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)                   2009          2008         $(Decr)       % (Decr)
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.

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.

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.

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.

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.

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.

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.