FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Mark
One
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31,
2009
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)
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|
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
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|
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2901
Las Vegas Boulevard South, Las Vegas, Nevada
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|
|
(Address
of principal executive offices)
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|
(Zip
Code)
|
|
(Registrant’s
telephone number, including area
code)
|
|
(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 ý No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
¨ 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 ý
|
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 ý
As of May
8, 2009, there were 12,477,855 shares of Common Stock, $.001 par value per
share, outstanding.
RIVIERA
HOLDINGS CORPORATION
INDEX
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Page
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PART
I.
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FINANCIAL
INFORMATION
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1
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Item
1.
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Financial
Statements
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1
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Consolidated
Balance Sheets at March 31, 2009 (Unaudited) and December 31,
2008
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2
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|
|
|
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Consolidated
Statements of Operations (Unaudited) for the Three Months Ended
March 31, 2009 and 2008
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3
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|
|
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Consolidated
Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 2009 and 2008
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4
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|
|
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Notes
to Consolidated Financial Statements (Unaudited)
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5
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|
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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28
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Item
4.
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Controls
and Procedures
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30
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PART
II.
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OTHER
INFORMATION
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30
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Item
1.
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Legal
Proceedings
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30
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Item
1A.
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Risk
Factors
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30
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Item
6.
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Exhibits
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30
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Signature
Page
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31
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Exhibits
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32
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PART
I – FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
|
The
accompanying unaudited 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 months ended March 31, 2009 and 2008 are not
necessarily indicative of the results for the entire year. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2008, included in our Annual Report on Form 10-K.
RIVIERA
HOLDINGS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
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|
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|
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ASSETS
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|
March
31
2009
|
|
|
December
31
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
16,300 |
|
|
$ |
13,461 |
|
Restricted
cash and investments
|
|
|
2,772 |
|
|
|
2,772 |
|
Accounts
receivable, net of allowances of $423 and $559,
respectively
|
|
|
2,815 |
|
|
|
2,457 |
|
Inventories
|
|
|
507 |
|
|
|
718 |
|
Prepaid
expenses and other assets
|
|
|
3,356 |
|
|
|
2,976 |
|
Total
current assets
|
|
|
25,750 |
|
|
|
22,384 |
|
|
|
|
|
|
|
|
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|
PROPERTY
AND EQUIPMENT-net
|
|
|
176,284 |
|
|
|
179,918 |
|
OTHER
ASSETS-net
|
|
|
2,584 |
|
|
|
2,658 |
|
TOTAL
|
|
$ |
204,618 |
|
|
$ |
204,960 |
|
|
|
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|
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|
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LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
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CURRENT
LIABILITIES:
|
|
|
|
|
|
|
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Current
portion of long-term debt
|
|
$ |
227,543 |
|
|
$ |
227,689 |
|
Current
portion of fair value of interest rate swap liabilities
|
|
|
15,156 |
|
|
|
16,828 |
|
Current
portion of obligation to officers
|
|
|
767 |
|
|
|
1,028 |
|
Accounts
payable
|
|
|
5,544 |
|
|
|
7,751 |
|
Accrued
interest
|
|
|
4,217 |
|
|
|
98 |
|
Accrued
expenses
|
|
|
10,885 |
|
|
|
10,201 |
|
Total
current liabilities
|
|
|
264,112 |
|
|
|
263,595 |
|
LONG-TERM
DEBT-Net of current portion
|
|
|
151 |
|
|
|
158 |
|
Total
liabilities
|
|
|
264,263 |
|
|
|
263,753 |
|
|
|
|
|
|
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COMMITMENTS
and CONTINGENCIES (Note 8)
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STOCKHOLDERS' DEFICIENCY:
|
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Common
stock $(.001 par value; 60,000,000 shares authorized, 17,145,924 and
17,161,824 shares issued at March 31, 2009 and December 31, 2008,
respectively, and 12,477,855 and 12,493,755 shares outstanding at March
31, 2009 and December 31, 2008, respectively)
|
|
|
17 |
|
|
|
17 |
|
Additional
paid-in capital
|
|
|
20,005 |
|
|
|
19,820 |
|
Treasury
stock (4,668,069 shares at March 31, 2009 and
|
|
|
|
|
|
|
|
|
December
31, 2008, respectively)
|
|
|
(9,635 |
) |
|
|
(9,635 |
) |
Accumulated
deficit
|
|
|
(70,032 |
) |
|
|
(68,995 |
) |
Total
stockholders' deficiency
|
|
|
(59,645 |
) |
|
|
(58,793 |
) |
TOTAL
|
|
$ |
204,618 |
|
|
$ |
204,960 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
RIVIERA
HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
FOR
THE THREE MONTHS ENDED MARCH 31,
(In
thousands, except per share amounts)
|
|
|
|
|
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REVENUES:
|
|
|
|
|
|
|
Casino
|
|
$ |
20,231 |
|
|
$ |
23,966 |
|
Rooms
|
|
|
10,336 |
|
|
|
15,870 |
|
Food
and beverage
|
|
|
5,564 |
|
|
|
8,045 |
|
Entertainment
|
|
|
2,043 |
|
|
|
3,377 |
|
Other
|
|
|
1,600 |
|
|
|
1,876 |
|
Total
revenues
|
|
|
39,774 |
|
|
|
53,134 |
|
Less
- promotional allowances
|
|
|
(5,118 |
) |
|
|
(5,172 |
) |
Net
revenues
|
|
|
34,656 |
|
|
|
47,962 |
|
|
|
|
|
|
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COSTS
AND EXPENSES:
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|
|
|
|
|
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Direct
costs and expenses of operating departments:
|
|
|
|
|
|
|
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Casino
|
|
|
10,635 |
|
|
|
12,421 |
|
Rooms
|
|
|
4,888 |
|
|
|
6,864 |
|
Food
and beverage
|
|
|
3,640 |
|
|
|
5,826 |
|
Entertainment
|
|
|
933 |
|
|
|
2,283 |
|
Other
|
|
|
296 |
|
|
|
328 |
|
Other
operating expenses:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
185 |
|
|
|
183 |
|
Other
general and administrative
|
|
|
8,710 |
|
|
|
9,911 |
|
Mergers,
acquisitions and development costs
|
|
|
- |
|
|
|
23 |
|
Depreciation
and amortization
|
|
|
3,899 |
|
|
|
3,423 |
|
Total
costs and expenses
|
|
|
33,186 |
|
|
|
41,262 |
|
INCOME
FROM OPERATIONS
|
|
|
1,470 |
|
|
|
6,700 |
|
|
|
|
|
|
|
|
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|
OTHER
EXPENSE:
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative instrument
|
|
|
1,672 |
|
|
|
(8,307 |
) |
Gain
on extinguishment of debt
|
|
|
146 |
|
|
|
- |
|
Restructuring
fees
|
|
|
(91 |
) |
|
|
- |
|
Interest
expense-net
|
|
|
(4,234 |
) |
|
|
(4,176 |
) |
Total
other expense
|
|
|
(2,507 |
) |
|
|
(12,483 |
) |
NET
LOSS
|
|
$ |
(1,037 |
) |
|
$ |
(5,783 |
) |
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE DATA:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.08 |
) |
|
$ |
(0.47 |
) |
Diluted
|
|
$ |
(0.08 |
) |
|
$ |
(0.47 |
) |
Weighted-average
common shares outstanding
|
|
|
12,492 |
|
|
|
12,341 |
|
Weighted-average
common and common equivalent shares
|
|
|
12,492 |
|
|
|
12,341 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
RIVIERA
HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
FOR
THE THREE MONTHS ENDED MARCH 31,
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,037 |
) |
|
$ |
(5,783 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,899 |
|
|
|
3,423 |
|
Provision
for bad debts
|
|
|
88 |
|
|
|
131 |
|
Stock
based compensation - restricted stock
|
|
|
151 |
|
|
|
154 |
|
Stock
based compensation – stock options
|
|
|
34 |
|
|
|
29 |
|
Change
in fair value of derivative instruments
|
|
|
(1,672 |
) |
|
|
8,307 |
|
Gain
on extinguishment of debt
|
|
|
(146 |
) |
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable-net
|
|
|
(446 |
) |
|
|
(384 |
) |
Inventories
|
|
|
211 |
|
|
|
256 |
|
Prepaid
expenses and other assets
|
|
|
(306 |
) |
|
|
(1,326 |
) |
Accounts
payable
|
|
|
(2,207 |
) |
|
|
(3,093 |
) |
Accrued
interest
|
|
|
4,119 |
|
|
|
(50 |
) |
Accrued
expenses
|
|
|
684 |
|
|
|
(1,761 |
) |
Deferred
compensation plan liability
|
|
|
(11 |
) |
|
|
(60 |
) |
Obligation
to officers
|
|
|
(250 |
) |
|
|
(500 |
) |
Net
cash provided by (used in) operating activities
|
|
|
3,111 |
|
|
|
(657 |
) |
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
expenditures for property and equipment-Las Vegas
|
|
|
(151 |
) |
|
|
(1,862 |
) |
Capital
expenditures for property and equipment-Black Hawk
|
|
|
(114 |
) |
|
|
(375 |
) |
Net
cash used in investing activities
|
|
|
(265 |
) |
|
|
(2,237 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
on long-term borrowings
|
|
|
(7 |
) |
|
|
(21 |
) |
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
100 |
|
Net
cash (used in) provided by financing activities
|
|
|
(7 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
2,839 |
|
|
|
(2,815 |
) |
CASH
AND CASH EQUIVALENTS-BEGINNING OF YEAR
|
|
|
13,461 |
|
|
|
28,820 |
|
CASH
AND CASH EQUIVALENTS-END OF PERIOD
|
|
$ |
16,300 |
|
|
$ |
26,005 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property
acquired with debt and accounts payable
|
|
$ |
103 |
|
|
$ |
912 |
|
Cash
paid for interest
|
|
$ |
142 |
|
|
$ |
4,079 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
RIVIERA
HOLDINGS CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
|
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 RHC and its direct and
indirect wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
The
financial statements have been prepared assuming that the Company will continue
as a going concern. As more fully discussed in Note 5 below, the
Company is currently in default on its $245 million Credit Facility (as defined
in Note 5 below) as of March 31, 2009. As a result, there is
substantial doubt about the Company’s ability to continue as a going
concern. If the Company’s debt is accelerated and the Company’s
long-term assets must be liquidated, these assets may be impaired in comparison
to current recovery values. The Company is carrying long-term assets
based upon management’s assumptions related to its current intentions and
plans.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Reclassifications
Certain
reclassifications, having no effect on net loss have been made to the previously
issued consolidated financial statements to conform to the current period’s
presentation of the Company’s condensed consolidated financial
statements.
Earnings Per
Share
Basic net
income (loss) per share amounts are computed by dividing net income (loss) by
weighted average shares outstanding during the period. Diluted net
income (loss) per share amounts are computed by dividing net income (loss) by
weighted average shares outstanding, plus, the dilutive effect of common share
equivalents during the period. There were no potentially dilutive
common share equivalents during the period.
Income
Taxes
The
income tax provision, if any, for the three months ended March 31, 2009 and
2008, 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, it is more likely than not that the Company
will not 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.
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of the recognition and measurement related to accounting
for income taxes. The Company is subject to the provisions of FIN 48
as of January 1, 2007. The Company believes that its income tax
filing positions and deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material adverse effect on the
Company’s financial condition, results of operations, or cash
flow. Therefore, no reserves for uncertain income tax positions have
been recorded pursuant to FIN 48. In addition, the Company did not
record a cumulative effect adjustment related to the adoption of FIN
48. Management does not believe that the amounts of unrecognized tax
benefits will increase within the next twelve months. With a few
exceptions, we are no longer subject to U.S. federal, state and local income tax
examinations for years before 1994.
Estimates and
Assumptions
The
preparation of condensed consolidated financial statements in conformity with
U.S. Generally Accepted Accounting Principles 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
instruments and deferred tax assets. Actual results may differ from
estimates.
Restricted
Cash
This cash
is held as a certificate of deposit for the benefit of the State of Nevada
Workers Compensation Division as a requirement of our being self-insured for
Workers Compensation. The cash is held in a one-year certificate of
deposit, which matures August 2009.
Mergers, Acquisitions and
Development Costs
Mergers,
acquisitions and development costs consist of associated legal
fees.
Derivative
Instruments
From time
to time, the Company enters into interest rate swaps. The Company’s
objective in using derivatives is to add stability to interest expense and to
manage its exposure to interest rate movements or other identified risks.
To accomplish this objective, the Company primarily uses interest rate
swaps and interest rate caps as part of its cash flow hedging strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts in exchange for fixed-rate payments over the life of the
agreements without exchange of the underlying principal amount. We do not
use derivative financial instruments for trading or speculative
purposes. As such, the Company has adopted SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”), and as amended by
SFAS 138 and 149, to account for interest rate swaps. The
pronouncements require us to recognize the interest rate swaps as either assets
or liabilities in the consolidated balance sheets at fair value. The
accounting for changes in fair value (i.e. gains or losses) of the interest rate
swap agreements depends on whether it has been designated and qualifies as part
of a hedging relationship and further, on the type of hedging
relationship. Additionally, the difference between amounts received
and paid under such agreements, as well as any costs or fees, is recorded as a
reduction of, or an addition to, interest expense as incurred over the life of
the swap.
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income (loss) and the ineffective portion,
if any, is recorded in the consolidated statement of operations.
Derivative
instruments that are designated as fair value hedges and qualify for the
“shortcut” method under SFAS 133, and as amended by SFAS 138 and 149, allow for
an assumption of no ineffectiveness. As such, there is no impact on
the consolidated statement of operations from the changes in the fair value of
the hedging instrument. Instead, the fair value of the instrument is
recorded as an asset or liability on our balance sheet with an offsetting
adjustment to the carrying value of the related debt.
As of
March 31, 2009, the Company has one interest rate swap agreement for the
notional amount of $210.4 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 $1.7 million gain and an $8.3 million
loss for the change in fair value of this derivative instrument in the
consolidated statements of operations for the three month periods ended March
31, 2009 and 2008, respectively.
Gain on Extinguishment of
Debt
In 2000,
the Company incurred debt totaling $1.2 million associated with Special
Improvement District Bonds issued by the City of Black Hawk, Colorado for road
improvements and other infrastructure projects benefiting Riviera Black Hawk and
neighboring casinos. The remaining balance of the debt was $146,000
at December 31, 2008 and this amount was forgiven by the City of Black Hawk in
February 2009. As a result, the $146,000 was recorded as a gain on
extinguishment of debt within the accompanying consolidated statement of
operations during the three months ended March 31, 2009.
Restructuring
Fees
During
the three months ended March 31, 2009, the Company incurred $91,000 in
professional fees associated with a potential restructuring of the Company’s
Credit Facility (see Note 5).
Recent Accounting
Pronouncements
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), a revision of SFAS 141, “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This statement is effective for us beginning January 1,
2009. The impact of the adoption of SFAS 141R on our consolidated
financial position, results of operations will largely be dependent on the size
and nature of the business combinations completed after the adoption of this
statement.
In
accordance with FASB Staff Position FAS 157-2, “Effective Date of FASB Statement
No. 157” (“FSP SFAS 157-2”), the provisions of SFAS 157 became effective
for the Company’s nonfinancial assets and nonfinancial liabilities that are
measured at fair value on a nonrecurring basis on January 1, 2009. The
Company’s nonfinancial assets for which the provisions of SFAS 157 are now
effective include property, plant and equipment, goodwill and other intangible
assets. The impact of applying the provisions of SFAS 157 to the Company’s
nonfinancial assets was not material.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—An Amendment of
FASB Statement No. 133” (“SFAS 161”). SFAS 161 applies to all derivative
instruments and related hedged items accounted for under FASB Statement No. 133
(“SFAS 133”), “Accounting for Derivative Instruments and Hedging
Activities.” It requires entities to provide greater transparency
about: (a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, results of operations, and cash
flows. SFAS 161 will be effective for the financial statements issued
by the Company beginning January 1, 2009. Because SFAS 161 applies
only to financial statement disclosures, it did not have an impact on our
consolidated financial position, results of operations, and cash
flows.
In April
2008, the FASB issued FSP 142-3. This guidance is intended to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142, and the period of expected cash flows used to measure the fair value
of the asset under SFAS 141R when the underlying arrangement includes renewal or
extension of terms that would require substantial costs or result in a material
modification to the asset upon renewal or extension. Companies
estimating the useful life of a recognized intangible asset must now consider
their historical experience in renewing or extending similar arrangements or, in
the absence of historical experience, must consider assumptions that market
participants would use about renewal or extension as adjusted for SFAS 142’s
entity-specific factors. FSP 142-3 is effective for us beginning
January 1, 2009. The impact of the adoption of FSP 142-3 was not
material.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1,” Interim Disclosures about
Fair Value of Financial Instruments” (“FSP FAS 107-1”). FSP FAS 107-1 requires
the disclosure of the fair value of financial instruments within the scope of
SFAS 107, Disclosures about Fair Value of Financial Instruments, in interim
financial statements, adding to the current requirement to make those
disclosures in annual financial statements. FSP FAS 107-1 is effective for
interim periods ending after June 15, 2009. The Company plans to adopt SFAS
107-1 and APB 28-1 and provide the additional disclosure requirements for second
quarter 2009.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4
provides guidance on how to determine the fair value of assets and liabilities
under SFAS 157, “Fair Value Measurements” (“SFAS 157”) when there is no active
market or where the price inputs being used to determine fair value represent
distressed sales. It reemphasizes that the objective of fair-value measurement
remains an exit price. It also reaffirms the need to use judgment to ascertain
if a formerly active market has become inactive and in determining fair values
when markets have become inactive. FSP FAS 157-4 is effective for interim
periods ending after June 15, 2009. The Company plans to adopt the
provisions of SFAS 157-4 during second quarter 2009, but does not believe this
guidance will have a significant impact on the Company’s financial position,
cash flows, or disclosures.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). FSP FAS 115-2 modifies
the requirements for recognizing other-than-temporarily-impaired debt securities
and significantly changes the existing impairment model for debt securities. It
also modifies the presentation of other-than-temporary impairment losses and
increases the frequency of and expands required disclosures about
other-than-temporary impairment for debt and equity securities. FSP FAS 115-2 is
effective for interim periods ending after June 15, 2009. The Company plans
to adopt the provisions of this Staff Position during second quarter 2009, but
does not believe this guidance will have a significant impact on the Company’s
financial position, cash flows, or disclosures.
4.
|
DEFERRED
FINANCING COSTS
|
Deferred
loan fees of $1.3 million and $1.4 million were included in other assets as of
March 31, 2009 and December 31, 2008, respectively. The deferred loan
fees were associated with refinancing our debt on June 8, 2007. The
Company is amortizing the deferred loan fees on a straight line basis, which
approximates the effective interest method, over the term of the
loan.
5.
|
LONG
TERM DEBT AND COMMITMENTS
|
2007 Credit Facility and
Swap Agreement
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 “Credit Agreement” together
with related security agreements and other credit-related agreements, the
“Credit Facility”) with Wachovia Bank, National Association (“Wachovia”), as
administrative agent. On June 29, 2007, in conjunction with the
Credit Facility, the Company entered into an interest rate swap agreement with
Wachovia as the counterparty (the “Swap Agreement”).
The
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
therein. The Credit Facility also includes a $20 million five-year
Revolver (“Revolver”) 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 Credit Facility without premium or penalties except
for payment of any funding losses resulting from prepayment of any LIBOR rate
loans. The Credit Facility is guaranteed by the Subsidiaries and is
secured by a first priority lien on substantially all of the Company’s
assets.
Prior to
certain events of default that occurred in the first fiscal quarter of 2009 (the
“First Quarter Defaults”) described below, 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 (the “Swap Agreement”) that RHC entered into
with Wachovia under the Credit Facility, substantially the entire Term Loan,
with quarterly step-downs, bore 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) prior to the First Quarter Defaults. The
Swap Agreement specifies that the Company pay an annual interest rate spread on
a notional balance that approximates the Term Loan balance and steps down
quarterly. The interest rate spread is the difference between the
LIBOR rate and 5.485% and the notional balance was $210.4 million as of March
31, 2009.
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 executed on July 9,
2007.
Prior to
the First Quarter Defaults, the interest rate on loans under the Revolver
depended on whether they were in the form of revolving loans or swingline loans
(“Swingline Loans”). Prior to the First Quarter Defaults, the
interest rate for each revolving loan depended on whether RHC elects to treat
the loan as an “Alternate Base Rate” loan (“ABR Loan”) or a LIBOR Rate loan; and
Swingline Loans bore interest at a per annum rate equal to the Alternative Base
Rate plus the Applicable Percentage for revolving loans that were ABR
Loans. Prior to the First Quarter Defaults, the applicable percentage
for Swingline Loans ranged from 0.50% to 1% depending on the Consolidated
Leverage Ratio as defined in our Credit Facility Credit
Agreement. Our Consolidated Leverage Ratio was 10.2 for the four
quarters ending March 31, 2009, which exceeded the maximum allowable
Consolidated Leverage Ratio set forth in the Credit Agreement. This
ratio test is only applicable if we have more than $2.5 million in Revolver
borrowings at the end of the applicable quarter.
Fees
payable under the Revolver include: (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 Revolver; (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. An annual administrative fee of $35,000 is also payable in
connection with the Revolver.
The
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
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.
First Quarter
Defaults
As
previously disclosed on a Form 8-K filed with the SEC on March 4, 2009, the
Company received a notice of default on February 26, 2009 (the “February
Notice”), from Wachovia with respect to the Credit Facility in connection with
the Company’s failure to provide a Deposit Account Control Agreement, or DACA,
from each of the Company’s depository banks per a request made by Wachovia to
the Company on October 14, 2008. The DACA that Wachovia requested the
Company to execute was in a form that the Company ultimately determined to
contain unreasonable terms and conditions as it would enable Wachovia to access
all of the Company’s operating cash and order it to be transferred to a bank
account specified by Wachovia. The Notice further provided that as a
result of the default, the Company would no longer have the option to request
the LIBOR Rate loans described above. Consequently, the Term Loan was
converted to an ABR Loan effective March 31, 2009.
On March
25, 2009, the Company engaged XRoads Solution Group LLC as our financial
advisor. Based on an extensive analysis of our current and projected
liquidity, and with our financial advisor’s input, we determined it was in the
best interests of the Company to not pay the accrued interest of approximately
$4 million on our $245 million Credit Facility, which was due March 30,
2009. Consequently, we elected not to make the
payment. The Company’s failure to pay interest due on any loan within
our Credit Facility within a three-day grace period from the due date was an
event of default under our Credit Facility. As a result of this event
of default, the Company’s lenders have the right to seek to charge additional
default interest on the Company’s outstanding principal and interest under the
Credit Agreement, and automatically charge additional default interest on any
overdue amounts under the Swap Agreement. These defaults rates are in
addition to the interest rates that would otherwise be applicable under the
Credit Agreement and Swap Agreement.
As
previously disclosed on a Form 8-K filed with the SEC on April 6, 2009, the
Company received an additional notice of default on April 1, 2009 (the
“Additional Default Notice”) from Wachovia. The Additional Default
Notice alleges that subsequent to the Company’s receipt of
the February Notice, additional defaults and events of default had
occurred and were continuing under the terms of the Credit Agreement including,
but not limited to: (i) the Company’s failure to deliver to Wachovia audited
financial statements without a “going concern” modification; (ii) the Company’s
failure to deliver Wachovia a certificate of an independent certified public
accountant in conjunction with the Company’s financial statement; and (iii) the
occurrence of a default or breach under a secured hedging
agreement. The Additional Default Notice also states that in addition
to the foregoing events of default that there were additional potential events
of default as a result of, among other things, the Company’s failure to pay: (i)
accrued interest on the Company’s LIBOR rate loan on March 30, 2009 (the “LIBOR
Payment”), (ii) the commitment fee on March 31, 2009 (the “Commitment Fee
Payment”), and (iii) accrued interest on the Company’s ABR Loans on March 31,
2009 (the “ABR Payment” and together with the LIBOR Payment and Commitment Fee
Payment, the “March 31st Payments”). The Company has not paid the
March 31st Payments and the applicable grace period to make these payments has
expired. The Additional Default Notice states that as a result of
these events of defaults, (a) all amounts owing under the Credit Agreement
thereafter would bear interest, payable on demand, at a rate equal to: (i) in
the case of principal, 2% above the otherwise applicable rate; and (ii) in the
case of interest, fees and other amounts, the ABR Default Rate (as defined in
the Credit Agreement), which as of April 1, 2009 was 6.25%; and (b) neither
Swingline Loans nor additional Revolving Loans are available to the Company at
this time.
As a
result of the February Notice and the Additional Default Notice, effective March
31, 2009, the Term Loan interest rate is now approximately 10.5% per annum and
effective April 1, 2009, the Revolver interest rate is approximately 6.25% per
annum.
On April
1, 2009, we also received Notice of Event of Default and Reservation of Rights
(the “Swap Default Notice”) in connection with an alleged event of default under
our Swap Agreement. Receipt of the Swap Default Notice was previously
disclosed on a Form 8-K filed with the SEC on April 6, 2009. The Swap
Default Notice alleges that (a) an event of default exists due to the occurrence
of an event of default(s) under the Credit Agreement and (b) that the Company
failed to make payments totaling $2.1 million to Wachovia with respect to one or
more transactions under the Swap Agreement. The Company has not paid
this overdue amount and the applicable grace period to make this payment has
expired. As previously announced by the Company, any default under
the Swap Agreement automatically results in an additional default interest of 1%
on any overdue amounts under the Swap Agreement. This default rate is
in addition to the interest rate that would otherwise be applicable under the
Swap Agreement. As of March 31, 2009, the mark-to-market amount
outstanding under the Swap Agreement was $28.0 million, excluding any credit
risk adjustment.
With the
aid of our financial advisors and outside counsel, we are continuing to
negotiate with our various creditor constituencies to refinance or restructure
our debt. We cannot assure you that we will be successful in
completing a refinancing or consensual out-of-court restructuring, if
necessary. If we were unable to do so, we would likely be compelled
to seek protection under Chapter 11 of the U. S. Bankruptcy Code.
As a
result of the defaults discussed above and the potential risk of Bankruptcy,
there is substantial doubt about the Company’s ability to continue as a going
concern.
Special Improvement District
Bonds
In 2000,
the Company incurred debt totaling $1.2 million associated with Special
Improvement District Bonds issued by the City of Black Hawk, Colorado for road
improvements and other infrastructure projects benefiting Riviera Black Hawk and
neighboring casinos. The remaining balance of the debt was $146,000
at December 31, 2008 and this amount was forgiven by the City of Black Hawk in
February 2009. As a result, the $146,000 was recorded as a gain on
extinguishment of debt within the accompanying consolidated statement of
operations during the three months ended March 31, 2009.
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.
The
Company expensed $34,000 and $29,000 for options during the three months ended
March 31, 2009 and 2008, respectively. To recognize the cost of
option grants, the Company estimates the fair value of each director or employee
option grant on the date of the grant using the Black-Scholes option pricing
model.
Additionally,
the Company expensed $151,000 and $154,000 for restricted stock during the three
months ended March 31, 2009 and 2008, respectively. Restricted stock
was issued to several key management team members and directors in 2005 and is
recognized on a straight line basis over a five year vesting period commencing
on the date of issuance.
The
activity for all stock options currently outstanding is as follows;
|
|
|
|
|
|
|
|
|
|
|
Share
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
Outstanding,
December 31, 2008
|
|
|
240,000 |
|
|
$ |
8.99 |
|
|
|
|
|
Options
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Options
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Options
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
240,000 |
|
|
$ |
8.99 |
|
6.75
years
|
|
$ |
-0- |
|
Exercisable
March 31, 2009
|
|
|
168,000 |
|
|
$ |
2.34 |
|
2.46
years
|
|
$ |
-0- |
|
7.
|
FAIR
VALUE MEASUREMENT
|
Effective
January 1, 2008, we adopted SFAS 157 and effective October 10, 2008, we adopted
FSP No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active”, except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. As a basis
for considering such assumptions, SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1—Observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2—Include other inputs
that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs
that are supported by little or no market activity.
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
In
accordance with SFAS 157, we measure our cash equivalents, investments, and
interest rate swaps at fair value. Our cash equivalents, investments
and interest rate swaps are classified within Level 1 or Level
2. This is because our cash equivalents, investments and interest
rate swaps are valued using quoted market prices or alternative pricing sources
and models utilizing market observable inputs.
Assets
and liabilities measured at fair value on a recurring basis are summarized below
(in thousands):
|
|
Balance
at
March
31,
2009
|
|
|
Quoted
prices
in
Active
Markets
For
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Equivalents
|
|
$ |
2,623 |
|
|
$ |
2,623 |
|
|
$ |
- |
|
|
$ |
- |
|
Investments
|
|
|
2,772 |
|
|
|
- |
|
|
|
2,772 |
|
|
|
- |
|
Total
Assets
|
|
$ |
5,395 |
|
|
$ |
2,623 |
|
|
$ |
2,772 |
|
|
$ |
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
15,156 |
|
|
$ |
- |
|
|
$ |
15,156 |
|
|
$ |
- |
|
The fair
values of cash equivalent assets are based on quotes for like instruments with
similar credit ratings and terms. The fair values of investments are
based on quoted prices in active markets.
The fair
value of interest rate swaps are based on quoted market prices from various
banks for similar instruments. These quoted market prices are based
on relevant factors such as the contractual terms of our interest rate swap
agreement and interest rate curves and are adjusted for the non-performance risk
of either us or our counterparties, as applicable. If we had
terminated our interest rates swap as of March 31, 2009, we would have been
required to pay a total of $28.0 million based on the mark-to-market values of
such derivative instruments. However, the fair value of our
derivative instrument at March 31, 2009 incorporated a $1.7 million credit
valuation adjustment based on credit comparables in the gaming industry given
that there were no credit default swaps underlying the Company.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Salary Continuation
Agreements
Approximately
56 executive officers and certain other employees (excluding Mr. Vannucci) of
ROC and RBH have salary continuation agreements effective through December
2009. The agreements entered into with 44 significant ROC employees
entitle 43 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 ROC or RBH, as applicable, terminated their
employment without cause (a “Company Termination”) within 12 months after a
change in control. One ROC employee is 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 entered into with
nine RBH employees, which include in such agreements definition of “change in
control” the sale of RBH by RHC and/or ROC to a non-affiliate of either the
Company or ROC. In addition, the Company entered into salary
continuation agreements with William Westerman, RHC’s Chief Executive Officer
and Tullio J. Marchionne, RHC’s Secretary and General Counsel and ROC’s
Secretary and Executive Vice President which entitle Mr. Westerman and 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 Company also entered into an agreement with
Phillip B. Simons, RHC’s Treasurer and CFO and ROC’s Vice President of Finance
which 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 of control of RHC. The estimated total amount payable under
all such agreements was approximately $5.4 million, which includes $640,000 in
benefits, as of March 31, 2009.
Sales and Use Tax on
Complimentary Meals
In March
2008, the Nevada Supreme Court ruled, in the matter captioned Sparks Nugget, Inc. vs. The State of
Nevada Ex Rel. Department of Taxation, that food and non-alcoholic
beverages purchased for use in providing complimentary meals to customers and to
employees was exempt from sales and use tax. In July 2008, the Court
denied the State’s motion for rehearing. ROC had paid use tax on these items and
has filed for refunds for the periods from January 2002 through February 2008.
The amount subject to these refunds is approximately $1.1 million. As
of March 31, 2009, the Company had not recorded a receivable related to
this matter.
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 and 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.
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
March
31,
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
Riviera
Las Vegas
|
|
$ |
24,462 |
|
|
$ |
36,450 |
|
Riviera
Black Hawk
|
|
|
10,194 |
|
|
|
11,512 |
|
Total
net revenues
|
|
$ |
34,656 |
|
|
$ |
47,962 |
|
|
|
|
|
|
|
|
|
|
Property
EBITDA (1):
|
|
|
|
|
|
|
|
|
Riviera
Las Vegas
|
|
$ |
3,318 |
|
|
$ |
7,371 |
|
Riviera
Black Hawk
|
|
|
3,236 |
|
|
|
3,903 |
|
|
|
|
|
|
|
|
|
|
Other
Costs and Expenses
|
|
|
|
|
|
|
|
|
Equity-based
compensation
|
|
|
185 |
|
|
|
183 |
|
Other
corporate expenses
|
|
|
1,000 |
|
|
|
945 |
|
Depreciation
and amortization
|
|
|
3,899 |
|
|
|
3,423 |
|
Mergers,
acquisitions and development costs
|
|
|
- |
|
|
|
23 |
|
Gain
on estinguishment of debt
|
|
|
(146 |
) |
|
|
- |
|
Restructuring
fees
|
|
|
91 |
|
|
|
- |
|
Interest
Expense-net
|
|
|
4,234 |
|
|
|
4,176 |
|
Change
in fair value of derivative instruments
|
|
|
(1,672 |
) |
|
|
8,307 |
|
Total
Other Costs and Expenses
|
|
|
7,591 |
|
|
|
17,057 |
|
Net
Loss
|
|
$ |
(1,037 |
) |
|
$ |
(5,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
December
31
|
|
Total
Assets
|
|
|
|
|
|
|
Las
Vegas
|
|
$ |
139,246 |
|
|
$ |
139,200 |
|
Black
Hawk
|
|
|
65,372 |
|
|
|
65,760 |
|
Total
Consolidated Assets
|
|
$ |
204,618 |
|
|
$ |
204,960 |
|
|
|
|
|
|
|
|
|
|
Property and
Equipment-net
|
|
|
|
|
|
|
|
|
Las
Vegas
|
|
$ |
116,434 |
|
|
$ |
119,155 |
|
Black
Hawk
|
|
|
59,850 |
|
|
|
60,763 |
|
Total
Property and Equipment-net
|
|
$ |
176,284 |
|
|
$ |
179,918 |
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
|
|
|
|
|
|
Las
Vegas
|
|
$ |
151 |
|
|
$ |
2,563 |
|
Black
Hawk
|
|
|
114 |
|
|
|
586 |
|
Total
Capital Expenditures
|
|
$ |
265 |
|
|
$ |
3,149 |
|
(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 U.S. 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
reconciliation of property EBITDA to net income (loss) is included to
evaluate items not included in EBITDA and their affect on the operations
of the Company.
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
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”).
Riviera
Las Vegas’ is comprised of a hotel with 2,075 guest rooms, a convention, meeting
and banquet space totaling 160,000 square feet, a casino with approximately 900
slot machines and 35 gaming tables, a poker room, a race and sports book and
various bars and restaurants. Our capital expenditures for Riviera
Las Vegas are primarily geared toward maintaining the hotel rooms and amenities
in sufficient condition to compete for customers in the convention and mature
adult markets. 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.
Riviera
Black Hawk is comprised of a casino with approximately 800 slot machines and 6
gaming tables, a buffet, a delicatessen, a casino bar and a
ballroom. Riviera Black Hawk caters primarily to the “locals” slot
customer. Until recently, only limited stakes gaming, which is
defined as a maximum single bet of $5.00, was legal in the Black Hawk/Central
City market. However, Colorado Amendment 50, which was approved by
voters on November 4, 2008, allowed residents of Black Hawk and Central City to
vote to extend casino hours, approve additional games, and increase the maximum
bet limit. On January 13, 2009, residents of Black Hawk voted to
enable Black Hawk casino operators to extend casino hours, add craps and
roulette gaming and increase the maximum betting limit to $100. July
2, 2009 is the earliest we are permitted to implement increased betting limits,
extended hours and craps and roulette gaming. Our capital
expenditures in Black Hawk are primarily geared toward maintaining competitive
slot machines in comparison to the market. We are also making limited
capital expenditures in Black Hawk to prepare for the implementation of
increased betting limits, extended hours and new games in accordance with the
approval of Amendment 50 as referenced above.
Results
of Operations
Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
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.
|
|
First
Quarter
|
|
|
Incr
|
|
|
Incr
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Riviera
Las Vegas
|
|
$ |
24,462 |
|
|
$ |
36,450 |
|
|
$ |
(11,988 |
) |
|
|
(32.9 |
%) |
Riviera
Black Hawk
|
|
|
10,194 |
|
|
|
11,512 |
|
|
|
(1,318 |
) |
|
|
(11.4 |
%) |
Total
Net Revenues
|
|
$ |
34,656 |
|
|
$ |
47,962 |
|
|
$ |
(13,306 |
) |
|
|
(27.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Income from
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Riviera
Las Vegas
|
|
|
743 |
|
|
|
5,539 |
|
|
|
(4,796 |
) |
|
|
(86.6 |
%) |
Riviera
Black Hawk
|
|
|
1,912 |
|
|
|
2,312 |
|
|
|
(400 |
) |
|
|
(17.3 |
%) |
Total
Property Income from Operations
|
|
|
2,655 |
|
|
|
7,851 |
|
|
|
(5,196 |
) |
|
|
(66.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation
|
|
|
(185 |
) |
|
|
(183 |
) |
|
|
(2 |
) |
|
|
(1.1 |
%) |
Other
Corporate Expense
|
|
|
(1,000 |
) |
|
|
(945 |
) |
|
|
(55 |
) |
|
|
(5.8 |
%) |
Mergers
Acquisitions and Development Costs
|
|
|
- |
|
|
|
(23 |
) |
|
|
23 |
|
|
|
100.0 |
% |
Total
Corporate Expenses
|
|
|
(1,185 |
) |
|
|
(1,151 |
) |
|
|
(34 |
) |
|
|
(3.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Income from Operations
|
|
$ |
1,470 |
|
|
$ |
6,700 |
|
|
$ |
(5,230 |
) |
|
|
(78.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Margins (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Riviera
Las Vegas
|
|
|
3.0 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
(12.2 |
%) |
Riviera
Black Hawk
|
|
|
18.8 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
(1.3 |
%) |
(1)
|
Operating
margins represent income from operations by property as a percentage of
net revenues by property.
|
Riviera
Las Vegas
Revenues
Net
revenues for the three months ended March 31, 2009 were $24.5 million, a
decrease of $12.0 million, or 32.9%, from $36.5 million for the comparable
period in the prior year.
Casino
revenues for the three months ended March 31, 2009 were $10.3 million, a
decrease of $2.4 million, or 19.5%, from $12.7 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 $8.2 million, a decrease of $1.7
million, or 15.5%, from $9.9 million and table game revenue was $1.9 million, a
decrease of $0.9 million, or 32.3% from $2.8 million. Slot machine
and table game revenues decreased primarily due to less wagering as a result of
the slower economy, less walk-in business due to construction at neighboring
projects and an increase in cash incentives provided to our high-value slot
players in order to stimulate slot machine play. Slot machine win per
unit per day for the three months ended March 31, 2009 was $99.94, a decrease of
$13.14, or 11.6%, from $113.08 for the comparable period in the prior
year.
Rooms
revenues for the three months ended March 31, 2009 were $10.3 million, a
decrease of $5.6 million, or 34.9%, from $15.9 million for the comparable period
in the prior year. The decrease in room rental revenues was primarily
due to a decrease in average daily room rates primarily as a result of lower
leisure segment room rates in comparison to the first quarter of 2008 and a
shift in the occupied room mix from higher rated convention segment occupancy to
lower rated leisure segment occupancy. During the three months ended
March 31, 2009, leisure segment and convention segment occupied rooms were 61.6%
and 19.4% of total occupied rooms, respectively, and during the three months
ended March 31, 2008, leisure segment and convention segment occupied rooms were
39.8% and 42.6% of total occupied rooms, respectively.
Hotel
room occupancy percentage for the three months ended March 31, 2009, was 76.8%
compared to 81.6% for the same period in the prior year. The average
daily room rate, or ADR, was $69.30, a decrease of $30.33, or 30.4%, from $99.63
for the comparable period in the prior year. The decrease in ADR was
due primarily to a decrease in leisure segment room rental rates, which were
$45.24, a decrease of $37.60, or 45.4%, from $82.84 for the comparable period in
the prior year. Revenue per available room, or RevPar, was $53.06, a
decrease of $34.63, or 39.5%, from $87.69 for the comparable period in the prior
year. RevPar is total revenue from hotel room rentals divided by
total hotel rooms available for sale. The decrease in RevPar was the
result of decreases in occupied rooms and average daily room rates as described
above.
Food and
beverage revenues for the three months ended March 31, 2009 was $4.3 million, a
decrease of $2.4 million, or 36.1%, from $6.7 million for the comparable period
in the prior year. The decrease in food and beverage revenue was due
to $1.8 million and $0.6 million decreases in food and beverage revenues,
respectively. Food covers decreased 19.4% and the average check
decreased 21.9% from the comparable period in the prior year as a result of the
weak economy, reduced hotel occupancy and the strategic closure of select food
and beverage outlets during low hotel occupancy periods. Beverage
revenues decreased as a result of a 25.6% reduction in drinks served primarily
due to less complimentary drinks served from our casino bars due to reduced
casino patronage. Food and beverage revenues include $1.2
million in revenues related to items offered to high-value guests on a
complimentary basis.
Entertainment
revenues for the three months ended March 31, 2009 were $2.0 million, a decrease
of $1.4 million, or 39.5%, from $3.4 million for the comparable period in the
prior year. The decrease in entertainment revenues is primarily due
to weak economic conditions resulting in the permanent and temporary closure of
select entertainment acts and an overall reduction in ticket sales at all
entertainment venues. During the three months ended March 31, 2009,
the La Cage Revue closed permanently and the Crazy Girls Revue closed
temporarily in January until economic conditions improve.
Other
revenues for the three months ended March 31, 2009 were $1.5 million, a decrease
of $0.3 million, or 14.5%, from $1.8 million for the same period in the prior
year. The decrease in other revenues was due to a $0.1 million
current year reduction in telephone revenues as a result of less occupancy and
call volume combined with a $0.2 million prior year increase as a result of the
reclassification of unclaimed slot token liabilities to income and the sale of
select lower performing slot machines.
Promotional
allowances for the three months ended March 31, 2009 and the three months ended
March 31, 2008 were $4.0 million. Promotional allowances are
comprised of food, beverage, hotel room nights and other items provided on a
complimentary basis primarily to our high-value casino
players. Promotional allowances did not decrease in proportion to
decreases in revenues primarily due to continued efforts to aggressively promote
the casino and hotel room rentals with complimentary offerings.
Costs and
Expenses
Casino
costs and expenses for the three months ended March 31, 2009 were $6.0 million,
a decrease of $1.4 million, or 18.2%, from $7.4 million for the comparable
period in the prior year. The decrease in casino expenses was
primarily due to a reduction in slot and table game payroll and related costs
which partially offset the $2.4 million decrease in casino revenue.
Room
rental costs and expenses for the three months ended March 31, 2009 were $4.9
million, a decrease of $2.0 million, or 28.8%, from $6.9 million for the
comparable period in the prior year. The decrease in room rental
expenses partially offsets the $5.6 million decrease in room rental revenues and
is primarily due to reduced payroll and related costs as a result of management
layoffs and a 4.6% decrease in occupied rooms.
Food and
Beverage costs and expenses for the three months ended March 31, 2009 were $3.4
million, a decrease of $2.1 million, or 38.5%, from $5.5 million for the
comparable period in the prior year. The decrease in food and
beverage costs and expenses correlated with the $2.4 million decrease in food
and beverage revenue and was due to lower cost of sales, payroll and related
costs and operating expenses.
Entertainment
department costs and expenses for the three months ended March 31, 2009 were
$0.9 million, a decrease of $1.4 million, or 59.1%, from $2.3 million for the
comparable period in the prior year. The decrease in entertainment
department costs and expenses is primarily due to a reduction in contractual
payments to the entertainment producers as a result of less ticket sales due to
the weak economy and the temporary and permanent closure of select entertainment
acts.
Other
general and administrative expenses for the three months ended March 31, 2009
were $5.6 million, a decrease of $1.1 million, or 16.6%, from $6.7 million for
the comparable period in the prior year. The decrease in other
general and administrative expenses was due primarily to a $0.6 million decrease
in payroll and related costs to offset revenue declines, a $0.2 million decrease
in marketing promotional expense and a $0.2 million decrease in utilities
expenses.
Depreciation
and amortization expenses for the three months ended March 31, 2009 were $2.9
million, an increase of $0.5 million, or 22.1%, from $2.4 million for the
comparable period in the prior year. The increase in depreciation and
amortization expenses was due primarily to asset additions related to our hotel
room renovation during the last 12 months.
Income from
Operations
Income
from operations for the three months ended March 31, 2009 were $0.7 million, a
decrease of $4.8 million, or 86.6%, from $5.5 million for the comparable period
in the prior year. The decrease is principally due to decreased net
revenues that were not offset with equivalent reductions in costs and
expenses.
Operating
margins were 3.0% for the three months ended March 31, 2009 in comparison to
15.2% for the comparable period in the prior year. Operating margins
decreased primarily due the $30.33, or 30.4%, decrease in ADR, resulting in a
$4.3 million reduction in income from operations, and the $16.83, or 14.3%,
decrease in slot machine win per unit per day, resulting in a $1.1 million
decrease in income from operations.
Riviera
Black Hawk
Revenues
Net
revenues for the three months ended March 31, 2009 were $10.2 million, a
decrease of $1.3 million, or 11.4%, from $11.5 million for the comparable period
in the prior year. The decrease was primarily due to a slot machine
revenue decrease of $1.1 million, or 10.2%, to $9.8 million from $10.9 million
for the comparable period in the prior year. Slot machine revenues
decreased primarily as a result of less wagering due to the weaker economy and
its effect on discretionary spending and increased cash incentives, which are
netted against slot revenues, to our high-value slot players. Amounts
wagered on slot machines decreased $20.4 million to $181.1 million from $201.5
million for the comparable period in the prior year. Slot machine win
per unit per day increased $6.99, or 4.2%, to $175.09 from $168.11 for the same
period in the prior year. The increase in slot win per unit per day
was due primarily to the removal of approximately 90 lower performing slot
machines since the first quarter of 2008. There was an average of 791
slot machines on the casino floor during the three months ended March 31,
2009.
Table
games revenue decreased $0.1 million from $0.3 million to $0.2 million primarily
as a result of the worsening economy.
Food and
beverage revenues were $1.3 million for the three months ending March 31, 2009
and 2008. Food and beverage revenues include $1.1 million in revenues
related to items offered to high-value guests on a complimentary
basis. Food and beverage revenues did not decrease in conjunction
with casino revenues as food and beverage complimentary offerings were used
aggressively to increase customer volume.
Costs and
Expenses
Costs and
expenses for the three months ended March 31, 2009 were $8.3 million, a decrease
of $0.9 million, or 10.0%, from $9.2 million for the comparable period in the
prior year. Cost and expenses decreased primarily due to lower casino
and general and administrative expenses mostly as a result of reduced gaming
taxes, payroll and contract labor costs which partially offset the reduction in
net revenues.
Income from
Operations
Income
from operations for the three months ended March 31, 2009 were $1.9 million, a
decrease of $0.4 million, or 17.3%, from $2.3 million for the comparable period
in the prior year. The decrease is related primarily to the decreased
slot revenues as described above.
Operating
margins were 18.8% for the three months ended March 31, 2009 in comparison to
20.1% for the comparable period in the prior year. Operating margins
decreased primarily due to the $1.1 million decrease in slot machine revenues
without correlating reductions in costs and expenses.
Consolidated
Operations
Income from
Operations
Income
from operations for the three months ended March 31, 2009 were $1.5 million, a
decrease of $5.2 million, or 78.1%, from $6.7 million for the same period in the
prior year. The decrease in income from operations was due to a $13.3
million decrease in consolidated net revenues partially offset by an $8.1
million decrease in consolidated costs and expenses. Consolidated net
revenues decreased as a result of a $12.0 million net revenue decrease in
Riviera Las Vegas and a $1.3 million net revenue decrease in Riviera Black
Hawk. Consolidated costs and expenses decreased as a result of a $7.2
million costs and expense decrease in Riviera Las Vegas and a $0.9 million costs
and expense decrease in Riviera Black Hawk.
Other
Expense
Other
expense was $2.5 million for the three months ended March 31, 2009 compared to
other expense of $12.5 million for the three months ended March 31,
2008. The primary reason for the $10.0 million improvement was
changes in the fair value of the derivative instrument. During the
three month period ended March 31, 2009, the change in the fair value of
derivatives resulted in a gain of $1.7 million compared to a loss of $8.3
million for the comparable period in the prior year.
Net Loss
Net loss
for the three months ended March 31, 2009 was $1.0 million, an improvement of
$4.8 million, from net loss of $5.8 million for the comparable period in the
prior year. The improvement is primarily due to the $10.0 million
improvement in other expense partially offset by a $5.2 million decrease in
consolidated income from operations.
Liquidity
and Capital Resources
Our
independent registered public accounting firm included an explanatory paragraph
that expresses doubt as to our ability to continue as a going concern in their
audit report contained in our Form 10-K report for the year ended December 31,
2008. We cannot provide any assurance that we will in fact operate
our business profitably, maintain existing financings, or obtain sufficient
financing in the future to sustain our business in the event we are not
successful in our efforts to generate sufficient revenue and operating cash
flow.
Our
ability to continue as a going concern will be determined by our ability to
obtain additional funding or restructure or negotiate waivers on our existing
indebtedness and to generate sufficient revenue to cover our operating
expenses. The
accompanying condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts of liabilities that might be necessary should we be unable to
continue in existence.
We had
cash and cash equivalents of $16.3 million and $13.5 million as of March 31,
2009 and December 31, 2008, respectively. Our cash and cash equivalents increased
$2.8 million during the three months ended March 31, 2009 as a result of $3.1
million in net cash provided by operating activities partially offset by $0.3
million in net cash used in investing activities due to maintenance capital
expenditures at both Riviera Las Vegas and Black Hawk. However, cash and
cash equivalents would have decreased by approximately $1.2 million had we paid
quarterly interest on our Credit Facility of approximately $4 million due by
March 31, 2009. The $3.1 million in net cash provided by
operating activities was due primarily to $1.5 million in income from operations
plus $3.9 million in non-cash depreciation and amortization partially offset by
a $2.2 million accounts payable reduction with no offsetting reduction in
accrued interest (see Note 5). Cash and cash equivalents decrease by
$2.8 million during the three months ended March 31, 2008 primarily due to $2.2
million in net cash used in investing activities.
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, which would require us to fund the CEO pension
obligation. Although Mr. Westerman has expressed no current intention
to require this funding, under certain circumstances, we may be required to
disburse approximately $0.8 million for this purpose in a short
period.
2007 Credit Facility and
Swap Agreement
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 Credit Agreement together
with related security agreements and other credit-related agreements, the Credit
Facility) with Wachovia Bank, National Association (Wachovia), as administrative
agent. On June 29, 2007, in conjunction with the Credit Facility, the
Company entered into an interest rate swap agreement with Wachovia as the
counterparty (the Swap Agreement).
The
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
therein. The Credit Facility also includes a $20 million five-year
Revolver (Revolver) 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 Credit Facility without premium or penalties except for
payment of any funding losses resulting from prepayment of any LIBOR rate
loans. The Credit Facility is guaranteed by the Subsidiaries and is
secured by a first priority lien on substantially all of the Company’s
assets.
Prior to
certain events of default that occurred in the first fiscal quarter of 2009 (the
First Quarter Defaults) described below, 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 (Swap Agreement) that RHC entered into with
Wachovia under the Credit Facility, substantially the entire Term Loan, with
quarterly step-downs, bore 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) prior to the First Quarter Defaults. The Swap
Agreement specifies that the Company pay an annual interest rate spread on a
notional balance that approximates the Term Loan balance and steps down
quarterly. The interest rate spread is the difference between the
LIBOR rate and 5.485% and the notional balance was $210.4 million as of March
31, 2009.
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 executed on July 9,
2007.
Prior to
the First Quarter Defaults, the interest rate on loans under the Revolver
depended on whether they were in the form of revolving loans or swingline loans
(Swingline Loans). Prior to the First Quarter Defaults, the interest
rate for each revolving loan depended on whether RHC elects to treat the loan as
an Alternate Base Rate loan (ABR Loan) or a LIBOR Rate loan; and Swingline Loans
bore interest at a per annum rate equal to the Alternative Base Rate plus the
Applicable Percentage for revolving loans that were ABR Loans. Prior
to the First Quarter Defaults, the applicable percentage for Swingline Loans
ranged from 0.50% to 1% depending on the Consolidated Leverage Ratio as defined
in our Credit Facility Credit Agreement. Our Consolidated Leverage
Ratio was 10.2 for the four quarters ending March 31, 2009, which exceeded the
maximum allowable Consolidated Leverage Ratio set forth in the Credit
Agreement. This ratio test, is only applicable if we have more than
$2.5 million in Revolver borrowings at the end of the applicable
quarter.
Fees
payable under the Revolver include: (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 Revolver; (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. An annual administrative fee of $35,000 is also payable in
connection with the Revolver.
The
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
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.
First Quarter
Defaults
As
previously disclosed on a Form 8-K filed with the SEC on March 4, 2009, the
Company received a notice of default on February 26, 2009 (the February Notice),
from Wachovia with respect to the Credit Facility in connection with the
Company’s failure to provide a Deposit Account Control Agreement, or DACA, from
each of the Company’s depository banks per a request made by Wachovia to the
Company on October 14, 2008. The DACA that Wachovia requested the
Company to execute was in a form that the Company ultimately determined to
contain unreasonable terms and conditions as it would enable Wachovia to access
all of the Company’s operating cash and order it to be transferred to a bank
account specified by Wachovia. The Notice further provided that as a
result of the default, the Company would no longer have the option to request
the LIBOR Rate loans described above. Consequently, the Term Loan was
converted to an ABR Loan effective March 31, 2009.
On March
25, 2009, the Company engaged XRoads Solution Group LLC as our financial
advisor. Based on an extensive analysis of our current and projected
liquidity, and with our financial advisor’s input, we determined it was in the
best interests of the Company to not pay the accrued interest of approximately
$4 million on our $245 million Credit Facility, which was due March 30,
2009. Consequently, we elected not to make the
payment. The Company’s failure to pay interest due on any loan within
our Credit Facility within a three-day grace period from the due date was an
event of default under our Credit Facility. As a result of this event
of default, the Company’s lenders have the right to seek to charge additional
default interest on the Company’s outstanding principal and interest under the
Credit Agreement, and automatically charge additional default interest on any
overdue amounts under the Swap Agreement. These defaults rates are in
addition to the interest rates that would otherwise be applicable under the
Credit Agreement and Swap Agreement.
As
previously disclosed on a Form 8-K filed with the SEC on April 6, 2009, the
Company received an additional notice of default on April 1, 2009 (the
Additional Default Notice) from Wachovia. The Additional Default
Notice alleges that subsequent to the Company’s receipt of
the February Notice, additional defaults and events of default had
occurred and were continuing under the terms of the Credit Agreement including,
but not limited to: (i) the Company’s failure to deliver to Wachovia audited
financial statements without a going concern modification; (ii) the Company’s
failure to deliver Wachovia a certificate of an independent certified public
accountant in conjunction with the Company’s financial statement; and (iii) the
occurrence of a default or breach under a secured hedging
agreement. The Additional Default Notice also states that in addition
to the foregoing events of default that there were additional potential events
of default as a result of, among other things, the Company’s failure to pay: (i)
accrued interest on the Company’s LIBOR rate loan on March 30, 2009 (the LIBOR
Payment), (ii) the commitment fee on March 31, 2009 (the Commitment Fee
Payment), and (iii) accrued interest on the Company’s ABR Loans on March 31,
2009 (the ABR Payment and together with the LIBOR Payment and Commitment Fee
Payment, the March 31st Payments). The Company has not paid the March
31st Payments and the applicable grace period to make these payments has
expired. The Additional Default Notice states that as a result of
these events of defaults, (a) all amounts owing under the Credit Agreement
thereafter would bear interest, payable on demand, at a rate equal to: (i) in
the case of principal, 2% above the otherwise applicable rate; and (ii) in the
case of interest, fees and other amounts, the ABR Default Rate (as defined in
the Credit Agreement), which as of April 1, 2009 was 6.25%; and (b) neither
Swingline Loans nor additional Revolving Loans are available to the Company at
this time.
As a
result of the February Notice and the Additional Default Notice, effective March
31, 2009, the Term Loan interest rate is now approximately 10.5% per annum and
effective April 1, 2009, the Revolver interest rate is approximately 6.25% per
annum.
On April
1, 2009, we also received Notice of Event of Default and Reservation of Rights
(Swap Default Notice) in connection with an alleged event of default under our
Swap Agreement. Receipt of the Swap Default Notice was previously
disclosed on a Form 8-K filed with the SEC on April 6, 2009. The Swap
Default Notice alleges that (a) an event of default exists due to the occurrence
of an event of default(s) under the Credit Agreement and (b) that the Company
failed to make payments totaling $2.1 million to Wachovia with respect to one or
more transactions under the Swap Agreement. The Company has not paid
this overdue amount and the applicable grace period to make this payment has
expired. As previously announced by the Company, any default under
the Swap Agreement automatically results in an additional default interest of 1%
on any overdue amounts under the Swap Agreement. This default rate is
in addition to the interest rate that would otherwise be applicable under the
Swap Agreement. As of March 31, 2009, the mark-to-market amount
outstanding under the Swap Agreement was $28.0 million, excluding any credit
risk adjustment.
With the
aid of our financial advisors and outside counsel, we are continuing to
negotiate with our various creditor constituencies to refinance or restructure
our debt. We cannot assure you that we will be successful in
completing a refinancing or consensual out-of-court restructuring, if
necessary. If we were unable to do so, we would likely be compelled
to seek protection under Chapter 11 of the U. S. Bankruptcy Code.
Current Economic and
Operating Environment
We
believe that due to a number of factors affecting consumers, including but not
limited to a slowdown in global economies, contracting credit markets and
reduced consumer spending, the outlook for the gaming and hospitality industries
remains highly uncertain. High travel costs have resulted in fewer
visitors coming to the Las Vegas and Black Hawk markets, resulting in lower
casino volumes and a reduced demand for hotel rooms. Based on these
adverse circumstances, we believe that the Company will continue to experience
lower than expected hotel occupancy rates and casino volumes.
As a
result of the economic factors and the defaults on the Credit Facility, there is
substantial doubt about our ability to continue as a going concern.
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.
Contractual
Obligations
The table
under “Item 3. Quantitative and Qualitative Disclosures about Market
Risk” summarizes our contractual obligations and commitments as of March 31,
2009.
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, 2008. For a
further discussion of our accounting policies, see Note 2, 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
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,” “project” or
“anticipate” and similar words and our discussions about our ongoing or future
plans, objectives or expectations and our liquidity projections. We
do not guarantee that any of the transactions or events described in this report
will happen as described or that any positive trends referred to in this report
will continue. These forward looking statements generally relate to
our plans, objectives and expectations for future operations and results and are
based upon what we consider to be reasonable estimates. Although we
believe that our forward looking statements are reasonable at the present time,
we may not achieve or we may modify our plans, objectives and
expectations. You should read this report 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 our plans or objectives, or might affect our ability to meet our
expectations include, but are not limited to:
·
|
the
effect of events of default or alleged events of default associated with
our Credit Agreement, Credit Facility and Swap
Agreement;
|
·
|
the
effect of the termination of our previously announced strategic process to
explore alternatives for maximizing stockholder value and the possible
resulting fluctuations in our stock price that will affect other parties’
willingness to make a proposal to acquire
us;
|
·
|
fluctuations
in the value of our real estate, particularly in Las
Vegas;
|
·
|
the
availability and adequacy of our cash flow to meet our requirements,
including payment of amounts due under our debt
instruments;
|
·
|
our
substantial indebtedness, debt service requirements and liquidity
constraints;
|
·
|
our
ability to meet the affirmative and negative covenants set forth in our
Credit Facility;
|
·
|
the
availability of additional capital to support capital improvements and
development;
|
·
|
the
smoking ban in Colorado on our Riviera Black Hawk property which became
effective on January 1, 2008;
|
·
|
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;
|
·
|
retirement
or other loss of our senior
officers;
|
·
|
economic,
competitive, demographic, business and other conditions in our local and
regional markets;
|
·
|
the
effects of a continued or worsening global and national economic
recession;
|
·
|
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;
|
·
|
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;
|
·
|
changes
in personnel or their compensation, including federal minimum wage
requirements;
|
·
|
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;
|
·
|
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;
|
·
|
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;
|
·
|
changes
in our business strategy, capital improvements or development
plans;
|
·
|
the
consequences of the war in Iraq and other military conflicts in the Middle
East, concerns about homeland security and any future security alerts or
terrorist attacks such as the attacks that occurred on September 11,
2001;
|
·
|
other
risk factors discussed elsewhere in this report;
and
|
·
|
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 US Treasury Bills
with maturities of 30 days or less. Such investments are generally
not affected by changes in interest rates.
As of
March 31, 2009, we had $227.7 million in borrowings. The borrowings
include a balance of $225.0 million on our Term Loan that matures in 2014 and
$2.5 million outstanding on our $20.0 million Revolving Credit
Facility. The borrowings also include a balance on a capital
equipment lease, which matures in 2013 and bears interest at 5.5%.
We are
not susceptible to interest rate risk because our outstanding debt is primarily
at a fixed rate as a result of the interest rate swap associated with our Term
Loan. Under this Swap Agreement, we pay a fixed rate of 5.485% plus
2% on the notional amount, which was $210.4 million at March 31, 2009, and
expires on June 8, 2014. The Swap Agreement has periodic step-downs
beginning in 2008 and expiring June 8, 2014. For the reasons
described in Note 5 above, effective March 31, 2009, the Term Loan interest rate
is approximately 10.5% per annum and effective April 1, 2009, the Revolver
interest rate is approximately 6.25% per annum plus the interest rate swap
incurs additional interest of 1% per annum on any overdue amounts under the Swap
Agreement.
Changes
in fair value of our interest rate swap between the end of each reporting period
are 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 rates would not have a material
effect on our financial statements as the interest rate swap we currently have
effectively locks most of our debt at approximately 10.5% for the Term Loan and
6.25% for the Revolver.
In
addition, FIN 48 requires that we book any future unrealized tax
payments. However, the Company does not have any reserves for
uncertain tax positions at this time.
Interest
Rate Sensitivity
Principal
(Notational Amount by Expected Maturity)
Average
Interest Rate
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
–Term Debt Including Current Portions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
loans and capital leases-Black Hawk
|
|
$ |
37 |
|
|
$ |
44 |
|
|
$ |
45 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
$ |
151 |
|
|
$ |
151 |
|
Average
interest rate
|
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$225
million Term Loan
|
|
$ |
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
225,000 |
|
|
$ |
90,000 |
|
Average
interest rate
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable
|
|
$ |
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,500 |
|
|
$ |
2,500 |
|
Average
interest rate
|
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of all Long-Term Debt, Including Current Portions
|
|
$ |
227,537 |
|
|
$ |
44 |
|
|
$ |
45 |
|
|
$ |
25 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
227,651 |
|
|
$ |
92,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long - Term Liabilities Including Current Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO
pension plan obligation
|
|
$ |
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
767 |
|
|
$ |
767 |
|
Average
interest rate
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,970 |
|
|
|
|
|
|
$ |
15,156 |
|
Average
receivable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
Average
payable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Interest
|
|
$ |
24,769 |
|
|
$ |
25,222 |
|
|
$ |
25,689 |
|
|
$ |
21,249 |
|
|
$ |
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2009, 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
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We are
party to routine lawsuits, either as plaintiff or as defendant, arising from the
normal operations of a hotel and 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.
Our
annual report on Form 10-K for the fiscal year ended December 31, 2008 (our
“2008 Form 10-K”) contains a detailed discussion of our risk
factors. No new risk factors have arisen since filing our 2008 Form
10-K.
See list
of exhibits on page 32.
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.
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RIVIERA
HOLDINGS CORPORATION
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By:
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William
L. Westerman
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Chairman
of the Board and
Chief
Executive Officer
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By:
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Phillip
B. Simons
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Treasurer
and
Chief
Financial Officer
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Date:
May 8, 2009
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Exhibits
Exhibits:
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31.1
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Certification
of the Principal Executive Officer of the Registrant pursuant to Exchange
Act Rule 13a-14(a)
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31.2
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Certification
of the Principal Financial Officer of the Registrant pursuant to Exchange
Act Rule 13a-14(a)
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32.1
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Certification
of the Principal Executive Officer of the Registrant pursuant to Exchange
Act Rule 13a-14(b) and 18 U.S.C. 1350
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32.2
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Certification
of the Principal Financial Officer of the Registrant pursuant to Exchange
Act Rule 13a-14(b) and 18 U.S.C. 1350
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