| RIVIERA HOLDINGS CORP Item 1A Risk Factors |
| 20 Item 1A Risk Factors An investment in our common stock involves a high degree of risk |
| We operate in a highly competitive, dynamic and rapidly changing industry that involves numerous risks and uncertainties |
| Moreover, our debt instruments impose restrictions on us that are for the benefit of certain of our creditors, but not necessarily for our stockholders or us |
| Anyone who is making an investment decision regarding our stock should carefully consider the following risk factors, as well as the other information contained or incorporated by reference in this report |
| The risks and uncertainties described below are those that we currently believe may materially affect our company or your investment |
| Other risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware, may become important factors that adversely affect our stockholders or us in the future |
| If any of the risks discussed below actually materialize, then our business, financial condition, operating results, cash flows and future prospects, or your investment in our stock, could be materially and adversely affected, resulting in a loss of all or part of your investment |
| 20 Risks Relating To Our Business And Our Capital Structure We face significant competition in the two markets where we operate |
| Competition in the Las Vegas and Black Hawk/Central City gaming markets has intensified over the last several years and is continuing to do so |
| In Las Vegas, this has resulted from significant increases in hotel rooms, casino sizes and convention, trade show and meeting facilities |
| Our success depends on the success of Riviera Las Vegas and its ability to attract visitors and to continue operating successfully |
| Riviera Las Vegas competes with high-end, middle market and other casinos resort properties and hotels, including those located on or near the Las Vegas Strip or in downtown Las Vegas, on the basis of overall atmosphere, range of amenities, level of service, price, location, entertainment offered, shopping and restaurant facilities, theme and size |
| Currently, there are approximately 30 major gaming properties located on or near the Las Vegas Strip, approximately ten additional major gaming properties in the downtown area and many additional gaming properties located in other areas of Las Vegas |
| Companies that have more than one hotel/casino facility operate many of these properties, and many have greater name recognition and financial and marketing resources than we do and market to the same target demographic groups as we do |
| Furthermore, additional major hotel/casino openings and significant expansion of existing properties, containing a large number of hotel rooms and attractions, are expected to occur in Las Vegas in the coming years, which will put even further pressure on us to remain competitive |
| In Black Hawk/Central City, the primary competitive factors are location, availability and convenience of parking, number of slot machines and gaming tables, promotional incentives, hotel rooms, types and pricing of non-gaming amenities, name recognition and overall atmosphere |
| Our main competitors are the larger gaming facilities, particularly those with considerable on-site or nearby parking and established reputations in the local market |
| Two of the most successful casinos in Colorado are located directly across the street from, and are considerably larger than, Riviera Black Hawk |
| Three other casinos in our market offer hotel accommodations as well as gaming facilities, and thereby have some competitive advantages over us |
| Also, a road which opened in November 2004 and which enables drivers to bypass Black Hawk on their way to Central City, may give our Central City competitors an advantage over us |
| There have also been efforts in Colorado by Native American tribes to acquire land to use for construction of a casino that would operate without the limitations imposed on the Colorado casino industry, and efforts by other parties to amend the Colorado Constitution to permit installation of slot machines at five racetracks |
| Thus far, the Native American casino initiatives in Colorado have either been rejected or have failed to win support from government authorities, and in 2003 a race track/slot machine initiative was rejected by Colorado voters |
| Nevertheless, if either of these types of initiatives were to be pursued further in Colorado and gain the necessary approvals, then our Colorado operations could be adversely affected |
| In addition to the competition that we face from our competitors in Las Vegas and Colorado, we face substantial competition from other companies in the gaming industry generally, such as land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American land in California and elsewhere, and other forms of legalized gambling |
| If other casinos operate more successfully, if other existing gaming properties continue to be enhanced or expanded, or if additional hotels and casinos are established in or around the locations where we conduct business, we may lose market share |
| The number of casinos on Native American lands has increased since enactment of the Indian Gaming Regulatory Act of 1988 |
| In 2000 California voters approved an amendment to the California Constitution that allows Las Vegas-style gaming on Native America lands in that state |
| While new gaming jurisdictions generally have not materially impacted Las Vegas, the expansion of gaming into California poses a more serious threat to the continued growth of Las Vegas |
| We also compete, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, Internet gaming, on- and off-track wagering and card parlors |
| In particular, the legalization of gaming or the expansion of legalized gaming in or near any geographic area from which we attract or expect to attract a significant number of our customers could have a significant adverse effect on our business, financial condition, results of operations and future prospects |
| 21 Increased competition may also require us to make substantial capital expenditures to maintain or enhance the competitive positions of our two properties |
| Because we are highly leveraged, after we satisfy our obligations under our outstanding indebtedness we might not have sufficient financing to make such expenditures |
| If we are unable to make such expenditures, our competitive position, results of operations and future prospects could be materially adversely affected |
| We do not have material assets or operations other than Riviera Las Vegas and Riviera Black Hawk |
| Therefore, we will be entirely dependent upon these two properties for all of our cash flow unless and until we develop other properties, which might never happen |
| This makes us more sensitive to events and conditions affecting the markets in which we operate, including the following: o local economic and competitive conditions, o inaccessibility due to weather conditions, road construction or closure of primary access routes; o decline in air passenger traffic due to higher ticket costs or fears concerning air travel; o a decline in automobile traffic due to higher gasoline prices; o changes in state and local laws and regulations, including those affecting gaming; o an increase in the cost of electrical power for Riviera Las Vegas as a result of, among other things, power shortages in California or other western states with which Nevada shares a single regional power grid; and o a decline in the number of visitors to Las Vegas or the number of Colorado residents who visit Black Hawk |
| We have a significant amount of debt, which could have important consequences to our stockholders and significant effects on our business and our ability to satisfy our debt obligations |
| For example, it could: o increase our vulnerability to adverse economic or industry conditions or a downturn in our business; o limit our ability to redeem our 11prca Senior Secured Notes ( "e 11prca Notes "e ) if we are required to do so as a result of a change in control of our company or due to regulatory requirements; o result in an event of default if we fail to comply with the financial and other restrictive covenants in our Note Indenture or our senior secured credit facility, which could result in all of our indebtedness becoming immediately due and payable and would permit certain lenders to foreclose on our assets securing that indebtedness; o limit our ability to fund or obtain additional financing for future working capital needs, capital expenditures and other general financial requirements; |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital needs, capital expenditures, development projects, acquisitions and other general corporate purposes; |
| limit our flexibility in planning for, or reacting to, changes in our business and industry; and o place us at a competitive disadvantage compared to our competitors that have less debt or whose debt is at lower interest rates and on more favorable terms than our debt |
| We Will Need To Refinance Our 11prca Notes In Order To Repay Them, And RefinancingTerms May Be Unfavorable To Us |
| Our ability to repay the 11prca Notes on or before the June 15, 2010 maturity date will depend on our ability to refinance them, because our cash flow from operations is insufficient for this purpose |
| In view of, among other things, our lack of profitability and the other risk factors that we are reporting, we may have to accept refinancing terms that are unfavorable to us |
| This, in turn, could have further adverse effects on our financial health and our ability to satisfy our debt obligations |
| Our ability to operate successfully is dependent, in part, upon the continued services of certain of our executive personnel |
| Our loss of any of them or our inability to attract or retain key employees in the future could have a material adverse effect on us |
| We have an employment agreement with William L Westerman, our Chairman of the Board, President and Chief Executive Officer ( "e CEO "e ) who has been with us or our predecessor company since 1991 |
| Westerman is employed for an indefinite period, subject to termination by us upon at least 90 days &apos written notice or termination by him upon at least 180 days &apos written notice |
| Westermanapstas contract is also subject to earlier termination upon the occurrence of certain events |
| We cannot assure you that we would find a suitable replacement for Mr |
| Westerman if he retires or his employment terminates for any other reason |
| There is a shortage of skilled management-level employees in the gaming industry, which might make it difficult for us to attract and retain qualified personnel at that level, in light of our relatively limited financial and marketing resources, competitive position within the industry and market perceptions about our future prospects |
| As owners and operators of gaming facilities, we are subject to extensive governmental regulation |
| The ownership, management and operation of gaming facilities are subject to extensive laws, regulations and ordinances, which are administered by various federal, state and local government entities and agencies |
| The gaming authorities in the jurisdictions in which we operate have broad authority and discretion to require us and our officers, directors, managers, employees and certain security holders to obtain various licenses, registrations, permits, findings of suitability or other approvals |
| To enforce applicable gaming regulations, gaming authorities may, among other things, limit, suspend or revoke the licenses of any gaming entity or individual, and may levy fines against us or individuals or may cause us to forfeit our assets for violations of gaming laws or regulations |
| Nevada and Colorado state and local government authorities require us to obtain gaming licenses and require our officers and key employees to demonstrate suitability to be involved in gaming operations |
| Those authorities may limit, condition, suspend or revoke a license for any cause they deem reasonable |
| Also, if we violate any gaming laws or regulations, those authorities may levy substantial fines against us or the individuals involved in the violations |
| The occurrence of any of these events could have a material adverse effect on our business, financial condition, results of operations and future prospects |
| We can not assure you that any new licenses, registrations, findings of suitability, permits and approvals, including for any proposed expansion of our properties or our entry into new markets, will be given or that our existing ones will be renewed when they expire |
| Any failure to renew or maintain our licenses or receive new licenses when necessary would have a material adverse effect on us |
| We are subject to a variety of other laws, rules and regulations, including those pertaining to zoning, environmental matters, construction, land use and the serving of alcoholic beverages |
| We also pay substantial taxes and fees in connection with our operations as a gaming company, which taxes and fees are subject to increase or other change at any time |
| Any changes to these laws could have a material adverse effect on our business, financial condition, results of operations and future prospects |
| Our compliance costs associated with these laws, regulations and licenses are significant |
| A change in the laws, regulations and licenses applicable to our business or a violation of any of them could require us to make material expenditures or could otherwise materially adversely affect our business, financial condition, results of operations and future prospects |
| In Black Hawk and in other jurisdictions from which we attract customers, or in which we may expand, gaming is subject to local referendum |
| If the results of a referendum held in a jurisdiction in which we operate were to restrict gaming in whole or in part or if the results of a referendum in a nearby non-gaming jurisdiction were to permit gaming, our results of operations could be negatively impacted |
| 23 Generally, we are subject to various federal, state and local governmental laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials |
| Failure to comply could result in the imposition of severe penalties or restrictions on our operations by governmental agencies or courts |
| We are not aware of any such exposure at our properties |
| Riviera Black Hawk is located within a 400-square mile area that in 1983 was designated as the Clear Creek Central/City National Priorities List Site Study Area under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended |
| Although Riviera Black Hawk is not within any of the specific areas currently identified for investigation or remediation under that statute, we cannot assure you that environmental problems will not subsequently be discovered, including in connection with any future construction on our property |
| Furthermore, governmental authorities could broaden their investigations and identify areas of concern within the site, we could be identified as a "e potentially responsible party "e and any related liability could have a material adverse effect on us |
| We do not have insurance to cover environmental liabilities, if we incur any |
| Energy Price Increases May Adversely Affect Our Costs Of Operations And Our Revenues Our casino properties use significant amounts of electricity, natural gas and other forms of energy |
| Recent substantial increases in the cost of electricity in the United States have negatively affected our operating results and are likely to continue to do so |
| The extent of the impact is subject to the magnitude and duration of energy price increases, but this impact could be material |
| In addition, energy price increases in cities that constitute a significant source of customers for our properties could result in a decline in disposable income of potential customers and a corresponding decrease in visitation to our properties, which could negatively impact our revenues |
| The economic health of our business is generally affected by a number of factors that are beyond our control, including: |
| general economic conditions and economic conditions specific to our primary markets; |
| decline in tourism and travel due to concerns about homeland security, terrorism or other destabilizing events; |
| decline in the Las Vegas convention business; |
| intense competitive conditions in the gaming industry, including the effect of such conditions on the pricing of our games and products; |
| changes in the regulatory regimes affecting our business, including changes to applicable gaming, employment, environmental or tax regulations; |
| inaccessibility to our property due to construction on adjoining or nearby properties, streets or walkways; |
| substantial increases in the cost of electricity, natural gas and other forms of energy; |
| local conditions in key gaming markets, including seasonal and weather-related factors; |
| increased transportation costs; |
| levels of disposable income of casino customers; |
| continued increases in health care costs; |
| increases in gaming taxes or fees; |
| the relative popularity of entertainment alternatives to casino gaming that compete for the leisure dollar; |
| an outbreak or suspicion of an outbreak of an infectious communicable disease; and |
| the adoption of anti-smoking regulations |
| Any of these factors could negatively impact our properties or the casino industry generally, and as a result, our business, financial condition and results of operations |
| Although we maintain insurance that we believe is customary and appropriate for our business, insurance might not be available or adequate to cover all loss or damage to which our business or our assets might be subjected |
| Since the terrorist attacks of September 11, 2001, insurance coverage for certain types of damages or occurrences has been diminished substantially and is no longer available at reasonable commercial rates |
| The lack of adequate insurance for certain types or levels of risk could expose us to significant losses if a catastrophe or lawsuit occurs for which we do not have insurance coverage |
| Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to pay the costs of replacing or repairing destroyed property and reduce the funds available for payment of our debt obligations |
| From time to time during the normal course of operating our business, we are subject to various litigation claims and other legal disputes |
| Some of the litigation claims may not be covered under our insurance policies or our insurance carriers may seek to deny coverage |
| As a result, we might be required to incur significant legal fees, which may have a material adverse effect on us |
| In addition, because we cannot predict the outcome of any legal action, it is possible that as a result of current or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses |
| The strength and profitability of our business depend on consumer demand for hotel/casino resorts, gaming in general and the types of amenities we offer |
| A general downturn in economic conditions and changes in consumer preferences or discretionary consumer spending could harm our business |
| The terrorist attacks of September 11, 2001, ongoing war activities and concerns about terrorism and homeland security have had a negative impact on travel and leisure expenditures, including lodging, gaming (in some jurisdictions) and tourism |
| We cannot predict the extent to which those events may continue to affect us, directly or indirectly, in the future |
| An extended period of reduced discretionary spending or disruptions or declines in travel could significantly harm our operations |
| In addition to concerns about war, homeland security and terrorism, other factors affecting discretionary consumer spending, including general or regional economic conditions, disposable consumer income, fears of recession and consumer confidence in the economy, may negatively impact our business |
| Negative changes in factors affecting discretionary spending could reduce customer demand for the products and services we offer, thus imposing practical limits on our pricing and harming our operations |
| Our common stock is traded on the American Stock Exchange ( "e AMEX "e ) |
| Our stockapstas average daily trading volume for the 52-week period ended February 21, 2006 was approximately 82cmam000 shares |
| The daily closing sale prices of our stock, as reported by AMEX, have ranged from dlra11dtta25 to dlra26dtta20 for the 52-week period ended February 21, 2006 |
| The volatility of the trading price of our stock could be due to many factors including, but not limited to: |
| the recent sale by our CEO of 1 million shares of our stock at dlra15dtta00 per share under a December 22, 2005 agreement that could also result in his sale of all or substantially all of his remaining 1dtta1 million shares at that price, if the buyers request and obtain approvals by gaming authorities and our board of directors; |
| the previously l reported intentions of the buyers of our CEOapstas shares to negotiate with us for an acquisition of our company at a price of not less than dlra15dtta00 per share, followed by the termination of those discussions on March 2, 2006, because the buyers and the special committee of our board of directors did not agree on the acquisition price; |
| our November 8, 2005 announcement that we concluded the process of exploring strategic alternatives to maximize shareholder value but will continue to consider appropriate strategic opportunities if and when they arise; |
| fluctuations in Las Vegas real estate values, particularly as they affect property on the Las Vegas Strip; |
| the relatively low trading volume for our stock; |
| quarterly fluctuations in our financial results; |
| changes in analysts &apos estimates of our financial performance or future prospects; |
| announcements of new services or programs; 25 |
| additions or departures of key personnel; |
| the potentially dilutive effect of outstanding stock options to purchase 310cmam500 shares of our stock at a weighted average exercise price of dlra2dtta44 per share; |
| general conditions in our industry and in the financial markets; and |
| a variety of other risk factors including the ones described elsewhere in this report |
| Over the past two years, the market value of real estate located on or near the Las Vegas Strip has increased substantially |
| Over that same period, there has been a substantial increase in the trading price of our stock |
| Our Las Vegas property, which is located near the northern end of the Las Vegas Strip and consists of approximately 26 acres, is valued on our balance sheet at its 1993 historical cost of dlra21 million |
| We believe that the increase in the value of real estate on the Las Vegas Strip has been a significant factor in the increase in our stock price over the past two years |
| Likewise, we believe that any future downward trend in those real estate values could cause a significant drop in the price of our stock |
| The Note Indenture restricts the ability of anyone to effect a change in control of our company |
| If anyone acquires 35prca or more of our outstanding stock, or if other events occur that constitute a change in control according to our Note Indenture, then we would have to make a prompt offer to repurchase all of our 11prca Notes at 101prca of their principal amount plus accrued interest |
| It is unlikely that we would have the funds to repurchase our 11prca Notes within the required time frame unless we obtained the necessary funding as part of the change in control transaction, which adds significantly to the funding that a buyer would need to acquire our company |
| Our Note Indenture also would require us to obtain the consent of holders of a majority of the outstanding principal amount of the 11prca Notes in order for us to be a party to a merger or to sell all or substantially all of our assets unless, after giving effect to the transaction, we meet certain net worth or financial ratio tests, which might be difficult or impossible for us to meet |
| Besides our Note Indenture, our articles of incorporation and bylaws contain provisions that could reduce the likelihood of a change in control or acquisition of our company |
| These could limit your ability to sell your shares at a premium or otherwise affect the price of our common stock |
| limit the voting power of persons who acquire more than 10prca of our outstanding stock without our prior approval |
| permit us to issue up to 60 million shares of common stock; |
| permit us to increase the size of our board of directors and fill the resulting vacancies without a vote by shareholders; and |
| limit the persons who may call special meetings of shareholders |
| In addition, Nevada law contains provisions governing the acquisition of a substantial or controlling interest in certain publicly-held Nevada corporations, including our company |
| Those laws provide generally that any person who acquires more than a specified percentage of our outstanding stock must obtain certain approvals from us before the acquisition or they might be denied voting rights or the ability to engage in various transactions with us, unless our disinterested stockholders vote to restore those rights |
| The ownership percentage that triggers some of these restrictions is 10prca, and further restrictions can be triggered at the 20prca, 33-1/3prca or 50dtta1prca ownership level |
| Also, a person that seeks to acquire control must satisfy the licensing requirements of the Nevada and Colorado gaming authorities |
| The gaming authorities may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with a person proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction |
| Nevada law also provides that we may resist a change or potential change in control if our board of directors determines that the change is not in the best interest of our company |
| We Have Never Paid Dividends, Do Not Intend To Pay Dividends In The Foreseeable Future And Cannot Pay Dividends To Any Unsuitable Person 26 We have never paid dividends on our stock, nor do we anticipate paying dividends in the foreseeable future |
| We intend to retain our cash flow or earnings, if any, to use in our growth and ongoing operations |
| In addition, because we are a holding company, our ability to pay dividends would be dependent on our subsidiaries &apos ability to provide funds to us |
| However, the terms of our debt instruments and credit facilities materially restrict our ability to pay dividends even when our subsidiaries pay dividends to us |
| Also, due to gaming law considerations, our articles of incorporation prohibit the payment of dividends to anyone who is deemed an "e unsuitable person "e or is an affiliate of an "e unsuitable person "e |
| Any person who acquires beneficial ownership of more than 10prca of our voting securities must apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails a written notice requiring such application |
| Under certain circumstances, if an "e institutional investor "e (as defined in Nevada gaming regulations) acquires beneficial ownership of more than 10prca but not more than 15prca of our voting securities and holds the securities only for investment purposes, it may apply for a waiver of such finding of suitability requirement |
| In addition, any beneficial owner of our voting securities, regardless of the number of shares owned, may be required, at the discretion of the Nevada Commission, to apply for a finding of suitability |
| A finding of suitability is comparable to licensing, and the applicant must pay all costs of investigation incurred by the Nevada gaming authorities in conducting the investigation |
| Any such person who fails to apply for a finding of suitability within 30 days after being ordered to do so by the Nevada Commission may be found to be unsuitable |
| Any person who is found by the Nevada Commission to be unsuitable to be a beneficial owner of our voting securities but continues such beneficial ownership beyond the period of time prescribed by the Nevada Commission may be guilty of a criminal offense |
| We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a beneficial owner of our voting securities or to have any other relationship with us, we: |
| pay that person any dividend or interest on our voting securities; |
| allow that person to exercise, directly or indirectly, any voting right conferred through our voting securities held by that person; |
| pay that person any remuneration in any form for services rendered or otherwise; or |
| fail to pursue all lawful efforts to require that person to relinquish our voting securities for cash at fair market value |
| Our articles of incorporation provide that if a gaming authority determines that any stockholder or its affiliates are unsuitable, or if deemed necessary or advisable by us for gaming law considerations, we may redeem shares of our stock that the stockholder or the stockholderapstas affiliates own or control |
| The redemption price will be the amount required by the gaming authority or, if the gaming authority does not determine the price, the price deemed reasonable by us |
| If we determine the redemption price, that price will be capped at the market price of the shares on the date we give the redemption notice |
| We may pay the redemption price in cash, by promissory note, or both, as required by the applicable gaming authority and, if not so required, as we elect |
| Our Shares Could Be Delisted From AMEX 27 Our common stock is traded on AMEX under the symbol RIV We do not currently meet the earnings or net worth standards of AMEX We have been informed, however, that according to AMEX policy, AMEX will not normally consider suspending dealings in or delisting the securities of a company which is below the earnings and net worth standards if the total market value of that companyapstas publicly held shares is at least dlra15cmam000cmam000 |
| Based on the number of our publicly held shares as of February 21, 2006, our shares would need to have a per-share market value of at least dlra1dtta50 in order to meet that dlra15cmam000cmam000 level |
| However, we cannot be sure that AMEX will follow that policy or that the price of our shares will enable us to stay at that level in the future |
| If our shares were delisted from AMEX, the marketability and liquidity of our stock could be significantly reduced |