FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -----------------------
Commission file number 000-21430
--------------
Riviera Holdings Corporation
-------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2901 Las Vegas Boulevard South, Las Vegas, Nevada 89109
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
Including area code (702) 794-9527
----------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check One)
Large accelerated filer ___ Accelerated filer _X_ Non-accelerated filer ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ___ NO _X__
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE LAST FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documentation and reports required to be filed by Section 12, 13, or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No
---- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of May 8, 2007,
there were 12,463,755 shares of Common Stock, $.001 par value per share,
outstanding.
RIVIERA HOLDINGS CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at March 31, 2007 and
December 31, 2006 3
Condensed Consolidated Statements of Income (Unaudited) for the
Three Months ended March 31, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months ended March 31, 2007 and 2006 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signature Page 22
Exhibits 23
1
PART I - FINANCIAL INFORMATION ITEM
1. Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements of
Riviera Holdings Corporation have been prepared in accordance with the
instructions to Form 10-Q, and therefore, do not include all information and
notes necessary for complete financial statements in conformity with accounting
principles generally accepted 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, 2007 and 2006 are
not necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2006, included in
our Annual Report on Form 10-K.
2
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands, except share amounts) March 31, December 31,
-------------------------------------------------------------------------------
2007 2006
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $33,960 $25,285
Accounts receivable, net of allowances
of $171 and $163, respectively 4,116 3,063
Inventories 1,663 1,792
Prepaid expenses and other assets 3,352 4,002
------------ -------------
Total current assets 43,091 34,142
PROPERTY AND EQUIPMENT, Net 170,367 171,320
OTHER ASSETS, Net 5,428 5,774
DEFERRED INCOME TAXES, Net 2,446 2,446
------------ -------------
TOTAL $221,332 $213,682
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $830 $879
Current portion of obligation to officers 1,000 1,000
Accounts payable 8,307 9,126
Accrued interest 6,968 1,063
Accrued expenses 13,376 13,167
------------ -------------
Total current liabilities 30,481 25,235
------------ -------------
OTHER LONG-TERM DEBT 2,763 2,763
OBLIGATION TO OFFICERS- net of current portion 1,834 2,094
LONG-TERM DEBT, net of current portion 214,028 214,124
------------ -------------
Total Liabilities 249,106 244,216
COMMITMENTS AND CONTINGENCIES (See Note 6)
STOCKHOLDERS' DEFICIENCY
Common stock ($.001 par value; 60,000,000
shares authorized; 17,131,824 and
17,131,824 issued at March 31, 2007
and December 31, 2006, respectively)
12,463,755 and 12,369,431 shares outstanding 17 17
Additional paid-in capital 18,157 18,165
Treasury stock (4,668,069 shares and
4,762,393 shares at March 31, 2007 and
December 31, 2006, respectively) (9,635) (9,841)
Accumulated deficit (36,313) (38,875)
------------ -------------
Total stockholders' deficiency (27,774) (30,534)
------------ -------------
TOTAL $221,332 $213,682
============ =============
See notes to condensed consolidated financial statements
3
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 Three Months Ended
(In thousands, except per share amounts) March 31,
------------------------------------------------------------------------------
2007 2006
------------ ----------
REVENUES
Casino $28,119 $27,082
Rooms 16,314 14,843
Food and beverage 8,188 8,898
Entertainment 2,406 3,681
Other 1,712 1,703
------------ ----------
Total revenues 56,739 56,207
Less-promotional allowances 4,712 4,518
------------ ----------
Net revenues 52,027 51,689
------------ ----------
COSTS AND EXPENSES
Direct costs and expenses of operating departments:
Casino 14,252 13,820
Rooms 7,051 6,789
Food and beverage 6,141 6,332
Entertainment 1,626 2,642
Other 337 466
Other operating expenses
Selling, general and administrative 10,154 10,245
Mergers, acquistions and development costs 50 117
Share based compensation 199 216
Asset impairment 0 13
Depreciation and amortization 3,256 3,260
------------ ----------
Total costs and expenses 43,066 43,900
------------ ----------
INCOME FROM OPERATIONS 8,961 7,789
------------ ----------
Interest expense, net (6,399) (6,509)
------------ ----------
NET INCOME $2,562 $1,280
============ ==========
INCOME PER SHARE DATA
Income per share
Basic $ 0.21 $ 0.11
------------ ----------
Diluted $ 0.20 $ 0.10
------------ ----------
Weighted-average common shares outstanding 12,260 11,997
------------ ----------
Weighted-average common and common equivalent shares 12,509 12,258
------------ ----------
See notes to condensed consolidated financial statements
4
RIVIERA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006 Three Months Ended
(in thousands) March 31,
2007 2006
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $2,562 $1,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,256 3,260
Share based compensation - options 30 -
Share based compensation - restricted stock 169 216
Asset impairment - 13
Provision for bad debts 15 108
Amortization of deferred loan fees 399 399
Increase in operating (assets) and liabilities:
Accounts receivable (1,068) (792)
Inventories 129 341
Other assets 49 112
Prepaid expenses 650 363
Accounts payable (901) (413)
Accrued interest 5,905 5,884
Accrued liabilities 209 949
Deferred compensation plan obligation (10) (13)
Obligation to officers (250) (250)
---------- ---------
Net cash provided by operating activities 11,144 11,457
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and
equipment - Las Vegas, Nevada (1,911) (1,401)
Capital expenditures for property and
equipment - Black Hawk, Colorado (311) (1,855)
---------- ---------
Net cash used in investing activities (2,222) (3,256)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term borrowings (247) (236)
Proceeds from exercise of stock options - 115
---------- ---------
Net cash used in financing activities (247) (121)
---------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 8,675 8,080
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,285 20,571
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $33,960 $28,651
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property acquired with debt and accounts payable $82 $1,653
Cash paid for interest $146 $168
See notes to condensed consolidated financial statements
5
RIVIERA HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
Riviera Holdings Corporation ("RHC") and its wholly-owned subsidiary, Riviera
Operating Corporation ("ROC") (together with their wholly-owned subsidiaries,
the "Company"), were incorporated on January 27, 1993, in order to acquire all
assets and liabilities of Riviera, Inc. Casino-Hotel Division on June 30, 1993,
pursuant to a plan of reorganization. The Company operates the Riviera Hotel &
Casino (the "Riviera Las Vegas") on the Las Vegas 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 wholly
owned subsidiaries. All material intercompany accounts and transactions have
been eliminated.
Earnings Per Share
Basic per share amounts are computed by dividing net income by weighted average
shares outstanding during the period. Diluted net income per share amounts are
computed by dividing net income by weighted average shares outstanding plus the
dilutive effect of common share equivalents. No potentially dilutive options
were excluded from the diluted shares outstanding calculation for the three
months ended March 31, 2007 and 2006.
Income Taxes
The income tax provisions of $833,000 and $135,000 for the three months ended
March 31, 2007 and 2006, respectively, were fully offset by the utilization of
loss carryforwards for which a valuation allowance had been previously provided.
The estimates used to determine the remaining valuation allowance are based upon
recent operating results and budgets for future operating results. These
estimates are made using assumptions about the economic, social and regulatory
environments in which we operate. These estimates could be impacted by numerous
unforeseen events including changes to regulations affecting how we operate the
business, debt refinancing, changes in the labor market or economic changes in
the areas where we operate.
6
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") on
January 1, 2007. There was no effect on our financial condition or results of
operations as a result of implementing FIN 48. We do not believe there will be
any material changes in our unrecognized tax positions over the next 12 months.
We do not have any accrued interest or penalties associated with any
unrecognized tax benefits.
Estimates and Assumptions
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires 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 reported period. Significant estimates used by
us include estimated useful lives for depreciable and amortizable assets,
certain accrued liabilities, the estimated allowance for receivables, cash flow
projections for testing asset impairment and establishment of the income tax
valuation allowance. Actual results may differ from estimates.
Mergers, Acquisitions and Development Costs
Mergers, acquisitions and development costs consist of legal fees and other
expenses associated with the on-going potential sale of the company.
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides
guidance on the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 on January 1,
2007 did not have an impact on the Condensed Consolidated Financial Statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 159 "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS 159"). SFAS 159 expands the use of fair value measurement by
permitting entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. This statement is effective for us beginning in January 2008. We have not
yet determined the impact, if any, that SFAS 159 will have on our Consolidated
Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 does not require any
new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the
information. This statement is effective for us beginning in January 2008. We
are evaluating the impact of adopting this statement as a result of any changes
to our fair value measurements.
7
2. OTHER ASSETS
Other assets at March 31, 2007 and December 31, 2006 include deferred loan fees
of approximately $4.2 million and $4.6 million respectively, associated with the
refinancing of our debt in 2002. We are amortizing the costs over the life of
the debt.
3. LONG -TERM DEBT AND COMMITMENTS
On June 26, 2002, we issued 11% Senior Secured Notes with a principal amount of
$215 million, substantially all of which were later exchanged for our Securities
Act of 1933-registered Senior Secured Notes with substantially the same terms
(collectively, the "11% Notes"). The 11% Notes were issued at a discount of $3.2
million. The discount is being amortized over the 8 year life of the 11% Notes.
The balance of the discount at March 31, 2007 was $1.3 million.
Effective July 26, 2002 we entered into a $30 million, five-year revolving
credit arrangement with a financial institution. Terms of the arrangement
include interest at prime plus .75 percent or a LIBOR -derived rate. There were
no advances outstanding on this revolver at March 31, 2007. We incurred loan
fees of approximately $1.5 million, which are being expensed over the life of
the arrangement. A 0.5 percent annual fee is payable monthly on the unused
portions of the revolver plus a $3,000 monthly service fee.
4. STOCK REPURCHASES
There were no shares of RHC common stock purchased by our Deferred Compensation
Plan for the three months ended March 31, 2007 or 2006. The Deferred
Compensation Plan distributed to participants 94,324 and 96,698 shares for the
three months ended March 31, 2007 and 2006, respectively.
5. SHARED-BASED PAYMENTS
During the three months ended March 31, 2007 the company recorded share-based
compensation of $199,000; $169,000 related to restricted stock and $30,000
related to stock options. For the three months ended March 31, 2006 the company
recorded share-based compensation of $216,000 related to restricted stock. Such
amounts have been included as a component of operating expenses.
No options were granted during the three months ended March 31, 2007 and 2006.
As of March 31, 2007 there were exercisable options of 210,000 shares. No
options were exercised during the three months ended Mach 31, 2007. No options
were forfeited or canceled during the three months ended March 31, 2007.
COMMITMENTS AND CONTINGENCIES
Salary Continuation Agreements
Approximately 65 executive officers and certain other employees (excluding Mr.
Westerman and Mr. Vannucci) of ROC and RBH have salary continuation agreements
effective through December 2007, pursuant to which they will be entitled to
receive (1) six months salary if their employment with the Company is
terminated, without cause, within 12 months of a change of control of the
Company; and (2) group health insurance for a period of 6 months. The base
salary payments are payable in biweekly installments, subject to the employee's
duty to mitigate by using his or her best efforts to find employment. In
8
addition, two officers and two significant employees have salary continuation
agreements effective through December 31, 2007, pursuant to which each of them
will be entitled to receive one year's base salary and health insurance benefits
for two years, if their employment is terminated without cause within 24 months
of a change of control of the Company. These four salary continuation agreements
are not subject to a duty to mitigate. The estimated total amount payable under
all such agreements was approximately $3.6 million, which includes $700,000 in
benefits, as of March 31, 2007.
Topping Fee Related to the Merger Agreement
Under our April 5, 2006 Agreement and Plan of Merger ("the Merger Agreement"),
we agreed to pay Riv Acquisition Holdings Inc. ("RAH") a "Topping Fee" of
approximately $7.9 million if: (i) the Merger Agreement is terminated because
our shareholders did not approve it; (ii) prior to such termination, a competing
"Takeover Proposal" (which includes a proposal for the acquisition of 30% or
more of the Company's assets or more than 30% of the outstanding stock of RHC or
any RHC subsidiary or for the acquisition of RHC or any RHC subsidiary through a
merger or other business combination) had been announced and had not been
withdrawn; and (iii) within 12 months after such termination (which occurred on
August 29, 2006), we enter into a definitive agreement with a third party with
respect to the consummation of a Takeover Proposal or any such Takeover Proposal
is consummated.
On August 8, 2006, we announced that we had received a competing proposal to
acquire all of RHC's outstanding stock through a merger. Prior to our
termination of the Merger Agreement on August 29, 2006 due to disapproval by our
shareholders, the competing proposal had not been withdrawn. Thereafter, our
board of directors rejected the proposal.
Legal Proceedings
On May 2, 2007, an amended complaint (the "Complaint") filed by RAH; Flag Luxury
Riv, LLC, ; Rivacq LLC; and RH1, LLC (collectively, the "Plaintiffs") was served
upon RHC and its directors. The Complaint was filed in the District Court of
Clark County, Nevada (Case No. A539614), as an amendment to a complaint filed on
April 17, 2007, but not served on the defendants.
The Plaintiffs request, among other things, a declaratory judgment that RAH's
entry into a March 21, 2007 Option Agreement with Triple Five Investco LLC and
Dominion Financial LLC covering 1,147,500 RHC shares (the "Triple Five Shares")
did not trigger the defensive provisions of the Nevada Business Combination Law
(which, if triggered, would disqualify RAH and its related parties from entering
into a merger or other business combination with RHC for a three-year period)
and the defensive provisions of Riviera's articles of incorporation (which, if
triggered, would substantially dilute RAH's and its related parties' voting
rights as to the Triple Five Shares, if they acquire those shares).
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
9
7. GUARANTOR INFORMATION
The 11% Notes and the $30 million revolving credit arrangement are guaranteed by
all of our restricted subsidiaries. These guaranties are full, unconditional,
and joint and several. Riviera Gaming Management of Missouri, Inc. ("RGMM") and
Riviera Gaming Management of New Mexico, Inc. ("RGMNM") are unrestricted
subsidiaries of RHC and are not guarantors of the 11% Notes and the revolving
credit arrangement. RGMM and RGMNM do not have operations and do not
significantly contribute to our financial position or results of operations.
8. SUBSQUENT EVENTS
On April 27, 2007 we signed a commitment letter with Wachovia Bank, National
Association to use its best efforts to market and syndicate up to $245 million
of senior secured credit facilities, to be comprised of a new $20 million five
year revolving credit facility and a new $225 million seven year term loan
facility.
If we obtain these credit facilities, we intend to use the proceeds for, among
other purposes, the refinancing of the 11% Notes.
Substantially all of the outstanding principal amount of the term loan would
mature in the seventh year of the term. We would be permitted to prepay the
facilities without premium or penalties, subject to our payment of any funding
losses if we enter into swap arrangements related to any LIBOR based loan under
the facilities.
If we obtain the credit facilities, we expect them to reduce interest costs and
provide greater financial flexibility.
10
9. SEGMENT DISCLOSURES
We determine our segments based upon the two geograplical markets that we
operate Riviera Las Vegas and Riviera Black Hawk. The indicator reviewed by
the chief- decision maker is earnings before interest, income taxes,
depreciation and amortization ("EBITDA") as described below. All inter-segment
revenues have been eliminated.
Three Months Three Months
Ended Ended
March 31, March 31,
(In thousands) 2007 2006
-------------- -------------
Net revenues
Riviera Las Vegas $38,472 $38,426
Riviera Black Hawk 13,555 13,263
-------------- -------------
Total net revenues $ 52,027 $ 51,689
============== =============
EBITDA (1)
Riviera Las Vegas $8,607 $8,467
Riviera Black Hawk 4,815 4,188
Other Costs and Expenses
Corporate Expenses
Equity Compensation 199 216
Other Corporate Expenses 956 1,260
Depreciation and Amortization 3,256 3,260
Mergers, Acquisitions and
Development Costs 50 117
Asset Impairment - 13
Interest Expense, net 6,399 6,509
-------------- -------------
Total Costs and Expenses 10,860 11,375
-------------- -------------
Net Income $ 2,562 $ 1,280
============== =============
March 31, December 31,
Property and Equipment, net 2007 2006
--------------------------- ------------- --------------
Las Vegas $ 107,956 $ 108,235
Black Hawk 62,411 63,085
------------- --------------
Total Property and Equipment, net $ 170,367 $ 171,320
============= ==============
(1) 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 (earnings before interest,
income taxes, depreciation, amortization and corporate expense) as the primary
measure of our business segment properties preformance, including the evaluation
of operating personnel. EBITDA should not be construed as an alternative to
operating income, as an indicator of our operating performance, as an
alternative to cash flows from operating activities, as a measure of liquidity,
or as any other measure determined in accordance with generally accepted
accounting principles. We have significant uses of cash flows, including capital
expenditures, interest payments and debt principal repayments, which are not
reflected in EBITDA. Also, other companies that report EBITDA may calculate it
in a different manner than we do.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overall Outlook and Recent Developments
We own and operate the Riviera Hotel and Casino on the Las Vegas Strip in Las
Vegas, Nevada ("Riviera Las Vegas"), and the Riviera Black Hawk Casino in Black
Hawk Colorado ("Riviera Black Hawk").
Our capital expenditures for Riviera Las Vegas are geared to maintain the hotel
rooms and amenities in sufficient condition to compete for customers in the
convention market and the mature adult customer. Room 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
and slot club redemptions.
In Black Hawk, the $5 maximum bet restricts our ability to generate table games
revenues. The Black Hawk market is basically a "locals" slot customer market.
Our capital expenditures for Riviera Black Hawk are geared to maintain
competitive slot machines compared to that market.
On March 26, 2007, we received a proposal from the investment group that owns
Riv Acquisition Holdings Inc. ("RAH") to acquire all of our outstanding stock
through a merger at a cash price of $27 per share. On March 28, 2007, we
notified RAH that we would not give further consideration to that proposal
because, among other reasons, an Option Agreement that RAH entered into without
our prior approval on March 21, 2007 (the "Option Agreement") with Triple Five
Investco LLC and Dominion Financial LLC covering 1,147,550 shares of our stock
(the "Triple Five Shares"), triggered the defensive provisions of Nevada's
Business Combination Law (the "BCL") and Article III, Section 7 of our articles
of incorporation ("Article III"). Consequently, RAH and its related parties were
disqualified from engaging in a merger or other business combination with us for
a three-year period and, to the extent that RAH or its related parties acquire
voting rights as to the Triple Five shares, those voting rights will be
substantially reduced. We also determined that even in the absence of the BCL
and Article III issues, we considered RAH's $27 per share merger proposal to be
unsatisfactory. RAH and its related parties have disputed our position and on
April 26, 2007 they notified us of their intent to present a competing slate of
five nominees for election to our board of directors at our 2007 annual meeting
of stockholders. On May 2, 2007, we were served with a complaint filed by RAH
and related parties in the District Court of Clark County, Nevada, in which they
are requesting a declaratory judgment that the Option Agreement did not trigger
the defensive provisions of the BCL and Article III. (See Part II, Item 1 -
Legal Proceedings.)
On April 27, 2007, we obtained a commitment from Wachovia Bank, National
Association ("Wachovia") to use its best efforts to market and syndicate up to
$245 million of new senior secured credit facilities, which would consist of a
$20 million five-year revolving credit facility and a $225 million seven-year
term loan facility. If we obtain the credit facilities, we intend to use the
proceeds for, among other purposes, the refinancing of our 11% Senior Secured
Notes due June 15, 2010 in the original principal amount of $215 million (the
"11% Notes"). Interest on loans under the facilities would bear interest at a
rate dependent in large part upon the rating we receive from the rating
12
agencies. The facilities would be guaranteed by all of our active subsidiaries
and would be secured by the stock of those subsidiaries and all or substantially
all of our and our subsidiaries' assets. Wachovia's commitment to use its best
efforts to secure commitments from other lenders for the facilities is subject
to various conditions precedent, including satisfactory completion of due
diligence reviews, completion of a definitive credit agreement with us and
related documentation for the facilities (which will contain, among other
things, representations, warranties, covenants and evens of default customarily
found in similar financings) and the absence of material adverse changes on our
part.
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
The following table sets forth, for the periods indicated, certain operating
data for Riviera Las Vegas and Riviera Black Hawk. Income from Operations
includes intercompany management fees.
First Quarter
(In Thousands) 2007 2006 Incr Incr%
---- ---- ------ --------
Net revenues
Riviera Las Vegas $38,472 $38,426 $46 0.1%
Riviera Black Hawk 13,555 13,263 292 2.2%
------ ------ ---
Total Net Revenues $52,027 $51,689 $338 0.7%
======= ======= ====
Income from Operations
Riviera Las Vegas $6,910 $6,642 $268 4.0%
Riviera Black Hawk 3,256 2,753 503 18.3%
----- ----- -----
Property Income from Operations 10,166 9,395 771 8.2%
Corporate Expenses
Equity Compensation (199) (216) 17 7.8%
Other Corporate Expenses (956) (1,260) 304 24.2%
Mergers, Acquisitions and Development
Costs (50) (117) 67 57.3%
Asset Impairment - (13) 13 NM
------ ---- ---
Total Income from Operations $8,961 $7,789 $1,172 15.0%
====== ====== ======
Operating Margins (1)
Riviera Las Vegas 18.0% 17.3% 0.7%
Riviera Black Hawk 24.0% 20.8% 3.2%
(1) Operating margins represent income from operations as percentage of net
revenues by property.
Riviera Las Vegas
Revenues
Net revenues increased by approximately $50,000, to $38.5 million in 2007 due
primarily to increased casino and hotel revenues offset by decreased food and
beverage and entertainment revenues during the period.
13
Casino revenues increased by approximately $690,000, or 4.9% for the quarter,
from $14.2 million during 2006 to $14.9 million during 2007 due primarily to
higher slot revenues. The slot revenues increased $750,000 or 7.0% from $10.7
million in 2006 to $11.5 million in 2007, primarily due to higher coin-in and an
increase in slot hold percentage. The slot coin-in increased by $4.1 million and
slot hold percentage increased 0.5% in the period, as we have begun to realize
the effects of new lower denomination games which were installed in late 2006
and early 2007.
Room revenues increased $1.5 million, or 9.9%, from $14.8 million in 2006 to
$16.3 million in 2007 due to an increase in hotel occupancy and the average
daily rate. Average daily room rate increased $6.10 from $83.60 in the first
quarter of 2006 to $89.70 in 2007 and hotel occupancy increased 2.3% to 93.2% in
2007 from 90.9% in 2006. Rev Par (revenue per available room) increased 10.0% or
$7.62 to $83.61.
Food revenues for the quarter decreased $610,000 or 8.0% from $7.6 million in
2006 to $7.0 million in 2007 due to lower banquet revenues, as certain large
conventions in 2006 did not occur in 2007. Entertainment revenues decreased by
approximately $1.3 million, or 34.6%, from $3.7 million during 2006 to $2.4
million during 2007 due primarily to the closure of our show "Splash" in late
2006. A new show called "Ice - Direct from Russia" opened April 25, 2007.
Costs and Expenses
Rooms departmental expenses increased 3.9% from $6.8 to $7.1 million due
primarily to increases in payroll and benefit costs related to our union
contracts and the increase in occupied rooms.
Food and beverage departmental costs and expenses decreased 3.0% in the quarter
due to lower volumes, as described above.
Entertainment departmental costs decreased 38.5% due to lower costs related to
the $1.3 million lower revenue for the quarter, primarily as a result of
"Splash" closing in 2006.
General and administrative costs increased approximately $490,000 or 8.1% from
$6.0 million in 2006 to $6.5 million in 2007 due mainly to costs associated with
our Information Technology department, which were charged to corporate in the
past.
Income from Operations
Income from operations at Riviera Las Vegas increased $270,000, or 4.0%, from
$6.6 million in 2006 to $6.9 million in 2007 due primarily to the reduced
expenses associated with food & beverage and other expenses.
Riviera Black Hawk
Revenues
Net revenues increased $290,000 or 2.2% from $13.3 million in 2006 to $13.6
million in 2007 due to increased slot hold percentage. Food and beverage
revenues were approximately $1.2 million in 2007, of which $1.0 million was
complimentary (promotional allowance).
14
Income from operations at Riviera Black Hawk increased $500,000, or 18.3%, from
$2.8 million in the first quarter of 2006 to $3.3 million in 2007 due to
increased casino revenue, as explained above, and reduced general and
administrative costs primarily due to reduced costs related to payroll benefits.
Consolidated Operations
Interest Expense, net
Interest on the 11% Notes of $5.9 million plus related amortization of loan fees
and other financing costs resulted in total net interest expense of
approximately $6.4 million in the first quarter of 2007 compared to $6.5 million
in 2006. Interest expense on equipment and other financing totaled approximately
$150,000 for the quarter, offset by interest income of $170,000, which resulted
in an approximate $100,000 decrease in interest expense.
Corporate expenses decreased $300,000 or 24.1% from $1.3 million in the first
quarter of 2006 to $1.0 million 2007 primarily due to reduced cost to comply
with the Sarbanes-Oxley Act of 2002 of approximately $260,000.
Net Income
Net income increased $1.3 million, or approximately 100.0%, from $1.3 million in
2006 to $2.6 million in 2007, due primarily to the $1.2 million increase in
operating income.
Liquidity and Capital Resources
At March 31, 2007, we had cash and cash equivalents of $34.0 million. Our cash
and cash equivalents increased $8.7 million during the first three months of
2007, as a result of $11.1 million of cash provided by operations primarily from
operating income, $2.2 million of cash outflow for investing activities
primarily due to capital expenditures and approximately $250,000 outflow for
financing activities primarily for repayment of debt. Cash balances include
amounts that could be required to pay our Chief Executive Officer's (William L.
Westerman's) retirement account balance into a rabbi trust upon 5 days notice.
We pay Mr. Westerman $250,000 per quarter from his retirement account balance
plus interest. In exchange for these payments, Mr. Westerman has agreed to
forbear his right to receive full transfer of his retirement account balance to
the rabbi trust. This does not limit his ability to give the five-day notice at
any time. Although we are aware of no current intention on the part of Mr.
Westerman to require this funding into a rabbi trust, under certain
circumstances we may have to disburse this balance, which amounts to
approximately $2.8 million as of March 31, 2007, within a short period.
We believe that cash flow from operations, combined with the $34.0 million cash
and cash equivalents and the $30 million revolving credit facility, will be
sufficient to cover our debt service requirements and enable investment in
budgeted capital expenditures of $11.0 million for 2007 for both Riviera Las
Vegas and Riviera Black Hawk. The revolver will expire in July 2007.
On June 26, 2002, we secured debt in the principal amount of $215 million in the
form of the 11% Notes with a maturity date of June 15, 2010. Interest on the 11%
Notes is at the annual rate of 11%, paid semiannually on each June 15 and
December 15. Our cash flow from operations is not expected to be sufficient to
pay 100% of the principal of the 11% Notes at maturity. Accordingly, our ability
to repay the 11% Notes at maturity would be dependent upon our ability to
refinance the 11% Notes. There can be no assurance that we would be able to
refinance the principal amount of the 11% Notes at maturity. On or after June
15, 2007, we may redeem the 11% Notes from time to time at a premium of 103.667%
and declining each subsequent year to par in 2009.
15
The Indenture governing the 11% Notes (the "Note Indenture") provides that, in
certain circumstances, we must offer to repurchase the 11% Notes upon the
occurrence of a change of control or certain other events. In the event of such
mandatory redemption or repurchase prior to maturity, we would be unable to pay
the principal amount of the 11% Notes without a refinancing.
The Note indenture contains certain covenants, which limit our ability, subject
to certain exceptions, to: (1) incur additional indebtedness; (2) pay dividends
or other distributions, repurchase capital stock or other equity interests or
subordinated indebtedness; (3) enter into certain transactions with affiliates;
(4) create certain liens; (5) sell certain assets; and (6) enter into certain
mergers and consolidations. As a result of these restrictions, our ability to
incur additional indebtedness to fund operations or to make capital expenditures
is limited. In the event that cash flow from operations is insufficient to cover
cash requirements, we would be required to curtail or defer certain capital
expenditure programs, which could have an adverse effect on operations.
On July 26, 2002, we entered into a $30 million, five-year senior secured credit
facility. The credit facility is secured by substantially the same collateral
that secures the 11% Notes. The lien on the collateral securing the credit
facility is senior to the lien on the collateral securing the 11% Notes. The
credit facility contains customary conditions to borrowing and certain
representations and warranties customary in gaming-related finance. The credit
facility also contains financial covenants and restrictions regarding, among
other things, indebtedness, distributions and changes in control. Under the
credit facility, we can obtain extensions of credit in the forms of cash and
letters of credit. We are required to pay interest on all outstanding cash
advances at the rate of interest announced by Wells Fargo at its principal
office in San Francisco as its prime rate plus 0.75% or at the rate at which
major international banks in London charge each other for borrowings in U.S.
dollars ("LIBOR") plus 3.00%. However, the minimum interest rate we will be
charged on outstanding cash advances is 4.50%.
As of March 31, 2007, we believe that we are in compliance with the covenants of
the 11% notes and all of our credit facilities.
On April 27, 2007 we signed a commitment letter with Wachovia Bank, under which
Wachovia agreed to use its best efforts to market and syndicate up to $245
million of new senior secured credit facilities, to be comprised of a $20
million five year revolving credit facility and a $225 million seven year term
loan facility. Substantially all of the outstanding principal amount of the term
loan would mature in the seventh year of the term. We would be permitted to
prepay the facilities without premium or penalties, subject to our payment of
any funding losses if we enter into swap arrangements related to any LIBOR-based
loan under the facilities. Interest on loans under the facilities would bear
interest at a rate dependent in large part upon the rating we receive from the
rating agencies.
If we obtain these senior secured credit facilities ("the facilities"), we
intend to use the proceeds for, among other purposes, the refinancing of its 11%
Senior Secured Notes due June 15, 2010 in the original principal amount of $215
million.
16
If we obtain the new credit facilities, we expect them to reduce our interest
costs and provide greater financial flexibility.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be found in
Item 7 of our Form 10-K for the year ended December 31, 2006. For a more
extensive discussion of our accounting policies, see Note 1, Summary of
Significant Accounting Policies, in the Notes to the Condensed Consolidated
Financial Statements in this Form 10-Q.
Forward-Looking Statements
Throughout this report we make "forward-looking statements," as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements include the words "may," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and similar words as well as our acquisition, development and expansion plans,
objectives or expectations and our liquidity projections. These forward-looking
statements generally relate to our plans, objectives, prospects and expectations
for future operations and results and are based upon what we consider to be
reasonable future estimates. Although we believe that our plans, objectives,
prospects and expectations reflected in, or suggested by, such forward-looking
statements are reasonable at the present time, we may not achieve or we may
modify them from time to time. Furthermore, there is no assurance that any
positive trends suggested or referred to in this report will continue. You
should read this report thoroughly and with the understanding that actual future
results may be materially different from what we expect. We do not plan to
update forward-looking statements even though our situation or plans may change
in the future, unless applicable law requires us to do so.
Specific factors that might cause our actual results to differ from our plans,
objectives or expectations, might cause us to modify them, or might affect our
ability to achieve them, include, but are not limited to:
o the availability and adequacy of our cash flow to meet our requirements,
funding and debt obligations;
o our ability to obtain the new senior secured credit facilities
discussed in this report, which would enable us to refinance the
11% Notes;
o the results of the election contest initiated by RAH's related
parties, in which they seek to replace our board of directors, and
litigation initiated by RAH and related parties against us in
connection with the dispute concerning their takeover attempts;
o our substantial indebtedness, debt service requirements and liquidity
constraints;
o the availability of additional capital to support capital improvements
and development;
o fluctuations in the value of our real estate, particularly in Las Vegas;
o competition in the gaming industry, including the availability and
success of alternative gaming venues and other entertainment
attractions;
17
o retirement or other loss of any of our senior officers;
o economic, competitive, demographic, business and other conditions in our
local and regional markets;
o changes or developments in laws, regulations or taxes in the gaming
industry;
o actions taken or not taken by third parties, such as our
customers, suppliers, and competitors, as well as legislative,
regulatory, judicial and other governmental authorities;
o changes in our personnel or their compensation, including those
resulting from changes in minimum wage requirements;
o our failure to obtain, delays in obtaining, or the loss of, any
licenses, permits or approvals, including gaming and liquor
licenses, or the limitation, conditioning, suspension or
revocation of any such licenses, permits or approvals, or our
failure to obtain an unconditional renewal of any of our licenses,
permits or approvals on a timely basis;
o the loss of any of our casino, hotel or convention facilities due
to terrorist acts, casualty, weather, mechanical failure or any
extended or extraordinary maintenance or inspection that may be
required;
o other adverse conditions, such as economic downturns, changes in
general customer confidence or spending, increased transportation
costs, travel concerns or weather-related factors, that may
adversely affect the economy in general or the casino industry in
particular;
o changes in our business strategy, capital improvements or development
plans;
o the consequences of the war in Iraq and other military conflicts
in the Middle East and any future security alerts or terrorist
attacks such as the attacks that occurred on September 11, 2001;
and
o other risk factors and uncertainties discussed elsewhere in this report.
All future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. In light of
these and other risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in
interest rates. We invest our cash and cash equivalents in U.S. Treasury Bills
with maturities of 30 days or less. Such investments are generally not affected
by changes in interest rates.
As of March 31, 2007, we had $214.9 million in borrowings. The borrowings
include $215 million in 11% Notes maturing in 2010 net of discount. Interest
under the 11% Notes is based on a fixed rate of 11%. The equipment loans and
capital leases have fixed interest rates ranging from 5.5% to 6.0%. The
borrowings also include $348,000 in a special improvement district bond offering
("SID Bonds") with the City of Black Hawk. Our share of the debt on the SID
Bonds of $1.2 million, is payable over 10 years beginning in 2000. The SID Bonds
bear interest at 5.5%. We are not susceptible to interest rate risk because our
outstanding debt is at fixed rates. Our $30 million senior secured revolving
credit facility is at prime plus three-quarters of one percent and would not
subject us to a material interest rate fluctuation. As of March 31, 2007, we had
no borrowing outstanding under our senior secured credit facility.
Interest Rate Sensitivity
Principal (Notational Amount by Expected Maturity)
Average Interest Rate
(Dollars in Fair Value
thousands) 2007 2008 2009 2010 2011 Thereafter Total at 3/31/07
Long-Term Debt Including
Current Portions
Equipment loans and
capital leases-Las Vegas $ 567 $ 187 $ 54 $ 808 $ 808
Average interest rate 5.8% 5.8% 5.8%
11% Notes $ 215,000 $ 215,000 $ 223,600
Less unamortized discount (1,298) (1,298) (1,298)
Average interest rate 11.8%
SID Bonds -
Black Hawk, Colorado $ 66 $ 137 $ 145 $ 348 $ 348
Average interest rate 5.5% 5.5% 5.5%
Total all long-term debt,
including current portions $ 633 $ 324 $ 199 $ 213,702 $ - $ - $ 214,858 $ 223,458
Other Long-Term Liabilities
including Current Portion
CEO pension plan obligation $ 750 $ 1,000 $ 1,000 $ 84 $ 2,834 $ 2,834
Average interest rate 11.8% 11.8% 11.8% 11.8%
Total all long-term
obligations $ 1,383 $ 1,324 $ 1,199 $ 213,786 $ - $ - $ 217,692 $ 226,292
19
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 and chief
financial officer, 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, 2007, we carried out an evaluation, under the supervision and
with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer 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
15d-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
On May 2, 2007, RAH; Flag Luxury Riv, LLC; Rivacq LLC; and RH1 LLC served the
Complaint upon RHC and its directors. The Complaint was filed in the District
Court of Clark County, Nevada (Case No. A539614), as an amendment to a complaint
filed on April 17, 2007, but not served on the defendants.
The Plaintiffs request, among other things, a declaratory judgment that RAH's
entry into the Option Agreement did not trigger the defensive provisions of the
BCL (which, if triggered, would disqualify RAH and its related parties from
entering into a merger or other business combination with RHC for a three-year
period) and Article III (which, if triggered, would substantially dilute RAH's
and its related parties' voting rights as to the Triple Five Shares, if they
acquire those shares).
We are also a party to routine lawsuits, either as plaintiff or as defendant,
arising from the normal operations of a hotel or casino. We do not believe that
the outcome of such litigation, in the aggregate, will have a material adverse
effect on our financial position or results of our operations.
20
Item 1A. Risk Factors
Our annual report on Form 10-K (as amended) for the fiscal year ended December
31, 2006 (our "2006 Form 10-K") contains a detailed discussion of our risk
factors. The information below updates and should be read in conjunction with
the risk factors and other information disclosed in our 2006 Form 10-K.
The Recently Announced Election Contest And Our Dispute With RAH And Related
Parties About Their Actions In Furtherance Of Their Takeover Objectives Might
Affect Our Ability To Obtain New Credit Facilities And Make It More Difficult
For Us To Replace Any Key Personnel If We Lose Their Services.
We have a commitment but have not yet entered into binding agreements for the
new senior secured credit facilities discussed in this Form 10-Q. Our agreement
with Wachovia calls for Wachovia to use best efforts to secure commitments from
other lenders for those facilities. We are seeking the new credit facilities in
order to (1) reduce our interest costs substantially, (2) retire the 11% Notes,
which we would likely be unable to pay on the June 15, 2010 maturity date
without a refinancing and (3) provide us with greater overall financial
flexibility. If prospective lenders view the election contest announced by RAH's
related parties to replace our current board of directors and our disputes with
RAH and those parties about their actions in furtherance of their takeover
objectives as creating too much uncertainty about our future prospects, we may
be unable to obtain the new credit facilities or other refinancing.
Those same uncertainties about our future prospects might add to our
difficulties in finding suitable replacements for any of our executives or other
key personnel if we lose their services.
Item 5. Other Information
Item 6. Exhibits.
See list of exhibits on page 23.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By: /s/ William L. Westerman
William L. Westerman
Chairman of the Board,
Chief Executive Officer
(Principle Executive Officer)
By: /s/ Mark Lefever
Treasurer and Principal
Financial and Accounting Officer
(Principle Financial Officer)
Date: May 10, 2007
22
Exhibits
Exhibits:
31.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.
32.2 Certification of the Principal Financial Officer of the Registrant
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.