**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

** **

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**FORM 10-Q**

** **
| **(Mark One)**                                          | ** **                                                                                               |
|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                               |
| **x**                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**  |
| ** **                                              | ** **                                                                                               |
| **For the  quarterly period ended March 31, 2006** |
| ** **                                              |
| **OR**                                                  |
| ** **                                              |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**For the transition periodfrom        to       **

** **

** **

**Commission File Number:333-115186**

** **

**RIVER ROCK ENTERTAINMENT AUTHORITY**

(Exact name of registrant as specified in its charter)

 

 

| **Not Applicable**               |   | **68-0490898**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

** **

**3250 Highway 128 EastGeyserville, California 95441(707) 857-2777**(Address, including zip code, and telephone number,including area code, of registrant’s principal executive offices)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes   x   No   o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.

 

| Large Accelerated Filer o | Accelerated  Filer o | Non-Accelerated  filer x |
|--------------------------------|---------------------------|-------------------------------|

 

Indicated by check madewhether the registrant is a shell company (as defined in Rule 126-2 of theExchange Act). Yes o    No x

 

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**RIVERROCK ENTERTAINMENT AUTHORITYINDEX TO FORM 10-Q**

 
| **  **Item   | ** ** | Description                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                             |       |                                                                                                            |       |       |       |
|                             | ** ** | **PART I—FINANCIAL  INFORMATION**                                                                     |       |       |       |
|                             |       |                                                                                                            |       |       |       |
| 1.                               |       | Financial Statements  (unaudited)                                                                               |       |       |       |
|                             |       | Balance  Sheets- March 31, 2006 and December 31, 2005                                                 |       |       |       |
|                             |       | Statements of  Revenues, Expenses and Changes in Fund Deficit- Three-Months ended  March 31, 2006 and 2005 |       |       |       |
|                             |       | Statements of Cash Flows-  Three-Months ended March 31, 2006 and 2005                                      |       |       |       |
|                             |       | Notes to  unaudited 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                                                                                                   |       |       |       |
| 6.                               |       | Exhibits  and Reports on Form 8-K                                                                          |       |       |       |
|                             |       |                                                                                                            |       |       |       |
| Signatures                       |       |                                                                                                            |       |
|                             |       |                                                                                                            |       |       |       |
| Exhibit Index               |       |                                                                                                            |       |

** **

 

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**CAUTIONARYSTATEMENT**

*Except for the historical financial information containedherein, the matters discussed in this report on Form 10-Q (as wellas documents incorporated herein by reference) may be consideredforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Such forward-looking statements are basedupon current expectations that involve risks and uncertainties and includedeclarations regarding the intent, belief or current expectations of us and ourmanagement and may be signified by the words “believes,” “anticipates”, “plan,”“expects,” “intends” and similar expressions. Our actual results and the timingof certain events may differ significantly from the results discussed in theforward-looking statements. All forward-looking statements in this document arebased on information available to us as of the date hereof, and we assume noobligation to update any such forward-looking statements, whether as a resultof new information, future events, or otherwise. All discussion in this reportshould be read in conjunction with our financial statements and theaccompanying notes contained in this report.*

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

*Our key risks are described in our annual report on Form 10-Kfor the year ended December 31, 2005 filed with the Securities andExchange Commission.*

 

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**PART1—FINANCIAL INFORMATION**

**ITEM1—FINANCIAL STATEMENTS (UNAUDITED)**

** **

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

**BALANCESHEETS(Unaudited)**
| ** **                                      | ** ** | **March 31, 2006** | ** **  | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| **ASSETS**                                      |       |                         |        |                            |       |
| ** **                                      |       |                         |        |                            |       |
| CURRENT ASSETS:                                 |       |                         |        |                            |       |
| Cash and cash equivalents                       |       | $                            | 25,269,143  |                            | $          | 17,649,658 |   |
| Restricted cash-current                         |       | 466,517                      |        | 666,517                         |       |
| Accounts receivable                             |       | 187,127                      |        | 93,252                          |       |
| Inventories                                     |       | 146,759                      |        | 159,434                         |       |
| Prepaid expenses and other current assets       |       | 1,456,217                    |        | 1,427,906                       |       |
|                                            |       |                         |        |                            |       |
| Total current assets                            |       | 27,525,763                   |        | 19,996,767                      |       |
|                                            |       |                         |        |                            |       |
| RESTRICTED CASH—Net  of Current            |       | 6,716,218                    |        | 6,706,964                       |       |
|                                            |       |                         |        |                            |       |
| PROPERTY AND  EQUIPMENT:                        |       |                         |        |                            |       |
| Buildings and building improvements             |       | 129,165,929                  |        | 128,858,771                     |       |
| Furniture, fixtures and equipment               |       | 26,527,908                   |        | 26,015,944                      |       |
|                                            |       | 155,693,837                  |        | 154,874,715                     |       |
|                                            |       |                         |        |                            |       |
| Accumulated  depreciation                       |       | (24,650,708                  | )           | (21,801,767                     | )          |
| Construction in  progress                       |       | 2,223,181                    |        | 1,819,271                       |       |
|                                            |       |                         |        |                            |       |
| Property and equipment—net                 |       | 133,266,310                  |        | 134,892,219                     |       |
|                                            |       |                         |        |                            |       |
| DEPOSITS AND  OTHER ASSETS                      |       | 5,756,414                    |        | 6,081,955                       |       |
|                                            |       |                         |        |                            |       |
| TOTAL ASSETS                                    |       | $                            | 173,264,705 |                            | $          | 167,677,905 |   |
|                                            |       |                         |        |                            |       |
| **LIABILITIES  AND FUND DEFICIT**               |       |                         |        |                            |       |
|                                            |       |                         |        |                            |       |
| CURRENT  LIABILITIES:                           |       |                         |        |                            |       |
| Accounts payable:                               |       |                         |        |                            |       |
| Trade                                           |       | $                            | 3,096,708   |                            | $          | 2,178,031 |   |
| Construction                                    |       | 798,707                      |        | 1,114,618                       |       |
| Accrued liabilities                             |       | 11,267,160                   |        | 6,463,556                       |       |
| Current maturities of long-term debt            |       | 103,126                      |        | 103,545                         |       |
|                                            |       |                         |        |                            |       |
| Total current liabilities                       |       | 15,265,701                   |        | 9,859,750                       |       |
|                                            |       |                         |        |                            |       |
| LONG-TERM  DEBT—net of current maturities  |       | 198,302,114                  |        | 198,243,209                     |       |
|                                            |       |                         |        |                            |       |
| Total long term  liabilities                    |       | 198,302,114                  |        | 198,243,209                     |       |
|                                            |       |                         |        |                            |       |
| FUND DEFICIT                                    |       |                         |        |                            |       |
| Invested in  capital assets-net of related debt |       | (65,138,930                  | )           | (63,454,535                     | )          |
| Restricted for  capital projects                |       | 7,182,734                    |        | 7,373,481                       |       |
| Unrestricted                                    |       | 17,653,086                   |        | 15,656,000                      |       |
|                                            |       |                         |        |                            |       |
| Total fund deficit                              |       | (40,303,110                  | )           | (40,425,054                     | )          |
|                                            |       |                         |        |                            |       |
| TOTAL LIABILITIES AND  FUND DEFICIT             |       | $                            | 173,264,705 |                            | $          | 167,677,905 |   |

 

The accompanying notes are an integral part of these unaudited financialstatements.

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

**STATEMENTSOF REVENUES, EXPENSES AND CHANGES IN FUND DEFICIT(Unaudited)**
| ** **                                  | ** ** | **Three-Month**       | ** **   |
|---------------------------------------------|------------|-----------------------|--------------|
| ** **                                  | ** ** | **Period Ended** | ** **   |
| ** **                                  | ** ** | **March 31,**    | ** **   |
| ** **                                  | ** ** | **2006**              | ** **   | **2005** | ** ** |
| REVENUES:                                   |       |                  |         |   |   |
|                                        |       |                  |         |   |   |
| Casino                                      |       | $                     | 33,136,425   |   | $ | 31,726,625 |   |
| Food,  beverage & retail           |       | 1,603,210             |         | 1,566,240 |   |
| Other                                       |       | 152,855               |         | 181,320 |   |
|                                        |       |                  |         |   |   |
| Gross revenues                              |       | 34,892,490            |         | 33,474,185 |   |
|                                        |       |                  |         |   |   |
| Promotional allowance                       |       | (916,300              | )            | (792,476 | ) |
|                                        |       |                  |         |   |   |
| Net revenues                                |       | 33,976,190            |         | 32,681,709 |   |
|                                        |       |                  |         |   |   |
| OPERATING EXPENSES:                         |       |                  |         |   |   |
| Casino                                      |       | 5,580,232             |         | 5,372,268 |   |
| Food,  beverage & retail           |       | 1,589,890             |         | 1,446,610 |   |
| Selling, general  and administrative        |       | 13,128,184            |         | 10,509,868 |   |
| Depreciation                                |       | 2,860,533             |         | 2,633,958 |   |
| Credit  enhancement fee                     |       | 1,602,417             |         | 1,942,849 |   |
| Gaming  commission and surveillance expense |       | 722,741               |         | 536,613 |   |
| Compact revenue  sharing trust fund         |       | 333,750               |         | 333,750 |   |
|                                        |       |                  |         |   |   |
| Total Operating  expenses                   |       | 25,817,747            |         | 22,775,916 |   |
|                                        |       |                  |         |   |   |
| INCOME FROM OPERATIONS                      |       | 8,158,443             |         | 9,905,793 |   |
|                                        |       |                  |         |   |   |
| OTHER EXPENSE—Net                      |       |                  |         |   |   |
| Interest expense                            |       | (5,224,632            | )            | (5,346,799 | ) |
| Interest income                             |       | 191,504               |         | 40,424 |   |
| Loss on sale of  assets                     |       | (3,384                | )            | (33,977 | ) |
| Other income  (expense)—net            |       | 13                    |         | (441 | ) |
|                                        |       |                  |         |   |   |
| Other  expense—net                     |       | (5,036,499            | )            | (5,340,793 | ) |
|                                        |       |                  |         |   |   |
| INCOME BEFORE  DISTRIBUTIONS TO TRIBE       |       | 3,121,944             |         | 4,565,000 |   |
|                                        |       |                  |         |   |   |
| DISTRIBUTIONS TO TRIBE                      |       | (3,000,000            | )            | (2,180,000 | ) |
|                                        |       |                  |         |   |   |
| NET INCOME AFTER  DISTRIBUTIONS TO TRIBE    |       | 121,944               |         | 2,385,000 |   |
|                                        |       |                  |         |   |   |
| FUND DEFICIT—Beginning  of period      |       | (40,425,054           | )            | (47,521,242 | ) |
|                                        |       |                  |         |   |   |
| FUND DEFICIT—End of period             |       | $                     | (40,303,110) |   | $ | (45,136,242) |   |

 

The accompanying notes are an integral part of these unaudited financialstatements.

 

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** **

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

**STATEMENTSOF CASH FLOWS(Unaudited)**

** **
| ** **                                                                                             | ** ** | **Three-Month**       | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **Period Ended** | ** ** |
| ** **                                                                                             | ** ** | **March 31,**    | ** ** |
| ** **                                                                                             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                 |       |                  |       |   |   |
| Cash received  from gaming winnings and concessions                                                    |       | $                     | 34,194,005 |   | $ | 32,862,413 |   |
| Cash paid for  salaries and benefits                                                                   |       | (7,478,278            | )          | (7,734,218 | ) |
| Cash paid to  suppliers                                                                                |       | (14,125,143           | )          | (11,544,610 | ) |
| Cash paid for  compact revenue sharing trust fund                                                      |       | (333,750              | )          | (333,750 | ) |
|                                                                                                   |       |                  |       |   |   |
| Net cash  provided by operating activities                                                             |       | 12,256,834            |       | 13,249,835 |   |
|                                                                                                   |       |                  |       |   |   |
| CASH FLOWS FROM CAPITAL  AND RELATED FINANCING ACTIVITIES:                                             |       |                  |       |   |   |
| Payments of  long-term debt                                                                            |       | (25,826               | )          | (10,113,853 | ) |
| Purchases of  property and equipment                                                                   |       | (211,234              | )          | (8,040,229 | ) |
| Change in  restricted cash                                                                             |       | 190,746               |       | 5,898,017 |   |
| Interest paid                                                                                          |       | (9,896                | )          | (190,815 | ) |
| Credit  enhancement fee                                                                                |       | (1,651,256            | )          | (1,714,915 | ) |
| Proceeds from  sale of assets                                                                          |       | —                |       | 2,000 |   |
| Other                                                                                                  |       | 70,117                |       | (71,380 | ) |
|                                                                                                   |       |                  |       |   |   |
| Net cash used in  capital and related financing activities                                             |       | (1,637,349            | )          | (14,231,175 | ) |
|                                                                                                   |       |                  |       |   |   |
| CASH FLOW FROM  NON-CAPITAL FINANCING ACTIVITIES  Distributions to Tribe                               |       | (3,000,000            | )          | (2,180,000 | ) |
|                                                                                                   |       |                  |       |   |   |
| CHANGE IN CASH AND CASH  EQUIVALENTS                                                                   |       | 7,619,485             |       | (3,161,340 | ) |
|                                                                                                   |       |                  |       |   |   |
| CASH AND CASH  EQUIVALENTS, Beginning of the period                                                    |       | 17,649,658            |       | 18,618,826 |   |
|                                                                                                   |       |                  |       |   |   |
| CASH AND CASH  EQUIVALENTS, End of the period                                                          |       | $                     | 25,269,143 |   | $ | 15,457,486 |   |
|                                                                                                   |       |                  |       |   |   |
| RECONCILIATION OF  INCOME BEFORE DISTRIBUTIONS TO TRIBE TO NET CASH PROVIDED BY OPERATING  ACTIVITIES: |       |                  |       |   |   |
| Income before Distributions  to Tribe                                                                  |       | $                     | 3,121,944  |   | $ | 4,565,000 |   |
|                                                                                                   |       |                  |       |   |   |
| Adjustments to  reconcile operating income to net cash provided by operating activities:               |       |                  |       |   |   |
| Depreciation                                                                                           |       | 2,860,564             |       | 2,633,958 |   |
| Interest expense                                                                                       |       | 5,224,632             |       | 5,346,799 |   |
| Credit  enhancement fee                                                                                |       | 1,602,417             |       | 1,942,849 |   |
| Loss on sale of  assets                                                                                |       | 3,384                 |       | 33,977 |   |
| Changes in  operating assets and liabilities:                                                          |       |                  |       |   |   |
| Accounts  receivable                                                                                   |       | (93,875               | )          | 8,546 |   |
| Inventories                                                                                            |       | 12,675                |       | 217 |   |
| Prepaid expenses  and other current assets                                                             |       | (28,311               | )          | 11,710 |   |
| Accounts payable—trade                                                                            |       | (424,038              | )          | (1,173,014 | ) |
| Accrued  liabilities                                                                                   |       | (22,558               | )          | (120,207 | ) |
| Total  adjustments                                                                                     |       | 9,134,890             |       | 8,684,835 |   |
|                                                                                                   |       |                  |       |   |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                                             |       | $                     | 12,256,834 |   | $ | 13,249,835 |   |
|                                                                                                   |       |                  |       |   |   |
| SUPPLEMENTARY SCHEDULE  OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES:                           |       |                  |       |   |   |
| Acquisition of property  and equipment through third party financing                                   |       | $                     | —     |   | $ | 246,757 |   |
| Acquisition of property  and equipment through accounts payable construction                           |       | 1,026,800             |       | 1,895,614 |   |
| Trade in allowance on purchase of property and equipment                                               |       | 2,000                 |       | 63,100 |   |

 

The accompanying 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 OFBUSINESS

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(as defined 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 uponapproval by the Secretary of Interior on May 5, 2000. The Compact expireson 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 on November 5,2003 pursuant to a reorganization whereby the Tribe’s gaming business becameowned and operated by the Authority. This reorganization was accounted for as areorganization of entities under common control. Accordingly, after thereorganization, the assets and liabilities of the Casino operating propertywere 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 $3,121,949 and $4,565,000 for the threemonths ended March 31, 2006 and 2005, respectively.  A fund deficit of $40,303,110 exists as of March 31,2006. The Authority’s current assets exceeded its current liabilities by$12,260,062 as of March 31, 2006. On November 7, 2003, the Authorityissued $200.0 million in its 93⁄4% Senior Notes, due 2011 (the “Notes”), and useda portion of the proceeds to reduce its current payables, accruals and debt.The Authority’s ability to fund future debt service payments is dependent uponthe success of the Casino. Management believes that the Casino will attractsufficient patronage levels to continue to provide sufficient cash flows and torepay its indebtedness. The Authority reached its substantial completion of theconstruction of the enhanced parking structures on December 29, 2004. On September 13,2005, the Authority received a certificate of occupancy on the parkingstructures. On October 1, 2005, the Authority’s certificate of occupancyfor the parking structure was revoked and a temporary occupancy permit wasissued due to some remaining construction issues. On November 4, 2005, afull certificate of occupancy was issued to the Authority for the parkingstructures.

**2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*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 withor contradict GASB pronouncements. The Authority is given the option whether toapply all FASB Statements and Interpretations issued after November 30,1989, except for those that conflict with or contradict GASB pronouncements.Accordingly, the Authority has elected to implement non conflicting FASBStatements and Interpretations issued after November 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

 

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fund deficit is 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 distributions to owners would be presentedunder FASB pronouncements. The amount shown as income before distributions toTribe would not be different if the Authority followed all FASB pronouncementsto determine net income and would be the most comparable amount to net incomecomputed under FASB pronouncements. The Authority is a separate fund of theTribe, a governmental entity, and as such there is no owners’ or shareholders’(deficit) equity as traditionally represented under FASB pronouncements. Themost comparable measure of owners’ (deficit) equity is presented on theAuthority’s balance sheet as fund (deficit) equity.

*New Accounting Pronouncements*—In March 2003, GASB issued Statement No. 40, *Deposit and Investment Risk Disclosures***—an amendment of GASBStatement No. 3**, which became effective for theAuthority at January 1, 2005. This statement requires state and localgovernments to communicate key information about deposit and investment risks.The adoption of this statement did not have a material impact on the financialstatements 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 standardsfor impairment 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 Deposit Insurance Corporation (“FDIC”) has insured$100,000 of the cash on deposit with the banks. The Authority believes thatthere is little risk of loss regarding the uninsured amounts of cash and cashequivalents 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 $7,182,735 and $7,373,481 at March 31,2006 and December 31, 2005, respectively. As of March 31, 2006,restricted cash includes amounts available for construction of $2,694,083 andland development funds of $4,488,652.

*Property and Equipment*—Property and equipment are stated at cost. Depreciation and amortizationare computed using the straight-line method over the estimated useful lives ofthe assets as follows:

| Buildings and improvements         |   | 21 years |   |
|------------------------------------|--------|----------|--------|
| Furniture, fixtures and  equipment |   | 5 years  |   |

 

TheAuthority evaluates its property and equipment for impairment in accordancewith the FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. When events or circumstances indicate that anasset should be reviewed for impairment, the Authority compares theundiscounted cash flows derived from the asset or asset group to the netcarrying value. If impairment

 

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is indicated, the impairmentloss is measured by the amount in which the carrying value of the asset orasset group exceeds its fair value. Fair value is measured by comparable sales,solicited offers or discounted cash flow models.

*Deposits and Other Assets*—As of March 31, 2006 and December 31, 2005, deposits andother assets include $5,706,803 and $5,962,226 in unamortized bond spread,legal fees and other issuance costs related to the issuance of the Notes, $0and $78,618 of equipment deposits, $12,700 and $4,200 of performance depositsand $36,911 and $36,911 of rental deposits. Deferred loan costs are amortizedusing the effective interest method to interest expense over the term of therelated financial arrangement.

*Accrued Liabilities*—Accrued liabilities consist of accrued interest, accrued payroll,accrued credit enhancement fee and other accrued liabilities.

 *Accrued Progressive SlotJackpots*—Accrued progressive slot jackpots consist of estimates forprizes relating to various games that have accumulated jackpots. The Authorityhas recorded the cost of these anticipated payouts as a reduction of casinorevenues, and the cost is included as a component of accrued liabilities.

*Accrued Slot Players Club*—In accordance with Emerging Issues Task Force Issue No. 00-22,*Accounting for “Points” and Certain OtherTime-Based or Volume-Based Sales Incentive Offers and Offers for Free Productsor Services to be Delivered in the Future*, the Authority hasrecorded a liability related to prizes and cash incentives earned by themembers of our Players Club and have adjusted the liability for the estimatedfuture breakage. The Authority has recorded the cost of the estimatedredemption of the liability related to prizes as an operating expense and theestimated redemption of the liability related to cash as promotional allowancein the accompanying statements of revenues, expenses and changes in funddeficit.

*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 freely in the gaming area for playing guests.

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

*Promotional Allowances*—The retail value of food and beverages provided to playing customerswithout charge is included in gross revenues and then deducted as promotionalallowances. The redemption of cash incentives earned by the Players Clubmembers is also recorded as promotional allowances. The estimated costs ofproviding complimentary services are recorded as casino expenses. The costs ofsuch services were $916,300 and $792,476 for the three months ended March 31,2006 and 2005, respectively.

*Food and Beverage Costs*—Food and beverage costs include costs associated with food andbeverage, excluding amounts classified as casino expenses.

*Advertising Costs*—Advertising costs are expensed the first time advertising takes place.Advertising costs included in selling, general and administrative expenses were$2,231,976 and $1,081,442 for the three months ended March 31, 2006 and2005, respectively.

*Gaming commission & surveillance**expenses*—The Authoritypaid for various expenses for the Tribal Gaming Commission and surveillance in2005 and 2004. Tribal Gaming Commission expenses were reported as GamingCommission expenses and surveillance costs were reported in Selling General andAdministrative Expenses on the Statement of Revenues, Expenses and Change inFund Balance. Effective July 1, 2005, the Tribal Gaming Commission adoptedregulation on payments of regulatory fees from the Authority. For Fiscal Year2005, Tribal Gaming Commission and surveillance expenses are being recorded inGaming Commission and surveillance expenses on the Statement of Revenues,Expenses and Changes in Fund Balance. Gaming Commission and surveillanceexpenses for the three months ended March 31, 2006 and 2005 are $722,741 and$536,613, respectively.

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

*Distributions to Tribe*—Distributions to Tribe are made up of a stated draw amount andpermitted payments. They are included in the statement of revenues, expensesand changes in fund deficit as distributions to Tribe. The Tribal draw was$1,000,000 per month for the three months ended March 31, 2006. In 2005,the Tribal draw was $500,000 per month for the three months ended March 31,2005 plus $680,000 in distributions as part of reimbursements for constructioncosts incurred by the Tribe prior to the formation of the Authority. As of March 31,2006, the remaining balance to be reimbursed to the Tribe for constructioncosts incurred before the formation of

 

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the Authority was $1,960,000.Distributions to the Tribe for the three months ended March 31, 2006 and2005 were $3,000,000 and $2,180,000, respectively.

**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.

**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 followingdepartments operated by the Tribe: Tribal Gaming Commission, surveillance,plant operations, human resources, purchasing and warehousing. On January 1,2005, the Authority started to operate purchasing and warehousing but continuedto pay for expenses for the other departments operated by the Tribe. Thesedepartmental expenses include but are not limited to payroll and relatedexpenses, legal and other operational expenses. Total amounts billed by theTribe for these departments, excluding Tribal Gaming Commission andsurveillance, were $598,174 and $524,838 for the three months ended March 31,2006 and 2005, respectively. They are recorded as a component of selling,general and administrative expenses.

 The Authority paid for various expenses forthe Tribal Gaming Commission and surveillance in 2006 and 2005. Prior to July 1,2005, Tribal Gaming Commission expenses were reported as Gaming Commissionexpenses and surveillance costs were reported in Selling, General andAdministrative Expenses on the Statement of Revenues, Expenses and Change inFund Balance. Effective July 1, 2005, the Tribal Gaming Commission adopteda regulation on payments of regulatory fees from the Authority. The TribalGaming Commission charges the Authority to cover any operating expensesincurred by the Tribal Gaming Commission and surveillance which are directlyrelated and necessary to the regulation of the Casino. Gaming Commission andsurveillance expenses for the three months ended March 31, 2006 and 2005are $722,741 and $536,613, respectively.

**5.**                           DEVELOPMENT AND LOANAGREEMENT

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’s 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 annual intereston $25.0 million principal amount of the Notes less revenues from sales ofalcoholic beverages. The Credit Enhancement Fee is required to be paid monthlyfor a period of five years commencing on June 1, 2003. The CreditEnhancement Fee was $1,602,417 and $1,942,849 for the three months ended March 31,2006 and 2005, respectively.

TheAuthority has the right to terminate the Development Agreement by exercising abuy-out option on or after June 1, 2006 (the “Buy-Out Option”). Ifexercised, the Authority is obligated to pay all amounts outstanding withrespect to financing, including outstanding development advances and accruedinterest plus an amount determined by multiplying the average monthly creditenhancement fee earned during the 12-month period immediately precedingthe month the buy-out option is exercised, by the number of months remaining inthe five-year term. The buy-out fee is required to be paid in equal monthlyinstallments of principal plus interest at the rate of

 

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12% per annum, on the 15thday of each month over a period equal to the remaining term of the DevelopmentAgreement.

**6.**                           CASH AND CASHEQUIVALENTS AND RESTRICTED CASH

Cashand cash equivalents and restricted cash consisted of the following as of March 31,2006 and December 31, 2005:
| ** **                                           | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Operating  accounts                                  |       | $                            | 5,086,150  |                            | $          | 5,241,644 |   |
| Money Market  Accounts                               |       | 51,532                       |       | 62,420                          |       |
| Short Term  Investments                              |       | 16,627,649                   |       | 8,988,622                       |       |
| Cash on hand                                         |       | 3,503,812                    |       | 3,356,972                       |       |
|                                                 |       |                         |       |                            |       |
| Cash and cash  equivalents                           |       | 25,269,143                   |       | 17,649,658                      |       |
| Restricted cash                                      |       | 7,182,735                    |       | 7,373,481                       |       |
|                                                 |       |                         |       |                            |       |
| Total cash and cash  equivalents and restricted cash |       | $                            | 32,451,878 |                            | $          | 25,023,139 |   |

 

The Authority’s cash in banks and cash equivalents (the “Investments”)are categorized by level of credit risk assumed by the Authority.Category 1 includes investments that are insured or registered or forwhich the investments are held by the Authority or its agent in the Authority’sname. Category 2 includes uninsured and unregistered investments for whichthe investments are held by the counterparty’s trust department or agent in theAuthority’s name. Category 3 includes uninsured and unregisteredinvestments for which the investments are held by the counterparty’s agent butnot in the Authority’s name. At March 31, 2006, the Authority had $200,000in Category 1 investments, $4,886,150 cash in banks, $51,532 in moneymarket accounts and $16,627,649 in short term investments which are Category 2investments and $7,182,735 restricted cash in bank over the FDIC insurancelimits, which are Category 3 investments. Amounts in Category 2 andCategory 3 investments are invested in short term, highly liquid cashequivalents and investments. As of March 31, 2006 and December 31,2005, these amounts are composed of money market accounts in the amount of$51,532 and $62,419, respectively, and A1/P1 bonds in the amount of $16,627,649and $8,988,622, respectively.

**7.**                           PROPERTY ANDEQUIPMENT

Property and equipment at January 1, 2006 and March 31, 2006consisted of the following:
| ** **                         | ** ** | **Balance,**        | ** **  | ** **    | ** ** | ** **       | ** ** | **Balance,**       | ** ** |
|------------------------------------|------------|---------------------|-------------|---------------|------------|------------------|------------|--------------------|------------|
| ** **                         | ** ** | **January 1,** | ** **  | ** **    | ** ** | ** **       | ** ** | **March 31,** | ** ** |
| ** **                         | ** ** | **2006**            | ** **  | **Additions** | ** ** | **Dispositions** | ** ** | **2006**           | ** ** |
| Buildings and  improvements        |       | $                   | 128,858,771 |          | $          | 307,158          |       | $                  | —     |   | $ | 129,165,929 |   |
| Furniture,  fixtures and equipment |       | 26,015,944          |        | 528,966       |       | (17,002          | )          | 26,527,908         |       |
| Less accumulated  depreciation     |       | (21,801,767         | )           | (2,860,559    | )          | 11,618           |       | (24,650,708        | )          |
|                               |       | 133,072,948         |        | (2,024,435    | )          | (5,384           | )          | 131,043,129        |       |
|                               |       |                |        |          |       |             |       |               |       |
| Construction in  progress          |       | 1,819,271           |        | 403,910       |       | —           |       | 2,223,181          |       |
|                               |       |                |        |          |       |             |       |               |       |
| Property and  equipment—net   |       | $                   | 134,892,219 |          | $          | (1,620,525       | )          | $                  | (5,384     | ) | $ | 133,266,310 |   |

 

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Construction in progress consists of payments to various vendorsrelated to the Authority’s master plan development and land improvements.Substantially all of the Authority’s personal property is pledged as collateralto secure its debt. At March 31, 2006 and 2005, the Authority had $315,012and $670,000 in capital lease assets with related accumulated depreciation of $63,974and $78,167, respectively.

**8.**                          ACCRUED LIABILITIES

Accruedliabilities consisted of the following as of March 31, 2006 and December 31,2005:

 

|                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Accrued in-house  progressive slot jackpots |       | $                  | 542,655    |                  | $          | 495,588 |   |
| Accrued payroll and  related benefits       |       | 1,639,060          |       | 1,677,290             |       |
| Accrued interest                            |       | 8,125,000          |       | 3,250,000             |       |
| Accrued credit  enhancement fees            |       | 636,820            |       | 685,659               |       |
| Accrued other expenses                      |       | 323,625            |       | 355,019               |       |
| Total accrued liabilities                   |       | $                  | 11,267,160 |                  | $          | 6,463,556 |   |

 

**9.**                           LONG-TERM DEBT

Long-term debt consisted of the following as of March 31, 2006 andDecember 31, 2005:

 

|                                                                                                | ** ** | **March 31,** | ** **  | **December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|-------------|
| ** **                                                                                     | ** ** | **2006**           | ** **  | **2005**              | ** **  |
| 9 3/4% Senior Notes,  net of unamortized issue discount of $1,882,976 and $1,967,289 due 2011. |       | $                  | 198,117,024 |                  | $           | 198,032,711 |   |
| Vehicles Notes                                                                                 |       | 46,960             |        | 51,937                |        |
| Capital leases obligations                                                                     |       | 241,256            |        | 262,106               |        |
| Total Long Term Debt                                                                           |       | 198,405,240        |        | 198,346,754           |        |
| Less: current portion                                                                          |       | (103,126           | )           | (103,545              | )           |
| Total long-term debt—net of current maturities                                            |       | $198,302,114       |        | $                     | 198,243,209 |   |
|                                                                                                |            |                    |             |                       |             |  |  |

 

OnNovember 7, 2003, the Authority issued the Notes. The proceeds wereutilized to fund an expansion project, which includes three parking structuresand related infrastructure improvements, repayment of various debt and advancesand fund payment of various accruals and payables, as well as to increase cashon hand. The proceeds were also utilized to fund a land purchase and settlelitigation. The Notes are secured by a first priority pledge of the Authority’srevenue and substantially all of the existing and future tangible andintangible personal property. Before November 1, 2007, the Authority mayredeem the Notes, in whole or in part, at a redemption price equal to 100% oftheir principal amount plus a make-whole premium and accrued and unpaidinterest. On or after November 1, 2007, the Authority may redeem theNotes, in whole or in part, at a redemption price that is at a premium to theprincipal amount of the Notes (expressed as percentages of principal amount),plus accrued and unpaid interest.

**Fair Value**—Ourlong-term debt is recorded at an amortized historical cost basis. The fairvalue of long-term debt approximates $215,500,000 at March 31, 2006.

 

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** **

**10.**                    LEASES

TheAuthority leases a Sprung structure, which is accounted for as an operatinglease. Such lease expense was $129,220 and $151,243 for the three months ended March 31,2006 and 2005, respectively. The Authority renewed the lease agreement on August 17,2005 for twenty four (24) 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. TheAuthority uses a portion of the space and reimburses the Tribe lease feesallocated based on the square footage utilized. The Authority reimbursed theTribe such lease fees in the amount of $127,963 and $105,982 for the threemonths ended March 31, 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 the lease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital leaseto purchase 13 Multi-deck shufflers in the amount of $88,307. The capital leaseis at 7.09% interest with monthly lease fees of $2,730 and a $1 buyout at theend of the lease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital leaseto purchase 6 King shufflers in the amount of $61,422. The capital lease is at7.09% interest with monthly lease fees of $1,899 and a $1 buyout at the end ofthe lease term.

OnJuly 31, 2005, the Authority entered into a thirty six month capital leaseto purchase 4 Ace shufflers in the amount of $45,283. The capital lease is at7.09% interest with monthly lease fees of $1,400 and a $1 buyout at the end ofthe lease term.

Leaseexpenses were $244,092 and $266,237 for the three months ended March 31,2006 and 2005, respectively, and are included in general and administrative expensesin the accompanying statement of revenues, expenses and changes in fund deficit.Expected remaining payments under operating leases are $789,364, $798,829,$414,484, $2,910 and $1,213 for the years ending December 31, 2006, 2007,2008, 2009 and 2010, respectively. Expected remaining payments under capitalleases are $85,138, $91,037, $67,032, $18,612 and $0 for the years ending December 31,2006, 2007, 2008, 2009 and 2010, respectively.

**11.****                    LEGAL MATTERS**

*SonomaCounty Fire Marshal Inspection Case*

On October 7,2002, the Sonoma County Fire Chief (the “County Fire Chief ”) filed an *ex parte* application for an inspectionwarrant in the Superior Court of the State of California for the County ofSonoma, seeking to inspect the casino. The Tribe believes that there is nobasis 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 October 9,2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand andmoved for summary judgment and the Tribe moved to dismiss under Federal Rules ofCivil procedure 12(b)(6) and 12(b)(7). On December 9, 2004, the Courtissued an order granting in part and denying in part the Tribe’s 12(b)(6) motionand denying the County Fire Chief ’ssummary judgment motion. The order reaffirmed the Court’s prior ruling denyingthe remand of that Public Law 280 does not authorize the County Fire Chief toinspect the casino. On March 1, 2005 the Court issued an order granting inpart 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, theCourt granted the Tribe’s motion. The County Fire Chief filed a Notice ofAppeal on May 26, 2005, at the Ninth Circuit Court of Appeals. Briefingwas completed at the Ninth Circuit on November 8, 2005. The case has notyet been set for oral argument.

*California Department of Alcoholic Beverage Control*

On September 13, 2004, the Department ofAlcoholic Beverage Control (“ABC”) denied the Tribe’s application for a liquorlicense based on the State Fire Marshal’s interpretation of the UniformBuilding Code. In May 2005, an Administrative Law Judge heard the Tribe’sappeal of the ABC’s denial and recommended that the ABC reverse

 

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itselfand approve the license. On August 25, 2005, the ABC announced that,effective October 11, 2005; it would adopt the Administrative Law Judge’sdecision to approve the license transfer pending a hearing on protests filed bycitizens and government officials. The ABC has received over 65 protestsagainst the license from citizens and government officials. The ABC held ahearing on the protests from March 7 to March 9, 2006. The deadlinefor filing post hearing briefs had been scheduled for early May 2006 andthe judge was to make his decision within 30 days after receipt of the finalbrief. However, on April 21, 2006, the California 4th District Court ofAppeal issued an unpublished decision which held that “the applicant bears theburden of proof regarding the applicant’s eligibility for a liquor license fromthe start of the application process until the Department makes the finaldetermination.” Coffin v. Department of Alcoholic Beverage Control (BaronaTribal Gaming Authority Real Party in Interest , No. D047218,Alcoholic Beverage Control Appeals Board Case Number AB 8336. On May 4,2006, the administrative law judge on this matter suspended the deadline forfiling written briefs until such time as the Appellate Court acts on requeststo certify the decision for publication. On May 12, 2006, the Court ofAppeal certified the decision for publication. Therefore, the Tribe’s case mayhave to be reheard in order to include references to the appropriate standardof proof. Once the judge makes a decision to approve or deny the licensetransfer application, it may be appealed by any parties to the proceeding solong as the appeal is filed within forty (40) days of the ABC’s decision. Thefirst appeal is to the ABC Appeals Board, and its decision may be appealed tothe California State court system.

Weare involved in other litigation and disputes from time to time in the ordinarycourse of business with vendors and patrons. We believe that the aggregateliability, if any, arising from such litigation or disputes will not have amaterial adverse effect on our results of operations, financial condition orcash flows.

**12.**                    COMPACT REVENUE SHARING TRUST FUND

TheCompact requires the Authority to pay a quarterly fee to the State ofCalifornia’s revenue sharing trust fund, based on the number of licensed gamingdevices operated by the Tribe. Revenue sharing trust fund fees assessed were$333,750 and $333,750 for the three months ended March 31, 2006 and 2005.

**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 the obligationsand liabilities of the Tribe are not the Authority’s. This law is untested andgenerally has no direct counterpart in other areas of the law. If this lawshould prove to be ineffective at limiting the Authority’s liability, theAuthority’s business and assets could become subject to claims asserted againstthe Tribe or its assets. Similarly, the Authority would be liable for suchclaims if the Tribe waived its sovereign immunity to an extent that allowedenforcement of such claims against the Authority’s business or assets.

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 andprovides Mr. Runyan an annual salary of $250,000 and a discretionarybonus, as determined by the Tribal Board, of not less than 7% and not more than25% of his annual salary based on various criteria. If Mr. Runyan’semployment is terminated for other reasons set forth in the employmentagreement including death or disability, Mr. Runyan will be entitled tohis salary for three months. Either party may terminate the agreement with a 90day written notice.

**Item 2. Management’s Discussion and Analysis of FinancialCondition 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

 

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reorganization wasaccounted for as a reorganization of entities under common control. Inaccordance with Statement of Financial Accounting Standards “141, BusinessCombinations,” the assets and liabilities of the Casino are presented by us ona historical cost basis.

     Weoffer Class III slot and video poker gaming machines, house banked tablegames (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 foodand beverage facilities and on June 18, 2003, we reached full operationwith 1,600 slot machines. The history of our operations is as follows:

·                  On September 14,2002, we commenced operations with approximately 66 gaming devices located in aportion of our current gaming facility.

·                  Between September 14, 2002 and March 31,2003, we periodically installed and removed a number of our gaming devices inpreparation for the opening of our entire gaming facility. During such period,the number of gaming devices operated increased to 242.

·                  On April 1,2003, we opened the remainder of our 62,000 square-foot gaming facility,including our food and beverage facilities, our Players Club, 16 table gamesand an additional 302 gaming devices.

·                  Between April 1,2003 and June 18, 2003, we gradually increased the number of gamingdevices from 544 to our current total of 1,600.

·                  In February 2005,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.

     Wecommenced operations with one parking lot located directly adjacent to our gamingfacility, designed to accommodate 225 customer vehicles or up to approximately325 customer vehicles when operated by a valet service during peak demandperiods. On March 23, 2003, we completed the construction of our secondparking lot, designed to accommodate 80 customer vehicles or up toapproximately 100 customer vehicles when operated by a valet service. On April 20,2003, we completed the construction of our third parking lot, designed toaccommodate 70 customer vehicles or up to approximately 75 customer vehicleswhen operated by a valet service.

     OnNovember 7, 2003, we issued the Notes. A portion of the net proceeds fromthe sale of the Notes was used to fund our expansion project, which includesthree new parking structures and related infrastructure improvements, to repayvarious debts and accrued expenses of the Tribe, as well as to increase ourcash on hand. The balance of the net proceeds was used to fund a land purchaseby the Tribe and settle litigation of the Tribe. The Notes are secured by afirst priority pledge of our revenues and substantially all of our existing andfuture tangible and intangible personal property.

     Atthe beginning of 2003, we started our infrastructure projects, including theexcavation of a hillside and the construction of retaining walls. In April 2003,we began the design process for the three new parking structures. The parkingstructures portion of the expansion project was completed in two phases and ourexisting gaming facility remained open during construction. On October 29,2004, we obtained a temporary certificate of occupancy to open the entire firstparking structure for self and valet parking. On December 1, 2004, wereceived a certificate of substantial completion on the first parking structure.The second phase, which included our second and third parking structures withapproximately 445 and approximately 470 spaces, respectively, opened on December 29,2004. As of March 31, 2006, we have parking spaces available toaccommodate a total of approximately 1,642 (decreasing

 

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from 1,735 due toconstruction of a retention basin in lot B) customer parked vehicles and 2,100vehicles when operated by a valet service.

**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 those estimates,including those related to asset impairment, accruals for our promotional slotclub, compensation and related benefits, revenue recognition, allowance fordoubtful accounts, contingencies and litigation. These estimates are based onthe information that is currently available to us and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults 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 and Equipment — Property andequipment are stated at cost. Depreciation and amortization are computed usingthe straight-line method over the estimated useful lives of the assets asfollows:

| Buildings and improvements        |   | 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 animpairment is indicated, the impairment loss is measured by the amount in whichthe carrying value of the asset or asset group exceeds its fair value. Fairvalue is measured by comparable sales, solicited offers or discounted cash flowmodels.

·                  AccruedProgressive Slot Jackpots — Accrued progressive slot jackpots consist ofestimates for prizes relating to various games that have accumulated jackpots.We have recorded 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, and providefor an exposure if it is judged to be probable and estimable. If the actualloss from a contingency differs from management’s estimate, operating resultscould be materially impacted. As of March 31, 2006, we have determinedthat no accruals for claims and legal actions are required. If circumstancessurrounding claims and legal actions change, the addition of accruals for suchitems in future periods may be required, which accruals may be material.

There are differences between financial statements preparedin 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

 

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andwould be the most comparable amount to net income computed under FASBpronouncements. We are an unincorporated instrumentality created by tribal lawand accounted for as a separate fund of the Tribe; as such there is no owners’or shareholders’ (deficit) equity as traditionally represented under FASBpronouncements. The most comparable measure of owners’ (deficit) equitypresented on our balance sheet would be Fund Deficit.

**Results of Operations**

**Comparison of the three monthsended March 31, 2006 and 2005**

*Net revenues*. Ournet revenues for the three months ended March 31, 2006 increased by $1.3million to $34.0 million from $32.7 million for the three months ended March 31,2005. The increase is attributed to increased operating activities.Approximately 97.5% of our net revenues were from our gaming activities in thefirst quarter 2006. We generated $29.1 million, or 85.5% of our net revenues,from gaming devices and $3.7 million, or 10.9% of our net revenues, from tablegames for the three months ended March 31, 2006 compared to $28.3 millionfrom gaming devices, or 86.5% of our net revenues, and $3.4 million, or 10.4%of our net revenues, from table games for three months ended March 31,2005. Our win per slot machine per day was $202 in the first quarter 2006,which increased by $2 from $200 in the first quarter 2005. The change in winper slot machine per day is also attributed to increased operating activities.

We generated $1.6 million and $1.6 million in food,beverage and retail sales for the three months ended March 31, 2006 and2005, respectively. The retail value of our food and beverage provided tocustomers without charge is included in gross revenues and then deducted aspromotional allowances. Such allowances were $0.9 million and $0.8 million forthree months ended March 31, 2006 and 2005, respectively.

*Operating expenses*.Operating expenses for the three months ended March 31, 2006 were $25.8million, or 76% of net revenues, compared to $22.8 million, or 69.7% of netrevenues, for the first quarter 2005. The increase in operating expenses isattributable to the Casino’s increased operating activities. Operating expenseas a percentage of net revenues increased in selling, general andadministrative expenses, due to an increased marketing effort to promote theCasino following the closure of the Casino on New Year’s Eve due to flooding inthe Geyserville, California area and the traffic interruptions caused by theclosure of the Geyserville Bridge.

Casino expense includes costs associated with ourgaming operations only. Casino expense also includes an allocation of food andbeverage expense related to the costs of complimentary activities. Casinoexpense for three months ended March 31, 2006 increased to $5.6 million,or 16.4% of Casino revenues, from $5.4 million, or 16.9% of Casino revenues,for the first quarter 2005. The increase in Casino expense is attributable toincreased labor costs in operational departments.

Food, beverage and retail expense for three monthsended March 31, 2006 was $1.6 million, or 99.2% of food, beverage andretail revenue, increasing from $1.4 million, or 92.4% of food, beverage andretail revenue for the first quarter 2005. Our food and beverage expense ratiois significantly higher than what we expect it to be in the future as we haveused our food and beverage services as a promotional opportunity to drawcustomers to our gaming facility and build customer loyalty rather than as asource of income.

Selling, general and administrative expense for threemonths ended March 31, 2006 increased by $2.6 million to $13.1 million, or38.6% of net revenues, from $10.5 million, or 32.2% of net revenues, for thefirst quarter 2005. The increase in selling, general and administrative expenseis attributable to increased marketing efforts to promote the Casino followingthe closure of the Casino on New Year’s Eve due to flooding in the Geyserville,California area and the traffic interruptions caused by the closure of theGeyserville Bridge.

Depreciation expense for three months ended March 31,2006 was $2.9 million, compared to $2.6 million, for the first quarter 2005.Depreciation expense was computed using the straight-line method over theuseful lives of property, plant and equipment. The increase in depreciationexpense is due to the addition of depreciable assets. On December 1, 2004,we obtained a certificate of substantial completion on the first of our threeparking structures and capitalized $22.6 million in related construction costs.We started to depreciate the first of our three parking structures in December 2004.The remaining structures were substantially complete on December 29, 2004.Depreciation on the remaining structures began January 1, 2005.

 

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We began paying the credit enhancement fee in June 2003.The credit enhancement fee was $1.6 million, or 4.7% of net revenues, for threemonths ended March 31, 2006, compared to $1.9 million, or 5.9% of netrevenues, for the first quarter 2005. The decrease is attributable to lower netincome.

Gaming commission and surveillance expense for threemonths ended March 31, 2006 increased by $0.2 million to $0.7 million,from $0.5 million for the first quarter 2005. This is attributable to addingsurveillance costs to Gaming commission expense starting the quarter ended September 30,2005 and an increase in regulatory staffing. Gaming commission and surveillancecosts for the first quarter 2006 and the first quarter 2005 were $722,741 and$536,613, respectively.  The Gamingcommission and surveillance expense consists of our reimbursement of the tribalgaming agency, known as the Dry Creek Gaming Commission’s (“TGA”) costs inconnection with the inspection of all gaming operations within the Tribe’sreservation boundaries, enforcement of all provisions of the tribal gamingordinance, investigation of all allegations of violations of the tribal gamingordinance, conducting or arranging for background investigations of allapplicants for tribal gaming licenses, issuing gaming licenses in accordancewith the tribal gaming ordinance and the compact, the payment of the salariesof the gaming commissioners and other employees of the TGA, surveillance costsand the payment of auditors fees.

Prior to July 1, 2005,TGA and surveillance costs were reimbursed by the Authority as incurred. TribalGaming Commission expenses were reported as Gaming Commission expenses and surveillance costs were reported in Selling, General andAdministrative Expenses on the Statement of Revenues, Expenses and Change inFund Balance. Effective July 1, 2005, the TGA adopted a regulation onpayments of regulatory fees from the Authority. Pursuant to the regulation, theTGA charges us a flat monthly fee of $235,000 to cover any operating expensesincurred by the TGA and surveillance, which are directly related and necessaryto the regulation of the Casino. Following the end of each calendar quarter,the TGA shall reconcile the monthly regulatory fee and actual operatingexpenses and make necessary adjustments. As of September 30, 2005, TGA andsurveillance expenses are being recorded in Gaming Commission and surveillanceexpenses on the Statement of Revenues, Expenses and Changes in Fund Balance.

Compact revenue sharing trust fund expense remainedthe same at $0.3 million for three months ended March 31, 2006 and 2005.Compact revenue sharing trust fund expense includes payments associated withoperating 1,600 gaming devices. These fees became payable by the Tribe when wecommenced operations in September 2002 and are based on the number of ourgaming device licenses. Compact revenue sharing trust fund expense includespayments to the Revenue Sharing Trust Fund (“RSTF”) as required by our Compactwith the State of California. The Tribe is obligated to remit certain fees tothe California Gambling Control Commission (“CGCC”) on a quarterly basis forinclusion in the RSTF. The RSTF is for the benefit of tribes that have no orlimited gaming. We pay these fees on behalf of the Tribe.

*Incomefrom operations.* Income from operations for three monthsended March 31, 2006 was $8.2 million, or 24% of net revenues, compared to$9.9 million, or 30.3% of net revenues, for the first quarter 2005. Thedecrease in income from operations is attributable to the Casino’s increasedmarketing and promotional efforts following the closure of the Casino on NewYear’s Eve due to flooding in the Geyserville, California area and the trafficinterruptions caused by the closure of the Geyserville Bridge.

*Otherexpense, net.* Other expense, net for three monthsended March 31, 2006 decreased to $5.0 million, or 14.8% of net revenues,from $5.3 million, or 16.3% of net revenues, for first quarter 2005. Otherexpense, net included $5.2 million of interest expense for the three monthsended March 31, 2006, compared to $5.3 million of interest expense for thefirst quarter 2005. No interest costs were capitalized in 2005 or 2006.

*Incomebefore distributions to the Tribe*. Income before distributions to theTribe for three months ended March 31, 2006 decreased by $1.4 million to$3.1 million, or 9.2% of net revenues, from $4.6 million, or 14.0% of netrevenues, in the first quarter 2005.

**Liquidity and Capital Resources**

Since our inception, wehave funded our capital expenditures and working capital requirements primarilythrough debt financing, gaming equipment supplier financing, other financingand operating cash flow.

 

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Construction of ourCasino and infrastructure improvements commenced on April 1, 2002. Thefirst portion of our gaming facility was completed in September 2002. Asof March 31, 2006, we had spent approximately $68.4 million on theplanning, development and construction of our gaming facility, infrastructure,furniture, fixtures and equipment excluding the expansion project. We financedthe development with borrowings and development advances.

We originally expectedcompletion of our expansion project to cost approximately $64.6 million,which we planned to fund with $61.4 million from the net proceeds of theoffering of our Notes (the “Notes Offering”) and $3.2 million from an advancefrom the Tribe. From the proceeds from the Notes Offering, we had also placedan additional $10.0 million in a construction escrow account to be available tofund additional construction contingencies. The original expansion budgetincluded $35.4 million for the three parking structures, $24.1 million forinfrastructure improvements and a $5.1 million construction contingency.

Duringthe spring of 2004, we revised our budget for the expansion project toapproximately $73.7 million. We have spent $75.8 million as of September 30,2005 on design and construction, which was funded through our restricted cashand cash from operations. The excess expenditure of $2.1 million is due to theout of scope work related to our infrastructure portion of the project, whichwas funded by our operating cash flow. Our final budget estimate is comprisedof $39.4 million for the three parking structures, which is $0.5 million morethan our original budget, and $34.3 million for infrastructure improvements,which is $8.6 million more than our original estimate. The total cost for theexpansion project was greater than original estimates because in an effort toexpedite construction, we commenced construction before all design documentswere finalized, which resulted in inefficiencies and modifications that causedactual construction costs to exceed budgeted amounts. In addition, theinfrastructure improvements portion of our expansion project resulted in higherthan expected costs due to weather delays and to unforeseeable soil conditions,which required us to substantially increase the scope of the work and quantityof the construction material.

As of March 31,2006, we spent $0.8 million on the development of an approximately 18-acreparcel of land adjacent to the Tribe’s reservation (referred to as the “DuganProperty”) which is expected to include an additional access road to ourCasino. We have $4.5 million remaining in a restricted account funded from theproceeds of our Notes Offering for the development of the Dugan Property.

Our capital expendituresfor the three months ended March 31, 2006 and 2005 were $1.2 million and$6.2 million, respectively. The decrease in 2006 is primarily attributable tothe completion of our expansion project and infrastructure improvements in thefirst quarter of 2005.

As of March 31,2006, we had cash and cash equivalents net of restricted cash of $25.2 million,as compared to $17.6 million, as of December 31, 2005. As of March 31,2006, we had restricted cash of $7.2 million, as compared to $7.4 million, asof December 31, 2005. Our principal source of liquidity during the threemonths ended March 31, 2006 consisted of cash flow from operatingactivities. Net cash provided by operating activities for three months ended March 31,2006 was $12.3 million, a decrease of $0.9 million from $13.2 million in thefirst quarter of 2005. The decrease in our net cash provided by operations is aresult of increases in our selling, general and administrative expensesresulting from efforts to promote the Casino following the flooding in theGeyserville, California area at the beginning of the year and the closure ofthe Geyserville Bridge.

Restricted cash consistsof net proceeds from the Notes Offering and investment earnings thereon setaside in construction financing accounts for construction costs for the threeparking structures, related infrastructure improvements and constructioncontingencies. It also includes funds that are reserved for additionalconstruction contingencies and the funds for the development of the DuganProperty. Our restricted cash is held in escrow accounts that can only be usedfor authorized construction disbursements until the related projects arecompleted.

Net cash used forcapital and related financing activities for the three months ended March 31,2006 was $1.6 million, compared to $14.2 million net cash used in capitaland related financing activities for three months ended March 31, 2005. Cashflow used in capital and related financing activities was primarily for paymentof the credit enhancement fees. Cash flow used in non-capital financingactivities for the three months ended March 31, 2006 was $3.0 million, anincrease of $0.8 million from $2.2 million, for three months ended March 31,2005. Cash flow used in non-capital financing activities consisted ofdistributions to the Tribe. On April 1, 2005, our payments to the Tribewere allowed to increase from $0.5 million per month to $1.0 million under theIndenture.

 

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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 toprevailing economic conditions and to financial, business and other factors,some of which are beyond our control. Additionally,the Indenture limits our ability to incur additional indebtedness.

**Contractual Obligations as of March 31,2006**

Thefollowing table summarizes ourcontractual obligations and commitments as of March 31, 2006:
| ** **                           | ** ** | **Total** | ** **  | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
|--------------------------------------|------------|-----------|-------------|-----------------|------------|--------------------|------------|--------------------|------------|
| Long-term debt  obligations (a) |       | $         | 200,046,960 |            | $          | 16,332             |       | $                  | 29,167     |   | $ | 200,001,461 |   |
| Operating lease  obligations         |       | 1,952,349 |        | 981,945         |       | 969,220            |       | 1,184              |       |
| Capital lease  obligations           |       | 241,256   |        | 86,794          |       | 154,462            |       | —             |       |
| Total obligations (b)                |       | $         | 202,240,565 |            | $          | 1,085,071          |       | $                  | 1,152,849  |   | $ | 200,002,645 |   |

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(a)             Excludedfrom long-term debt obligations above are interest payments of $19.5 million in1 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)            TheCompact requires us to pay a quarterly fee of $0.4 million to the RSTF based onthe number of our licensed gaming devices. Total obligations do not include theRSTF  payments.

**Regulationand Taxes**

We are subject toextensive regulation by the TGA, the CGCC and the National Indian GamingCommission. Changes in applicable laws or regulations could have a significantimpact on our operations.

On September 13,2004, the Department of Alcoholic Beverage Control (“ABC”) denied the Tribe’sapplication for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, anAdministrative Law Judge heard the Tribe’s appeal of the ABC’s denial andrecommended that the ABC reverse itself and approve the license. On August 25,2005, the ABC announced that, effective October 11, 2005; it would adoptthe Administrative Law Judge’s decision to approve the license transfer pendinga hearing on protests filed by citizens and government officials. The ABC hasreceived over 65 protests against the license from citizens and governmentofficials. The ABC held a hearing on the protests from March 7 to March 9,2006. The deadline for filing post hearing briefs had been scheduled for early May 2006and the judge was to make his decision within 30 days after receipt of thefinal brief. However, on April 21, 2006, the California 4th District Courtof Appeal issued an unpublished decision which held that “the applicant bearsthe burden of proof regarding the applicant’s eligibility for a liquor licensefrom the start of the application process until the Department makes the finaldetermination.” Coffin v. Department of Alcoholic Beverage Control (BaronaTribal Gaming Authority Real Party in Interest , No. D047218,Alcoholic Beverage Control Appeals Board Case Number AB 8336. On May 4,2006, the administrative law judge on this matter suspended the deadline forfiling written briefs until such time as the Appellate Court acts on requeststo certify the decision for publication. On May 12, 2006, the Court ofAppeal certified the decision for publication. Therefore, the Tribe’s case mayhave to be reheard in order to include references to the appropriate standardof proof. Once the judge makes a decision to approve or deny the licensetransfer application, it may be appealed by any parties to the proceeding solong as the appeal is filed within forty (40) days of the ABC’s decision. Thefirst appeal is to the ABC Appeals Board, and its decision may be appealed tothe California State court system.

Since we are anunincorporated governmental instrumentality of the Tribe located on reservationland held in trust by the United States of America, we are not subject tofederal or state income taxes. Various efforts have been made in Congress overthe past several years to enact legislation that would subject the income oftribal

 

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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.

**Impactof Inflation**

Absent changes incompetitive and economic conditions or in specific prices affecting the casinoindustry, we do not expect that inflation will have a significant impact on ourgaming facility operations. Changes in specific prices, such as fuel andtransportation prices, relative to the general rate of inflation may have amaterial adverse effect on the casino industry in general.

**Seasonality**

We have a limitedoperating history. We anticipate that activity at our gaming facility may bemodestly seasonal with stronger results expected during the summer due in partto the relatively higher levels of tourism during such times of the year. Inaddition, our operations may be impacted by adverse weather conditions andfluctuations in the tourism business. Accordingly, our results may fluctuatefrom quarter to quarter and the results of one quarter may not be indicative ofresults expected from future quarters.

**ITEM 3. QUANTITATIVE ANDQUALITATIVE 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.

Through March 31, 2006, we had not invested inderivative or foreign currency-based financial instruments. Additionally, weprimarily have fixed rate debt. As such, we do not believe we have materialexposure to market risk.

**ITEM 4. CONTROLSAND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that the information required to be disclosed in ourreports filed with, or furnished to, the SEC, pursuant to the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules,regulations and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer, ChiefOperations Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and15d-15(e) of the Exchange Act.

Our Chief OperationsOfficer, who was our acting Chief Executive Officer for the period covered bythis report, and Chief Financial Officer have reviewed and evaluated theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 240.13a — 15(e) and 15d — 15(e)) as of the end of thequarterly period ended March 31, 2006. Based on that evaluation, they haveconcluded that our disclosure controls and procedures as of the end of theperiod covered by this report are effective in timely providing them withmaterial information relating to us required to be disclosed in the reports wefile or submit under the Exchange Act. Our disclosure controls and proceduresare designed to provide reasonable assurances of achieving its objectives andour Chief Operations Officer and Chief Financial Officer have concluded thatour disclosure controls and procedures are effective in reaching that level ofreasonable assurance.

**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

*SonomaCounty Fire Marshal Inspection Case*

* *

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On October 7,2002, the Sonoma County Fire Chief (the “County Fire Chief”) filed an *ex parte* application for an inspectionwarrant in the Superior Court of the State of California for the County ofSonoma, seeking to inspect the casino. The Tribe believes that there is nobasis 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 October 9,2002, the Tribe removed the case to the United States District Court for theNorthern District of California. The County Fire Chief moved to remand andmoved for summary judgment and the Tribe moved to dismiss under Federal Rules ofCivil procedure 12(b)(6) and 12(b)(7). On December 9, 2004, the Courtissued an order granting in part and denying in part the Tribe’s 12(b)(6) motionand denying the County Fire Chief’s summary judgment motion. The orderreaffirmed the Court’s prior ruling denying the remand of that Public Law 280does not authorize the County Fire Chief to inspect the casino. On March 1,2005 the Court issued an order granting in part and denying in part the Tribe’s12(b)(7) motion. On March 4, 2005, the Tribe moved for summaryjudgment, and on April 29, 2005, the Court granted the Tribe’s motion. TheCounty Fire Chief filed a Notice of Appeal on May 26, 2005, at the NinthCircuit Court of Appeals. Briefing was completed at the Ninth Circuit on November 8,2005. The case has not yet been set for oral argument.

*California Department of Alcoholic Beverage Control*

On September 13,2004, the Department of Alcoholic Beverage Control (“ABC”) denied the Tribe’sapplication for a liquor license based on the State Fire Marshal’sinterpretation of the Uniform Building Code. In May 2005, anAdministrative Law Judge heard the Tribe’s appeal of the ABC’s denial andrecommended that the ABC reverse itself and approve the license. On August 25,2005, the ABC announced that, effective October 11, 2005; it would adoptthe Administrative Law Judge’s decision to approve the license transfer pendinga hearing on protests filed by citizens and government officials. The ABC hasreceived over 65 protests against the license from citizens and governmentofficials. The ABC held a hearing on the protests from March 7 to March 9,2006. The deadline for filing post hearing briefs had been scheduled for early May 2006and the judge was to make his decision within 30 days after receipt of thefinal brief. However, on April 21, 2006, the California 4th District Courtof Appeal issued an unpublished decision which held that “the applicant bearsthe burden of proof regarding the applicant’s eligibility for a liquor licensefrom the start of the application process until the Department makes the finaldetermination.” Coffin v. Department of Alcoholic Beverage Control (BaronaTribal Gaming Authority Real Party in Interest , No. D047218,Alcoholic Beverage Control Appeals Board Case Number AB 8336. On May 4,2006, the administrative law judge on this matter suspended the deadline forfiling written briefs until such time as the Appellate Court acts on requeststo certify the decision for publication. On May 12, 2006, the Court ofAppeal certified the decision for publication. Therefore, the Tribe’s case mayhave to be reheard in order to include references to the appropriate standardof proof. Once the judge makes a decision to approve or deny the licensetransfer application, it may be appealed by any parties to the proceeding solong as the appeal is filed within forty (40) days of the ABC’s decision. Thefirst appeal is to the ABC Appeals Board, and its decision may be appealed tothe California 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.

**ITEM 6. EXHIBITS**

(a)                       Exhibits

The Exhibit Index filed herewith is incorporated herein by reference.

(b)                     Reports on Form 8-K

None

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Dated: May 22, 2006 | RIVER ROCK ENTERTAINMENT AUTHORITY  (Registrant) |
|--------------------------|--------------------------------------------------|
|                     |                                             |   |
|                     | By:                                              | /s/ NORMAN RUNYAN |
|                     |                                             | Norman Runyan,  Chief Operations Officer  (Acting Chief Executive Officer for the  period covered by the Report) |
|                     |                                             |   |
|                     |                                             |   |
|                     | By:                                              | /s/ HANS WINKLER |
|                     |                                             | Hans Winkler,  Acting Chief Financial Officer |

 

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                   | ** ** | Exhibit | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|------------|------------|
| 31.1             |       | Certification by Norman  Runyan, Chief Operations Officer (Acting Chief Executive Officer for the  period covered by the Quarterly Report on Form 10-Q), pursuant to  Exchange Act Rules 13a-14(a) and 15d-14(a) (filed  herewith)                                                                                                       |
| 31.2             |       | Certification by  Hans Winkler, Acting Chief Financial Officer, pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a) (filed herewith)                                                                                                                                                                                                      |
| 32*              |       | Certification by Norman  Runyan, Chief Operations Officer (Acting Chief Executive Officer for the  period covered by the Quarterly Report on Form 10-Q) and by Hans  Winkler, Acting 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) |

 

*                    Thiscertification is being furnished solely to accompany this annual reportpursuant to 18 U.S.C. Section 1350, and is not being filed for purposes ofSection 18 of the Securities Exchange Act of 1934 and is not to be incorporatedby reference into any filing of River Rock Entertainment Authority whether madebefore or after the date hereof, regardless of any general incorporationlanguage in such filing.

 

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