** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C.  20549**

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# **FORM 10-Q**

**(MarkOne)**

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934.**

**For thequarterly period ended September 30, 2006**

**OR**

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934.**

**For thetransition period from                      to                     **

**CommissionFile Number: 333-115186**

**RIVER ROCK ENTERTAINMENTAUTHORITY**

(Exact name of registrant asspecified in its charter)

| **Not Applicable**                                                                                                           |   | **68-0490898**       |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                                                                                             |   | (I.R.S. Employer     |
| incorporation or  organization)                                                                                              |   | Identification  No.) |
|                                                                                                                         |   |                 |
| **3250  Highway 128 East  Geyserville, California 95441  (707) 857-2777**                                                    |
| (Address,  including zip code, and telephone number,  including area code, of registrant’s principal executive offices) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x       No  o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  o    LargeAccelerated - Filer  o    Accelerated - Filer    x  Non Accelerated Filer

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o       No  x

 

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** **

**RIVER ROCK ENTERTAINMENTAUTHORITY**

**INDEX TO FORM 10-Q**

 
| Item           | ** ** | **Description**                                                                                                                                                                                       |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                  |
|           | ** ** | **PART I – FINANCIAL  INFORMATION**                                                                                                                                                              |
|           |       |                                                                                                                                                                                                  |
| 1.             |       | Condensed  Financial Statements (unaudited)                                                                                                                                                           |
|           |       | Condensed  Balance Sheets-  September 30, 2006 and December 31, 2005                                                                                                                                  |
|           |       | Condensed Statements of Revenues, Expenses and Changes  in Fund Deficit-Three-Months ended September 30, 2006 and 2005 (as restated)  and Nine-Months ended September 30, 2006 and 2005 (as restated) |
|           |       | Condensed  Statements of Cash Flows-  Nine-Months ended September 30, 2006 and 2005 (as restated)                                                                                                     |
|           |       | Notes to  unaudited Condensed Financial Statements                                                                                                                                                    |
| 2.             |       | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations                                                                                                          |
| 3.             |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                           |
| 4.             |       | Controls and  Procedures                                                                                                                                                                              |
|           |       |                                                                                                                                                                                                  |
|           | ** ** | **PART II – OTHER INFORMATION**                                                                                                                                                                  |
|           | ** ** | ** **                                                                                                                                                                                            |
| 1.             |       | Legal  Proceedings                                                                                                                                                                                    |
| 1A.            |       | Risk  Factors                                                                                                                                                                                         |
| 5.             |       | Other  Information                                                                                                                                                                                    |
| 6.             |       | Exhibits and Reports on Form 8-K                                                                                                                                                                      |
|           |       |                                                                                                                                                                                                  |
| Signatures     |
|           |
| Exhibit  Index |

** **

i

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**CAUTIONARYSTATEMENT**

*Except for the historical financial information containedherein, the matters discussed in this report on Form 10-Q (as well as documentsincorporated herein by reference) may be considered forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Suchforward-looking statements are based upon current expectations that involverisks and uncertainties and include declarations regarding the intent, beliefor current expectations of us and our management and may be signified by thewords “believes,” “anticipates,” “plan,” “expects,” “intends” and similarexpressions. Our actual results and the timing of certain events may differsignificantly from the results discussed in the forward-looking statements. Allforward-looking statements in this document are based on information availableto us as of the date hereof, and we assume no obligation to update any suchforward-looking statements, whether as a result of new information, futureevents, or otherwise. All discussion in this report should be read inconjunction with our financial statements and the accompanying notes containedin this report.*

*References in this Form 10-Q to the “Authority” and the “Tribe”are to the River Rock Entertainment Authority and the Dry Creek Rancheria Bandof Pomo Indians, respectively. The terms “we,” “us” and “our” refer to theAuthority.*

*Our key risks are described in our annual report on Form10-K filed with the Securities and Exchange Commission.*

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**PART I. FINANCIALINFORMATION**

**ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)**

** **

**RIVER ROCKENTERTAINMENT AUTHORITY**

**(A Governmental Instrumentality of the Dry Creek Rancheria Band of PomoIndians)**

**CONDENSED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                      | ** ** | **September 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **ASSETS**                                      |       |                             |        |                            |       |
|                                            |       |                             |        |                            |       |
| CURRENT ASSETS:                                 |       |                             |        |                            |       |
|                                            |       |                             |        |                            |       |
| Cash and cash  equivalents                      |       | $                                | 30,669,061  |                            | $          | 17,649,658 |   |
| Restricted  cash-current                        |       | 466,517                          |        | 666,517                         |       |
| Accounts  receivable                            |       | 386,161                          |        | 93,252                          |       |
| Inventories                                     |       | 156,875                          |        | 159,434                         |       |
| Prepaid expenses  and other current assets      |       | 1,531,394                        |        | 1,427,906                       |       |
|                                            |       |                             |        |                            |       |
| Total current  assets                           |       | 33,210,008                       |        | 19,996,767                      |       |
|                                            |       |                             |        |                            |       |
| RESTRICTED CASH-Net of  Current                 |       | 6,759,776                        |        | 6,706,964                       |       |
|                                            |       |                             |        |                            |       |
| PROPERTY AND EQUIPMENT:                         |       |                             |        |                            |       |
| Buildings and  building improvements            |       | 129,215,794                      |        | 128,858,771                     |       |
| Furniture,  fixtures and equipment              |       | 26,429,515                       |        | 26,015,944                      |       |
|                                            |       | 155,645,309                      |        | 154,874,715                     |       |
|                                            |       |                             |        |                            |       |
| Accumulated depreciation                        |       | (29,809,293                      | )           | (21,801,767                     | )          |
| Construction in  progress                       |       | 4,305,571                        |        | 1,819,271                       |       |
|                                            |       |                             |        |                            |       |
| Property and equipment-net                      |       | 130,141,587                      |        | 134,892,219                     |       |
|                                            |       |                             |        |                            |       |
| DEPOSITS AND OTHER ASSETS                       |       | 5,219,932                        |        | 6,081,955                       |       |
|                                            |       |                             |        |                            |       |
| TOTAL ASSETS                                    |       | $                                | 175,331,303 |                            | $          | 167,677,905 |   |
|                                            |       |                             |        |                            |       |
| **LIABILITIES AND FUND DEFICIT**                | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| ** **                                      | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| CURRENT LIABILITIES:                            |       |                             |        |                            |       |
| Accounts payable:                               |       |                             |        |                            |       |
| Trade                                           |       | $                                | 2,303,592   |                            | $          | 2,178,031 |   |
| Construction                                    |       | 498,596                          |        | 1,114,618                       |       |
| Accrued liabilities                             |       | 11,952,392                       |        | 6,463,556                       |       |
| Current maturities of  long-term debt           |       | 119,449                          |        | 103,545                         |       |
|                                            |       |                             |        |                            |       |
| Total current  liabilities                      |       | 14,874,029                       |        | 9,859,750                       |       |
|                                            |       |                             |        |                            |       |
| Long-Term debt - net of  current maturities     |       | 198,603,440                      |        | 198,243,209                     |       |
|                                            |       |                             |        |                            |       |
|                                            |       |                             |        |                            |       |
| FUND DEFICIT                                    |       |                             |        |                            |       |
| Invested in capital  assets-net of related debt |       | (68,581,302                      | )           | (63,454,535                     | )          |
| Restricted for capital  projects                |       | 7,226,293                        |        | 7,373,481                       |       |
| Unrestricted                                    |       | 23,208,843                       |        | 15,656,000                      |       |
|                                            |       |                             |        |                            |       |
| Total fund deficit                              |       | (38,146,166                      | )           | (40,425,054                     | )          |
|                                            |       |                             |        |                            |       |
| TOTAL LIABILITIES AND FUND DEFICIT              |       | $                                | 175,331,303 |                            | $          | 167,677,905 |   |

 

The accompanying notes are anintegral part of these unaudited financial statements.

2

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**RIVER ROCKENTERTAINMENT AUTHORITY**

**(A Governmental Instrumentality of the Dry Creek Rancheria Band of PomoIndians)**

**CONDENSED****STATEMENTS OF REVENUES, EXPENSES AND CHANGESIN FUND DEFICIT**

**(Unaudited)**
| ** **                                 | ** ** | **Three-Month**        | ** **  | **Nine-Month**                                 | ** ** |
|--------------------------------------------|------------|------------------------|-------------|------------------------------------------------|------------|
| ** **                                 | ** ** | **Period Ended**  | ** **  | **Period Ended**                          | ** ** |
| ** **                                 | ** ** | **September 30,** | ** **  | **September 30,**                         | ** ** |
| ** **                                 | ** ** | **2006**               | ** **  | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **             | ** **  | **(as restated, see  note 15)** | ** ** | ** ** | ** ** | **(as restated, see  note 15)** | ** ** |
| REVENUES:                                  |       |                   |        |                                           |       |   |   |   |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Casino                                     |       | $                      | 35,703,993  |                                           | $          | 34,042,093 |   | $ | 100,576,568 |   | $ | 99,226,745 |   |
| Food, beverage & retail                |       | 1,656,494              |        | 1,945,910                                      |       | 4,637,500 |   | 5,096,843 |   |
| Other                                      |       | 155,625                |        | 159,069                                        |       | 453,362 |   | 508,201 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Gross revenues                             |       | 37,516,112             |        | 36,147,072                                     |       | 105,667,430 |   | 104,831,789 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Promotional allowances                     |       | (3,954,185             | )           | (2,146,912                                     | )          | (9,420,322 | ) | (4,362,370 | ) |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Net revenues                               |       | 33,561,927             |        | 34,000,160                                     |       | 96,247,108 |   | 100,469,419 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| OPERATING  EXPENSES:                       |       |                   |        |                                           |       |   |   |   |   |
| Casino                                     |       | 5,191,608              |        | 4,923,363                                      |       | 15,200,955 |   | 14,243,493 |   |
| Food, beverage & retail                |       | 1,570,259              |        | 1,567,696                                      |       | 4,555,220 |   | 4,436,114 |   |
| Selling, general and administrative        |       | 9,532,708              |        | 12,551,045                                     |       | 30,531,375 |   | 35,672,478 |   |
| Depreciation                               |       | 2,883,783              |        | 2,798,182                                      |       | 8,615,732 |   | 8,189,691 |   |
| Credit enhancement fee                     |       | 2,312,920              |        | 1,861,997                                      |       | 5,774,547 |   | 5,661,648 |   |
| Gaming commission and surveillance expense |       | 672,799                |        | 623,322                                        |       | 2,121,531 |   | 1,991,475 |   |
| Compact revenue sharing trust fund         |       | 333,750                |        | 333,750                                        |       | 1,001,250 |   | 1,001,250 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Total Operating expenses                   |       | 22,497,827             |        | 24,659,355                                     |       | 67,800,610 |   | 71,196,149 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| INCOME FROM  OPERATIONS                    |       | 11,064,100             |        | 9,340,805                                      |       | 28,446,498 |   | 29,273,270 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| OTHER  EXPENSE-Net                         |       |                   |        |                                           |       |   |   |   |   |
| Interest expense                           |       | (5,219,617             | )           | (5,229,867                                     | )          | (15,665,102 | ) | (15,822,004 | ) |
| Interest income                            |       | 301,451                |        | 107,514                                        |       | 704,428 |   | 199,468 |   |
| Loss on sale of assets                     |       | (85,301                | )           | (70,140                                        | )          | (126,394 | ) | (104,117 | ) |
| Other income (expense) - net               |       | (429                   | )           | (344                                           | )          | (541 | ) | (1,293 | ) |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| Other expense-net                          |       | (5,003,896             | )           | (5,192,837                                     | )          | (15,087,609 | ) | (15,727,946 | ) |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| INCOME BEFORE  DISTRIBUTIONS TO TRIBE      |       | 6,060,204              |        | 4,147,968                                      |       | 13,358,889 |   | 13,545,324 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| DISTRIBUTIONS TO  TRIBE                    |       | (5,020,000             | )           | (3,000,000                                     | )          | (11,080,000 | ) | (8,180,000 | ) |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| NET INCOME AFTER  DISTRIBUTIONS TO TRIBE   |       | 1,040,204              |        | 1,147,968                                      |       | 2,278,889 |   | 5,365,324 |   |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| FUND  DEFICIT-Beginning of period          |       | (39,186,370            | )           | (43,303,886                                    | )          | (40,425,054 | ) | (47,521,242 | ) |
|                                       |       |                   |        |                                           |       |   |   |   |   |
| FUND DEFICIT-End of  period                |       | $                      | (38,146,166 | )                                              | $          | (42,155,918 | ) | $ | (38,146,165 | ) | $ | (42,155,918 | ) |

 

The accompanying notes are anintegral part of these unaudited financial statements.

3

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**RIVER ROCKENTERTAINMENT AUTHORITY**

**(A Governmental Instrumentality of the Dry Creek RancheriaBand of Pomo Indians)**

**CONDENSED****STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                                    | ** ** | **Nine-Month**         | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **Period Ended**  | ** ** |
| ** **                                                                                                    | ** ** | **September 30,** | ** ** |
| ** **                                                                                                    | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                                                                                    | ** ** | ** **             | ** ** | **(as restated, see  note 15)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                        |       |                   |       |   |   |
| Cash received from gaming winnings and concessions                                                            |       | $                      | 97,102,908 |   | $ | 100,235,266 |   |
| Cash paid for salaries and benefits                                                                           |       | (21,206,224            | )          | (22,935,112 | ) |
| Cash paid to suppliers                                                                                        |       | (31,632,771            | )          | (34,617,623 | ) |
| Cash paid for compact revenue sharing trust fund                                                              |       | (1,001,250             | )          | (1,001,250 | ) |
|                                                                                                          |       |                   |       |   |   |
| Net cash provided by operating activities                                                                     |       | 43,262,663             |       | 41,681,281 |   |
|                                                                                                          |       |                   |       |   |   |
| CASH FLOWS FROM  CAPITAL AND RELATED FINANCING ACTIVITIES:                                                    |       |                   |       |   |   |
| Payments of long-term debt                                                                                    |       | (197,564               | )          | (10,454,846 | ) |
| Purchases of property and equipment                                                                           |       | (3,835,719             | )          | (16,687,893 | ) |
| Change in restricted cash                                                                                     |       | 147,188                |       | 8,796,633 |   |
| Interest paid                                                                                                 |       | (9,770,894             | )          | (10,002,800 | ) |
| Credit enhancement fee                                                                                        |       | (5,629,375             | )          | (5,491,580 | ) |
| Proceeds from sale of assets                                                                                  |       | 27,350                 |       | 9,500 |   |
| Other                                                                                                         |       | 95,754                 |       | 59,493 |   |
|                                                                                                          |       |                   |       |   |   |
| Net cash used in capital and related financing  activities                                                    |       | (19,163,260            | )          | (33,771,493 | ) |
|                                                                                                          |       |                   |       |   |   |
| CASH FLOW FROM  NON-CAPITAL FINANCING ACTIVITIES                                                              |       |                   |       |   |   |
| Distributions to the Tribe                                                                                    |       | (11,080,000            | )          | (8,180,000 | ) |
|                                                                                                          |       |                   |       |   |   |
| CHANGE IN CASH  AND CASH EQUIVALENTS                                                                          |       | 13,019,403             |       | (270,212 | ) |
|                                                                                                          |       |                   |       |   |   |
| CASH AND CASH  EQUIVALENTS, Beginning of the period                                                           |       | 17,649,658             |       | 18,618,826 |   |
|                                                                                                          |       |                   |       |   |   |
| CASH AND CASH  EQUIVALENTS, End of the period                                                                 |       | $                      | 30,669,061 |   | $ | 18,348,614 |   |
|                                                                                                          |       |                   |       |   |   |
| RECONCILIATION  OF INCOME BEFORE DISTRIBUTIONS TO TRIBE TO NET CASH PROVIDED BY OPERATING  ACTIVITIES:        |       |                   |       |   |   |
| Income before  Distributions to Tribe                                                                         |       | $                      | 13,358,886 |   | $ | 13,545,324 |   |
|                                                                                                          |       |                   |       |   |   |
| Adjustments to  reconcile income before distributions to tribe to net cash provided by  operating activities: |       |                   |       |   |   |
| Depreciation                                                                                                  |       | 8,615,732              |       | 8,189,691 |   |
| Interest expense                                                                                              |       | 15,665,102             |       | 15,822,004 |   |
| Credit enhancement fee                                                                                        |       | 5,774,547              |       | 5,661,648 |   |
| Loss on sale of assets                                                                                        |       | 126,394                |       | 104,117 |   |
| Changes in operating assets and liabilities:                                                                  |       |                   |       |   |   |
| Accounts receivable                                                                                           |       | (292,909               | )          | (16,481 | ) |
| Inventories                                                                                                   |       | 2,559                  |       | (141,994 | ) |
| Prepaid expenses and other current assets                                                                     |       | (103,488               | )          | (453,527 | ) |
| Accounts payable                                                                                              |       | (490,461               | )          | (995,245 | ) |
| Accrued liabilities                                                                                           |       | 606,301                |       | (34,256 | ) |
| Total adjustments                                                                                             |       | 29,903,777             |       | 28,135,957 |   |
|                                                                                                          |       |                   |       |   |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                                                    |       | $                      | 43,262,663 |   | $ | 41,681,281 |   |
|                                                                                                          |       |                   |       |   |   |
| SUPPLEMENTARY  SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES:                                  |       |                   |       |   |   |
| Acquisition of  property and equipment through third party financing                                          |       | $                      | —     |   | $ | 227,799 |   |
| Acquisition of property  and equipment through accounts payable construction                                  |       | —                 |       | 776,284 |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

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**RIVER ROCK ENTERTAINMENTAUTHORITY (A Governmental Instrumentality of the Dry Creek Rancheria Band of PomoIndians)**

**NOTES TO UNAUDITED FINANCIAL STATEMENTS**

**1.**                           DESCRIPTION OF BUSINESS

RiverRock Entertainment Authority (the “Authority”) is a governmental instrumentalityof the Dry Creek Rancheria Band of Pomo Indians (the “Tribe”), a federallyrecognized Indian tribe. River Rock Casino (the “Casino”) is a governmentaldevelopment project of the Authority. The Casino offers Class III gaming (asdefined by the Indian Gaming Regulatory Act) on tribal land located inGeyserville, California. The legal authority for slot machines and table gamesis provided by the Tribe’s gaming compact with the State of California (the “Compact”),which was entered into in September 1999 and became effective upon approval bythe Secretary of Interior on May 5, 2000. The Compact expires on December 31, 2020.

TheTribe opened a portion of the Casino on September 14, 2002. Followingcompletion of construction, the Casino was fully opened on April 1, 2003.

TheAuthority was formed as an unincorporated instrumentality of the Tribe onNovember 5, 2003 pursuant to a reorganization whereby the Tribe’s gamingbusiness became owned and operated by the Authority. This reorganization wasaccounted for as a reorganization of entities under common control.Accordingly, after the reorganization, the assets and liabilities of the Casino’soperating property were presented by the Authority on a historical-cost basis.

TheAuthority operates as a separate, wholly owned operating unit of the Tribe andis not a separate legal entity. These financial statements reflect thefinancial position and activity of only the Authority and do not purport torepresent the financial position and activity of the Tribe.

Incomebefore distributions to the Tribe was $6,060,204 and $4,147,968 for the threemonths ended September 30, 2006 and 2005, respectively.  A fund deficit of $38,146,166 exists as ofSeptember 30, 2006.   Income beforedistributions to the Tribe was $13,358,889 and $13,545,324 for the nine monthsended September 30, 2006 and 2005, respectively.  The Authority’s current assets exceeded itscurrent liabilities by $18,335,979 as of September 30, 2006. On November 7,2003, the Authority issued $200.0 million in its 93⁄4% Senior Notes, due 2011(the “Notes”), and used a portion of the proceeds to reduce its currentpayables, accruals and debt. The Authority’s ability to fund future debtservice payments is dependent upon the success of the Casino. Managementbelieves that the Casino will attract sufficient patronage levels to continueto provide sufficient cash flows and to repay its indebtedness.

** 2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

The accompanying unaudited condensed financialstatements have been prepared from the records of the Authority without auditand, in the opinion of management, include all adjustments that are normal andrecurring in nature necessary to present fairly the Authority’s financialposition at September 30, 2006, the interim results of operations for thethree month and nine month periods ended September 30, 2006 and 2005, andchanges in cash flows for the nine month periods ended September 30, 2006and 2005. The balance sheet at December 31, 2005, presented herein, hasbeen derived from the audited financial statements of the Authority for theyear then ended December 31, 2005.

Accounting policies followed by the Authority aredescribed in Note 2 to the audited financial statements for the fiscalyear ended December 31, 2005. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted for purposes of presenting the interim condensed financialstatements. Such statements should be read in conjunction with the auditedfinancial statements, including notes thereto, for the year endedDecember 31, 2005.

*Accounting Standards*—The Authority prepares its financial statements in accordance withaccounting principles generally accepted in the United States of America (“generallyaccepted accounting principles”). The financial statements presented areprepared on the accrual basis of accounting from the accounts and financialtransactions of the Authority. Generally accepted accounting principles requirethe Authority to apply all applicable pronouncements of the GovernmentalAccounting Standards Board (“GASB”). The Authority is also required to followFinancial Accounting Standards Board (“FASB”) Statements and Interpretations,Accounting Principles Board Opinions and Accounting Research Bulletins issuedon or before November 30, 1989, unless those pronouncements conflict with orcontradict GASB pronouncements.  TheAuthority is given the option whether to apply all FASB Statements andInterpretations issued after November 30, 1989, except for those that conflictwith or contradict GASB pronouncements. Accordingly, the Authority has electedto implement non-conflicting FASB Statements and Interpretations issued afterNovember 30, 1989.

Thereare differences between financial statements prepared in accordance with GASBpronouncements and those prepared in accordance with FASB pronouncements. Thestatements of revenues, expenses and changes in fund deficit are a combinedstatement under GASB pronouncements. FASB pronouncements allow a statement ofincome or operations and a separate statement of owners’ or shareholders’(deficit) equity, which is where 

5

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distributions to ownerswould be presented under FASB pronouncements. The amount shown as income before distributions to Tribe would not bedifferent if the Authority followed all FASB pronouncements to determine netincome and would be the most comparable amount to net income computed underFASB pronouncements. The Authority is a separate fund of the Tribe, agovernmental entity, and as such there is no owners’ or shareholders’ (deficit)equity as traditionally represented under FASB pronouncements.  The most comparable measure of owners’(deficit) equity is presented on the Authority’s balance sheet as fund(deficit) equity.

*New Accounting Pronouncements*—In March 2003, GASB issued Statement No. 40, *Deposit andInvestment Risk Disclosures***—an amendment of GASB Statement No. 3**,which became effective for the Authority at January 1, 2005. This statementrequires state and local governments to communicate key information aboutdeposit and investment risks. The adoption of this statement did not have amaterial impact on the financial statements of the Authority.

InNovember 2003, GASB issued Statement No. 42, *Accountingand Financial Reporting for Impairment of Capital Assets and for InsuranceRecoveries*, effective for periods beginning after December 15, 2004.This statement establishes accounting and financial reporting standards forimpairment of capital assets. This statement also clarifies and establishesaccounting requirements for insurance recoveries. The adoption of thisstatement did not have a material impact on the financial statements of theAuthority.

*Use of Estimates*—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

*Cash and Cash Equivalents*—The Authority considers all highly liquid investments with a maturityof three months or less at date of purchase as cash equivalents. The carryingamount of cash and cash equivalents approximates its fair value. Cash and cashequivalents include cash on hand, cash on deposit with banks and highly liquidinvestments.  The Federal DepositInsurance Corporation (“FDIC”) has insured $100,000 of the cash on deposit withthe banks. The Authority believes that there is little risk of loss regardingthe uninsured amounts of cash and cash equivalents on deposit with the banks.

*Inventories*—Inventories,consisting principally of gaming supplies and concession items, are stated atthe lower of cost (first-in, first-out) or market.

*Restricted Cash*—Restrictedcash consists of estimated construction expenses for three parking structures,related infrastructure improvements and construction contingencies. It alsoincludes funds that are reserved for additional construction contingencies andthe funds necessary to develop an approximately 18-acre parcel of land adjacentto the Tribe’s reservation. These funds are held in escrow accounts which arerestricted for authorized construction disbursements. These escrow accounts areinvested in CD markets, which generate interest on a monthly basis. The FDIChas insured $100,000 of this balance. The Authority believes that there islittle risk of loss regarding the uninsured amounts of restricted cash held inthe escrow account. Restricted cash was $7,226,293 and $7,373,481 at September30, 2006 and December 31, 2005, respectively. As of September 30, 2006, restricted cash includes amounts available forconstruction of $2,710,421 and land development funds of $4,515,872.

*Deposits and Other Assets*—As of September 30, 2006 and December 31, 2005, deposits and otherassets include $5,195,955 and $5,962,226 in unamortized bond spread, legal feesand other issuance costs related to the issuance of the Notes, $0 and $78,618of equipment deposits, $23,977 and $4,200 of performance deposits and $0 and$36,911 of rental deposits.  Deferredloan costs are amortized using the effective interest method to interestexpense over the term of the related financial arrangement.

*Casino Revenues*—Inaccordance with industry practice, the Authority recognizes as casino revenuethe net win from gaming activities, which is the difference between gaming winsand losses. Casino revenues are net of accruals for anticipated payouts ofprogressive slot jackpots.

*Food, Beverage and Retail*—The Authority recognizes as food, beverage and retail revenues theproceeds from its food, beverage and gift shop sales. The Authority continuesto distribute beverages without cost in the gaming area for playing guests.

*Other Revenues*—Otherrevenues are comprised of commissions on ATM and vending machine transactions.

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*Promotional Allowances*—The retail value of food and beverages provided to customers withoutcharge or at a discount is included in Food, beverage and retail revenues andthen deducted as promotional allowances. Such amounts that are included inFood, beverage and retail revenues for the three months ended September 30,2006 and 2005 are $657,381 and $991,543, respectively.  The amounts included in Food, beverage andretail revenues for the nine months ended September 30, 2006 and 2005 were$1,656,388 and $2,221,922, respectively. The distribution of electronic coupons (e-coupons) to customers areincluded in Casino revenues and are also deducted as promotionalallowances.  The total e-coupons for thethree months ended September 30, 2006 and 2005 were $2,829,145 and $648,675,respectively.  The total e-coupons forthe nine months ended September 30, 2006 and 2005 were $6,570,564 and$1,037,112, respectively.  The redemptionof cash incentives earned by the Players Club members is also recorded aspromotional allowances. The cost of cash incentives for the three months ended September30, 2006 and 2005 were $467,659 and 506,694, respectively, and for the ninemonths ended September 30, 2006 and 2005 were $1,193,370 and $1,103,336,respectively.

*Food and Beverage Costs*—Food and beverage costs include costs associated with food andbeverage, excluding amounts reclassified as Casino expenses.  The estimated costs of providingcomplimentary services are reclassified from food and beverage to Casinoexpenses.  The costs of such serviceswere $823,724 and $976,024 for the three months ended September 30, 2006 and2005, respectively.  The costs of suchservices were $2,853,168 and $2,750,505 for the nine months ended September 30,2006 and 2005, respectively.

*Advertising Costs*—Advertising costs are expensed the first time advertising takes place.Advertising costs included in selling, general and administrative expenses were$921,453 and $2,276,483 for the three months ended September 30, 2006 and 2005,respectively.  Advertising costs for thenine months ended September 30, 2006 and 2005 were $4,344,866 and $6,045,221,respectively.

*Gaming Commission & surveillance expenses*—The Authority pays for various expenses forthe Tribal Gaming Commission and surveillance. Tribal Gaming Commission expenses are reported as Gaming Commission andsurveillance expense on the Statement of Revenues, Expenses and Changes in FundDeficit. Gaming Commission and surveillance expenses for the three months endedSeptember 30, 2006 and 2005 were $672,799 and $623,322, respectively.  Gaming Commission and surveillance expensesfor the nine months ended September 30, 2006 and 2005 were $2,121,531 and$1,991,475, respectively.

*Income Taxes*—Asa governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians,a federally recognized Indian tribe, the Authority is a non-taxable entity forpurposes of federal and state income taxes.

*Distributions to Tribe*—Distributions to Tribe are made up of permitted payments.  They are included in the Statement ofRevenues, Expenses and Changes in Fund Deficit as distributions to Tribeallowed pursuant to the indenture for the Notes.  Monthly permitted payments increased by$20,000 from $1,000,000 to $1,020,000 in April 2006.  Total distributions to the Tribe for thethree months ended September 30, 2006 and 2005 were $5,020,000 and $3,000,000,respectively.   The increase reflectsreimbursements by the Authority to the Tribe of the remaining $1,960,000 forconstruction costs incurred by the Tribe prior to the formation of theAuthority, and are being paid in the third quarter of 2006 with the permittedincrease of $20,000 per month.  Totaldistributions to the Tribe for the nine months ended September 30, 2006 and2005 were $11,080,000 and $8,180,000, respectively. The increase reflectsreimbursements by the Authority to the Tribe for construction costs previouslystated, plus payment of another $680,000 made in the first quarter of 2005, andan increase in the monthly permitted payments in April 2005, from $500,000 permonth to $1,000,000 per month, as a result of final completion of the parkingstructure construction.

**3.       CERTAINRISKS AND UNCERTAINTIES**

TheAuthority’s operations are dependent on the continued licensing andqualification of the Authority by the Tribal Gaming Commission. Such licensingand qualification are reviewed periodically by the Tribal Gaming Commission andregulatory agencies of the State of California. The Authority believes that noevents or circumstances have arisen that would have an adverse effect on theCasino’s ability to continue its licensing and qualification by the TribalGaming Commission or regulatory agencies of the State of California to operatethe Authority.

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**4.       RELATEDPARTIES**

TheAuthority has been constructed on federal land beneficially owned by the Tribe.The Authority does not pay the Tribe for the use of the land.

StartingJanuary 1, 2004, the Authority paid for various expenses for the following departmentsoperated by the Tribe: Tribal Gaming Commission, surveillance, plantoperations, human resources, purchasing and warehousing.  On January 1, 2005, the Authority operatedthe Purchasing and Warehouse departments, and continued to pay expenses for theother departments operated by the Tribe. These departmental expenses include but are not limited to payroll andrelated expenses, legal and other operational expenses.  Under direction of the River RockEntertainment Authority Board and the Tribal Council, the Tribe assumedresponsibility of the Purchasing and Warehouse departments on May 8, 2006.  The expenses associated with the Purchasingand Warehouse departments incurred by the Tribe are included in these amountsand will be reimbursed to the Tribe by the Authority as with other Tribaldepartments.

Totalamounts billed by the Tribe for these departments, excluding Tribal GamingCommission and surveillance, were $830,437 and $284,006 for the three monthsended September 30, 2006 and 2005, respectively. They are recorded as acomponent of selling, general and administrative expenses. Total amounts billedby the Tribe for these departments were $2,122,187 and $887,184 for the ninemonths ended September 30, 2006 and 2005, respectively.

 The Authority pays for various expenses forthe Tribal Gaming Commission and surveillance. Effective July 1, 2005, theTribal Gaming Commission adopted a regulation on payments of regulatory feesfrom the Authority.  Tribal GamingCommission and surveillance expenses are being recorded in Gaming Commissionand surveillance expenses on the Statement of Revenues, Expenses and Changes inFund Deficit.  Gaming Commission andsurveillance expenses for the three months ended September 30, 2006 and 2005 were$672,799 and $623,322, respectively. Gaming Commission and surveillance expenses for the nine months endedSeptember 30, 2006 and 2005 were $2,121,531 and $1,991,475, respectively.

**5.**                           DEVELOPMENT AND LOAN AGREEMENT

TheTribe entered into a Development and Loan Agreement with Dry Creek Casino, LLC(“DCC”) on August 26, 2001, which has been amended from time to time(as amended, the “Development Agreement”). In consideration of DCC providingcredit enhancement and other services under the Development Agreement, theTribe is obligated to pay DCC the Credit Enhancement Fee. The CreditEnhancement Fee is defined as 20% of the Authority’s net income beforedistributions to the Tribe plus depreciation and amortization plus annualinterest on $25.0 million principal amount of the Notes less revenues fromsales of alcoholic beverages. The Credit Enhancement Fee is required to be paidmonthly for a period of five years commencing on June 1, 2003. The CreditEnhancement Fee was $2,305,385 and $1,861,997 for the three months ended September30, 2006 and 2005, respectively.  TheCredit Enhancement Fee was $5,767,012 and $5,661,648 for the nine months endedSeptember 30, 2006 and 2005, respectively.

TheAuthority has the right to terminate the Development Agreement by exercising abuy-out option (the “Buy-Out Option”). If exercised, the Authority is obligatedto pay all amounts outstanding with respect to financing, including outstandingdevelopment advances and accrued interest, plus an amount determined bymultiplying the average monthly credit enhancement fee earned during the12-month period immediately preceding the month the buy-out option isexercised, by the number of months remaining in the five-year term. The buy-outfee is required to be paid in equal monthly installments of principal plusinterest at the rate of 12% per annum, on the 15th day of each month over aperiod equal to the remaining term of the Development Agreement.

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**6.         CASH AND CASH EQUIVALENTS ANDRESTRICTED CASH**

Cash and cash equivalentsand restricted cash consisted of the following as of September 30, 2006 andDecember 31, 2005.
|                                                      | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                                 |       |                             |       |                            |       |
| Operating  accounts                                  |       | $                                | 4,995,957  |                            | $          | 5,241,644 |   |
| Money market  accounts                               |       | 17,697                           |       | 62,420                          |       |
| Short-term  investments                              |       | 21,543,626                       |       | 8,988,622                       |       |
| Cash on hand                                         |       | 4,111,781                        |       | 3,356,972                       |       |
|                                                 |       |                             |       |                            |       |
| Cash and cash  equivalents                           |       | 30,669,061                       |       | 17,649,658                      |       |
| Restricted cash                                      |       | 7,226,293                        |       | 7,373,481                       |       |
|                                                 |       |                             |       |                            |       |
| Total cash and cash  equivalents and restricted cash |       | $                                | 37,895,354 |                            | $          | 25,023,139 |   |

 

The Authority’s cash inbanks and cash equivalents (the “Investments”) are categorized by level ofcredit risk assumed by the Authority. Category 1 includes investments thatare insured or registered or for which the investments are held by theAuthority or its agent in the Authority’s name. Category 2 includesuninsured and unregistered investments for which the investments are held bythe counterparty’s trust department or agent in the Authority’s name.Category 3 includes uninsured and unregistered investments for which theinvestments are held by the counterparty’s agent but not in the Authority’sname. At September 30, 2006, the Authority had $200,000 in Category 1investments, $4,895,957 cash in banks, $17,697 in money market accounts and$21,543,626 in short-term investments, which are Category 2 investments, and$7,126,293 restricted cash in bank over the FDIC insurance limits, which areCategory 3 investments.  Amounts inCategory 2 and Category 3 investments are invested in short-term, highly liquidcash equivalents and investments.  As ofSeptember 30, 2006 and December 31, 2005, these amounts are composed of moneymarket accounts in the amount of $17,697 and $62,420, respectively, and A1/P1bonds in the amount of $21,543,626 and $8,988,622, respectively.

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**7.**                           PROPERTY AND EQUIPMENT

Property and equipment at January 1, 2006 and September 30, 2006consisted of the following:
|                                    | ** ** | **Balance,**        | ** **  | ** **    | ** ** | ** **       | ** ** | **Balance,**           | ** ** |
|------------------------------------|------------|---------------------|-------------|---------------|------------|------------------|------------|------------------------|------------|
| ** **                         | ** ** | **January 1,** | ** **  | ** **    | ** ** | ** **       | ** ** | **September 30,** | ** ** |
| ** **                         | ** ** | **2006**            | ** **  | **Additions** | ** ** | **Dispositions** | ** ** | **2006**               | ** ** |
|                               |       |                |        |          |       |             |       |                   |       |
| Buildings and improvements         |       | $                   | 128,858,771 |          | $          | 357,023          |       | $                      | —     |   | $ | 129,215,794 |   |
| Furniture,  fixtures and equipment |       | 26,015,944          |        | 1,148,171     |       | (734,600         | )          | 26,429,515             |       |
| Less accumulated  depreciation     |       | (21,801,767         | )           | (8,615,732    | )          | 608,206          |       | (29,809,293            | )          |
|                               |       | 133,072,948         |        | (7,110,538    | )          | (126,394         | )          | 125,836,016            |       |
| Construction in progress           |       | 1,819,271           |        | 2,486,300     |       | —           |       | 4,305,571              |       |
|                               |       |                |        |          |       |             |       |                   |       |
| Property and equipment—net    |       | $                   | 134,892,219 |          | $          | (4,624,238       | )          | $                      | (126,394   | ) | $ | 130,141,587 |   |

 

**Construction in progress consists ofpayments or amounts owed to various vendors related to the Authority’s masterplan development and land improvements. Substantially all of the Authority’spersonal property is pledged as collateral to secure its debt.  At September 30, 2006 and 2005, the Authorityhad $256,840 and $314,808 in capital lease assets with related accumulateddepreciation of $51,685 and $32,494, respectively.**

**8.         ACCRUED LIABILITIES**

Accruedliabilities consisted of the following as of September 30, 2006 and December31, 2005:
|                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                        |       |                   |       |                  |       |
| Accrued in-house  progressive slot jackpots |       | $                      | 758,158    |                  | $          | 495,588 |   |
| Accrued payroll  and related benefits       |       | 2,005,443              |       | 1,677,290             |       |
| Accrued interest                            |       | 8,125,000              |       | 3,250,000             |       |
| Accrued credit  enhancement fees            |       | 830,831                |       | 685,659               |       |
| Accrued other  expenses                     |       | 232,960                |       | 355,019               |       |
| Total accrued  liabilities                  |       | $                      | 11,952,392 |                  | $          | 6,463,556 |   |

 

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**9.**                           LONG-TERM DEBT

Long-term debt consisted of the following as of September 30, 2006 andDecember 31, 2005:
|                                                                                                | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2006**               | ** **  | **2005**              | ** ** |
|                                                                                           |       |                   |        |                  |       |
| 9 3/4% Senior  Notes, net of unamortized issue discount of $1,714,351 and $1,967,289 due  2011 |       | $                      | 198,285,649 |                  | $          | 198,032,711 |   |
| Vehicle and Slot  Notes                                                                        |       | 184,436                |        | 51,937                |       |
| Capital lease  obligations                                                                     |       | 252,804                |        | 262,106               |       |
| Total Long-Term  Debt                                                                          |       | 198,722,889            |        | 198,346,754           |       |
| Less: current  portion                                                                         |       | (119,449               | )           | (103,545              | )          |
|                                                                                           |       |                   |        |                  |       |
| Total long-term debt -  net of current maturities                                              |       | $                      | 198,603,440 |                  | $          | 198,243,209 |   |

 

OnNovember 7, 2003, the Authority issued the Notes. The proceeds were utilized tofund an expansion project, which includes three parking structures and relatedinfrastructure improvements, repayment of various debt and advances and fundpayment of various accruals and payables, as well as to increase cash on hand.The proceeds were also utilized to fund a land purchase and settlelitigation.  The Notes are collateralizedby a first priority pledge of the Authority’s revenue and substantially all ofthe existing and future tangible and intangible personal property. BeforeNovember 1, 2007, the Authority may redeem the Notes, in whole or in part, at aredemption price equal to 100% of their principal amount plus a make-wholepremium and accrued and unpaid interest. On or after November 1, 2007, theAuthority may redeem the Notes, in whole or in part, at a redemption price thatis at a premium to the principal amount of the Notes (expressed as percentagesof principal amount), plus accrued and unpaid interest.

**10.**                    LEASES

TheAuthority leases a Sprung structure, which is accounted for as an operatinglease. Such lease expense was $108,690 and $115,083 for the three months endedSeptember 30, 2006 and 2005, respectively.  This lease expense was $346,600 and $377,214 for the nine months endedSeptember 30, 2006 and 2005, respectively. The Authority renewed the lease agreement on August 17, 2005 for $36,230per month for twenty four months ending August 17, 2007.

OnOctober 1, 2003, the Tribe entered into a five year operating leaseagreement for office and warehouse space to replace existing facilities.  Prior to the Tribe taking control over thePurchasing and Warehouse departments, the Authority reimbursed the Tribe forlease fees allocated based on the square footage utilized.  Since May of 2006, when the Tribe assumed responsibilityfor the Purchasing and Warehouse departments, the Authority no longerreimburses the Tribe lease fees.  TheAuthority reimbursed the Tribe for such lease fees in the amount of $0 and$115,094 for the three months ended September 30, 2006 and 2005, respectively, and$256,681 and $352,438 for the nine months ended September 30, 2006 and 2005,respectively.

OnSeptember 1, 2004, the Authority entered into a five year capital lease topurchase two licenses to operate three-card poker tables in the amount of$120,000.  The capital lease is at 7.25%interest with monthly lease fees of $2,390 and a $1 buyout at the end of thelease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 13 Multi-deck shufflers in the amount of $88,307.  The capital lease is at 7.09% interest withmonthly lease fees of $2,730 and a $1 buyout at the end of the lease term.

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OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 6 King shufflers in the amount of $61,422.  The capital lease is at 7.09% interest withmonthly lease fees of $1,899 and a $1 buyout at the end of the lease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital lease topurchase 4 Ace shufflers in the amount of $45,283.  The capital lease is at 7.09% interest withmonthly lease fees of $1,400 and a $1 buyout at the end of the lease term.

OnApril 27, 2006 the Authority entered into a thirty six month capital lease topurchase 5 Deckmate shufflers in the amount of $67,828.  The capital lease is at 7.92% interest withmonthly lease fees of $2,387 and a $1 buyout at the end of the lease term.

Leaseexpenses were $119,184 and $260,668 for the three months ended September 30,2006 and 2005, respectively, and $390,526 and $793,481 for the nine monthsended September 30, 2006 and 2005, respectively.  Lease expenses are included in general andadministrative expenses in the accompanying statement of revenues, expenses andchanges in fund deficit.

Expectedremaining payments under operating leases are $115,385, $268,290, $7,631,$2,910 and $1,213 for the years ending December 31, 2006, 2007, 2008, 2009 and2010, respectively. Expected remaining payments under capital leases are$26,665, $111,141, $88,762, $26,246 and $0 for the years ending December 31,2006, 2007, 2008, 2009 and 2010, respectively.

**11.    LEGALMATTERS**

*SonomaCounty Fire Marshal Inspection Case*

OnOctober 7, 2002, the Sonoma County Fire Chief (the “County Fire Chief”) filedan *ex parte* application for aninspection warrant in the Superior Court of the State of California for theCounty of Sonoma, seeking to inspect the casino. The Tribe believes that thereis no basis for the County’s Fire Chief to assert jurisdiction over the Tribe’slands, which are governed by tribal and federal law and the Compact. On October9, 2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand, whichsuch motion was denied by the court and subsequently moved for summaryjudgment. The Tribe moved to dismiss under Federal Rules of Civil procedure12(b)(6) and 12(b)(7). On December 9, 2004, the Court issued an order grantingin part and denying in part the Tribe’s 12(b)(6) motion and denying the CountyFire Chief’s summary judgment motion. The order reaffirmed the Court’s priorruling denying the remand of that Public Law 280 does not authorize the CountyFire Chief to inspect the casino. On March 1, 2005, the Court issued an ordergranting in part and denying in part the Tribe’s 12(b)(7) motion. On March 4,2005, the Tribe moved for summary judgment, and on April 29, 2005, the Courtgranted the Tribe’s motion. The County Fire Chief filed a Notice of Appeal onMay 26, 2005, at the Ninth Circuit Court of Appeals. Briefing was completed atthe Ninth Circuit on November 8, 2005. The case has not yet been set for oralargument.

*California Department of Alcoholic Beverage Control*

OnSeptember 13, 2004, the Department of Alcoholic Beverage Control (“ABC”) deniedthe Tribe’s application for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, an Administrative LawJudge (“ALJ”) heard the Tribe’s appeal of the ABC’s denial and recommended thatthe ABC reverse itself and approve the license. On August 25, 2005, the ABCannounced effective October 11, 2005, it would adopt the ALJ decision toapprove the license transfer pending a hearing on protests filed by citizensand government officials. The ABC has received over 65 protests against thelicense from citizens and government officials. The ABC held a hearing on theprotests on March 9, 2006. Following the close of the hearing, a new Californiacourt decision, *Coffin v. Alcoholic Beverage Control AppealsBoard*, 139 Cal. App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  A preliminary hearing was held on November 2,2006, to determine which 

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issues need to bereheard in light of the Coffin decision. The ALJ ordered that a definitive list of issues will be finalized onJanuary 20, 2007, and the final hearing on protests is scheduled for the twoweeks beginning April 23, 2007.  Thedecision to approve or deny the license transfer application may be appealed byany parties to the proceeding so long as the appeal is filed within forty daysof the ABC’s decision. The first appeal is to the ABC Appeals Board, and itsdecision may be appealed to the California State court system.

TheAuthority is involved in other litigation and disputes from time to time in theordinary course of business with vendors and patrons. The Authority believesthat the aggregate liability, if any, arising from such litigation or disputeswill not have a material adverse effect on its results of operations, financialcondition or cash flows.

**12.**                    COMPACTREVENUE SHARING TRUST FUND

TheCompact requires the Authority to pay a quarterly fee to the State of California’srevenue sharing trust fund, based on the number of licensed gaming devicesoperated by the Tribe. Revenue sharing trust fund fees assessed were $333,750for the three months ended September 30, 2006 and 2005 and $1,001,250 for thenine months ended September 30, 2006 and 2005, respectively.

**13.****                   ****COMMITMENTS AND CONTINGENCIES**

TheAuthority is an unincorporated instrumentality of the Tribe formed pursuant toa law of the Tribe. While the Authority is not a separate corporation or otherlegal entity distinct from the Tribe, this tribal law allows the Authority toown and operate its business. This tribal law also provides that the Authority’sobligations and other liabilities are not those of the Tribe and that theobligations and liabilities of the Tribe are not those of the Authority. Thislaw is untested and generally has no direct counterpart in other areas of thelaw. If this law should prove to be ineffective at limiting the Authority’sliability, the Authority’s business and assets could become subject to claimsasserted against the Tribe or its assets. Similarly, the Authority would beliable for such claims if the Tribe waived its sovereign immunity to an extentthat allowed enforcement of such claims against the Authority’s business orassets.

TheAuthority renewed an employment agreement with Mr. Norman Runyan on November 8,2005 to continue to serve as the Chief Operations Officer of the Authority.This three year employment agreement commenced on October 14, 2005 and providesMr. Runyan an annual salary of $250,000 and a discretionary bonus, asdetermined by the Tribal Board, of not less than 7% and not more than 25% ofhis annual salary based on various criteria. If Mr. Runyan’s employment is terminated for other reasons set forth inthe employment agreement including death or disability, Mr. Runyan will beentitled to his salary for three months. Either party may terminate the agreement with a 90 day written notice.

TheAuthority entered into an employment agreement with Mr. Shawn Smyth on April13, 2006 to serve as the Chief Executive Officer of the Authority. This twoyear employment agreement commenced as of April 13, 2006, and provides Mr.Smyth an annual salary of $250,000 and a discretionary bonus, as determined bythe Tribal Board, of not more than 25% of his annual salary based on variouscriteria.  If Mr. Smyth’s employment isterminated for other reasons set forth in the employment agreement includingdeath or disability, Mr. Smyth will be entitled to his salary for threemonths.  Either party may terminate theagreement with a 90 day written notice.

**14.****                   ****BENEFIT OBLIGATIONS**

OnApril 1, 2006, the Authority became fully self-insured for its dental benefitsplan. The Authority pays 100% of the dental benefits plan coverage cost foremployees and 50% of the coverage cost for dependents and domestic partnersbased on calculated premiums. Maximum coverage under the dental plan is limitedto $2,000 per covered person per year. All employees working an average of 60hours per pay period are eligible for the dental benefits plan. Administrationof the plan is provided by a third party under an administrative servicesagreement.

OnApril 1, 2006, the Authority became fully self-insured for its medical benefitsplan coverage from $250 to 

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$2,000 of medicalbenefit cost per covered person per year. Employees are responsible for thefirst $250 of medical benefit costs and 20% of the medical benefit costs from$250 to $2,000, while the Authority is responsible for 80% of the medicalbenefit costs. Coverage above $2,000 is provided by a fully insured, highdeductible medical benefits plan. The Authority pays 100% of the medicalbenefits plan coverage cost for employees, and 50% of the coverage cost fordependents and domestic partners based on calculated premiums. Maximum coverageunder the fully self-insured medical benefits plan is limited to $1,400 percovered person per year. All employees working an average of 60 hours per payperiod are eligible for the dental benefits plan. Administration of the plan isprovided by a third party under an administrative services agreement.

The Claims payable, Claims IBNR (incurred but not reported), andInsurance premiums payable for the above self-insured benefits plans arerecorded in Accounts payable trade on the financial statements.

**15.          RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS:**

Subsequent to the filing of the Authority’s quarterly report on Form10-Q for the quarter ended June 30, 2006, the Authority identified certainclassification errors in its recording of promotional allowances and gamingrevenues and losses.  As a result, the Authorityhas restated the accompanying financial statements for the three and nine monthperiods ended September 30, 2005 from amounts previously reported.  The restatement has no impact on Income fromOperations, Net Income Before or After Distributions to the Tribe, the BalanceSheet, or net cash flows.  The impact of therestatement is as follows:
|                                                     | ** ** | **Three-Month Period Ended  September 30, 2005** | ** ** | **Nine-Month Period Ended  September 30, 2005** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **As  previously  reported**                                         | ** ** | **Adj**                                                             | ** ** | **As Restated** | ** ** | **As  previously  reported** | ** ** | **Adj** | ** ** | **As Restated** | ** ** |
| REVENUE                                             |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Casino                                              |       | $                                                                    | 34,788,259 |                                                                | $          | (746,166 | ) | $ | 34,042,093 |   | $ | 101,356,750 |   | $ | (2,130,006 | ) | $ | 99,226,744 |   |
| Food, beverage & retail                         |       | 2,108,605                                                            |       | (162,695                                                            | )          | 1,945,910 |   | 5,512,966 |   | (416,123 | ) | 5,096,843 |   |
| Other                                               |       | 159,069                                                              |       |                                                                |       | 159,069 |   | 508,201 |   |   |   | 508,201 |   |
| Gross Revenues                                      |       | $                                                                    | 37,055,933 |                                                                | $          | (908,861 | ) | $ | 36,147,072 |   | $ | 107,377,917 |   | $ | (2,546,129 | ) | $ | 104,831,788 |   |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Promotional Allowances                              |       | (1,476,730                                                           | )          | (670,182                                                            | )          | (2,146,912 | ) | (3,324,914 | ) | (1,037,095 | ) | (4,362,009 | ) |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net Revenues                                        |       | $                                                                    | 35,579,203 |                                                                | $          | (1,579,043 | ) | $ | 34,000,160 |   | $ | 104,053,003 |   | $ | (3,583,224 | ) | $ | 100,469,779 |   |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| OPERATING  EXPENSES                                 |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Casino                                              |       | $                                                                    | 5,603,438  |                                                                | $          | (680,075 | ) | $ | 4,923,363 |   | $ | 16,196,511 |   | $ | (1,953,020 | ) | $ | 14,243,491 |   |
| Food, beverage & retail                         |       | 1,748,287                                                            |       | (180,591                                                            | )          | 1,567,696 |   | 4,812,267 |   | (376,152 | ) | 4,436,115 |   |
| Selling, general and administrative                 |       | 13,269,422                                                           |       | (718,377                                                            | )          | 12,551,045 |   | 36,926,891 |   | (1,254,052 | ) | 35,672,839 |   |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total Operating  Expenses                           |       | $                                                                    | 26,238,398 |                                                                | $          | (1,579,043 | ) | $ | 24,659,355 |   | $ | 74,779,733 |   | $ | (3,583,224 | ) | $ | 71,196,509 |   |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Cash received  from gaming winnings and concessions |       |                                                                 |       |                                                                |       |   |   | $ | 104,036,522 |   | $ | (3,801,256 | ) | $ | 100,235,266 |   |
|                                                |       |                                                                 |       |                                                                |       |   |   |   |   |   |   |   |   |
| Cash paid to suppliers                              |       |                                                                 |       |                                                                |       |   |   | $ | (38,418,879 | ) | $ | 3,801,256 |   | $ | (34,617,623 | ) |

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

     Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying financialstatements and related notes included in Item 1 of this report.

**Overview**

          *General*

     Wehave historically operated as a separate wholly-owned operating property of theTribe. We were formed as an unincorporated governmental instrumentality of theTribe to own and operate the River Rock Casino. Upon the issuance of our Notes,the Tribe reorganized so that its gaming business became owned and operated byus. This reorganization was accounted for as a reorganization of entities undercommon control. In accordance with 

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Statement of FinancialAccounting Standards 141, “Business Combinations,” the assets and liabilitiesof the Casino are presented by us on a historical cost basis.

     Weoffer Class III slot and video poker gaming machines, house banked table games(including Blackjack, Three card poker, Mini-baccarat and Pai Gow poker),Poker, featuring Texas Hold’em, comprehensive food and non-alcoholic beverageofferings, and goods for sale in our gift shop.

     Ourbusiness has increased since we commenced operations on September 14, 2002,primarily due to increases in the number of gaming positions, as we openedadditional portions of our facility. On April 1, 2003, we opened our food andbeverage facilities and on June 18, 2003, we reached full operation with 1,600slot machines and 16 Table Games. The history of our operations is as follows:

·                  In February2005, we increased the number of our table games from 16 to 24.

·                  On December 2,2005, we removed 3 table games and added 5 Poker tables featuring Texas Hold’em.

     Asof September 30, 2006, we have parking spaces available to accommodate a totalof approximately 1,642 (decreasing from 1,735 due to construction of aretention basin in lot B) customer parked vehicles and 2,100 vehicles whenoperated by a valet service.

**Restatementof Financial Statements**

     Subsequent to the filing of our quarterlyreport on Form 10-Q for the quarter ended June 30, 2006, we identified certainclassification errors in our recording of promotional allowances and gamingrevenues and losses. As a result, we have restated our financial statements forthe three and nine month periods ended September 30, 2005 as discussed inNote 15 to the unaudited condensed financial statements. The ManagementDiscussion and Analysis gives effect to the restatement.

     Dueto the error, we will also be restatingour financial statements for the three fiscal years in the period endedDecember 31, 2005 and our fiscal quarters ended March 31, 2006 and 2005 andJune 30, 2006 and 2005. See Part II, Item 5. Other Information in this Form10-Q for additional discussion on the impact to prior periods.

**CriticalAccounting Policies and Estimates**

     Wehave identified certain critical accounting policies and estimates that affectour more significant judgments and estimates used in the preparation of ourfinancial statements. The preparation of our financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires that we make estimates and judgments that affect the reported amountsof assets and liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities. On an on-going basis, we evaluate thoseestimates, including those related to asset impairment, accruals for ourpromotional slot club, compensation and related benefits, revenue recognition,allowance for doubtful accounts, contingencies and litigation. These estimatesare based on the information that is currently available to us and on variousother assumptions that we believe to be reasonable under the circumstances.Actual results could vary from those estimates under different assumptions orconditions. We believe that the following critical accounting policies affectsignificant judgments and estimates used in the preparation of our financialstatements:

·                  Casino Revenues –In accordance with industry practice, casino revenue is recognized as the netwin from gaming activities, which is the difference between gaming wins andlosses. Casino revenues are net of accruals for anticipated payouts ofprogressive slot jackpots.

·                  Property andEquipment – Property and equipment are stated at cost. Depreciation andamortization are computed using the straight-line method over the estimateduseful lives of the assets as follows:

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Buildings andimprovements                 21 years

Furniture, fixtures and equipment           5 years

·                  We evaluate ourproperty and equipment for impairment in accordance with the FinancialAccounting Standards Board’s Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  When events or circumstances indicate that anasset should be reviewed for impairment, we compare the undiscounted cash flowderived from the asset or asset group to the net carrying value. If impairmentis indicated, the impairment loss is measured by the amount in which thecarrying value of the asset or asset group exceeds its fair value. Fair valueis measured by comparable sales, solicited offers or discounted cash flowmodels.

·                  Accrued ProgressiveSlot Jackpots – Accrued progressive slot jackpots consist of estimates forprizes relating to various games that have accumulated jackpots. We haverecorded the cost of these anticipated payouts as a reduction of casinorevenues and the cost is included as a component of accrued liabilities.

·                  Contingencies –We assess our exposure to loss contingencies, including legal matters, andprovide for an exposure if it is judged to be probable and estimable. If theactual loss from a contingency differs from management’s estimate, operatingresults could be materially impacted. As of September 30, 2006, we havedetermined that no accruals for claims and legal actions are required. Ifcircumstances surrounding claims and legal actions change, the addition ofaccruals for such items in future periods may be required, which accruals maybe material.

There are differences between financial statementsprepared in accordance with Governmental Accounting Standards Board (“GASB”)pronouncements and those prepared in accordance with Financial AccountingStandards Board (“FASB”) pronouncements. The statement of revenues, expensesand fund deficit is a combined statement under GASB pronouncements. FASBpronouncements allow a statement of income or operations and a statement ofowners’ or shareholders’ (deficit) equity, which is where distributions toowners would be presented under FASB pronouncements. The amount shown on ourstatement of revenues, expenses and fund deficit as income before distributionsto the Tribe would not be different if we followed all FASB pronouncements todetermine net income and would be the most comparable amount to net incomecomputed under FASB pronouncements. We are an unincorporated instrumentalitycreated by tribal law and accounted for as a separate fund of the Tribe; assuch there is no owners’ or shareholders’ (deficit) equity as traditionallyrepresented under FASB pronouncements. The most comparable measure of owners’(deficit) equity presented on our balance sheet would be Fund Deficit.

**Results of Operations**

**Comparison of the three monthsended September 30, 2006 and 2005**

*Net revenues*.Our net revenues for the three months ended September 30, 2006 decreased by$0.4 million to $33.6 million from $34.0 million for the three months endedSeptember 30, 2005.  The decrease isattributed to the lack of access to our Casino from the Geyserville Bridge inGeyserville, California which was closed from January 1, 2006 through August 18,2006.  The Geyserville Bridge approach isone of the primary routes to our Casino. The new Geyserville Bridge is expected to better withstand significantlymore rainfall and flooding than the previous bridge.  Approximately 96.6% of our net revenues werefrom our gaming activities in the third quarter 2006. We generated $28.8million, or 86.8% of our net revenues from gaming devices, net of respectivepromotional allowances of $3.2 million, and $3.6 million, or 10.8% of our netrevenues from table games, net of promotional allowance of $0.1 million, forthe three months ended September 30, 2006, compared to $29.3 million fromgaming devices, or 90.0% of our net revenues, net of respective promotionalallowances of $1.1 million, and $3.5 million from table games, net ofrespective promotional allowances of $0.1 million, or 10.1% of our netrevenues, for three months ended September 30, 2005. Our win per slot machineper day was $196 in the third quarter 2006, which decreased by $3 from $199 inthe third quarter 2005.  The change inwin per slot machine per day is attributed to decreased volume of play due tothe lack of access from the Geyserville Bridge.

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     Wegenerated $1.7 million and $1.9 million in food, beverage and retail sales forthe three months ended September 30, 2006 and 2005, respectively.  The retail value of our food and beverageprovided to customers without charge is included in gross revenues and thendeducted as promotional allowances. Such food, beverage and retail allowanceswere $0.7 million and $1.0 million for the three months ended September 30,2006 and 2005, respectively.  The decreasesare attributable to the lower volume of guests dining in the restaurant, due tothe elimination of our mid-week buffet, along with a reduction of menu prices.

*     PromotionalAllowances*. Promotional allowancesfor the three months ended September 30, 2006 were $4.0 million, or 11.8% ofnet revenues, compared to $2.1 million, or 6.3% of net revenues, for the thirdquarter 2005. The increase in promotional allowances is attributable to the expandeduse of e-coupons.  E-coupons cannot becashed out and requires the patron to use their Players Club card.  This technology was not available until late2005.

     *Operating expenses*. Operating expenses forthe three months ended September 30, 2006 were $22.5 million, or 67.0% of netrevenues, compared to $24.6 million, or 72.5% of net revenues, for the thirdquarter 2005. The decrease in operating expenses is attributable to operationalefficiencies, largely due to a hiring freeze, and changing from cashincentives, recorded as operating expense in 2005, to E-coupons in 2006, whichare reflected in promotional allowances. The reason for the change from cashincentives to E-coupons in 2006 versus 2005 was because E-coupon technology wasnot generally available until late 2005. Operating expenses as a percentage of net revenues decreased due to thereduction in operating expenses during the third quarter 2006.

     Casinoexpense includes costs associated with our gaming operations and the allocationof food and beverage expense related to the cost of complimentary activities.Casino expense for three months ended September 30, 2006 increased to $5.2million, or 15.8% of Casino revenues, net of promotional allowances, from $4.9million, or 14.7% of Casino revenues, for the third quarter 2005. The increasein Casino expense is attributable to increased operational and labor costs fromthe establishment of the Poker room, and increases in participation fees onslot machines from the increased number of machines with participatory feearrangements.

     Food,beverage and retail expense for three months ended September 30, 2006 was $1.6million, or 157.2% of food, beverage and retail revenue, net of promotionalallowances, from $1.6 million, or 164.3% of food, beverage and retail revenue,net of promotional allowances for the third quarter 2005. We have increased ouruse of promotional food and beverage as part of our marketing initiatives.  Our food, beverage and retail expense ratiois significantly higher than the industry average because we have utilizedthese amenities as an opportunity to build customer loyalty rather than as asource of income.

     Selling,general and administrative expense for three months ended September 30, 2006decreased by $3.0 million to $9.5 million, or 28.4% of net revenues, from $12.5million, or 36.9% of net revenues, for the third quarter 2005. The decrease inselling, general and administrative expense is attributable to reductions inpayroll from a hiring freeze, during an evaluation of vacant positions fromattrition, higher legal fees in 2005, due to the continued legal processinvolved in our liquor licensing hearings, a reduction in advertising costsfrom restructuring the marketing department’s approach to focus more on direct marketingas well as other operational changes.

   Depreciation expense for three months endedSeptember 30, 2006 was $2.9 million, compared to $2.8 million, for the thirdquarter 2005. Depreciation expense was computed using the straight-line methodover the useful life of property, plant and equipment. The increase indepreciation expense is due to the addition of depreciable assets.

     We have beenpaying the credit enhancement fee since June 2003. The credit enhancement feewas $2.3 million, or 6.9% of net revenues, for three months ended September 30,2006, compared to $1.9 million, or 5.5% of net revenues, for the third quarterof 2005.

     Pursuant to the regulation, the TribalGaming Authority (“TGA”) charged us a flat monthly fee of $235,000 for thefirst quarter 2006, and April and May of the second quarter 2006.  In June 2006, our Board approved a feeincrease to $344,000 to cover all operating expenses incurred by the TGA andsurveillance, which are directly related and necessary to the regulation of theCasino. Following the end of each calendar quarter, the TGA must reconcile themonthly regulatory fee and actual operating expenses and make necessaryadjustments.  The reconciliation of the thirdquarter resulted in the Authority having overpaid the TGA by $0.4 million,which was booked as a receivable and will be repaid during the fourth quarterof 2006. As of July 1, 2005, TGA and surveillance expenses are being recordedin Gaming Commission and surveillance expenses on the

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Statementof Revenues, Expenses and Changes in Fund Balance.  GamingCommission and surveillance expense for three months ended September 30, 2006increased by $0.1 million to $0.7 million, from $0.6 million, for the thirdquarter 2005. This is attributable to increases in regulatory staffing.  Gaming Commission and surveillance costs forthe three months ended September 30, 2006 and 2005 were $0.7 million and $0.6 million,respectively.

TheCompact requires us to pay a quarterly fee to the State of California’s revenuesharing trust fund, based on the number of licensed gaming devices operated bythe Tribe. Revenue sharing trust fund fees assessed were $333,750 for the threemonths ended September 30, 2006 and 2005, respectively.

     *Income from operations.* Income fromoperations for three months ended September 30, 2006 was $11.0 million, or33.0% of net revenues, compared to $9.3 million, or 15.3% of net revenues, forthe third quarter of 2005.  The increasein income from operations is attributable to the decline in selling, generaland administrative expense and an increase in volume of play due to there-opening of the Geyserville Bridge on August 18, 2006.

     *Other expense, net.* Other expense, net forthree months ended September 30, 2006 decreased to $5.0 million, or 14.9% ofnet revenues, from $5.2 million, or 15.3% of net revenues, for third quarter of2005.  Other expense, net included $0.3million of interest income for the three months ended September 30, 2006,compared to $0.1 million of interest income for the third quarter of 2005.

     *Income before distributions to the Tribe*.Income before distributions to the Tribe for three months ended September 30,2006 increased by $1.9 million to $6.0 million, or 18.1% of net revenues, from$4.1 million, or 12.2% of net revenues, in the third quarter of 2005.

**Comparison of the nine monthsended September 30, 2006 and 2005**

     *Net revenues*. Our net revenues for thenine months ended September 30, 2006 decreased by $4.2 million to $96.2million, from $100.4 million, for the nine months ended September 30,2005.  The decrease is attributed to thelack of access to our Casino from the Geyserville Bridge in Geyserville,California which was closed from January 1, 2006 through August 18, 2006.  The Geyserville Bridge approach is one of theprimary routes to our Casino.  The newGeyserville Bridge is expected to better withstand significantly more rainfalland flooding than the previous bridge. Approximately 96.4% of our net revenues were from our gaming activitiesin the first nine months of 2006. We generated $82.1 million, or 92.9% of ournet revenues from gaming devices, net of respective promotional allowance of$7.6 million, and $10.7 million, net of respective promotional allowances of$0.2 million, or 11.3% of our net revenues from table games, for the ninemonths ended September 30, 2006, compared to $87.4 million from gaming devices,net of respective promotional allowances of $1.0 million or 87.0% of our netrevenues, and $10.8 million from table games, net of respective promotionalallowances of $0.1 million or 10.7% of our net revenues, for nine months endedSeptember 30, 2005. Our win per slot machine per day was $187 in the first ninemonths of 2006, which decreased by $13 from $200, in the first nine months of2005.  The change in win per slot machineper day is attributed to decreased volume of play due to the lack of accessfrom the Geyserville Bridge.

     Wegenerated $4.6 million and $5.1 million in food, beverage and retail sales forthe nine months ended September 30, 2006 and 2005, respectively.  The retail value of our food and beverageprovided to customers without charge is included in gross revenues and thendeducted as promotional allowances. The cost of such allowances were $1.7million and $2.2 million for the nine months ended September 30, 2006 and 2005,respectively.

*PromotionalAllowances*. Promotional allowancesfor the nine months ended September 30, 2006 were $9.4 million, or 9.8% of netrevenues, compared to $4.4 million, or 4.3% of net revenues, for the ninemonths ended September 30, 2005. The increase in promotional allowances isattributable to the expanded use of e-coupons. E-coupons cannot be cashed out and requires the patron to use their PlayersClub card.  This technology was notavailable until late 2005.

*Operatingexpenses*. Operating expenses forthe nine months ended September 30, 2006 were $67.8 million, or 70.4% of netrevenues, compared to $71.2 million, or 70.9% of net revenues, for the thirdquarter 2005. The decrease in operating expenses is attributable to operationalefficiencies, largely due to a hiring freeze and changing from cash incentivesbeing recorded as an operating expense in 2005, to E-coupons in 2006, which arereflected in

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promotional allowances.The reason for the change from cash incentives to E-coupons in 2006 versus 2005was because E-coupon technology was not generally available until late2005.  Operating expenses as a percentageof net revenues decreased due to the reduction in operating expenses during thethird quarter 2006.

     Casinoexpense includes costs associated with our gaming operations and the allocationof food and beverage expense related to the costs of complimentary activities.Casino expense for nine months ended September 30, 2006 increased to $15.2million, net of promotional allowance, or 16.2% of Casino revenues, from $14.2million, or 13.7% of Casino revenues, net of promotional allowances, for thefirst nine months of 2005.  The increasein Casino expense is attributable to increased operational costs from theestablishment of the Poker room, increase in labor costs in gaming operationsand an increase in participation fees on slot machines.

     Food, beverage and retail expense for ninemonths ended September 30, 2006 was $4.6 million, or 152.8% of food, beverageand retail revenue, net of promotional allowances, increasing from $4.4million, or 154.3% of food, beverage and retail revenue, net of promotionalallowances, for the first nine months of 2005. We have increased our use of promotional food and beverage as part ofour marketing initiatives.  Our food,beverage and retail expense ratio is significantly higher than the industryaverage because we have utilized these amenities as an opportunity to buildcustomer loyalty rather than as a source of income.

     Selling,general and administrative expense for nine months ended September 30, 2006decreased by $5.1 million to $30.5 million, or 31.7% of net revenues, from$35.7 million, or 35.5% of net revenues, for the first nine months of 2005. Thedecrease in selling, general and administrative expense is attributable toreductions in payroll from a hiring freeze, during an evaluation of vacantpositions from attrition, higher legal fees in 2005 due to the liquor licensinghearings, reduction in advertising costs from restructuring the marketingdepartment’s approach to focus more on direct marketing, as well as otheroperational changes.

     Depreciationexpense for nine months ended September 30, 2006 was $8.6 million, compared to$8.2 million, for the first nine months of 2005. Depreciation expense wascomputed using the straight-line method over the useful life of property, plantand equipment. The increase in depreciation expense is due to the addition ofdepreciable assets.

     The creditenhancement fee was $5.8 million, or 6.0% of net revenues, for nine monthsended September 30, 2006, compared to $5.7 million, or 5.6% of net revenues,for the first nine months of 2005. The increase in credit enhancement fee isdirectly attributable to the increase in net income.

     Pursuant to the regulation, the TribalGaming Authority (“TGA”) charged us a flat monthly fee of $235,000 for thefirst quarter 2006, and April and May of the second quarter 2006.  In June 2006, our Board approved a feeincrease to $344,000 to cover all operating expenses incurred by the TGA andsurveillance, which are directly related and necessary to the regulation of theCasino. Following the end of each calendar quarter, the TGA must reconcile themonthly regulatory fee and actual operating expenses and make necessaryadjustments.  The reconciliation of thethird quarter resulted in the Authority having overpaid the TGA by $0.4million, which was booked as a receivable and will be repaid during the fourthquarter of 2006. As of July 1, 2005, TGA and surveillance expenses are beingrecorded in Gaming Commission and surveillance expenses on the Statement ofRevenues, Expenses and Changes in Fund Balance. Gaming Commission andsurveillance expense for nine months ended September 30, 2006 increased by $0.1million to $2.1 million, from $2.0 million, for the nine months ended September30, 2005. This is attributable to increases in regulatory staffing.  Gaming Commission and surveillance costs forthe nine months ended September 30, 2006 and 2005 were $2,121,531 and$1,991,475, respectively.

     Compactrevenue sharing trust fund expense remained the same at $1.0 million for ninemonths ended September 30, 2006 and 2005.

     *Income from operations.* Income fromoperations for nine months ended September 30, 2006 was $28.4 million, or 29.6%of net revenues, compared to $29.3 million, or 29.1% of net revenues, for thefirst nine months of 2005.  The decreasein income from operations is attributable to the decrease in volume of play dueto the Geyserville Bridge closure from January 1, 2006 to August 18, 2006, andthe increase in Casino, Gaming Commission and Surveillance operating expenses.

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     *Other expense, net.* Other expense, net fornine months ended September 30, 2006 decreased to $15.1 million, or 15.7% ofnet revenues, from $15.7 million, or 15.7% of net revenues, for the first ninemonths of 2005.  Other expense, netincluded $0.7 million of interest income for the nine months ended September30, 2006, compared to $0.2 million of interest income, for the nine monthsended September 30, 2005.

     *Income before distributions to the Tribe*.Income before distributions to the Tribe for nine months ended September 30,2006 decreased by $0.2 million to $13.3 million, or 13.9% of net revenues, from$13.5 million, or 13.5% of net revenues, in the first nine months of 2005.

**Liquidityand Capital Resources**

     Sinceour inception, we have funded our capital expenditures and working capitalrequirements primarily through debt financing, gaming equipment supplierfinancing, and other financing and operating cash flow.

     ThroughSeptember 30, 2006, we spent $0.8 million on the development of anapproximately 18-acre parcel of land adjacent to the Tribe’s reservation(referred to as the “Dugan Property”) which is expected to include anadditional access road to our Casino. We have $4.5 million remaining in arestricted account funded from the proceeds of our Notes Offering for thedevelopment of the Dugan Property.

     Ourcapital expenditures for the nine months ended September 30, 2006 and 2005 were$3.8 million and $16.7 million, respectively. The decrease in 2006 isattributable to the completion of our expansion project in 2005.  Our capital expenditures for 2006 consistedprimarily of a series of minor infrastructure improvements.

     ThroughSeptember 30, 2006, we had cash and cash equivalents net of restricted cash of$30.7 million, as compared to $17.6 million, as of December 31, 2005. As ofSeptember 30, 2006, we had restricted cash of $7.2 million, as compared to $7.4million, as of December 31, 2005. Our principal source of liquidity during thenine months ended September 30, 2006 consisted of cash flow from operatingactivities. Net cash provided by operating activities for the nine months endedSeptember 30, 2006 was $43.3 million, an increase of $1.6 million from $41.7million in 2005. The increase in our net cash provided by operations is aresult of decreased amounts paid to suppliers and decreased labor costs in2006.

     Restrictedcash consists of net proceeds from the Notes Offering and investment earningsthereon set aside in construction financing accounts for construction costs forthe three parking structures, related infrastructure improvements andconstruction contingencies. It also includes funds that are reserved foradditional construction contingencies and the funds for the development of theDugan Property. Our restricted cash is held in escrow accounts that can only beused for authorized construction disbursements until the related projects arecompleted.

     Netcash used for capital and related financing activities for the nine monthsended September 30, 2006 was $19.2 million, compared to $33.8 million, for thenine months ended September 30, 2005. Cash flow used in capital and related financing activities was primarilyfor payment of the credit enhancement fee and interest payments.  Cash flow used in non-capital financingactivities for the nine months ended September 30, 2006 was $11.1 million, anincrease of $2.9 million from $8.2 million, for the nine months ended September30, 2005.  Cash flow used in non-capitalfinancing activities consisted of distributions to the Tribe.  The increase is due to permitted increase indistributions pursuant to the terms of our Indenture for the Notes.  On April 1, 2006, our monthly payments to theTribe increased from $1.0 million to $1.02 million under the Indenture. Tribaldistributions in the third quarter also included the final reimbursement to theTribe for the construction costs previously paid for by the Tribe before the formationof the Authority.  The final one-timepayment of $2.0 million of the original $3.2 million, contributed by theTribe for these construction costs, was repaid in the third quarter of2006.  Through September 30, 2006 and2005 we had total distributions to the Tribe of $11.1 million and $8.2million, respectively.

     Webelieve that existing cash balances, cash from operations, as well as permitteddisbursements from our restricted cash escrow accounts will provide adequatefunds for our working capital needs, planned capital expenditures and debtservice requirements for the foreseeable future. However, our ability to fundour operations, make planned capital expenditures, make scheduled debt paymentsand refinance our indebtedness depends on our future operating performance andcash flow, which in turn, are subject to prevailing economic conditions and to

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financial, business andother factors, some of which are beyond our control. Additionally, theIndenture limits our ability to incur additional indebtedness.

**Contractual Obligations as ofSeptember 30, 2006**

     The followingtable summarizes our contractual obligations and commitments as of September30, 2006:
|                                 | ** ** | **Total** | ** **  | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **Thereafter** | ** ** |
|---------------------------------|------------|-----------|-------------|-----------------|------------|--------------------|------------|--------------------|------------|----------------|------------|
| Long-term debt  obligations (a) |       | $         | 200,184,436 |            | $          | 166,597            |       | $                  | 14,913     |           | $          | 2,926 |   | $ | 200,000,000 |   |
| Operating lease  obligations    |       | 430,778   |        | 394,770         |       | 23,991             |       | 12,017             |       | —         |       |
| Capital lease  obligations      |       | 252,781   |        | 109,294         |       | 143,487            |       | —             |       | —         |       |
|                            |       |      |        |            |       |               |       |               |       |           |       |
| Total obligations (b)           |       | $         | 200,867,995 |            | $          | 670,661            |       | $                  | 182,391    |           | $          | 14,943 |   | $ | 200,000,000 |   |

 

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(a)      Excluded from long-term debt obligations aboveare interest payments of $19.5 million in 1 year; $39.0 million in 2-3 years;$39.0 million in 4-5 years and $16.4 million in more than 5 years.

(b)     The Compact requires usto pay a quarterly fee of $0.3 million to the RSTF based on the number of ourlicensed gaming devices. Total obligations do not include the RSTF  payments.

**Regulationand Taxes**

     Weare subject to extensive regulation by the TGA, the CGCC and the NationalIndian Gaming Commission. Changes in applicable laws or regulations could havea significant impact on our operations.

Wehad initially applied for a liquor license for our Casino in 2002. On September 13, 2004, the Departmentof Alcoholic Beverage Control (“ABC”) denied the Tribe’s application for aliquor license based on the State Fire Marshal’s interpretation of the UniformBuilding Code. In May 2005, an Administrative Law Judge (“ALJ”) heard the Tribe’sappeal of the ABC’s denial and recommended that the ABC reverse itself andapprove the license. On August 25, 2005, the ABC announced effective October11, 2005, it would adopt the ALJ’s decision to approve the license transferpending a hearing on protests filed by citizens and government officials. TheABC has received over 65 protests against the license from citizens andgovernment officials. The ABC held a hearing on the protests on March 9, 2006.Following the close of the hearing, a new California court decision, Coffin v.Alcoholic Beverage Control Appeals Board, 139 Cal. App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  A preliminary hearing was held on November 2,2006, to determine which issues need to be reheard in light of the Coffindecision.  The ALJ ordered that adefinitive list of issues will be finalized on January 20, 2007, and the finalhearing on protests is scheduled for the two weeks beginning April 23,2007.  The decision to approve or denythe license transfer application may be appealed by any parties to theproceeding so long as the appeal is filed within forty days of the ABC’sdecision. The first appeal is to the ABC Appeals Board, and its decision may beappealed to the California State court system.

     Sincewe are an unincorporated governmental instrumentality of the Tribe located onreservation land held in trust by the United States of America, we are notsubject to federal or state income taxes. Various efforts have been made inCongress over the past several years to enact legislation that would subjectthe income of tribal governmental business entities, such as us, to federalincome tax. Although no such legislation has been enacted, similar legislationcould be passed in the future. It is not possible to determine with certaintythe likelihood of possible changes in tax law or in the administration of suchlaw. Such changes, if adopted, could have a material adverse effect on ouroperating results and cash flow from operations.

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**Impactof Inflation**

     Absentchanges in competitive and economic conditions or in specific prices affectingthe casino industry, we do not expect that inflation will have a significantimpact on our gaming facility operations. Changes in specific prices, such asfuel and transportation prices, relative to the general rate of inflation mayhave a material adverse effect on the casino industry in general.

**Seasonality**

     Activityat our gaming facility is modestly seasonal with stronger results expectedduring the summer due in part to the relatively higher levels of tourism duringsuch times of the year. In addition, our operations may be impacted by adverseweather conditions and fluctuations in the tourism business. Accordingly, our resultsmay fluctuate from quarter to quarter and the results of one quarter may not beindicative of results expected from future quarters.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk is the risk ofloss arising from adverse changes in market rates and prices, such as interestrates, foreign currency exchange rates and commodity prices.

ThroughSeptember 30, 2006, we had not invested in derivative or foreign currency-basedfinancial instruments.  Additionally, weprimarily have invested in short-term, fixed rate debt.  As such, we do not believe we have materialexposure to market risk.

**ITEM4.  CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

         We maintain disclosure controls andprocedures that are designed to ensure that the information required to bedisclosed in our reports filed with, or furnished to, the SEC, pursuant to theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules, regulations and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer, ChiefFinancial Officer and Chief Operations Officer, as appropriate, to allow timelydecisions regarding required disclosure based on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Ourdisclosure controls and procedures are designed to provide reasonable assurancesof achieving its objectives.

Our Chief Executive Officer and Chief Financial Officer for the periodcovered by the report, have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Exchange Act Rules 240.13a –15(e) and 15d – 15(e)) as of the end of the quarterly period ended September30, 2006.  Based on that evaluation, theyhave concluded that our disclosure controls and procedures as of the end of theperiod covered by this report are effective in reaching that level ofreasonable assurance.

**Changes to Internal Controls Over FinancialReporting**

A change infinance personnel (the CFO position) during the quarter endedSeptember 30, 2006 led to the discovery of errors in the application ofGAAP in prior periods. Those errors related to the previous improperclassification of complimentary services and non-cash revenues sources as bothrevenues and offsetting operational expenses which did not follow GAAP, theIndustry Audit Guide for Casinos, or casino industry practices. The classificationerrors resulted in overstated revenues and overstated expenses, as previouslyreported, and require restatement of prior quarter and annual financialstatements as discussed in Note 15 to the unaudited condensed financialstatements and in Item 5, Other Information.

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** **
| **PART II.** | **OTHER INFORMATION** |
|--------------|-----------------------|
| ** **   | ** **            |
| **ITEM 1.**  | **LEGAL PROCEEDINGS** |

 

*SonomaCounty Fire Marshal Inspection Case*

OnOctober 7, 2002, the Sonoma County Fire Chief (the “County Fire Chief”) filedan *ex parte* application for aninspection warrant in the Superior Court of the State of California for theCounty of Sonoma, seeking to inspect the casino. The Tribe believes that thereis no basis for the County’s Fire Chief to assert jurisdiction over the Tribe’slands, which are governed by tribal and federal law and the Compact. On October9, 2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand, whichsuch motion was denied by the court and subsequently moved for summaryjudgment. The Tribe moved to dismiss under Federal Rules of Civil procedure12(b)(6) and 12(b)(7). On December 9, 2004, the Court issued an order grantingin part and denying in part the Tribe’s 12(b)(6) motion and denying the CountyFire Chief’s summary judgment motion. The order reaffirmed the Court’s priorruling denying the remand of that Public Law 280 does not authorize the CountyFire Chief to inspect the casino. On March 1, 2005 the Court issued an ordergranting in part and denying in part the Tribe’s 12(b)(7) motion. On March 4,2005, the Tribe moved for summary judgment, and on April 29, 2005, the Courtgranted the Tribe’s motion. The County Fire Chief filed a Notice of Appeal onMay 26, 2005, at the Ninth Circuit Court of Appeals. Briefing was completed atthe Ninth Circuit on November 8, 2005. The case has not yet been set for oralargument.

*California Department of Alcoholic Beverage Control*

OnSeptember 13, 2004, the Department of Alcoholic Beverage Control (“ABC”) deniedthe Tribe’s application for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, an Administrative LawJudge (“ALJ”) heard the Tribe’s appeal of the ABC’s denial and recommended thatthe ABC reverse itself and approve the license. On August 25, 2005, the ABCannounced effective October 11, 2005, it would adopt the ALJ decision toapprove the license transfer pending a hearing on protests filed by citizensand government officials. The ABC has received over 65 protests against thelicense from citizens and government officials. The ABC held a hearing on theprotests on March 9, 2006. Following the close of the hearing, a new Californiacourt decision, *Coffin v. Alcoholic Beverage Control AppealsBoard*, 139 Cal. App. 4th 471, 43 Cal. Rptr. 3d 420 (2006), changed theburden of proof in ABC license protest hearings from the protestors to theapplicant.  As a result of that decision,the ALJ suspended post-hearing briefing. On July 20, 2006, the ALJ wrote the parties indicating his tentativedecision to conduct a de novo hearing on the protests to the Tribe’s licenseapplication under the new burden of proof allocation.  A preliminary hearing was held on November 2,2006, to determine which issues need to be reheard in light of the Coffindecision.  The ALJ ordered that adefinitive list of issues will be finalized on January 20, 2007, and the finalhearing on protests is scheduled for the two weeks beginning April 23, 2007.  The decision to approve or deny the licensetransfer application may be appealed by any parties to the proceeding so longas the appeal is filed within forty days of the ABC’s decision. The firstappeal is to the ABC Appeals Board, and its decision may be appealed to theCalifornia State court system.

We are involved in other litigation anddisputes from time to time in the ordinary course of business with vendors andpatrons. We believe that the aggregate liability, if any, arising from suchlitigation or disputes will not have a material adverse effect on our resultsof operations, financial condition or cash flows.

**ITEM 1A.               RISK FACTORS**

There have been nomaterial changes from the risk factors previously disclosed in our Form 10-K.

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###### **ITEM 5.                   OTHERINFORMATION**

**Financial Impact from Restatementof Annual and Quarterly reports in the Statement of Revenues, Expenses, andChanges in Fund Deficit**

Subsequent to thefiling of the Authority’s quarterly report on Form 10-Q for the period endedJune 30, 2006, the Authority identified certain classification errors in therecording of promotional allowances and gaming revenues and losses. TheAuthority intends to amend its filing on Form 10-K for the year endedDecember 31, 2005 and its filings on Form 10-Q for the quarterlyperiods ended March 31, 2006 and June 30, 2006 to restate thefinancial statements for the impact of the error as described below:

***Financialimpact of restated annual financial statements for the years ended December 31,2005, 2004 and 2003***

Casino revenueswill be reduced by $2.8 million, $2.4 million and $1.7 million, and Food,beverage and retail revenues will be reduced by $0.6 million and $0.4 millionand $0.1 million for the three years ended December 31, 2005, 2004, and 2003, respectively.  Promotional allowances will be increased by$2.5 million, $0.4 million and $0.3 million for the three years ended December31, 2005, 2004 and 2003, respectively. Net revenues will be reduced by $6.0 million, $3.2 million and $2.0million for the three years ended December 31, 2005, 2004 and 2003,respectively.

Operating expenses willbe reduced by $6.0 million, $3.2 million and $2.0 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. Casino operational expenses will be reduced by $2.6 million, $2.6million and $1.8 million, respectively. Food, beverage and retail operating expenses will be reduced by $0.5million, $0.4 million and $0.3 million, respectively.  Selling, general and administrative expenseswill be reduced by $2.9 million, $0.3 million and $0.0 million, respectively.

***Financialimpact of restated financial statements for the Quarters ended March 31, 2006and 2005 and June 30, 2006 and 2005 are as follows:***

***Forthe Quarters ended March 31, 2006 and 2005***. Casinorevenues will be reduced by $0.6 million and $0.6 million, respectively.  Food, beverage and retail revenues will bereduced by $0.1 million and $0.1 million, respectively.  Promotional allowances will be increased by$1.6 million and $0.0 million, respectively. Net revenues will be reduced by $2.4 million and $0.8 million. Operatingexpenses will be reduced by $2.4 million and $0.8 million. Casino operationalexpenses will be reduced by $0.5 million and $0.6 million, respectively.  Food, beverage and retail operating expenseswill be reduced by $0.1 million and $0.1 million, respectively.  Selling, general and administrative expenseswill be reduced by $1.7 million and $0.1 million, respectively.

***Forthe Quarters ended June 30, 2006 and 2005*.** Casino revenueswill be reduced by $0.7 million and $0.7 million, respectively.  Food, beverage and retail revenues will bereduced by $0.1 million and $0.1 million, respectively.  Promotional allowances will be increased by$2.0 million and $0.4 million, respectively. Net revenues will be reduced by$2.8 million and $1.2 million, respectively. Operating expenses will be reducedby $2.8 million and $1.2 million, respectively. Casino operational expenseswill be reduced by $0.5 million and $0.6 million, respectively. Food, beverageand retail operating expenses will be reduced by $0.1 million and $0.1 million,respectively.  Selling, general andadministrative expenses will be reduced by $2.2 million and $0.5 million,respectively.

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###### **ITEM 6.                   EXHIBITS**

(a)                       Exhibits

The Exhibit Index filedherewith is incorporated herein by reference.

(b)                     Reports onForm 8-K

None

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**SIGNATURE**

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 theundersigned thereunto duly authorized.
| Dated: November 20, 2006 |   | RIVER ROCK ENTERTAINMENT AUTHORITY |
|--------------------------|--------|------------------------------------|
|                     |   | (Registrant)                       |
|                     |   |                               |
|                     |   | By:                                |                /s/ Shawn S. Smyth |   |
|                     |   |                               | Shawn S. Smyth, |   |
|                     |   |                               | Chief Executive  Officer |   |
|                     |   |                               |
|                     |   |                               |
|                     |   |                               |
|                     |   | By:                                |                /s/ David  B. Wolfe |   |
|                     |   |                               | David B. Wolfe, |   |
|                     |   |                               | Chief Financial  Officer |   |

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                               |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification by Shawn S. Smyth, Chief Executive  Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed  herewith)                                                                                                       |
|        |       |                                                                                                                                                                                                                                      |
| 31.2        |       | Certification by David B. Wolfe, Chief Financial  Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed  herewith)                                                                                                       |
|        |       |                                                                                                                                                                                                                                      |
| 32*         |       | Certification by Shawn S. Smyth, Chief Executive  Officer and by David B. Wolfe, Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (furnished herewith) |

 

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| * | This certification is being furnished solely to  accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and is  not being filed for purposes of Section 18 of the Securities Exchange Act of  1934 and is not to be incorporated by reference into any filing of River Rock  Entertainment Authority whether made before or after the date hereof,  regardless of any general incorporation language in such filing. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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