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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 


 

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, 2010

 

OR

 

o

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

 

68-0490898

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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

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

 

Indicate by check 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  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No x

 

 

 



Table of Contents

 

RIVER ROCK ENTERTAINMENT AUTHORITY

INDEX TO FORM 10-Q

 

Item

 

Description

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

1.

 

Unaudited Condensed Financial Statements

4

 

 

Condensed Balance Sheets-March 31, 2010 (unaudited) and December 31, 2009

4

 

 

Unaudited Condensed Statements of Revenues, Expenses and Changes in Net Assets (Deficit) - Three Months ended March 31, 2010 and 2009

5

 

 

Unaudited Condensed Statements of Cash Flows - Three Months ended March 31, 2010 and 2009

6

 

 

Notes to Unaudited Condensed Financial Statements

8

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

3.

 

Quantitative and Qualitative Disclosures About Market Risk

25

4T.

 

Controls and Procedures

25

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

1.

 

Legal Proceedings

26

1A.

 

Risk Factors

26

6.

 

Exhibits

29

 

 

 

 

Signatures

30

 

 

Exhibit Index

30

 

2



Table of Contents

 

CAUTIONARY STATEMENT

 

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (as well as documents incorporated herein by reference) may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Such forward-looking statements are based upon current expectations that involve risks and uncertainties and include declarations regarding the intent, belief or current expectations of us and our management and may be signified by the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, whether as a result of new information, future events, or otherwise. All discussion in this report should be read in conjunction with our financial statements and the accompanying 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 Creek Rancheria 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-K filed with the Securities and Exchange Commission.

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

CONDENSED BALANCE SHEETS

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

35,860,929

 

$

31,617,507

 

Accounts receivable

 

225,934

 

266,146

 

Inventories

 

65,992

 

77,643

 

Prepaid expenses and other current assets

 

1,197,413

 

1,379,133

 

 

 

 

 

 

 

Total Current Assets

 

37,350,268

 

33,340,429

 

 

 

 

 

 

 

RESTRICTED CASH

 

7,099,276

 

7,097,526

 

 

 

 

 

 

 

CAPITAL ASSETS:

 

 

 

 

 

Buildings and building improvements

 

131,561,640

 

131,361,604

 

Furniture, fixtures and equipment

 

35,296,083

 

35,102,290

 

Accumulated depreciation

 

(62,580,068

)

(60,121,221

)

Construction in progress

 

74,326,761

 

59,588,618

 

 

 

 

 

 

 

Capital assets - net

 

178,604,416

 

165,931,291

 

 

 

 

 

 

 

DEPOSITS AND OTHER ASSETS

 

1,723,198

 

1,936,623

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

224,777,158

 

$

208,305,869

 

 

 

 

 

 

 

LIABILITIES AND NET ASSETS (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

2,441,212

 

$

6,060,663

 

Payable to Tribe

 

11,086,054

 

 

Accrued liabilities

 

13,028,949

 

7,695,373

 

Current maturities of long-term debt

 

188,176

 

492,203

 

Total current liabilities

 

26,744,391

 

14,248,239

 

 

 

 

 

 

 

LONG-TERM DEBT - net of current maturities

 

199,466,024

 

199,381,712

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

226,210,415

 

213,629,951

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

NET ASSETS (DEFICIT)

 

 

 

 

 

Invested in capital assets-net of related debt

 

(21,049,784

)

(33,942,624

)

Restricted for capital projects

 

7,099,276

 

7,097,526

 

Unrestricted

 

12,517,251

 

21,521,016

 

 

 

 

 

 

 

Total net assets (deficit)

 

(1,433,257

)

(5,324,082

)

 

 

 

 

 

 

TOTAL LIABILITIES AND NET ASSETS (DEFICIT)

 

$

224,777,158

 

$

208,305,869

 

 

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

 

4



Table of Contents

 

RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS (DEFICIT)

(Unaudited)

 

 

 

Three-Month Period Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

30,935,377

 

$

29,952,516

 

Food, beverage and retail

 

1,439,312

 

1,425,886

 

Other

 

257,020

 

128,836

 

 

 

 

 

 

 

Gross revenues

 

32,631,709

 

31,507,238

 

 

 

 

 

 

 

Promotional allowances

 

(378,915

)

(219,911

)

 

 

 

 

 

 

Net revenues

 

32,252,794

 

31,287,327

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

Casino

 

3,833,008

 

4,172,882

 

Food, beverage and retail

 

1,803,753

 

2,062,378

 

Selling, general and administrative

 

10,563,323

 

10,084,895

 

Depreciation

 

2,458,847

 

2,374,610

 

Gaming commission and surveillance expense

 

767,973

 

865,501

 

Compact revenue sharing trust fund

 

333,750

 

333,750

 

 

 

 

 

 

 

Total Operating expenses

 

19,760,654

 

19,894,016

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

12,492,140

 

11,393,311

 

 

 

 

 

 

 

NON-OPERATING EXPENSE-Net:

 

 

 

 

 

Interest expense

 

(5,214,736

)

(5,215,500

)

Interest income

 

11,400

 

8,438

 

 

 

 

 

 

 

Non-operating expense-net

 

(5,203,336

)

(5,207,062

)

 

 

 

 

 

 

INCOME BEFORE DISTRIBUTIONS TO TRIBE

 

7,288,804

 

6,186,249

 

 

 

 

 

 

 

DISTRIBUTIONS TO TRIBE

 

(3,397,979

)

(3,324,979

)

 

 

 

 

 

 

CHANGE IN NET ASSETS

 

3,890,825

 

2,861,270

 

 

 

 

 

 

 

NET ASSETS (DEFICIT) - Beginning of period

 

(5,324,082

)

(15,669,154

)

 

 

 

 

 

 

NET ASSETS (DEFICIT) - End of period

 

$

(1,433,257

)

$

(12,807,884

)

 

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

 

5



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RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three-Month
Period Ended
March 31,

 

 

 

2010

 

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Cash received from gaming winnings and concessions

 

$

32,195,520

 

$

31,264,476

 

Cash paid for salaries and benefits

 

(6,625,429

)

(8,030,206

)

Cash paid to suppliers

 

(10,858,616

)

(10,198,251

)

Cash paid for compact revenue sharing trust fund

 

(333,750

)

(333,750

)

 

 

 

 

 

 

Net cash provided by operating activities

 

14,377,725

 

12,702,269

 

 

 

 

 

 

 

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

 

 

 

 

 

Payments of debt

 

(304,027

)

(56,577

)

Purchases of capital assets

 

(2,899,948

)

(3,908,054

)

Transfers to the Tribe for development costs

 

(3,500,000

)

 

Change in restricted cash

 

(1,750

)

(1,747

)

Interest paid

 

 

(762

)

Other

 

(41,999

)

48,294

 

 

 

 

 

 

 

Net cash used in capital and related financing activities

 

(6,747,724

)

(3,918,846

)

 

 

 

 

 

 

CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:

 

 

 

 

 

Interest Income

 

11,400

 

8,438

 

 

 

 

 

 

 

CASH FLOWS USED IN NON-CAPITAL FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Distribution to Tribe

 

(3,397,979

)

(3,324,979

)

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

4,243,422

 

5,466,882

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, Beginning of the period

 

31,617,507

 

27,348,392

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, End of the period

 

$

35,860,929

 

$

32,815,274

 

 

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RIVER ROCK ENTERTAINMENT AUTHORITY

(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three-Month
Period Ended
March 31,

 

 

 

2010

 

2009

 

RECONCILIATION OF INCOME FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Income From Operations

 

$

12,492,140

 

$

11,393,311

 

 

 

 

 

 

 

Adjustments to reconcile operating income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

2,458,847

 

2,374,610

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

40,212

 

(197,020

)

Inventories

 

11,651

 

25,204

 

Prepaid expenses

 

181,720

 

199,760

 

Accounts payable

 

(1,265,421

)

(921,353

)

Accrued liabilities

 

458,576

 

(172,243

)

Total adjustments

 

1,885,585

 

1,308,958

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

14,377,725

 

$

12,702,269

 

 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

225,102

 

$

 

Acquisition of property and equipment through transfers to Tribe for development costs

 

$

11,086,054

 

$

 

 

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

 

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NOTES TO UNAUDITED CONDENSED 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 of 1988, as amended) 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 Compact expires on December 31, 2020.

 

The Authority was formed as an unincorporated instrumentality of the Tribe on November 5, 2003 pursuant to a reorganization whereby the Tribe’s gaming business became 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’s 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 the Authority only and do not purport to represent the financial position and activity of the Tribe.

 

2.                                BASIS OF PRESENTATION, UNAUDITED INTERIM FINANCIAL STATEMENTS

 

The unaudited condensed financial statements of the Authority, presented herein are presented on the same basis and can be compared to the audited financial statements reported in the Authority’s annual information in the Authority’s 2009 Annual Report on Form 10-K, filed with the SEC. The accompanying condensed balance sheet as of December 31, 2009 has been derived from the audited financial statements included in the Authority’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

River Rock Entertainment Authority has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to financial statements in accordance with the Securities and Exchange Commission’s rules and regulations. The unaudited condensed financial statements should be read in conjunction with the financial statements and the notes thereto in River Rock Entertainment Authority’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

In the opinion of the Authority’s management, the accompanying unaudited interim condensed financial statements contain all adjustments (consisting of normal recurring adjustments) to fairly present the Authority’s condensed financial position as of March 31, 2010 and the condensed statements of revenues, expenses and changes in net assets (deficit) for the three month periods ended March 31, 2010 and 2009, and condensed statements of cash flows for the three months ended March 31, 2010 and 2009, as applicable. The condensed statements of revenues, expenses and changes in net assets (deficit) and condensed cash flows for all periods presented are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.

 

3.                    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 (“GAAP”) applicable to State and local government agencies and, as such, the Authority is accounted for as a proprietary fund. The financial statements presented are prepared on the accrual basis of accounting from the accounts and financial transactions of the Authority. GAAP requires the Authority to apply all applicable pronouncements of the Governmental Accounting Standards Board (“GASB”). The Authority is also required to follow the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”) for topics

 

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issued on or before November 30, 1989, unless those topics conflict with or contradict GASB pronouncements.  The Authority is given the option whether to apply the FASB topics 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 topics issued after November 30, 1989.

 

There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with the FASB Codification. The statements of revenues, expenses and changes in net assets (deficit) are a combined statement under GASB pronouncements. The FASB Codification 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 the FASB Codification.  The amount shown as income before distributions to Tribe would be the most comparable amount to net income computed under the FASB Codification.  The Authority is a separate enterprise fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ equity (deficit) as traditionally represented under the FASB Codification.  The most comparable measure of owners’ equity (deficit) is presented on the Authority’s balance sheet as net assets (deficit).

 

During the third quarter of 2009, the Authority adopted the new Accounting Standards Codification (“ASC”) as issued by the FASB.  The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The ASC is not intended to change or alter existing GAAP.  The adoption of the ASC did not have a material impact on the Authority’s financial statements.

 

FASB has issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements.” This ASU requires certain new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require: (A) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (B) In the reconciliation for fair value measurements using significant unobservable inputs, Level 3, a reporting entity should present separately information about purchases, sales, issuances, and settlements.  In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures: (A) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (B) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. As this update is only “disclosure-related,” it does not have an impact on the Authority’s financial position and results of revenues, expenses and changes in net assets (deficit).

 

FASB has issued ASU No. 2010-16, “Entertainment — Casinos (Topic 924) — Accruals for Casino Jackpot Liabilities.”  This ASU addresses the accounting for casino base jackpot liabilities, specifically, whether an entity accrues liabilities for a base jackpot before it is won if the entity is not required to award the base jackpot.  This ASU clarifies that an entity should not accrue jackpot liabilities (or portions thereof) before a jackpot is won if the entity can avoid paying that jackpot.  Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot.  This guidance applies to both base and progressive jackpots.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this new standard is not expected to have any effect on the Authority’s financial position or result of operations.

 

Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include legal and other contingencies, obligations under players’ club programs and useful lives

 

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and recoverability of long-lived assets. Actual results could differ from these 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, cash on deposit with banks and highly liquid investments.  The Federal Deposit Insurance Corporation (“FDIC”) has insured $250,000 of the cash on deposit at an FDIC member bank. The Authority believes that there is little risk of loss regarding the uninsured amounts of cash and cash equivalents on deposit with the banks.

 

Restricted Cash— Restricted cash consists of net proceeds from the Notes Offering and investment earnings thereon set aside in construction financing accounts, for construction costs for related infrastructure improvements and construction contingencies. It also includes funds that are reserved for construction contingencies and the funds for the development of the Dugan Property, an approximately 18-acre parcel of land adjacent to the Tribe’s reservation. The restricted cash is held in escrow accounts that can only be used for authorized construction disbursements until the related projects are completed.  These escrow accounts are invested in money market accounts, which generate interest on a monthly basis. The FDIC has insured $250,000 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 $7,099,276 and $7,097,526 at March 31, 2010 and December 31, 2009, respectively.  As of March 31, 2010, restricted cash includes amounts available for construction of $2,772,694 and land development funds of $4,326,582.

 

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

 

Capital Assets — Capital Assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings and improvements:

 

5-21 years

Furniture, fixtures and equipment:

 

5 years

 

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the life of the asset are not capitalized.

 

Major outlays of capital assets and improvements are capitalized as construction-in-progress as projects are constructed.

 

Evaluation of Long-Lived Assets — Accounting pronouncement GASB No. 42, “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries,” established accounting and financial reporting standards for impairment of capital assets.  The Authority’s capital assets include building and improvements, furniture, fixtures and equipment.  A capital asset is considered impaired if both the decline in service utility of the capital asset is large in magnitude and the event or change in circumstances is outside the normal life cycle of the capital asset.  The Authority is required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred.  Common indicators of impairment include evidence of physical damage where restoration efforts are needed to restore service utility, enactment or approval of laws or regulations setting standards that the capital asset would not be able to meet, technological development or evidence of obsolescence, a change in the manner or expected duration of use of a capital asset or construction stoppage.  This Statement will require the Authority to report the effects of capital asset impairment in its financial statements when they occur, rather than as part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset, and to account for insurance recoveries in the same manner.  The Authority’s management has determined that no impairment of capital assets currently exists.

 

Capitalized interest The interest cost associated with major development and construction projects is capitalized and included in the cost of the asset.  Capitalization of interest ceases when the project is substantially complete or when development activity is suspended.  The Authority did not capitalize any interest for the three months ended March 31, 2010 and 2009.

 

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Prepaid Expenses and Other Current  Assets — Prepaid expenses and other current assets were $1,197,413 and $1,379,133 as of March 31, 2010 and December 31, 2009, respectively, which includes prepaid insurance, prepaid uniforms and prepaid supplies.

 

Deposits and Other Assets — As of March 31, 2010 and December 31, 2009, respectively, deposits and other assets mainly represent $1,620,024 and $1,875,448 in unamortized legal fees and other issuance costs related to the issuance of the Authority’s 9 ¾% Senior Notes due 2011 (the “Senior Notes”) under the Indenture, dated November 7, 2003 (the “Indenture”).

 

Accrued Liabilities — Accrued liabilities consist of accrued interest, accrued payroll and other accrued liabilities.

 

Progressive Jackpots Liabilities —The Casino has a number of progressive jackpot slot machines.  As coins are played, the amount available to win increases and will be paid out when the appropriate winning combination occurs.  The Casino has recorded the progressive jackpots as a liability, with a corresponding charge against gaming revenue, of $1,582,336 and $1,587,748 as of March 31, 2010 and December 31, 2009, respectively.  Also, the Casino has available for customer play, wide area progressive slot machines that are interlinked with other unrelated casinos.  These machines are monitored and maintained by the vendor and the Casino is required to remit a percentage of coin-in to the respective vendor.  The Casino records a charge against revenue for the portion of the fee applied to the wide area progressive jackpots.  Amounts recorded against revenue for the portion of the fee applied to the wide area progressive jackpots were approximately $218,218 and $350,744 for the three months ended March 31, 2010 and 2009, respectively.  All other administrative charges are recorded in operating expenses.

 

Accrued Slot Players Club — The Authority has recorded a liability related to free play, prizes and cash incentives earned by the members of our Players Club. The Authority has recorded the estimated redemption of the liability as contra-revenue in the accompanying statements of revenues, expenses and changes in net assets (deficit).

 

Contingencies — The Authority assesses its exposure to loss contingencies, including legal matters, and provides for an exposure if it is judged to be probable and estimable. If the actual loss from a contingency differs from management’s estimate, operating results could be materially impacted. As of March 31, 2010, management determined that no accruals for claims and legal actions are required. If circumstances surrounding claims and legal actions change materially, the addition of accruals for such items in future periods may be required.

 

Authority net assets — Investments in capital assets, net of related debt, consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets.  Invested in capital assets, net of related debt, excludes unspent debt proceeds.  Restricted net assets represent amounts that are appropriated or are legally segregated for a specific purpose.  The Authority’s net assets are reported as restricted when there are limitations imposed on its use, either through the enabling legislation adopted by the Authority or through external restrictions imposed by creditors, grantors, laws or regulations of other governments.

 

Casino Revenues—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 and certain player incentives, when earned by the customer.

 

Food, Beverage and Retail Revenues — The Authority recognizes as food, beverage and retail revenues the proceeds from its food, beverage and gift shop sales. The Authority continues to distribute non-alcoholic beverages without cost in the gaming area for playing guests.  In December 2009, the Authority replaced the gift shop with vending machines.  The vending machines are owned and operated by a third party.  The Authority receives a commission from the vending machine sales and such commission are recorded as Other Revenues.

 

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

 

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Promotional Allowances — The retail value of food and beverages provided to customers without charge or at a discount is included in food, beverage and retail revenues and then deducted as promotional allowances. Such amounts that are included in food, beverage, and retail revenues for the three months ended March 31, 2010 and 2009 were $378,915 million and $219,911, respectively.

 

Food and Beverage Expenses — Food and beverage expenses include cost of goods sold related to providing food and beverage to our customers. The estimated costs of providing complimentary products and services are reflected in Casino expenses.

 

Advertising Costs — Advertising costs are expensed as incurred or when an advertisement is first aired or circulated. Advertising costs included in selling, general and administrative expenses for the three months ended March 31, 2010 and 2009 were $1,522,876 and $841,976, respectively.

 

Gaming Commission and Surveillance Expenses — The Authority pays for various expenses for the Tribal Gaming Commission and Surveillance.  Such expenses include salaries and wages and related benefits for Regulatory, Surveillance and office staff, training, audit fees, background checks and licensing.

 

Income Taxes —As a governmental instrumentality of the Tribe, the Authority is a non-taxable entity for purposes of federal and state income taxes.

 

Distributions to Tribe — Distributions to Tribe are made up of permitted and service payments under the covenants of the Indenture.  They are included in the statements of Revenues, Expenses and Changes in Net Assets (deficit) as distributions to Tribe allowed pursuant to the Indenture.  Total distributions to the Tribe for the three months ended March 31, 2010 and 2009 were $3,397,979 and $3,324,979, respectively.

 

Reclassifications — Certain prior period balances in the Statement of Cash Flows, have been reclassified to be consistent with current period presentation with no impact on cash provided by operating activities, cash used in capital and related financing activities, cash provided by investing activities or cash used in non-capital financing activities. In addition, approximately $174,000 of promotional allowances for the three month period ended March 31, 2009 was reclassified from selling, general and administrative expenses to promotional allowances with no impact on income from operations.

 

4.                          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.

 

5.                          RELATED PARTIES

 

The Casino 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 pays for various expenses for the following departments operated by the Tribe:  Tribal Gaming Commission including surveillance, and plant operations and human resources.  These departmental expenses include but are not limited to payroll and related expenses, legal, and other operational expenses.  The Tribe had been operating the warehouse.  However, in 2010, the Authority began operating the warehouse department.

 

Total amounts billed by the Tribe to the Casino for these departments, excluding Tribal Gaming Commission and surveillance, for the three months ended March 31, 2010 and 2009 were $986,065 and $879,915, respectively.  These amounts are recorded as a component of selling, general and administrative expenses.

 

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The Authority pays for various expenses for the Tribal Gaming Commission and surveillance. Tribal Gaming Commission and surveillance expenses are recorded in Gaming Commission and surveillance expenses on the Statements of Revenues, Expenses and Changes in Net Assets (deficit).  Gaming Commission and surveillance expenses for the three months ended March 31, 2010 and 2009 were $767,973 and $865,501, respectively.

 

The Tribe incurred approximately $67.0 million in total expenses on the Authority’s behalf for master planning of the proposed resort and infrastructure improvements on the reservation that benefits the Casino, of which almost all of such expenditures were incurred prior to 2009 before the construction was suspended.  The Authority reimbursed the Tribe approximately $52.4 million through 2009.  On January 8, 2010, the Authority’s Board of Directors authorized the reimbursement of the Tribe in an amount not to exceed approximately $14.9 million of construction costs.  The approval included a payment schedule according to which the Authority reimbursed the Tribe $2,700,000 on January 18, 2010, $400,000 on each of February 1, 2010 and March 1, 2010.  The Authority has agreed to reimburse the Tribe $400,000 on April 1, 2010 and $700,000 monthly through November 1, 2010 without exceeding $14.9 million.  When the reimbursement payments are made or accrued, the related expenses are capitalized and reflected in construction-in-progress. The reimbursed costs consist of engineering and design costs related to the proposed master plan development, including electrical, HVAC, landscaping, interior design services and consulting fees for legal, branding, feasibility, and public relations services, as well as the construction costs of the lower Acorn Road.  During the three months ended March 31, 2010, the Authority reimbursed the Tribe $3.5 million for development expenditures and accrued the remaining $11.1 million, which is included in Payable to Tribe in the Condensed Balance Sheet at March 31, 2010.

 

The Authority reserved 50 recreational vehicle spaces and 10 campsite spaces at Alexander RV Park and Campground for casino guests.  Alexander RV Park and Campground is a wholly owned subsidiary of the Tribe.  The cost of reserving the parking spaces and campsite spaces for the three months ended March 31, 2010 was $69,458 compared to $66,150 for the same prior year period.

 

6.                          CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

Cash and cash equivalents and restricted cash consisted of the following as of March 31, 2010 and December 31, 2009:

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Operating accounts

 

$

9,372,581

 

$

16,281,764

 

Money market accounts*

 

22,104,300

 

10,095,039

 

Cash on hand

 

4,384,048

 

5,240,704

 

 

 

 

 

 

 

Cash and cash equivalents

 

35,860,929

 

31,617,507

 

Restricted cash

 

7,099,276

 

7,097,526

 

 

 

 

 

 

 

Total cash and cash equivalents and restricted cash

 

$

42,960,205

 

$

38,715,033

 

 


*Represents level 1 fair value measurement, quoted prices in active markets for identical items.

 

Deposits — Custodial credit risk is the risk that in the event of a bank failure, the Authority’s deposits (cash in checking, sweep, and money market accounts held with its third-party administrator) may not be returned to it.  The Authority does not have a deposit policy for custodial credit risk.  As of March 31, 2010 and December 31, 2009, approximately $38,017,617 and $34,009,525, respectively, of the Authority’s bank balance for these deposits of $38,533,335 and $34,580,666, respectively, was exposed to custodial credit risk, as it was uninsured and uncollateralized.

 

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7.         CAPITAL ASSETS

 

Capital Assets at March 31, 2010 and December 31, 2009 consisted of the following:

 

 

 

Balance, as of
December 31, 2009

 

Additions

 

Dispositions

 

Transfers
In(Out)

 

Balance, as of
March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and improvements

 

$

131,361,604

 

$

3,976

 

$

 

$

196,060

 

$

131,561,640

 

Furniture, fixtures and equipment

 

35,102,290

 

127,946

 

 

65,847

 

35,296,083

 

Less accumulated depreciation

 

(60,121,221

)

(2,458,847

)

 

 

(62,580,068

)

 

 

106,342,673

 

(2,326,925

)

 

261,907

 

104,277,655

 

Construction in Progress

 

59,588,618

 

15,000,050

 

 

(261,907

)

 

74,326,761

 

Capital assets - net

 

$

165,931,291

 

$

12,673,125

 

$

 

$

 

$

178,604,416

 

 

Construction in progress consists of payments to the Tribe and various vendors related to the Authority’s master plan development and land improvements.  Substantially all of the Authority’s personal property is pledged as collateral to secure its debt.

 

8.         ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of March 31, 2010 and December 31, 2009:

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Accrued in-house progressive slot jackpots

 

$

1,582,336

 

$

1,587,748

 

Accrued payroll and related benefits

 

2,091,458

 

1,514,557

 

Accrued interest

 

8,125,000

 

3,250,000

 

Accrued other expenses

 

1,230,155

 

1,343,068

 

Total accrued liabilities

 

$

13,028,949

 

$

7,695,373

 

 

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9.             LONG-TERM DEBT

 

Long-term debt consisted of the following as of March 31, 2010 and December 31, 2009:

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

9-3/4% Senior Notes, net of unamortized issue discount of $533,976 and $618,288. Due November 2011

 

$

199,466,024

 

$

199,381,712

 

Vehicle and Slot Notes

 

188,176

 

492,203

 

 

 

 

 

 

 

Total Long-Term Debt

 

199,654,200

 

199,873,915

 

Less: current portion

 

(188,176

)

(492,203

)

 

 

 

 

 

 

Total long-term-debt - net of current maturities

 

$

199,466,024

 

$

199,381,712

 

 

On November 7, 2003, the Authority issued the Senior Notes. The proceeds were utilized to fund an expansion project, which included three parking structures, related infrastructure improvements, repayment of various debt and advances and fund payment of various accruals and payables, as well as to increase cash on hand. The proceeds were also utilized to fund a land purchase and settle litigation.  The Senior Notes are collateralized by a first priority pledge of the Authority’s revenue and substantially all of the existing and future tangible and intangible personal property. The Authority may redeem the Senior Notes, in whole or in part, at a redemption price that is at a premium to the principal amount of the Senior Notes (expressed as percentages of principal amount), plus accrued and unpaid interest.  Interest on the Senior Notes is due semi-annually in May and November.

 

The Authority’s long-term debt is recorded at an amortized historical cost basis.  The fair value of the Senior Notes was approximately $188.3 million as of March 31, 2010 based on level one inputs, quoted prices in active markets.

 

10.                   EMPLOYEE BENEFIT PLAN

 

The Authority participates in a 401(k) Plan, a retirement plan (the “Plan”), which is qualified under Section 401(k) of the Internal Revenue Code.  The Plan is a defined contribution plan administered by an insurance company and is available to all eligible employees of the Casino who have attained age 21 and have at least three months of eligible service as defined in the Plan.  The Plan participants may contribute up to 50 percent of their eligible pretax compensation, subject to legal limitations.  The Authority at its discretion, will make matching contributions.  Any forfeiture due to employee terminations reduces future Casino contributions.  Participants become vested in employer contributions, as well as any earnings thereon, over a three-year period at the rate of 30 percent, 60 percent and 100 percent at the end of each year, respectively.  Employee contributions to the Plan were $127,413 and $141,151 for the three months ended March, 31, 2010, and 2009, respectively.  The Casino made matching contributions to the Plan of $11,968 and $41,637 during the three months ended March 31, 2010, and 2009, respectively.  The Casino temporarily suspended its matching contribution in January 2009 and reinstated it in March 2010.

 

11.          RISK MANAGEMENT

 

The Casino is exposed to various risks of loss related to worker’s compensation and torts; theft of, damage to or destruction of assets; and errors or omissions.  The Casino has purchased commercial insurance policies for said risks.  There has been no significant reduction of insurance coverage, and settlements have not exceeded coverage in the past three years.  The Casino retains the risk of dental claims subject to individual limits of $1,500 per employee.

 

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12.                   LEASES

 

The Authority extended its operating lease of the sprung structure that houses the casino operations.  The amended lease expires on June 17, 2012.  The agreement calls for monthly payments of $25,395.  During the three months ended March 31, 2010 and 2009, total rental expense was $76,185, and $108,690, respectively.

 

Other operating leases include leases for office spaces and copiers.

 

13.                   LEGAL MATTERS AND SUBSEQUENT EVENTS

 

Runyan Litigation

 

On March 7, 2008, Norman Runyan, the Authority’s former Chief Operations Officer, filed a wrongful termination suit against the Authority, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of the Authority’s Board, in the Sonoma County Superior Court.  The Authority believed the case lacked merit and moved to dismiss.  On October 17, 2008, the Court issued an Order dismissing the lawsuit.  On December 3, 2008, the Court entered an Order granting the Authority’s motion and dismissed the case.

 

On January 14, 2009, Mr. Runyan filed a Petition for Order Compelling Arbitration with the Sonoma County Superior Court, and on January 30, 2009, he filed a Motion for Order Compelling Arbitration.  In both the Petition and the Motion, Mr. Runyan sought to have the Court issue an order compelling arbitration of the claims asserted in the complaint that was dismissed by the court in December 2008.  The Authority believed, based on fact that Mr. Runyan entered into a Severance Agreement and General Release with the Casino, and other released parties, that there was no basis for Mr. Runyan to seek arbitration.  On April 13, 2009, the Authority, the Casino, and Mr. Hopkins filed a hybrid motion to quash summons and dismiss the Petition and Motion.  On June 1, 2009, the Court granted the motion in its entirety, holding that the Court lacked personal and subject matter jurisdiction, that Mr. Runyan terminated and extinguished his purported employment agreement (which contained the arbitration clause he attempted to rely on) and that he waived any right to arbitration he might have had by settling and releasing all claims.  Finally, the Court held that the Authority and the other respondents have tribal sovereign immunity from service of process.

 

Mr. Runyan filed a Notice of Appeal of the Superior Court’s Order on July 27, 2009 and filed his opening brief in the First District Court of Appeal on December 11, 2009.  The Authority’s respondents brief was filed on January 8, 2010, Mr. Runyan’s reply brief was filed on February 26, 2010, and oral argument has been set for May 11, 2010.  The Authority continues to believe that there was no basis for Mr. Runyan to seek arbitration and will argue vigorously in favor of upholding the Superior Court’s Order granting the motion to quash summons and dismissing Mr. Runyan’s petition and motion for an order compelling arbitration.

 

Other Legal Matters

 

The Authority is involved in other litigation and disputes from time to time in the ordinary course of business with vendors and patrons. The Authority believes that the aggregate liability, if any, arising from such litigation or disputes will not have a material adverse effect on its results of operations, financial condition or cash flows.

 

14.                   COMPACT REVENUE SHARING TRUST FUND

 

Under the Compact as entered into with the State of California in September 1999, the Tribe must pay annual license fees of $900-$4,350 per Class III gaming device, based on the number of gaming device licenses approved by the state gaming commission.  The Compact does not require a license for the first 350 Class III gaming devices in use and does not require a license fee for an additional 350 machines. Payments are due on a quarterly basis and are remitted into a state revenue sharing trust fund.  License fees expense totaled $333,750 for each of the three months ended March 31, 2010, and 2009.

 

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15.                   COMMITMENTS AND CONTINGENCIES

 

The Authority is an unincorporated instrumentality of the Tribe formed pursuant to an adopted law of the Tribe. While the Authority is not a separate corporation or other legal entity distinct from the Tribe, this tribal law allows the Authority to own and operate its business. This tribal law also provides that the Authority’s obligations and other liabilities are not those of the Tribe and that the obligations and liabilities of the Tribe are not those of the Authority. This law is untested and generally has no direct counterpart in other areas of the law. If this law should prove to be ineffective at limiting the Authority’s liability, the Authority’s business and assets could become subject to claims asserted against the Tribe or its assets. Similarly, the Authority would be liable for such claims if the Tribe waived its sovereign immunity to an extent that allowed enforcement of such claims against the Authority’s business or assets.

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) which settled several long-standing legal disputes between Sonoma County (the “County”) and the Tribe and provides a binding framework for resolving future disputes.  Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over the next 12 years to offset the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and to support the services being provided by the County.  In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.  The Tribe has not made any determinations to seek reimbursement or direct payment from the Authority of amounts due to the County pursuant to the MOA.

 

16.                   SUBSEQUENT EVENTS

 

On April 9, 2010, the Authority entered into an employment agreement with Mr. David F. Fendrick as its Chief Executive Officer and General Manager of the Casino.  The agreement is effective as of April 9, 2010, and continues through April 8, 2013, unless terminated earlier by the parties under the terms of the agreement. The agreement provides for the payment to Mr. Fendrick of an initial annual base salary of $300,000.  Mr. Fendrick will also be eligible to receive an annual bonus at the discretion of the Authority’s Board of Directors not to exceed thirty percent (30%) of his annual base salary.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed financial statements and related notes included in Item 1 of this report.

 

Overview

 

We are an unincorporated governmental instrumentality of the Tribe that owns and operates the Casino.  We offer Class III slot and video poker gaming machines, house banked table games (including Blackjack, Three card poker, Mini-baccarat and Pai Gow poker), Poker, featuring Texas Hold’em, and comprehensive food and beverage offerings.

 

FASB Codification Discussion

 

Over the years, the Financial Accounting Standards Board (“FASB”) and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc.  The FASB recognized the complexity of its standard-setting process and embarked on a revised process in 2004 resulting in the release of the FASB Accounting Standards Codification (the “ASC”) on July 1, 2009.  The ASC was effective for financial statements for interim or annual reporting periods ending after September 15, 2009.

 

The ASC became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this Statement, the ASC superseded all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the ASC will become nonauthoritative. This Statement was effective for financial statements issued for interim and annual periods ending after September 15, 2009.

 

Following the ASC, FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. FASB will not consider Accounting Standards Updates as authoritative in their own right.  Accounting Standards Updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s)  in the ASC.

 

The ASC does not change how we account for our transactions or the nature of related disclosures made.  However, when referring to guidance issued by the FASB, we will refer to topics in the ASC rather than FASB Statements, for example.  We have updated references to GAAP in this Form 10-Q to reflect the guidance in the ASC.

 

Critical Accounting Policies and Estimates

 

We have identified certain critical accounting policies and estimates that affect our more significant judgments and estimates used in the preparation of our financial statements. The preparation of our financial statements, in conformity with GAAP, requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate those estimates, including those related to asset impairment, accruals for our promotional slot club, compensation and related benefits, revenue recognition, contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We believe that the following critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements:

 

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·                              Casino Revenues — Casino revenue is recognized as 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 and certain player incentives, when earned by the customer.

 

·                              Capital Assets — Capital assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings and improvements:

 

5-21 years

Furniture, fixtures and equipment:

 

5 years

 

We evaluate our capital assets for impairment in accordance with the Accounting pronouncement GASB No. 42, “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries.”  This Statement establishes accounting and financial reporting standards for impairment of capital assets.  Our capital assets include building and improvements, furniture, fixtures and equipment.  A capital asset is considered impaired if both the decline in service utility of the capital asset is large in magnitude and the event or change in circumstances is outside the normal life cycle of the capital asset.  We are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred.  Common indicators of impairment include evidence of physical damage where restoration efforts are needed to restore service utility, enactment or approval of laws or regulations setting standards that the capital asset would not be able to meet, technological development or evidence of obsolescence, a change in the manner or expected duration of use of a capital asset or construction stoppage.  This Statement requires us to report the effects of capital asset impairment in its financial statements when they occur, rather than as part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset, and to account for insurance recoveries in the same manner.

 

· Accrued Progressive Slot Jackpots — Accrued progressive slot jackpots consist of estimates for prizes relating to various games that have accumulated jackpots. We have recorded the anticipated payouts as a reduction of casino revenues and as a component of accrued liabilities.  We do not accrue for the base jackpot.

 

· Contingencies — We assess our exposure to loss contingencies, including legal matters, and provide for an exposure if it is judged to be probable and estimable. If the actual loss from a contingency differs from management’s estimate, operating results could be materially impacted. As of March 31, 2010, we have determined that no accruals for claims and legal actions are required. If circumstances surrounding claims and legal actions change materially, the addition of accruals for such items in future periods may be required.

 

Codification — There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with the Codification issued by the FASB. The statements of revenues, expenses and changes in net assets (deficit) are a combined statement under GASB pronouncements. The FASB Codification 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 the FASB Codification. The amount shown as income before distributions to the Tribe would be the most comparable amount to net income computed under the FASB Codification. We are a separate enterprise fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ equity (deficit) as traditionally represented under the FASB Codification.  The most comparable measure of owners’ equity (deficit) is presented on our balance sheet as net assets (deficit).

 

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RIVER ROCK ENTERTAINMENT AUTHORITY

(A governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)

 

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2010 and 2009

(Dollars in Millions)

 

 

 

March 31,

 

Dollar
Variance

 

Percentage
Variance

 

 

 

2010

 

2009

 

2010 vs. 2009

 

2010 vs. 2009

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Casino

 

$

30.9

 

$

30.0

 

$

1.0

 

3.3

%

Food, beverage and retail

 

1.4

 

1.4

 

0.0

 

0.9

%

Other

 

0.3

 

0.1

 

0.1

 

99.5

%

 

 

 

 

 

 

 

 

 

 

Gross revenues

 

32.6

 

31.5

 

1.1

 

3.6

%

 

 

 

 

 

 

 

 

 

 

Promotional allowances

 

(0.4

)

(0.2

)

(0.2

)

72.3

%

 

 

 

 

 

 

 

 

 

 

Net revenues

 

32.3

 

31.3

 

1.0

 

3.1

%

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Casino

 

3.8

 

4.2

 

(0.3

)

-8.1

%

Food, beverage and retail

 

1.8

 

2.1

 

(0.3

)

-12.5

%

Selling, general and administrative

 

10.6

 

10.1

 

0.5

 

4.7

%

Depreciation

 

2.5

 

2.4

 

0.1

 

3.5

%

Gaming commission and surveillance expense

 

0.8

 

0.9

 

(0.1

)

-11.3

%

Compact revenue sharing trust fund

 

0.3

 

0.3

 

 

0.0

%

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

19.8

 

19.9

 

(0.1

)

-0.7

%

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

12.5

 

11.4

 

1.1

 

9.6

%

 

 

 

 

 

 

 

 

 

 

NON-OPERATING EXPENSE-Net

 

 

 

 

 

 

 

 

 

Interest expense

 

(5.2

)

(5.2

)

0.0

 

0.0

%

Interest income

 

0.0

 

0.0

 

0.0

 

35.1

%

 

 

 

 

 

 

 

 

 

 

Non-operating expense-net

 

(5.2

)

(5.2

)

0.0

 

-0.1

%

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE DISTRIBUTIONS TO TRIBE

 

$

7.3

 

$

6.2

 

$

1.1

 

17.8

%

 

Results of Operations

 

Comparison of the three months ended March 31, 2010 and 2009

 

Net revenues. Net revenues for the three months ended March 31, 2010 increased by $1.0 million to $32.3 million, from $31.3 million, for the three months ended March 31, 2009.  We believe the increase in net revenues is attributable to an increase in customer satisfaction levels resulting from the casino renovation project.  Our renovation project has resulted in better customer retention, longer stays, and an increase in the number of visits.  Approximately 95.9% of our net revenues were from our gaming activities in the first quarter of 2010, as compared to 95.7% in the comparable prior year period.  We generated $28.0 million or 86.7% of our net revenues from gaming devices, and $3.0 million, or 9.2% of our net revenues

 

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from table games and poker for the three months ended March 31, 2010, compared to $27.0 million from gaming devices or 86.2% of our net revenues, and $3.0 million or 9.6% of net revenues from table games and poker for the three months ended March 31, 2010.  Our win per slot machine per day was $257 for the three months ended March 31, 2010, which increased by $66 from $191 for the three months ended March 31, 2009.  The increase in net win per machine per day is primarily attributable to the decrease in the average number of slot machines on the floor.  We have been reconfiguring our gaming floor in an effort to enhance our overall appeal.  As part of this effort, we reduced the average number of slot machines to 1,211 for the three  months ended March 31, 2010, compared to 1,569 for the three months ended March 31, 2009.

 

We generated $1.1 million, net of promotional allowance of $0.4 million, in food, beverage and retail sales for the three months ended March 31, 2010, compared to $1.2 million, net of promotional allowances of $0.2 million, in food, beverage and retail sales for the three months ended March 31, 2009.

 

Promotional allowances. Promotional allowances for the three months ended March 31, 2010 were $0.4 million, or 1.2% of net revenues, compared to $0.2 million, or 0.7% of net revenues, for the three months ended March 31, 2009.

 

Operating expenses. Operating expenses for the three months ended March 31, 2010 were $19.8 million, or 61.3% of net revenues, compared to $19.9 million, or 63.6% of net revenues, for the three months ended March 31, 2009.

 

Casino expense includes costs associated with our gaming operations and the allocation of food and beverage expense related to the cost of complimentary activities.  Casino expense for the three months ended March 31, 2010 was $3.8 million compared to $4.2 million for the three months ended March 31, 2009.  Casino expense as a percentage of Casino revenues decreased to 12.4% from 13.9% for the three months ended March 31, 2009.  The decrease in Casino expenses is due to the decrease in payroll, contract and consulting services.

 

Food, beverage and retail expense for the three months ended March 31, 2010 was $1.8 million, or 170.1% of food, beverage and retail revenue, net of promotional allowances, compared to $2.1 million, or 171.0% of food, beverage and retail revenue, net of promotional allowances for the three months ended March 31, 2009.  Our food, beverage and retail expense ratio is significantly higher than the industry average because we have utilized these amenities as an opportunity to build customer loyalty rather than as a source of income.

 

Selling, general and administrative expense for the three months ended March 31, 2010 was $10.6 million, or 32.8% of net revenues, from $10.1 million, or 32.2% of net revenues, for the three months ended  March 31, 2009.

 

Depreciation expense for the three months ended March 31, 2010 was $2.5 million compared to $2.4 for the three months ended March 31, 2009.  Depreciation expense was computed using the straight-line method over the useful life of property, plant and equipment.

 

Gaming Commission and surveillance expense for the three months ended March 31, 2010 was $0.8 million compared to $0.9 million for the three months ended March 31, 2009.

 

The Compact requires us to pay a quarterly fee to the State of California’s revenue sharing trust fund, based on the number of licensed gaming devices we are allowed to operate.  Revenue sharing trust fund fees assessed were $0.3 million for each of the three months ended March 31, 2010 and 2009.

 

Income from operations. Income from operations for the three months ended March 31, 2010 was $12.5 million, or 38.7% of net revenues, compared to $11.4 million, or 36.4% of net revenues, for the three months ended March 31, 2009.  The increase in income from operations is attributable to the increase in business volumes as a result of the Casino renovation project as well as the ongoing marketing efforts and the decrease in operating expenses from our cost saving measures.

 

Non-Operating expense, net. Non-operating expense, net for the three months ended March 31, 2010 was $5.2  million, or 16.1% of net revenues, compared to $5.2 million or 16.6% of net revenues, for the three months ended March 31, 2009.  Non-operating expense, net, includes $5.2 million of interest expense for each of the three months ended March 31, 2010 and 2009.  No interest costs were capitalized in the three months ended March 31, 2010 and 2009.

 

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Income before distributions to Tribe. Income before distributions to the Tribe for the three months ended March 31, 2010 was $7.3 million, or 22.6% of net revenues, compared to $6.2 million, or 19.8% of net revenues, for the three months ended March 31, 2009.

 

Distributions to the Tribe. Distributions to the Tribe for the three months ended March 31, 2010 were $3.4 million, compared to $3.3 million for the three months ended March 31, 2009.

 

Liquidity and Capital Resources

 

Since our inception, we have funded our capital expenditures and working capital requirements primarily through debt financing, gaming equipment supplier financing, other financing, and operating cash flow.

 

Our capital expenditures for the three months ended March 31, 2010 and 2009 were $6.4 million and $3.9 million, respectively.  The addition to capital expenditures for the three months ended March 31, 2010 consisted primarily of construction-in-progress related to the master plan development of our planned resort of which $3.5 million was reimbursed to the Tribe as well as costs relating to remodels of our Casino and restaurants.  We have reflected the expenditures relating to the master plan development which we reimbursed the Tribe as construction-in-progress in our balance sheet.

 

As of March 31, 2010, we had cash and cash equivalents, net of restricted cash of $35.9 million, compared to $31.6 million, as of December 31, 2009. We had restricted cash of $7.1 million as of March 31, 2010 and December 31, 2009.  Our principal source of liquidity during the three months ended March 31, 2010 consisted of cash flow from operating activities.

 

Restricted cash consists of net proceeds from the Senior Notes and investment earnings thereon set aside in construction financing accounts for construction costs for the three parking structures, related infrastructure improvements and construction contingencies. It also includes funds that are reserved for additional construction contingencies and the funds for the development of the Dugan Property.  Our restricted cash is held in escrow accounts that can only be used for authorized construction disbursements until the related projects are completed.  The construction of the three parking structures has been completed and the remaining funds are expected to be released from the restricted account.

 

Net cash used for capital and related financing activities for the three months ended March 31, 2010 was $6.7 million, compared to $3.9 million, for the three months ended March 31, 2009.  This increase was primarily attributable to the increase in transfers to the Tribe for development costs.

 

Cash flows provided by investing activities consisting of interest income for the three months ended March 31, 2010 was $11,400, compared to $8,438 for the three months ended March 31, 2009.

 

Cash flows used in non-capital financing activities for the three months ended March 31, 2010 was $3.4 million, compared to $3.3 million, for the three months ended March 31, 2009.  Cash flows used in non-capital financing activities consist of distributions to the Tribe.

 

We believe that existing cash balances, cash from operations, as well as permitted disbursements from our restricted cash escrow accounts will provide adequate funds for our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future. However, our ability to fund our operations, make planned capital expenditures, make scheduled debt payments and refinance our indebtedness depends on our future operating performance and cash flow, which, in turn, are subject to prevailing 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.

 

The Senior Notes mature on November 1, 2011. We are actively reviewing our options.  We have remained in contact with various financial institutions regarding the maturing debt to explore our options, which may include refinancing the Senior Notes.

 

The Tribe announced plans to build a destination resort, which plans are more fully described in our Form 8-K dated June 28, 2007, and exhibits listed therein.  The proposed project includes the construction of a casino, hotel and spa, several

 

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food and beverage venues, administrative facilities, a garden and terrace plaza, a retail area, and back of house facilities. The proposed project includes three above-ground levels and a hotel tower (up to eight levels) and two below-ground levels.  The construction of our expansion project has temporarily been postponed due to inadequate liquidity or cash flow to finance the project as proposed.  We will consider various sources of liquidity to finance the first phase of the proposed project, although it cannot be assured that we will be able to obtain financing or that the interest rates on any financings will be favorable.

 

The Tribe incurred approximately $67.0 million in total expenses on our behalf for master planning of the proposed resort and infrastructure improvements on the reservation that benefits the Casino, of which almost all of such expenditures were incurred prior to 2009 before the construction was suspended.  We reimbursed the Tribe approximately $52.4 million through 2009.  On January 8, 2010, our Board of Directors authorized the reimbursement of the Tribe in an amount not to exceed approximately $14.9 million of construction costs.  The approval included a payment schedule according to which we reimbursed the Tribe $2,700,000 on January 18, 2010 and $400,000 on February 1, 2010 and on March 1, 2010. We will reimburse the Tribe $400,000 on April 1, 2010 and $700,000 monthly thereafter without exceeding $14.9 million.  When the reimbursement payments are made or accrued, the related expenses are capitalized and reflected in construction-in-progress on our balance sheet. The reimbursed costs consist of engineering and design costs related to the proposed master plan development, including electrical, HVAC, landscaping, interior design services and consulting fees for legal, branding, feasibility, and public relations services, as well as the construction costs of the lower Acorn Road.  During the three months ended March 31, 2010, we reimbursed the Tribe $3.5 million for development expenditures and accrued the remaining $11.1 million, which is included in Payable to Tribe in the Condensed Balance Sheet at March 31, 2010.

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe and provides a binding framework for resolving future disputes.  We believe the MOA has had significant positive impacts on the conduct of our business and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.  Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over a 12 year period to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and is intended to support the services being provided by the County.  In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.  The Tribe has not made any determinations to seek reimbursement or direct payment from us of amounts due to the County pursuant to the MOA.

 

As part of the effort to enhance the overall appeal of our product, we have been reconfiguring our gaming floor.  This effort has resulted in the reduction of approximately 372 slot machines since June 2009 and 2 table games since August 2009.  We will maintain our contractual rights under the Compact to operate a total of 1,600 slot machines in our Casino and pay the related Revenue Sharing Trust Fund (“RSTF”) payments.  We considered many factors such as peak period demand, per unit productivity, and player comfort in our analysis to ensure that the reduction of gaming devices will not adversely impact our revenues.  The reduction of gaming units on the Casino floor has provided us an opportunity to upgrade current amenities, improve player comfort and enhance entertainment value. We are confident that these improvements, targeted at improving product appeal, will ultimately open up a greater spectrum of potential consumers within our designated market area.  In combination with our continuing effort to improve operational efficiency, upgrading our gaming technology, and refocusing our marketing efforts, we are confident that we will have set a solid foundation for improved and sustained cash flows.

 

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Table of Contents

 

Contractual Obligations as of March 31, 2010

 

The following table summarizes our contractual obligations and commitments as of March 31, 2010:

 

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

Long-term debt obligations (a)

 

$

200,188,176

 

$

188,176

 

$

200,000,000

 

 

Operating lease obligations

 

1,594,241

 

610,396

 

843,133

 

140,712

 

Total obligations (b)

 

$

201,782,417

 

$

798,572

 

$

200,843,133

 

$

140,712

 

 


(a)           Excluded from long-term debt obligations above are interest payments of $14.6 million in 1 year and $16.3 million in 2-3 years.

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

 

Regulation and Taxes

 

We are subject to extensive regulation by the Tribe’s Gaming Commission, the California Gambling Control Commission and the National Indian Gaming Commission. Changes in applicable laws or regulations could have a significant impact on our operations.

 

On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into the MOA that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe, and provides a binding framework for resolving future disputes.   Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license.  In a related action, the Alexander Valley Association (“AVA”), a local business and residents association which has long objected to the issuance of a liquor license, agreed to withdraw its objections to the license and has persuaded its members and a number of other protestors to do likewise.

 

In May 2008, the California Department of Alcoholic Beverage Control (“ABC”) issued a liquor license to our gaming and entertainment facility.  However, the Tribe has agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol altogether at midnight except for Friday and Saturday nights and the nights before holidays. The Tribe has also agreed not to serve liquor on the Casino floor, although patrons may bring drinks purchased at the restaurant or bar on to the Casino floor. The restrictions may be renegotiated following the first to occur of the three year anniversary of the MOA or the opening of a hotel, which is anticipated to occur within the next two to three years.

 

In addition, the MOA commits the County Sheriff’s Department and Fire Marshall to providing public safety and fire services to the Casino and the Tribe’s future gaming projects on the Rancheria, provides detailed agreements on off reservation impact mitigation measures, and permits the Tribe’s application to take the Dugan Property into trust, which has already been approved by the Department of the Interior (“DOI”) but was appealed by the DOI, to move forward without further County opposition.

 

The Tribe has agreed to pay the County up to $75 million in mitigation fees over a 12 year period to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and is intended to support the services being provided by the County.  In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.  The Tribe has not made any determinations to seek reimbursement or direct payment from us of amounts due to the County pursuant to the MOA.

 

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Table of Contents

 

We believe the MOA has had significant positive impacts on the conduct of our business and our and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.

 

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

 

Impact of Inflation

 

Absent changes in competitive and economic conditions or in specific prices affecting the casino industry, we do not expect that inflation will have a significant impact on our gaming facility operations. Since many of our patrons drive up from Santa Rosa and San Francisco, changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the casino industry in general.

 

Seasonality

 

We anticipate that activity at our gaming facility may be modestly seasonal with stronger results expected during the summer due in part to the relatively higher levels of tourism during such times of the year. In addition, our operations may be impacted by adverse weather conditions and fluctuations in the tourism business. Accordingly, our results may fluctuate from quarter to quarter and the results of one quarter may not be indicative of results expected from future quarters.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Through March 31, 2010, we had not invested in derivative or foreign currency-based financial instruments.  We primarily have invested in money markets.  As such, we do not believe we have material exposure to market risk.

 

ITEM 4T.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our reports filed with, or furnished to the Securities Exchange Commission (the “SEC”) pursuant to 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 and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and 15d-15(e) of the Exchange Act.

 

Management has performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures were effective.

 

Changes to Internal Controls Over Financial Reporting

 

We continue to test our internal controls so as to make improvements to the weaknesses that we have identified and to determine whether there are other procedures that we can implement to improve our financial reporting processes.  For the

 

25



Table of Contents

 

three month period ended March 31, 2010, there have been no changes in the internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

Runyan Litigation

 

On March 7, 2008, Norman Runyan, our former Chief Operations Officer, filed a wrongful termination suit against us, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of our Board, in the Sonoma County Superior Court.  We believed the case lacked merit and moved to dismiss.  On October 17, 2008, the Court issued an Order dismissing the lawsuit.  On December 3, 2008, the Court entered an Order granting our motion and dismissed the case.

 

On January 14, 2009, Mr. Runyan filed a Petition for Order Compelling Arbitration with the Sonoma County Superior Court, and on January 30, 2009, he filed a Motion for Order Compelling Arbitration.  In both the Petition and the Motion, Mr. Runyan sought to have the Court issue an order compelling arbitration of the claims asserted in the complaint that was dismissed by the court in December 2008.  We believed, based on fact that Mr. Runyan entered into a Severance Agreement and General Release with the Casino, and other released parties, that there was no basis for Mr. Runyan to seek arbitration.  On April 13, 2009, we, along with the Casino and Mr. Hopkins, filed a hybrid motion to quash summons and dismiss the Petition and Motion.  On June 1, 2009, the Court granted the motion in its entirety, holding that the Court lacked personal and subject matter jurisdiction, that Mr. Runyan terminated and extinguished his purported employment agreement (which contained the arbitration clause he attempted to rely on) and that he waived any right to arbitration he might have had by settling and releasing all claims.  Finally, the Court held that we have tribal sovereign immunity from service of process.

 

Mr. Runyan filed a Notice of Appeal of the Superior Court’s Order on July 27, 2009 and filed his opening brief in the First District Court of Appeal on December 11, 2009.  Our respondents brief was filed on January 8, 2010, Mr. Runyan’s reply brief was filed on February 26, 2010, and oral argument has been set for May 11, 2010.  We continue to believe that there was no basis for Mr. Runyan to seek arbitration and will argue vigorously in favor of upholding the Superior Court’s Order granting the motion to quash summons and dismissing Mr. Runyan’s petition and motion for an order compelling arbitration.

 

Other Legal Matters

 

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

 

ITEM 1A.

RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K other than the following:

 

We face competition from other California Indian casinos, casinos located in Nevada and elsewhere and other forms of gaming.

 

The gaming industry is very competitive. We face or will face competition from existing and proposed Indian gaming facilities in the surrounding area, and elsewhere in California, and with casino gaming in Nevada, including gaming facilities that could be located closer to the San Francisco Bay area. We also compete with card rooms located in the surrounding area, and other forms of gaming that are legal in California, including on and off-track wagering and the California State Lottery, as well as with non-gaming leisure activities. The availability of such alternative gaming and non-gaming activities may increase in the future. Many of our competitors have substantially greater resources and name recognition than our Casino. In addition, we may also face competition in our market from new facilities that may be built by other Indian tribes in the future.

 

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Table of Contents

 

Federal and California law currently permits Class III casino gaming only on federally recognized tribal lands pursuant to compacts negotiated with the State of California and approved by the U.S. Secretary of the Interior. Class II gaming for tribes is permitted only on federally recognized tribal lands. There are currently 55 tribes operating 56 compacted gaming facilities in the State of California. The closest existing competitors are the Hopland Sho-ka-wah Casino, located approximately 35 miles and 40 minutes north of the Tribe’s reservation; the Konocti Vista Casino, located approximately 45 miles and one hour and ten minutes northeast of the Tribe’s reservation; the Thunder Valley Casino, located approximately 124 miles and two hours and forty-five minutes east of the Tribe’s reservation; and Cache Creek Indian Casino and Bingo, located approximately 95 miles and two hours and fifteen minutes east of the Tribe’s reservation. In addition, several potential competitors are attempting to develop and open casinos near our Casino.

 

The greatest competition may come from the proposed Graton Rancheria casino. In April 2003, the Federated Indians of the Graton Rancheria, also known as the Coast Miwoks, announced plans to purchase land in Sonoma County near Highway 37 and Lakeville Highway, approximately 20 miles south of our gaming facility and closer to San Francisco than our reservation. The proposed location would lie directly between our Casino and the majority of the 7 million population base of the San Francisco Bay area. The announced plans include construction of a casino-hotel complex that will be managed by Station Casinos, Inc. based in Las Vegas, Nevada. The proposed facility would house approximately 2,000 slot machines, 120 card tables and bingo, as well as a 300-room hotel, five restaurants and a theater with up to 2,000 seats. As a result of environmental opposition to the development of such location, the Federated Indians of the Graton Rancheria announced plans to move the proposed casino-hotel complex to a site near Rohnert Park, California. The Rohnert Park City Council has approved an agreement with the Federated Indians of the Graton Rancheria to share revenues with Rohnert Park and various community groups, approximately $200.0 million over 20 years, to offset the impact of the proposed project.

 

In May 2008, the U.S. Department of Interior published in the Federal Register a notice to take the proposed Rohnert Park site into federal trust on behalf of the Graton Rancheria. This represents a significant step towards the development of a casino at Rohnert Park, as do the separate agreements negotiated between the Graton Rancheria and Sonoma County and Marin County, whereby the counties pledged to not challenge the land-into-trust decision and the Graton Rancheria agreed not to build any additional casinos in Sonoma or Marin counties. The U.S. Department of Interior’s land-into-trust decision has, however, been challenged by citizens group opposed to a casino in Rohnert Park. The federal district court dismissed the citizens group’s lawsuit on April 21, 2009, but the group has appealed the decision to the Ninth Circuit Court of Appeals.  The Department of the Interior has agreed to withhold action on taking the land into trust pending the appeal.  A spokesperson for the citizen’s group has also stated publicly that the group will challenge the adequacy of the environmental impact statement for the proposed Graton casino, which was issued in February 2009.  Another obstacle facing the proposed Graton Rancheria casino is the ability to obtain financing for the project.  In addition, the Graton Rancheria will also need to enter into a tribal-state compact with the State of California before it can operate Class III gaming at the Rohnert Park site.

 

The Hopland Sho-ka-wah Casino is located several miles east of Highway 101 on Route 175. The facility features a 40,000 square foot casino offering 570 slot machines and eight table games. The facility offers poker, pai gow, blackjack, card-based roulette, and card-based craps table games.  The facility contains a Mexican food taqueria, a small cafe-type food and beverage area, a fine-dining steak house and a bar. Hopland operates a small bus program but does not operate a hotel.

 

East of the Sho-ka-wah Casino is the Konocti Casino in Lakeport, California. Lakeport is located approximately 37 miles from Cloverdale with access off Highway 20.  The casino currently houses 349 slot machines and 6 table games. The facility also offers an 80-room hotel and marina with small pool as well as a 74-space recreational vehicle park. The food and beverage program includes a small restaurant, buffet and a newly remodeled steakhouse restaurant serving liquor.

 

The Thunder Valley Casino opened in June 2003 and is located at the intersection of Highway 65 and Interstate 80 just outside of Sacramento, California. The Nevada-style property offers over 2,400 slot machines and 98 table games that include blackjack, baccarat, and a variety of poker games including Let It Ride and Pai Gow. The facility features a salon, private dining rooms, bars and butler service. In addition, it houses a 500-seat buffet and various fast food options. The facility also features a nightclub.  In 2008, the Thunder Valley Casino announced plans to build a new 650-room, 23-story hotel featuring a spa, family center and other amenities.  Thunder Valley also planned to construct a 3,000-seat performing arts center, and to expand the casino to include three new restaurants, more gaming space and new poker room, and a parking

 

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structure capable of holding 5,000 cars.  Thunder Valley obtained financing for the expansion, which began in July 2008 but was halted in November 2008.  In May 2009, the casino resumed work on the expansion, but the project has been scaled down to include a 12-story hotel with 297 rooms; a 700-seat, 10,000-square-feet multipurpose entertainment center in place of the performing arts center; and a 7-story parking structure with approximately 3,800 spaces. Thunder Valley expects to open the hotel in July 2010.

 

The Cache Creek Casino is located approximately 50 miles west of Sacramento. The Cache Creek Casino offers over 2,400 slot machines. The casino recently added a 14-table poker room and houses 122 table games including blackjack, Texas Hold’em, Pai Gow and Caribbean Stud. The facility also includes a 200-room luxury hotel, 9 restaurant outlets, an entertainment pavilion with seating for 600, a spa and outdoor pool, an 18-hole golf course and a 1,883 spot parking structure. In 2007, Cache Creek announced plans to add more shops and parking and expand its gaming floor, and to add a 10-story hotel tower with 467 rooms, and a 62,500 square-foot convention center capable of seating 2,300 people.  These expansion plans were put on hold in early October 2009 but were resumed in January 2010 when the Cache Creek Casino announced plans to resume the expansion, proposing to add over 20,000 square-feet of casino space, a 52,000 square-foot convention center, and a 900-car garage.  The expansion is expected to be completed by 2013.

 

The Lytton Band of Pomo Indians currently operate a 70,000 square-foot casino with over 1,100 Class II electronic bingo machines and over 30 table games on a 9-acre site in a card room in San Pablo, near Oakland, California, on land that was placed in trust for the tribe through congressional legislation. The Lytton Band signed a compact with Governor Arnold Schwarzenegger for operating Class III casino gaming on the San Pablo site, but the state legislature withheld its approval. In May 2007, legislation was introduced in the U.S. Senate, which has the support of the Lytton Band, that would require the Lytton Band to forego any Class III machines at the San Pablo site and instead limit itself to operating its existing Class II machines. This legislation was passed by the Senate in November 2007 and referred to the Committee on Natural Resources of the U.S. House of Representatives, but no further action was taken.  The legislation was again introduced in the U.S. Senate in January 2009, and the Senate passed the bill on March 12, 2009.

 

The Twin Pine Casino and Hotel, owned and operated by the Middletown Rancheria of Pomo Indians, is located approximately 4 miles off Highway 29 in Napa County, approximately 34 miles from our gaming and entertainment facility. The Middletown Rancheria has recently completed an expansion of the Twin Pine Casino and Hotel which includes a 60-room hotel, three food areas and a wine tasting room, as well as 50,000 square feet of gaming space with approximately 520 slot machines and 12 table games consisting of blackjack and poker.  The Twin Pine Casino and Hotel recently announced plans to add a fourth restaurant offering, a 40-seat café with a mid-priced menu.

 

There are a number of other Indian tribes, including the Scotts Valley Band of Pomo Indians and the Guidiville Band of Pomo Indians, that have announced preliminary plans to develop gaming projects in the San Francisco Bay area.

 

The Guidiville Band hopes to have transferred to it land at the former Point Molate Naval Base in Richmond, California on which it hopes to operate a 240,000 square-foot casino with 124,000 square-feet of gaming space, along with two hotels, a conference center, retail shops, restaurants and two parking structures.  The project is still in its early stages, as the land transfer has not been approved and environmental reviews must be completed.  In January 2009, two environmental groups filed a lawsuit against the City of Richmond, the Guidiville Band and its financial backer and developer in an effort to stop the transfer of the land.  The Guidiville Band released the draft environmental impact study for the proposed project in July 2009, and the Bureau of Indian Affairs held a public hearing on the draft study in August 2009 and took public comments on the study until September 23, 2009.

 

The Scotts Valley Band hopes to build a 225,000 square-foot casino complex and five-story parking garage on a 29.87-acre site in unincorporated Contra Costa County, near Richmond, California.  In March 2008, the Bureau of Indian Affairs announced the filing of the Final Environmental Impact Statement for the proposed project.  In August 2008, the Contra Costa County Superior Court struck down a municipal services agreement between the City of Richmond and the Scotts Valley Band on the ground that the City failed to conduct the proper environmental reviews before signing the agreement but the superior court’s decision was overturned in February 2010.

 

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The Cloverdale Rancheria has announced preliminary plans to build a 596,000 square-foot hotel/spa and casino resort some ten miles north of our Casino on U.S. Highway 101, and they and their financial backers have purchased approximately 79 acres for the proposed facility. The environmental review process for the proposed Cloverdale Rancheria project began in July 2008, and in December 2008 the U.S. Department of the Interior issued an opinion stating that if the lands were taken into trust, they would be eligible for gaming under the Indian Gaming Regulatory Act.

 

Each of these proposed projects face numerous obstacles in addition to environmental approvals, including the negotiation and approval of a compact with the State of California, approval from the U.S. Department of the Interior to take the land on which the project would be located into federal trust on behalf of the tribe, and, for the Guidiville and Scotts Valley projects, determinations from appropriate federal agencies that the tribes may conduct gaming on these lands pursuant to IGRA.

 

In June 2009, the Mishewal Wappo Tribe of Alexander Valley, a tribe with aboriginal lands and a former rancheria located in Sonoma County that was terminated by the federal government under the 1958 California Rancheria Act, filed suit against the United States Secretary of the Interior seeking to have their federally-recognized status restored.  The Chairman of the Mishewal Wappo Tribe has stated publicly that the tribe has no plans for casino, but the tribe could have the right to conduct gaming under IGRA if their federally-recognized status is restored.

 

We also compete with other forms of gaming such as statewide lotteries, live and simulcast pari-mutuel wagering and card rooms.

 

In May 2007, Governor Schwarzenegger proposed that the California State Lottery be leased to a private concessionaire to increase its revenue and efficiency. Part of the Governor’s proposal includes authorizing the use of instant lottery video terminals that resemble and operate like slot machines at locations including horse racing tracks and card rooms. Approval of this proposal would require a two-thirds affirmative vote of the state legislature and could require a constitutional amendment to the Constitution of the State of California. While it is uncertain whether or when this proposal will be approved, implementation of such a proposal could adversely affect our and other Indian casinos’ competitive positions.  A proposal that would have allowed the California State Lottery to dedicate a higher percentage of its revenues to player winnings (with the hope of boosting lottery sales in California), securitize California State Lottery revenues, and change the amount of California Lottery revenues dedicated to education was defeated in a statewide ballot referendum in May 2009.

 

Other initiatives expanding competitive forms of gaming have been approved and may, from time to time, be approved by state or local authorities. Examples include the passage in California of recent legislation expanding off-site betting on horse races through expanded advance deposit wagering and increased satellite wagering sites, and a legislative proposal in the California Assembly in February 2007 to amend the California Penal Code to expand permitted bingo games by charitable organizations to include electronic bingo cards.

 

In August 2009, a federal district court judge issued an order, in ongoing litigation regarding the proper number of total slot machines allowed under the 1999 tribal-state gaming compacts, requiring that the State of California issue an additional 10,549 slot machine licenses.  A drawing was held on October 5, 2009, and 3,548 licenses were awarded to eleven different Indian tribes.  The only one of our competitors to receive licenses in the draw was the Middletown Rancheria of Pomo Indians, which operates the Twin Pine Casino and Hotel and received 100 additional licenses through the draw.  As with the licenses awarded to other tribes in the draw, the licenses awarded to the Middletown Rancheria will revert back to the State if the machines are not put into operation within one year of the draw.  The licenses could also be withdrawn if the State of California is successful in its appeal of the district court’s ruling to the United States Court of Appeals for the Ninth Circuit.

 

ITEM 6. 

EXHIBITS

 

The Exhibit Index filed herewith is incorporated herein by reference.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: May 17, 2010

RIVER ROCK ENTERTAINMENT AUTHORITY

 

(Registrant)

 

 

 

By:

/s/ David Fendrick

 

 

David Fendrick,

 

 

Chief Executive Officer

 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

31.1

 

Certification by David Fendrick, Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith)

 

 

 

31.2

 

Certification by Joseph R. Callahan, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith)

 

 

 

32*

 

Certification by David Fendrick, Chief Executive Officer, and by Joseph R. Callahan, 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)

 


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

 

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