River Rock Entertainment Authority - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to ____

Commission File Number: 333-115186

RIVER ROCK ENTERTAINMENT AUTHORITY
(Exact name of registrant as specified in its charter)

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

	3250 Highway 128 East Geyserville, California 95441 (707) 857-2777

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

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

Yes No

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
INDEX TO FORM 10-Q


Item	Description	Page

	PART I – FINANCIAL INFORMATION

1.	Financial Statements (unaudited)
	Balance Sheets-June 30, 2004 and December 31, 2003	1
	Statement of Revenues, Expenses and Changes in Fund Deficit — Three-Months ended June 30, 2004 and 2003 and Six-Months ended June 30, 2004 and 2003	2
	Statements of Cash Flows — Six-Months ended June 30, 2004 and 2003	3
	Notes to unaudited Financial Statements	5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
3.	Quantitative and Qualitative Disclosures About Market Risk	23
4.	Controls and Procedures	23

	PART II – OTHER INFORMATION

1.	Legal Proceedings	24
6.	Exhibits and Reports on Form 8-K	25

Signature Exhibit Index	25

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

BALANCE SHEETS

		June 30, 2004 (Unaudited)		December 31, 2003

	ASSETS

CURRENT ASSETS:
	Cash and cash equivalents	$19,588,162		$16,897,644
	Restricted cash-current	15,227,165		13,304,106
	Accounts receivable	203,715		106,748
	Inventories	376,548		149,401
	Prepaid expenses and other current assets	578,793		882,933


	Total current assets	35,974,383		31,340,832


RESTRICTED CASH-Net of Current		26,046,697		56,762,374

PROPERTY AND EQUIPMENT:
	Buildings and improvements	40,797,206		40,345,177
	Furniture, fixtures and equipment	21,534,657		20,512,559

		62,331,863		60,857,736
	Accumulated depreciation	(7,638,421	)	(4,610,859	)
	Construction in progress	47,610,709		17,965,694


	Property and equipment-net	102,304,151		74,212,571

DEPOSITS AND OTHER ASSETS		7,712,878		7,864,059


TOTAL		$172,038,109		$170,179,836

	LIABILITIES AND FUND DEFICIT

CURRENT LIABILITIES:
	Accounts payable:
	Trade	$2,605,798		$6,185,353
	Construction	5,197,505		3,285,658
	Accrued liabilities	6,639,918		5,634,797
	Current maturities of long-term debt	10,029,660		10,018,448


	Total current liabilities	24,472,881		25,124,256

LONG-TERM DEBT – net of current maturities		197,575,650		197,410,354
FUND DEFICIT		(50,010,422	)	(52,354,774	)

TOTAL		$172,038,109		$170,179,836

The accompanying notes are an integral part of these unaudited financial statements.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND DEFICIT
(Unaudited)

		Three-Month Period Ended June 30,					Six-Month Period Ended June 30,

			2004		2003			2004		2003

REVENUES:
	Casino		$24,548,140		$18,393,578			$49,284,959		$23,854,359
	Food, beverage & retail		1,177,265		734,218			2,397,848		734,218
	Other		148,326		76,268			270,049		132,623

	Gross revenues		25,873,731		19,204,064			51,952,856		24,721,200

	Promotional allowance		(507,054	)	(192,490	)		(1,030,815	)	(192,490	)


	Net revenues		25,366,677		19,011,574			50,922,041		24,528,710

OPERATING EXPENSES:
	Casino		4,719,024		3,865,091			9,144,119		4,659,081
	Food, beverage & retail		1,106,243		1,172,666			2,460,994		1,423,710
	Selling, general and administrative		8,680,249		6,496,461			17,215,273		9,258,323
	Depreciation		1,545,642		1,282,181			3,069,679		1,456,004
	Credit enhancement fee		1,354,717		300,458			2,744,954		300,458
	Gaming commission expense		460,326		368,990			897,549		660,302
	Compact revenue sharing trust fund		333,750		333,750			667,500		667,500


	Total Operating expenses		18,199,951		13,819,597			36,200,068		18,425,378


INCOME FROM OPERATIONS			7,166,726		5,191,977			14,721,973		6,103,332

OTHER EXPENSE-Net
	Interest expense		(5,465,860	)	(1,700,085	)		(9,581,162	)	(1,743,059	)
	Interest income		125,520		—			283,289		—
	Gain (Loss) on sale of assets		(54,517	)	—			(54,517	)	—
	Other expense		(65	)	—			(231	)	—


	Other expense-net		(5,394,922	)	(1,700,085	)		(9,352,621	)	(1,743,059	)


INCOME BEFORE DISTRIBUTIONS TO TRIBE			1,771,804		3,491,892			5,369,352		4,360,273
DISTRIBUTIONS TO TRIBE			(1,500,000	)	(334,613	)		(3,025,000	)	(1,111,212	)
NET INCOME AFTER DISTRIBUTIONS TO TRIBE			271,804		3,157,279			2,344,352		3,249,061
FUND DEFICIT-Beginning of period			(50,282,226	)	(6,244,628	)		(52,354,774	)	(6,336,410	)


FUND DEFICIT-End of period			$(50,010,422	)	$(3,087,349	)		$(50,010,422	)	$(3,087,349	)

The accompanying notes are an integral part of these unaudited financial statements.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

STATEMENTS OF CASH FLOWS
(Unaudited)

		Six-Month Period Ended June 30,

		2004			2003

CASH FLOWS FROM OPERATING ACTIVITIES:
	Cash received from gaming winnings and concessions		$50,802,821			$24,588,577
	Cash paid for salaries and benefits		(12,160,580	)		(7,053,759	)
	Cash paid to suppliers		(20,844,666	)		(6,985,737	)
	Cash paid for compact revenue sharing trust fund		(667,500	)		(667,500	)

	Net cash provided by operating activities		17,130,075			9,881,581

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:
	Proceeds from long-term financing		20,566			—
	Payments of long-term debt		(12,683	)		9,862,566
	Purchases of property and equipment		(28,066,601	)		(2,024,850	)
	Change in restricted cash		28,792,618			(14,500,651	)
	Interest paid		(9,951,232	)		1,810,920
	Credit enhancement fee		(2,310,805	)		(1,899,001	)
	Proceeds on sale of assets		113,580			—
	Other		—			(165,689	)

	Net cash (used in) capital and related financing activities		(11,414,557	)		(6,916,705	)

CASH FLOW FROM NON-CAPITAL FINANCING ACTIVITIES-
	Distributions to Tribe		(3,025,000	)		(1,111,212	)

CHANGE IN CASH AND CASH EQUIVALENTS			2,690,518			1,853,664

CASH AND CASH EQUIVALENTS, Beginning of the period			16,897,644			872,168

CASH AND CASH EQUIVALENTS, End of the period			$19,588,162			$2,725,832

RECONCILIATION OF INCOME BEFORE DISTRIBUTIONS TO TRIBE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
	Income before Distributions to Tribe		$5,369,352			$4,360,273

	Adjustments to reconcile income before distributions to Tribe to net cash provided by operating activities:
	Depreciation		3,069,679			1,456,004
	Interest Expense, net		9,581,162			1,743,059
	Credit enhancement fee		2,744,954			300,458
	Loss on sales of assets		54,517			—
	Changes in operating assets and liabilities:
	Accounts receivable		(96,967	)		(12,196	)
	Inventories		(227,147	)		(152,851	)
	Prepaid expenses and other current assets		(60,984	)		(131,443	)
	Accounts payable-trade		(3,579,555	)		1,719,462
	Accrued liabilities		275,064			598,815

	Total adjustments		11,760,723			5,521,308

NET CASH PROVIDED BY OPERATING ACTIVITIES			$17,130,075			$9,881,581

SUPPLEMENTARY SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES:
	Acquisition of property and equipment through third party financing		$20,566			$6,937,240
	Acquisition of property and equipment through accounts payable construction		1,911,847			(175,512	)
	Capitalized interest included in purchases of property and equipment		1,350,908			714,235

The accompanying notes are an integral part of these unaudited financial statements.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1.	DESCRIPTION OF BUSINESS

River Rock Entertainment Authority (the “Authority”) is a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians (the “Tribe”), a federally recognized Indian tribe. River Rock Casino (the “Casino”) is a governmental development project of the Authority. The Casino offers Class III gaming (as defined by the Indian Gaming Regulatory Act) on tribal land located in Geyserville, California. The legal authority for slot machines and table games is provided by the Tribe’s gaming compact with the State of California (the “Compact”), which was entered into in September 1999 and became effective upon approval by the Secretary of Interior on May 5, 2000.

The Tribe opened a portion of the Casino, while construction was being completed, on September 14, 2002. Following completion of construction the Casino was fully opened to the public on April 1, 2003.

The Authority was formed as an unincorporated instrumentality of the Tribe on November 5, 2003, which effected a reorganization whereby the Tribe’s gaming business is now owned and operated by the Authority. This reorganization was accounted for as a reorganization of entities under common control. Accordingly, after the reorganization, the assets and liabilities of the casino operating property were presented by the Authority on a historical-cost basis.

The Authority operates as a separate, wholly owned operating unit of the Tribe and is not a separate legal entity. These financial statements reflect the financial position and activity of only the Authority and do not purport to represent the financial position and activity of the Tribe.

The Authority is in the initial stages of operations. Income before distributions to Tribe was $1,771,804 for the three months ended June 30, 2004 and $5,369,352 for the six-months ended June 30, 2004. A fund deficit of $50,010,422 exists as of June 30, 2004. The Authority’s current assets exceeded its current liabilities by $11,501,502. On November 7, 2003, the Authority issued $200,000,000 in 9¾% Senior Notes, due 2011 (the “Notes”), and used a portion of the proceeds to reduce current payables, accruals and debt. The Authority’s ability to fund future debt service payments is dependent upon the success of the Authority. Management believes that the full-scale casino will attract sufficient patronage levels to achieve profitability and to repay its indebtedness. The Authority currently generates significant cash flow from operations and expects that its cash flow will increase substantially upon completion of construction of the enhanced parking structures. The Authority anticipates that its operations will require only modest capital investment after the completion of its expansion project. In addition, the Authority has not been subject to any local, state or federal income taxes.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Standards–The Authority prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). The financial statements presented are prepared on the accrual basis of accounting from the accounts and financial transactions of the Authority. Generally accepted accounting principles require the Authority to apply all applicable pronouncements of the Governmental Accounting Standards Board (“GASB”). The Authority is also required to follow Financial Accounting Standards Board (“FASB”) Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The Authority is given the option whether to apply 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 FASB Statements and Interpretations issued after November 30, 1989.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS– (Continued)

There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with FASB pronouncements. The statements of revenues, expenses and changes in fund deficit is a combined statement under GASB pronouncements, FASB pronouncements allow a statement of income or operations and a separate statement of owners’ or shareholders’ equity deficit, which is where distributions to owners would be presented under FASB pronouncements. The amount shown as income (loss) before distributions to Tribe would not be different if the Authority followed all FASB pronouncements to determine net income and would be the most comparable amount to net income computed under FASB pronouncements. The Authority is a separate fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ equity deficit as traditionally represented under FASB pronouncements. The most comparable measure of owners’ equity deficit is presented on the Authority’s balance sheet as fund deficit.

New Accounting Pronouncements–In June 1997, GASB issued Statement No. 34, Basic Financial Statements–and Management’s Discussion and Analysis–for State and Local Governments, which becomes effective for the Authority for the year ending December 31, 2004. The statement modifies the reporting requirements for basic financial statements and the required supplementary information for general-purpose governments. In June 2001, GASB also issued Statement No. 37, Basic Financial Statements–and Management’s Discussion and Analysis–for State and Local Governments: Omnibus, and Statement No. 38, Certain Financial Statement Disclosures. These also become effective for the fiscal year ending December 31, 2004. Management believes that the impact of adoption of these statements on the financial statements of the Authority will not be material.

In March 2003, GASB issued Statement No. 40, Deposit and Investment Risk Disclosures–an amendment of GASB Statement No. 3, which becomes effective for the Authority for the year ending December 31, 2005. This statement requires state and local governments to communicate key information about deposit and investment risks. The impact of adoption of this statement on the financial statements of the Authority has not yet been determined.

In May 2003, the GASB issued Statement of Governmental Accounting Standards No. 41, Budgetary Comparison Schedules–Perspective Differences–an amendment of GASB Statement No. 34. The provisions of this Statement should be implemented simultaneously with Statement No. 34. For governments that have implemented Statement No. 34 prior to the issuance of this statement, the requirements of this statement are effective for financial statements for periods beginning after June 15, 2002. Earlier application is encouraged. This statement becomes effective for the Authority for the year ending December 31, 2004. The amendment to Statement No. 34 clarifies the budgetary presentation requirements for governments with significant budgetary perspective differences that result in their not being able to present budgetary comparison information for their general fund and major special revenue funds. These governments are required to present budgetary comparison schedules as required supplementary information (“RSI”) based on the fund, organization or program structure that the government uses for its legally adopted budget. Management believes that the impact of adoption of these statements on the financial statements of the Authority will not be material.

In November 2003, the GASB issued Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, effective for periods beginning after December 15, 2004. Earlier application is encouraged. This statement establishes accounting and financial reporting standards for impairment of capital assets. This statement also clarifies and establishes accounting requirements for insurance recoveries. The impact of adoption of this statement on the financial statements of the Authority has not yet been determined.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS– (Continued)

Use of Estimates –The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents–The Authority considers all highly liquid investments with a maturity of three months or less at date of purchase as cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value. Cash and cash equivalents include cash on hand and cash on deposit with banks. The Federal Deposit Insurance Corporation (“FDIC”) has insured $100,000 of the cash on deposit with the bank. The Authority believes that there is little risk of loss regarding the uninsured amounts of cash and cash equivalents on deposit with the bank.

Inventories–Inventories, consisting principally of gaming supplies and concession items, are stated at the lower of cost (first-in, first-out) or market.

Restricted Cash–Restricted cash consists of estimated construction expenses for three parking structures, related infrastructure improvements and construction contingencies. It also includes funds that are reserved for additional construction contingencies and the funds necessary to develop an approximately 18-acre parcel of land adjacent to the Tribe’s reservation, which is expected to be used primarily to build an additional access road to the Tribe’s reservation. These funds are held in escrow accounts which are restricted for authorized construction disbursements. These escrow accounts are invested in CD markets, which generate interest on a monthly basis. The FDIC has insured $100,000 of this balance. The Authority believes that there is little risk of loss regarding the uninsured amounts of restricted cash held in the escrow account. Restricted cash was $41,273,862 and $70,066,480 at June 30, 2004 and December 31, 2003, respectively.

Property and Equipment–Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:

	Building and Improvements	10-39 years

	Furniture, fixtures and equipment	5-7 years

The Authority evaluates its property and equipment for impairment in accordance with the FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When events or circumstances indicate that an asset should be reviewed for impairment, the Authority compares the undiscounted cash flows derived from the asset or asset group to the net carrying value. If impairment is indicated, the impairment loss is measured by the amount in which the carrying value of the asset or asset group exceeds its fair value. Fair value is measured by comparable sales, solicited offers or discounted cash flow models.

Capitalized Interest–The interest cost associated with major development and construction projects is capitalized and included in the cost of the Authority. Capitalization of interest ceases when the project is substantially complete or development activity is suspended. Capitalized interest for the six-months ended June 30, 2004 and 2003 was $1,350,908 and $714,235, respectively.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS– (Continued)

Deposits and Other Assets – As of June 30, 2004 and December 31, 2003, deposits and other assets include $7,494,768 and $7,728,532 in unamortized loan costs related to the issuance of the Notes. Deferred loan costs are amortized to interest expense over the term of the related financial arrangement.

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

Accrued Progressive Slot Jackpots–Accrued progressive slot jackpots consist of estimates for prizes relating to various games that have accumulated jackpots. The Authority has recorded the cost of these anticipated payouts as a reduction of casino revenues, 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 Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future, the Authority has recorded a liability related to prizes and cash incentives earned by the members of the players club and have adjusted the liability for the estimated future breakage. The Authority has recorded the cost of the estimated redemption of the liability related to prizes as an operating expense and the estimated redemption of the liability related to cash as promotional allowance in the accompanying statements of revenues, expenses and changes in fund deficit.

Casino Revenues–In accordance with industry practice, the Authority recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive slot jackpots.

Food, Beverage and Retail–The Authority recognizes as food, beverage and retail revenues the proceeds from its food, beverage and gift shop sales. Food and beverages were distributed freely within the Authority during 2002 and the first half of 2003. The Authority continues to distribute beverages freely in the gaming area.

Other Revenues–Other revenues are comprised of commissions on ATM, check cashing, vending machine transactions and Gaming Commissions revenues.

Promotional Allowances–The retail value of food and beverages provided to customers without charge is included in gross revenues and then deducted as promotional allowances. The redemption of cash incentives earned by the player’s club members is also recorded as promotional allowances. The estimated costs of providing complimentary services are recorded as casino expenses. The costs of such services for the three months ended June 30, 2004 and 2003 were $836,938 and $501,938, respectively. The cost of such services for the six months ended June 30, 2004 and 2003 were $1,424,438 and $501,938, respectively.

Food and Beverage Costs–Food and beverage costs include costs associated with food and beverage, excluding amount 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 $830,317 and $554,156 for the three months ended June 30, 2004 and 2003, respectively. Advertising costs were $1,693,056 and $870,295 for the six months ended June 30, 2004 and 2003, respectively.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS– (Continued)

Income Taxes –As a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians, a federally recognized Indian tribe, the Authority is a nontaxable entity for purposes of federal and state income taxes.

Distributions to Tribe–Distributions to Tribe are made up of a stated draw amount and are included in the statement of revenues, expenses and changes in fund deficit as distributions to Tribe. The Tribal draw was $500,000 per month for the first half of 2004. The Authority also distributed $25,000 to the Tribe for a deposit in an effort to purchase a parcel of land for the use of the Authority. The total distributions to the Tribe were $3,025,000 and $1,500,000 for the six and three months ended June 30, 2004, respectively. The total distributions to the Tribe were $1,111,212 and $334,613 for the six and three months ended June 30, 2003, respectively.

3.	CERTAIN RISKS AND UNCERTAINTIES

The Authority’s operations are dependent on the continued licensing and qualification of the Authority by the Tribal Gaming Commission. Such licensing and qualification are reviewed periodically by the Tribal Gaming Commission and regulatory agencies of the State of California. The Authority believes that no events or circumstances have arisen that would have an adverse effect on the Casino’s ability to continue its licensing and qualification by the Tribal Gaming Commission or regulatory agencies of the State of California to operate the Authority.


4.	RELATED PARTIES

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

The Authority paid for various expenses for the Tribal Gaming Commission (gaming commission expense), surveillance, plant operations, human resource, purchasing and warehousing in the first half of 2004. These expenses include but are not limited to payroll and related expenses, legal and other operational expenses. These expenses were $1,290,202 and $2,388,478 for the three and six months ended June 30, 2004, respectively. The Authority paid for various expenses for the Tribal Gaming Commission in 2003. These expenses were $368,990 and $660,302 for the three and six months ended June 30, 2003, respectively. With the exception of the gaming commission expense, these expenses were recorded as part of selling, general and administrative expenses.

5.	DEVELOPMENT AND LOAN AGREEMENT

The Tribe 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”). The Development Agreement required DCC to: (1) use its best efforts to arrange for the Tribe to receive loan proceeds in the amount of $23,000,000 for construction of the Casino; (2) advance specified amounts to the Tribe to fund tribal government relocation, housing and costs; and (3) fund additional advances to the Tribe to assist in the development of the Casino and to cover other costs of construction not related to the loan. On November 7, 2003, the Authority refinanced $22,600,000 of the $32,600,000 principal amount of the development loan. As of June 30, 2004, the outstanding debt related to the Development Agreement was $10,000,000, which was included in the restricted cash to cover construction cost overruns. In the case when management decides to cover the construction cost overruns by operation cash flow, this loan will be repaid to DCC.

Back to Contents

RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

NOTES TO UNAUDITED FINANCIAL STATEMENTS– (Continued)

In addition to its obligations to repay the loan and advances specified in the Development Agreement in consideration of DCC’s providing credit enhancement and other services under the Development Agreement, the Tribe is obligated to pay DCC a Credit Enhancement Fee. The credit enhancement fee is defined as 20% of the Authority’s net income before distributions to the Tribe plus depreciation. On November 7, 2003, the Authority and DCC entered into the Sixth Amendment to the Development and Loan Agreement, which modified the credit enhancement fee calculation so that operating expenses shall not include interest expense on $25,000,000 million principal amount of the Notes. The credit enhancement fee is required to be paid monthly for a period of five years commencing on June 1, 2003. The credit enhancement fee for the three months and six months ended June 30, 2004 was $1,354,717 and $2,744,954, respectively. The credit enhancement fee for the three and six months ended June 30, 2003 was $300,458.

The Authority has the right to terminate the Development Agreement by exercising a buy-out option on or after June 1, 2006 (the “Buy-Out Option”). If exercised, the Authority is obligated to pay all amounts outstanding with respect to financing, including outstanding development advances and accrued interest plus an amount determined by multiplying the average monthly credit enhancement fee earned during the 12-month period immediately preceding the month the Buy-Out Option is exercised, by the number of months remaining in the five-year term (the “Remaining Term”). The buy-out fee is required to be paid in equal monthly installments of principal plus interest at the rate of 12% per annum, on the 15th day of each month over a period equal to the Remaining Term.

6.	CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Cash and cash equivalents and restricted cash consisted of the following as of June 30, 2004:


	June 30, 2004		December 31, 2003

Operating accounts	$	17,455,768	$	14,639,349
Cash on hand		2,132,394		2,258,295


Cash and cash equivalents		19,588,162		16,897,644
Restricted cash		41,273,862		70,066,480


Total cash and cash equiva