and Wachovia
Bank, National Association.
10.6 Environmental Indemnity dated as of June 8, 2007 between the Company and
Wachovia Bank, National Association.
10.7 Environmental Indemnity dated as of June 8, 2007, among the Company,
Riviera Black Hawk, Inc. and Wachovia Bank, National Association.
10.8 Credit Party Pledge Agreement, dated June 8, 2007, among the Company, the
Company's restricted subsidiaries, Riviera Gaming Management, Inc. and
Wachovia Bank, National Association.
10.9 Gaming Pledge Agreement dated June 8, 2007, between the Company and
Wachovia Bank, National Association.
10.10 Security Agreement, dated June 8, 2007, among the Company, the Company's
restricted subsidiaries, Wachovia Bank, National Association and the
Lenders that are parties thereto.
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
(A) Management contract or compensatory plan or arrangement