**Tableof Contents**

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

**x**      **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly periodended December 31, 2009**

 

**OR**

 

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

** **

**For thetransition period from                     to                     **

 

**Commission File Number:**333-117633

** **

**SENECA GAMING CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Not Applicable**                                              | ** ** | **7990**                                                  | ** ** | **54-2122988**                        |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (Primary Standard Industrial  Classification Code Number) |       | (I.R.S. Employer  Identification No.) |

 

**310 Fourth Street**

**Niagara Falls, New York (SenecaNation Territory) 14303**

**(716) 299-1100**

(Address, including zip code, and telephonenumber,

including area code, of registrant’sprincipal executive offices)

 

Indicateby check mark whether the registrant has (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes o No x

 

(Note: As a voluntary filer, not subject to thefiling requirements, the registrant filed all reports under Section 13 or15(d) of the Exchange Act during the preceding 12 months.)

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yeso No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” 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) |   |                              |

 

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

 

At February 4,2010, the registrant had no outstanding shares of common stock. The registrantis wholly owned by the Seneca Nation of Indians.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                         |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Financial Statements                                                                                                              | 1      |
|              | Consolidated Balance Sheets as of  December 31, 2009 (Unaudited) and September 30, 2009                                 | 1      |
|              | Consolidated Statements of  Income and Changes in Capital for the three months ended December 31,  2009 and 2008 (Unaudited) | 2      |
|              | Consolidated Statements of  Cash Flows for the three months ended December 31, 2009 and 2008  (Unaudited)                    | 3      |
|              | Notes to  Consolidated Financial Statements                                                                                       | 4      |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                       | 13     |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 28     |
| Item 4T.          | Controls and  Procedures                                                                                                          | 28     |
|              |                                                                                                                              |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                             |   |
| Item 1.           | Legal Proceedings                                                                                                                 | 29     |
| Item 1A.          | Risk Factors                                                                                                                      | 30     |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                      | 30     |
| Item 3.           | Defaults  Upon Senior Securities                                                                                                  | 30     |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                              | 30     |
| Item 5.           | Other Information                                                                                                                 | 30     |
| Item 6.           | Exhibits                                                                                                                          | 30     |
|              | Signatures                                                                                                                        | 31     |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item I.****                                                             ****Financial Statements**

 

**SENECA GAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                               | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2009**                             | ** ** | **2009**               | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                               | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current assets:                          |       |                                 |       |                   |       |
| Cash and cash equivalents                |       | $                                    | 91,235     |                   | $          | 83,230 |   |
| Short-term investments                   |       | —                               |       | 113                    |       |
| Receivables from the  Nation             |       | 586                                  |       | 6,201                  |       |
| Other receivables, net                   |       | 2,539                                |       | 2,539                  |       |
| Inventories                              |       | 4,110                                |       | 4,046                  |       |
| Other current assets                     |       | 9,322                                |       | 10,369                 |       |
| Total current assets                     |       | 107,792                              |       | 106,498                |       |
|                                     |       |                                 |       |                   |       |
| Property and equipment,  net             |       | 662,642                              |       | 670,111                |       |
| Other long-term assets                   |       | 64,844                               |       | 65,319                 |       |
|                                     |       |                                 |       |                   |       |
| Total assets                             |       | $                                    | 835,278    |                   | $          | 841,928 |   |
|                                     |       |                                 |       |                   |       |
| **Liabilities and Capital**              | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current liabilities:                     |       |                                 |       |                   |       |
| Trade payables                           |       | $                                    | 2,975      |                   | $          | 2,328 |   |
| Construction payables                    |       | 6,194                                |       | 9,373                  |       |
| Distributions payable to  the Nation     |       | —                               |       | 3,727                  |       |
| Exclusivity fees payable                 |       | 7,396                                |       | 8,220                  |       |
| Accrued interest payable                 |       | 6,042                                |       | 15,104                 |       |
| Accrued regulatory costs                 |       | 37,417                               |       | 33,683                 |       |
| Accrued gaming liabilities               |       | 14,380                               |       | 15,113                 |       |
| Accrued payroll and  related liabilities |       | 10,060                               |       | 9,652                  |       |
| Other current liabilities                |       | 5,961                                |       | 6,722                  |       |
| Total current liabilities                |       | 90,425                               |       | 103,922                |       |
|                                     |       |                                 |       |                   |       |
| Long-term debt                           |       | 497,616                              |       | 497,363                |       |
| Other long-term  liabilities             |       | 834                                  |       | 834                    |       |
|                                     |       |                                 |       |                   |       |
| Total liabilities                        |       | 588,875                              |       | 602,119                |       |
|                                     |       |                                 |       |                   |       |
| Capital:                                 |       |                                 |       |                   |       |
| Retained earnings                        |       | 246,403                              |       | 239,809                |       |
|                                     |       |                                 |       |                   |       |
| Total liabilities and  capital           |       | $                                    | 835,278    |                   | $          | 841,928 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME ANDCHANGES IN CAPITAL**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**                | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Revenues:**                              | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Gaming                                     |       | $                                                   | 135,377    |   | $ | 137,023 |   |
| Food and beverage                          |       | 13,254                                              |       | 14,204 |   |
| Lodging                                    |       | 5,204                                               |       | 6,296 |   |
| Retail, entertainment and  other           |       | 5,892                                               |       | 6,440 |   |
| Gross Revenue                              |       | 159,727                                             |       | 163,963 |   |
| Promotional allowances                     |       | (24,565                                             | )          | (25,244 | ) |
| Net revenues                               |       | 135,162                                             |       | 138,719 |   |
|                                       |       |                                                |       |   |   |
| **Expenses:**                              | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Gaming                                     |       | 35,722                                              |       | 37,225 |   |
| Food and beverage                          |       | 10,600                                              |       | 11,207 |   |
| Lodging                                    |       | 2,985                                               |       | 3,032 |   |
| Retail, entertainment and  other           |       | 4,171                                               |       | 3,978 |   |
| Advertising, general and  administrative   |       | 47,101                                              |       | 49,500 |   |
| Pre-opening costs                          |       | 72                                                  |       | 58 |   |
| Depreciation                               |       | 10,730                                              |       | 12,587 |   |
| Impairment of property and  equipment      |       | 55                                                  |       | — |   |
| Total operating expenses                   |       | 111,436                                             |       | 117,587 |   |
|                                       |       |                                                |       |   |   |
| Operating income                           |       | 23,726                                              |       | 21,132 |   |
|                                       |       |                                                |       |   |   |
| Other non-operating  expenses              |       | (112                                                | )          | (113 | ) |
| Interest income                            |       | 11                                                  |       | 58 |   |
| Interest expense                           |       | (9,541                                              | )          | (9,603 | ) |
|                                       |       |                                                |       |   |   |
| Net income                                 |       | $                                                   | 14,084     |   | $ | 11,474 |   |
|                                       |       |                                                |       |   |   |
| Beginning capital balance                  |       | 239,809                                             |       | 290,846 |   |
| Cash distributions declared  to the Nation |       | (7,490                                              | )          | (16,506 | ) |
| Ending capital balance                     |       | $                                                   | 246,403    |   | $ | 285,814 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**                | ** ** |
| ** **                                                                         | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash flows relating to  operating activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 14,084     |   | $ | 11,474 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation                                                                       |       | 10,730                               |       | 12,587 |   |
| Loss on disposal of assets                                                         |       | —                               |       | 24 |   |
| Amortization of deferred  financing costs, debt discount                           |       | 811                                  |       | 810 |   |
| Other than temporary  decline in investments                                       |       | 113                                  |       | 100 |   |
| Provision for bad debts                                                            |       | 85                                   |       | 75 |   |
| Change in operating assets  and liabilities:                                       |       |                                 |       |   |   |
| Current assets                                                                     |       | 1,412                                |       | (101 | ) |
| Current liabilities                                                                |       | (9,562                               | )          | (4,054 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by  operating activities                                         |       | 17,673                               |       | 20,915 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  investing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchases of property and  equipment                                               |       | (3,469                               | )          | (21,909 | ) |
| Land acquisition costs                                                             |       | (83                                  | )          | (497 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing  activities                                             |       | (3,552                               | )          | (22,406 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  financing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Contribution received from  the Nation                                             |       | 5,101                                |       | — |   |
| Proceeds from senior  secured revolving loan agreement                             |       | —                               |       | 20,000 |   |
| Distributions paid to the  Nation                                                  |       | (11,217                              | )          | (20,506 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in financing  activities                                             |       | (6,116                               | )          | (506 | ) |
|                                                                               |       |                                 |       |   |   |
| Net increase (decrease) in  cash                                                   |       | 8,005                                |       | (1,997 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash balances:                                                                     |       |                                 |       |   |   |
| Beginning of period                                                                |       | 83,230                               |       | 53,305 |   |
|                                                                               |       |                                 |       |   |   |
| End of period                                                                      |       | $                                    | 91,235     |   | $ | 51,308 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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** **

**SENECA GAMING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.**                                      Organization and Basis of Presentation

** **

Theconsolidated financial statements include the accounts of Seneca GamingCorporation, or SGC, and its wholly owned subsidiaries, or collectively, theCompany.  In consolidation, allintercompany balances and transactions have been eliminated.  The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles for interim financial information.  Accordingly, they do not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  In theopinion of SGC’s management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation have been included.  Operating results for the three months ended December 31,2009 are not necessarily indicative of the results that may be expected for SGC’sfiscal year ending September 30, 2010. For further information, reference is made to the consolidated financialstatements and notes thereto included in SGC’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2009, or 2009 Form 10-K, aswell as SGC’s other filings with the Securities and Exchange Commission, orSEC, pursuant to the Securities Exchange Act of 1934, as amended.

 

Certain prior yearamounts have been reclassified to conform to current year presentation.

 

SGC,which was formed on August 1, 2002, is wholly owned by the Seneca Nationof Indians, or the Nation.  The Nation isa federally recognized Indian tribe with total territorial land comprisingapproximately 54,000 acres in the Western New York region.  SGC was organized by the Nation to operateand manage its Class III gaming activities on the Nation’s territoriespursuant to the Indian Gaming Regulatory Act of 1988, or IGRA.  Under IGRA, federally recognized Indiantribes are permitted to conduct full-scale casino gaming operations on triballand, subject to, among other things, the negotiation of a compact with theaffected state.  Pursuant to IGRA, in August 2002,the Nation entered into the Nation-State Gaming Compact with the State of NewYork, or the Compact, which has been approved by the Federal Bureau of IndianAffairs, Department of the Interior.  TheCompact became effective in December 2002, expires in December 2016and automatically renews for an additional seven year period unless either theNation or the State of New York objects in writing, in which case the partiesare required to negotiate in good faith to address the objecting party’sconcerns, with only the issue of a party’s good faith subject to third partydispute resolution.  The Compact providesthat its terms will remain in effect during the pendency of suchnegotiations.  The Compact provides theNation with the exclusive right to conduct Class III gaming activities atthree sites in the western region of the State of New York.

 

TheNation’s Constitution established the Nation’s Council, or the Council, to actas the Nation’s legislative authority. The Council acts on the Nation’s behalf with respect to SGC, and theCouncil established the Seneca Gaming Authority, or SGA, to regulate the gamingactivities of SGC under the Compact.

 

TheCouncil, at the request of the SGC Board of Directors, chartered threesubsidiary corporations of SGC to operate the three sites authorized by theCompact.  In addition, the SGC Board ofDirectors hired the executive management of SGC to oversee, develop and managethe three sites. The subsidiary corporations that operate the three sitesauthorized by the Compact are as follows:

 

·                                          Seneca Niagara Falls Gaming Corporation,or SNFGC;

 

·                                          Seneca Territory Gaming Corporation, orSTGC; and

 

·                                          Seneca Erie Gaming Corporation, or SEGC.

 

SNFGCwas formed on August 1, 2002 to operate the Nation’s Class III gamingactivities on the Nation’s territory in Niagara Falls, New York.  Operations at SNFGC’s casino, or SenecaNiagara Casino, commenced December 31, 2002.  On March 31, 2006, SNFGC officiallycompleted the phased opening of its luxury hotel expansion, which included apermanent 147,000 square foot gaming facility (adding 35,000 square feet ofgaming space to the original 112,000 square-foot facility), a 604-room luxuryhotel with 118 suites of various sizes, a full-service spa, salon, and fitnesscenter, three fine dining restaurants and a 24-hour casual restaurant, threenew retail stores, and a 25,200 square-foot multi-purpose room and eventscenter.  The luxury hotel is adjacent andconnected to the Seneca 

 

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NiagaraCasino.  The entire complex, includingthe luxury hotel and the Seneca Niagara Casino, is referred to as the SenecaNiagara Casino and Hotel.

 

STGCwas formed on September 20, 2003 to operate the Nation’s Class IIIgaming activities in Salamanca, New York on the Nation’s then-existingterritorial land. Operations at STGC’s casino, or Seneca Allegany Casino,commenced May 1, 2004 utilizing an approximately 120,000 square foottemporary structure.  On March 30,2007, the phased opening of the permanent gaming facility and resort hotel wascompleted, which included a permanent 63,500 square foot gaming facility(adding 12,000 square feet of additional gaming space to the original temporarygaming facility), a 212-room resort hotel, two fine dining restaurants, a 24hour casual restaurant, a spa and fitness center, and retail and otheramenities.  In March 2008, STGC completeda conversion of the former approximately 120,000 square foot temporary casinostructure into an events center and multi-purpose room with a seating capacityfor 2,200 people, along with additional administrative and support space.  The entire complex, including the SenecaAllegany Casino, resort hotel, and events center, is referred to as the SenecaAllegany Casino and Hotel.

 

SEGC was formed on August 9,2003 to operate the Nation’s Class III gaming activities in Erie County,New York.  On October 3, 2005, theNation acquired approximately nine acres of land in the inner-harbor districtof downtown Buffalo, New York.  SEGCcommenced construction of its Seneca Buffalo Creek Casino on those nine acreson December 8, 2005, and on July 3, 2007 commenced Class IIIgaming on such property in a temporary facility, in fulfillment of the requirementset forth in the Nation’s Compact with the State of New York.  The temporary facility features approximately8,600 square feet and includes 244 slot machines and a snack bar.  Various plaintiffs have filed suit in federaland state court challenging the Nation’s right to conduct Class III gamingon the Nation’s nine acre Buffalo Creek Territory.  On July 8, 2008, in a federal suitcaptioned Citizens Against Casino Gambling in Erie County (CACGEC) v. Hogen,the Court issued its decision and order finding that, although the Nation’sBuffalo Creek Territory is “Indian country,” the determination by the NationalIndian Gaming Commission, or NIGC, determination that the Nation’s BuffaloCreek Territory is gaming-eligible land pursuant to the IGRA’s settlement of aland claim exception was “arbitrary, capricious, and not in accordance with thelaw.”  The Court’s decision did notprovide for injunctive relief, and SEGC has continued its operations at theSeneca Buffalo Creek Casino.  Plaintiffssubsequently filed a motion on July 14, 2008 to force the court to enforceits judgment.

 

On January 20, 2009,the NIGC approved an amended Class III Gaming Ordinance that had beensubmitted by the Nation and concluded that, based upon new Department of theInterior regulations, IGRA’s general prohibition against gaming onafter-acquired lands did not apply to lands such as the Buffalo Creek Territorythat are held in restricted fee, and that gaming on the Nation’s Buffalo CreekTerritory is not precluded by IGRA. Subsequently, on January 30, 2009, the District Court denied theplaintiffs’ motion to enforce, and further concluded that the NIGC’s newanalysis is presumed valid unless it becomes the subject of a successful legalchallenge.

 

On March 31, 2009,plaintiffs in the litigation noted in the foregoing paragraph filed suit tochallenge the NIGC’s approval of the amended Class III GamingOrdinance.   On June 15, 2009, theNation moved to intervene as a defendant in the litigation known as CACGEC III,for certain limited claims.  Theplaintiffs are opposing the Nation’s motion which as of February 4, 2010,remains pending before the Court.

 

If the plaintiffsare successful in any of the Buffalo Creek-related legal proceedings, SEGC maybe unable to continue Class III gaming at the existing Seneca BuffaloCreek Casino.

 

TheNation’s Council has also chartered, at the request of the SGC Board ofDirectors, an additional subsidiary corporation, Lewiston Golf CourseCorporation, or LGCC, as a wholly-owned subsidiary of SNFGC.  LGCC was formed on July 18, 2007 by theNation’s Council to own, develop and operate SNFGC’s golf course in Lewiston,New York.

 

**Recent Accounting Pronouncements**

** **

**A variety of proposed or otherwise potentialaccounting standards are currently under study by standard-settingorganizations and certain regulatory agencies. Because of the tentative andpreliminary nature of such proposed standards, SGC has not yet determined theeffect, if any, that the implementation of such proposed standards would have onthe consolidated financial statements.**

** **

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**2.****                                    ****Short-Term Investments**

 

Short-term investmentsare classified as available for sale as defined in the Financial AccountingStandards Board, or FASB, Accounting Standards Codification, or ASC, 320, *Investments —**Debt and Equity Securities*.  Investments are stated at fair value.  The Company evaluates investments forconditions that may indicate that an other-than-temporary decline in marketvalue has occurred. In conducting this review, numerous factors are consideredwhich, individually or in combination, may indicate that a decline isother-than-temporary. Based on this evaluation, an other-than-temporary loss onone specific investment of $0.1 million was recorded in the three months ended December 31,2009 and 2008, as a component of other non-operating expense. The cost basis ofthis investment has been reduced by the amount of the other-than-temporary lossrecorded.

 

**3.**                                      **Propertyand Equipment**

 

Inaccordance with ASC 360, *Property, Plant andEquipment*, the carrying value of the Company’s assets are reviewedwhen events or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. If it is determined that an impairment loss hasoccurred based on current and future levels of income and expected future cashflows as well as other factors, then an impairment loss is recognized as adeduction in determining operating income.

 

Duringthe three months ended December 31, 2009, $55,000 was recorded as animpairment of property and equipment in addition to the $107.6 millionimpairment recognized during Fiscal 2009.

 

**4.**                                      Principal Debt Arrangements

** **

Long-termdebt, as described below, consists of the following:

 
| ** **                                                                                          | ** ** | **As of**                                    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **December 31,  2009**                  | ** ** | **September 30,  2009** | ** ** |
| ** **                                                                                          | ** ** | **(In Thousands of Dollars)** | ** ** |
| 2004 71⁄4% senior notes due  2012                                                                |       | $                                            | 300,000    |   | $ | 300,000 |   |
| 2005 71⁄4% senior notes due  2012 net of unamortized discount of $2,384 and $2,637, respectively |       | 197,616                                      |       | 197,363 |   |
| Long-term debt                                                                                      |       | $                                            | 497,616    |   | $ | 497,363 |   |

 

**71⁄4% Senior Notes due 2012**

** **

On May 5, 2004, SGCissued $300.0 million in 71⁄4% senior notes due 2012, or the 2004 seniornotes.  On May 23, 2005, SGC issued an additional $200.0 million in71⁄4% senior notes due 2012, Series B, or the 2005 senior notes, andtogether with the 2004 senior notes, the Senior Notes.

 

The 2005 senior noteswere issued at a discount of $7.0 million. The discount is being amortized over the term of the 2005 senior notes,which amounted to $0.3 million for the three months ended December 31,2009 and 2008.

 

The Senior Notes areguaranteed by SNFGC, STGC, SEGC and LGCC. The 2005 senior notes are treated asa single class with the 2004 senior notes and are identical to the 2004 seniornotes, except for certain tax attributes, and prior to November 1, 2005,the amount of interest accrued thereon.   Interest on the SeniorNotes is payable semi-annually on May 1 and November 1.  TheSenior Notes are unsecured and rank equally.  As of December 31, 2009and September 30, 2009, aggregate accrued and unpaid interest on theSenior Notes was $6.0 million and $15.1 million, respectively.  The Senior Notes, which mature on May 1,2012, are redeemable at SGC’s option in whole or in part at any time after May 1,2008 at the redemption prices set forth in the Senior Notes Indenture, aresubject to redemption requirements imposed by gaming laws and regulations andare required to be repurchased by SGC at the option of holders upon certainchange of control events.

 

TheSenior Notes Indenture contains certain negative and affirmative covenants. Thenegative covenants include limitations on restricted payments and theincurrence of indebtedness, while the affirmative covenants include reportingobligations and compliance with laws. As of December 31, 2009, SGC was incompliance with all covenants in the Indenture.

 

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**SeniorSecured Revolving Loan Agreement**

 

On December 18,2009, SGC amended its $50 million Senior Secured Revolving Loan Agreement toextend the maturity date from December 19, 2009 to December 31, 2011.Amounts borrowed under the Amended Senior Secured Revolving Loan Agreementcontinue to bear interest at either one, three or six-month LIBOR plus one andone quarter percent (1.25%), or the prime rate (as reported in The Wall StreetJournal) plus one quarter percent (0.25%), with any outstanding principalbalance to be paid by, or on, the new maturity date.  The $50.0 million commitment under theAmended Senior Secured Revolving Loan Agreement reduces in tandem with anyreduction in the letter of credit requirement imposed by the Empire StateDevelopment Corporation, or ESDC, (relating to the ESDC’s efforts on behalf ofSGC in connection with ongoing condemnation proceedings in Niagara Falls, NY),up to an aggregate reduction of $10.0 million. The Amended Senior Secured Revolving Loan Agreement requires that SGCmaintain all of its deposit and investment accounts with the lender, subject tolimited exceptions for certain existing accounts.

 

SGC’sobligations under the Amended Senior Secured Revolving Loan Agreement continueto be secured by substantially all gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. SGC’s obligations are guaranteed by SNFGC, STGC, SEGC and LGCC,and the guarantors’ obligations continue to be secured by substantially all ofeach guarantor’s gaming and related assets (including substantially all gamingrevenues) not constituting real property or improvements. The Amended SeniorSecured Revolving Loan Agreement modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12 month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.  The Amended Senior Secured Revolving LoanAgreement also continues to contain additional customary covenants, includingcovenants restricting the incurrence of additional indebtedness, the creationof additional liens and the disposition of assets. As of December 31,2009, SGC was in compliance with all covenants in the Amended Senior SecuredRevolving Loan Agreement.

 

As of December 31,2009, at SGC’s request, the lender under the Amended Senior Secured RevolvingLoan Agreement had issued letters of credit (as required by the ESDC) totaling$19.6 million, $13.2 million of which may be drawn upon to fund the purchase ofcertain parcels within the 50 acre “footprint” described in the Compact withNew York State and designated for ownership by the Nation, with the remaining$6.4 million issued in connection with worker’s compensation policies andcertain other contracts, as required. As of December 31, 2009, there wereno amounts outstanding on the Amended Senior Secured Revolving Loan Agreement.

 

**5.****                                     ****Fair Value of FinancialInstruments**

 

The fair values of certain of the Company’sfinancial instruments, including cash and cash equivalents, accounts receivableand other current liabilities, approximate their recorded carrying amountsbecause of their short-term nature.

 

The fair value of long term debt is estimated basedon the current rates offered to SGC for debt of the same remainingmaturities.  As of December 31,2009, the carrying amount and fair value of long term debt is approximately$498 million and $490 million, respectively.

 

**6.****                                     ****Related-Party Transactions**

 

**Distributions**

 

Distributionsto the Nation, as described below, consist of the following:

 
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(In Millions of Dollars)**         | ** ** |
| Cash distributions                    |       | $                                                   | 7.5        |   | $ | 17.2 |   |
| Distribution Agreement  distributions |       | 3.7                                                 |       | 3.3 |   |
|                                  |       | $                                                   | 11.2       |   | $ | 20.5 |   |

 

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*CashDistributions*

 

·                  SGC paid cash distributions to the Nation in the amount of $2.5 millionper month from October 2009 through December 2009, totaling $7.5million.

 

·                  SGC paid cash distributions to the Nation in the amount of $4 millionper month from October 2008 through December 2008, totaling $12million. Also, during the three months ended December 31, 2008, SGC paid$4 million pursuant to distribution declarations made in July 2008. Inaddition, in November 2008, SGC paid an additional $1.2 milliondistribution to the Nation.

 

*Distribution Agreement Obligations*

 

·                  During the three months ended December 31, 2009 and 2008, SGCdistributed $3.7 million and $3.3 million, respectively, to the Nation underthe Distribution Agreement, dated April 27, 2007, relating to the SenecaNation of Indians Capital Improvements Authority’s special obligation bonds.See “Note 7 — Commitments and Contingencies” for additional informationregarding SGC’s Distribution Agreement obligations.

 

**SGC has recorded approximately $59.1 million in landand related acquisition costs as ‘Other long-term assets’ in the accompanyingconsolidated balance sheets as of December 31, 2009 and September 30,2009, which are expected to be transferred to the Nation.**

** **

**Operating Lease Agreements**

** **

*Head Leases:*

 

TheNation has entered into operating lease agreements (each, a Head Lease) witheach of SNFGC, STGC and SEGC.  Due to therelated party nature of these Head Leases, which can be effectively modified bythe Nation, SGC records monthly Head Lease expense equal to the requiredpayment amount for the respective month. Payment increases under the Head Leases are restricted under the termsof the Indenture governing the Senior Notes and the Distribution Agreementreferenced in “Note 7 — Commitments and Contingencies”.  The Head Leases contain no renewal options orescalation clauses.

 

Expensesresulting from the above Head Leases were as follows for the three months endedDecember 31, 2009 and 2008:

 
| ** ** | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| ** ** | ** ** | **(In Millions of Dollars)**         | ** ** |
| SNFGC      |       | $                                                   | 9.0        |   | $ | 9.3 |   |
| STGC       |       | 6.0                                                 |       | 6.5 |   |
| SEGC       |       | 4.0                                                 |       | 4.5 |   |
|       |       | $                                                   | 19.0       |   | $ | 20.3 |   |

 

SNFGC,STGC and SEGC record the Head Lease costs as a component of advertising,general and administrative costs in the accompanying consolidated statements ofincome.

 

Seneca Niagara Falls Gaming Corporation

 

The SNFGC Head Lease(dated October 25, 2002) expires on December 31, 2023 and covers useof the land and certain improvements existing at the commencement of such HeadLease, principally including structures formerly known as the Niagara FallsConvention Center and Lackey Plaza. Effective October 1, 2007, the monthly payments were approximately $1.4million per month, as approved by the Board of Directors of SGC and SNFGC.  Pursuant to the terms of the Amended andRestated SNFGC Head Lease entered into on March 27, 2008, and effective October 1,2007, payments were further increased, at the request of the Nation, to approximately$2.0 million per month, with such increase effective as of October 1,2007.  On August 1, 2008, at therequest of the Nation, SGC approved an increase in the SNFGC Head Lease to approximately$3.1 million per month, effective October 1, 2008, and to approximately $3.7million per month, effective October 1, 2009.  On March 19, 2009 SNFGC entered into anamendment to the foregoing Head Lease agreement with the

 

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Nation,which reduced payments to approximately $3.0 million per month effective October 1,2008 and eliminated the increase that would have taken effect as of October 1,2009.

 

Seneca Territory Gaming Corporation

 

TheSTGC Head Lease (effective as of May 1, 2004) expires on December 31,2023 and covers use of the land which is currently being used in operating theSeneca Allegany Casino and Hotel. Effective October 1, 2007, the monthly payments were approximately $1.4 million, as approved by the Board ofDirectors of STGC.  Pursuant to anamendment to the STGC Head Lease entered into on March 27, 2008, andeffective as of October 1, 2007, the payments were increased, at therequest of the Nation, to approximately $1.7 million per month.  On August 1, 2008, at the request of theNation, SGC approved increases in the payments under the STGC Head Lease to approximately $2.1 million per month effective October 1,2008, and to approximately $2.7 million per month effective October 1,2009.  On March 19, 2009 STGCentered into an amendment to the foregoing Head Lease agreement with theNation, which reduced payments to $2.0 million per month effective October 1,2008 and eliminated the increase that would have taken effect as of October 1,2009.

 

SenecaErie Gaming Corporation

 

TheSEGC Head Lease (effective as of April 1, 2006) expires on December 31,2023 and covers use of the land which is currently being used in operating theSeneca Buffalo Creek Casino.  Effective October 1,2007, the monthly payments were approximately $1.3 million, as approved by the Board ofDirectors of SEGC.  Pursuant to anamendment to the SEGC Head Lease entered into on March 27, 2008, and effectiveas of October 1, 2007, the payments were increased, at the request of theNation, to approximately $1.4million per month. On August 1, 2008, at the request of the Nation, SGCapproved an increase in the payments under the SEGC Head Lease to $1.5 millionper month effective October 1, 2008 and thereafter.  On March 19, 2009 SEGC entered into anamendment to the foregoing Head Lease agreement with the Nation, which reducedpayments to approximately $1.3 million per month effective October 1, 2008.

 

In connection with the March 19, 2009, HeadLease amendments described above, for purposes of compliance with its Indenturegoverning the Senior Notes and the Distribution Agreement, SGC obtained anddelivered to Wells Fargo, N.A. (as trustee under the Indenture governing theSenior Notes) written fair market value rent opinions from an independentfinancial advisor with regard to the SNFGC and STGC Head Lease amendments (asrequired by the Indenture).  The SEGCHead Lease amendment reflects a 3% per annum (for two years) increase in rentas permitted by the Indenture.  SGC alsodelivered to Wells Fargo, N.A. (as trustee under the indenture governing theNation’s municipal bonds and a party to the Distribution Agreement) anadditional certification required pursuant to the Distribution Agreement.  Further or additional increases in rentpayable under the Head Lease agreements are restricted under the terms of SGC’sIndenture governing its Senior Notes and the Distribution Agreement, and aresubject to compliance with all applicable contractual commitments of SGC andthe Nation, such that noincrease may contravene, or constitute a default under any agreement,indenture, instrument or other commitment legally binding upon the Nation,SNFGC, STGC or SEGC, respectively, or to which the premises (described in theHead Leases) are subject.

 

*Class IIPoker Leases:*

 

As of January 1,2005, the Company transferred all Class II operations to the Nation,including its poker operations.  TheCompany leases space within Seneca Niagara Casino & Hotel to SenecaGaming and Entertainment, which operates the Nation’s Class II facilities,for operation of the poker room. On November 9, 2009, Seneca Gaming andEntertainment relocated its poker operations in Seneca Allegany Casino to a newfacility located within one mile of the Allegany Casino property., SGC recorded$0.2 million of rental income during each of the three months ended December 31,2009 and 2008, respectively, and at December 31, 2009 and September 30,2009, SGC recorded $0.6 million and $0.5 million, respectively, as a receivablefrom Seneca Gaming and Entertainment relating to poker room rentals.

 

*OtherLease:*

 

STGCleases office space in a building owned in part by the brother of a formermember of SGC’s Board of Directors,who served on the Board until September 2009**. **For the threemonths ended December 31, 2009 and 2008, such operating lease expensetotaled $44,000 and $63,000, respectively.

 

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**OtherRelated Party Transactions**

 

*ConstructionServices:*

 

SNFGC,STGC and SEGC have each entered into construction management agreements withSeneca Construction Management Corporation, or SCMC, for certain renovationsand capital improvements at Seneca Niagara Casino and Hotel, Seneca AlleganyCasino and Hotel, and Seneca Buffalo Creek Casino, respectively.  SCMC is wholly owned by the Nation.  For the three months ended December 31,2009 and 2008, SNFGC, STGC and SEGC have collectively made payments to SCMC forconstruction management and related fees of $0 and $1.0 million,respectively.  Such fees reflect theamounts earned by SCMC for the performance of construction management services.Additional amounts paid to SCMC are passed through and used to paysubcontractors, reimbursements for out-of-pocket expenses and similar costs.

 

*Regulatory Services:*

 

SGC is charged by the Nation for its costs incurred related to theoperation of SGA gaming regulatory services. These include:  a) costs incurredsolely and directly in connection with regulatory services and oversight of SGC’sgaming operations and which are therefore 100% allocable to SGC; and b) anadministration fee, assessed by the Nation for costs indirectly incurred inconjunction with the operation and regulation of SGC, which is fixed as apercentage of direct costs, currently 20%, as determined by the Nation in itsperformance of administration of the SGA and its oversight of the Company. Suchcosts were approximately $2.2 million and $2.6 million, respectively, for thethree months ended December 31, 2009 and 2008.

 

SGC is also charged by the Nation for its costs incurred related toservices provided by the New York State Racing and Wagering Board, New YorkState Police, Seneca Nation of Indians Marshals, Buffalo Police****and Cattaraugus County Sheriff Department solely anddirectly in connection with SGC’s operations, which costs were approximately$3.7 million and $2.6 million for the three months ended December 31, 2009and 2008, respectively.

 

At December 31, 2009 and September 30, 2009, approximately$37.4 million and $33.7 million, respectively, were recorded as “accruedregulatory costs” in the accompanying consolidated balance sheets, for thepayment of such New York State related regulatory costs.

 

**7.**                                        Commitments and Contingencies

** **

**Distribution Agreement Obligations**

 

On April 27,2007, SGC entered into a Distribution Agreement among the Nation, the SenecaNation of Indians Capital Improvements Authority, or the Authority, SGC andWells Fargo Bank, as Trustee, in connection with the Authority’s issuance intwo series (one tax exempt and the other taxable) of an aggregate principalamount of $159,495,000 special obligation bonds, or the 2007 NationBonds.  The Distribution Agreement obligates SGC, subject to anycontractual restrictions applicable to SGC (including, but not limited to,those contained in the Senior Notes Indenture), to make monthly distributionsto the Nation at the times and in the amounts necessary to enable the Authorityto pay the debt service on the 2007 Nation Bonds as required under theAuthority’s indenture.  At the direction of the Nation and the Authority,SGC pays such distributions directly to the Trustee.  The Authority’s debtservice commenced on June 1, 2007.  For the period from June 1,2007 through November 1, 2007, the Authority’s debt service averagedapproximately $0.9 million per month. For the period from December 1, 2007through June 1, 2008, the Authority’s debt service averaged approximately$1.7 million per month.  In June 2008,it was determined that the amortization (debt service) schedule upon which theforegoing $1.7 million monthly payments was made, was incorrect.  A corrected amortization schedule wasprovided and, after giving effect to a resulting credit for amounts overpaid,for the period from January 1, 2008 through December 1, 2023, theAuthority’s debt service averages approximately $1.2 million per month. Theforegoing debt service averages are based on scheduled payments of interest andprincipal under the Authority’s indenture and bonds and do not address theeffects of any earlier call for redemption, by acceleration or otherwise. The Distribution Agreement provides that neither the Trustee nor the Authority’sbondholders will have any recourse under the Distribution Agreement to anyrevenues, assets or property of SGC or its subsidiaries should SGC fail tocomply with its distribution obligations. For the three months ended December 31, 2009 and 2008, SGCdistributed to the Nation $3.7 million and $3.3 million, respectively, for theAuthority’s debt service on the special obligation bonds.

 

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**The Seneca Nation Compact**

** **

As part of its Compact, the Nation agrees to contribute to the State ofNew York a portion of the proceeds from the operation and conduct of eachcategory of Gaming Device (as defined in the Compact) for which exclusivityexists, based on the win of such machines (cash dropped into machines, afterpayouts but before expenses) and totaled on a cumulative quarterly basis to beadjusted annually at the end of the relevant calendar year.  However, beginning in February 2005, theCompany began advancing to the Nation on a monthly basis the exclusivity feedue for the prior month.  The exclusivityfee to the State of New York for years 1–4 (through December 31, 2006),was 18.0%, payable on an annual basis. Thereafter, the exclusivity fee was 22%for years 5–7 (through December 31, 2009), payable on a semi-annual basisand is 25.0% for years 8–14 (through December 31, 2016), payable on aquarterly basis.

 

The following table summarizesthe exclusivity fees expense by property:

 
|                                  |   | **Three Months Ended**     |       |
|---------------------------------------|--------|--------------------------------------|------------|
|                                  |   | **December 31,**                |       |
|                                  |   | **2009**                             | ** ** | **2008** |   |
|                                  |   | **(Dollars in Thousands)** |       |
| Seneca Niagara Falls Casino and Hotel |   | $                                    | 15,937     |   | $ | 16,573 |   |
| Seneca Allegany Casino and Hotel      |   | 6,268                                |       | 6,599 |   |
| Seneca Buffalo Creek Casino           |   | 2,365                                |       | 1,909 |   |
| Total                                 |   | $                                    | 24,570     |   | $ | 25,081 |   |

 

**Expansion and Development**

** **

As described in “Note 1 — Organization and Basis of Presentation,” theCompact provides the Nation with the exclusive right to conduct Class IIIgaming activities at three sites in the western region of the State of NewYork.  The Company opened its third Class IIIcasino on July 3, 2007 in a temporary facility in Buffalo, New York, andcommenced construction of a permanent facility later that year.  The Company also commenced construction in April 2008of a second hotel tower at the Seneca Allegany Casino and Hotel.

 

In August  2008, construction activities at Seneca Allegany Casinoand Hotel and Seneca Buffalo Creek Casino were suspended indefinitely forreasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on available cash, such as payments tothe Nation.  As of December 31,2009, construction remained suspended indefinitely.  Furthermore, certain planning efforts relatedto the future expansion of the Seneca Niagara Falls property were suspended forthe same reasons.  As a result of thesecircumstances an impairment charge of $107.6 million was recognized duringFiscal 2009. During the three months ended December 31, 2009, anadditional $55,000 was recorded as an impairment of property and equipment.Nonetheless, SGC will continue to explore alternative future expansion anddevelopment options.

 

The construction of a permanent casino at the Buffalo Creek site, aswell as any expansion by STGC at Seneca Allegany Casino and Hotel will requiresignificant capital outlays. The ability to recommence these projects willdepend on various factors including cash flow from operations, the availabilityof external financing with regard to one or more of the projects, certainNation and governmental approvals, and the effects of legal and/oradministrative proceedings.

 

*Seneca Niagara Falls Casino and Hotel. *In 2006, SNFGC began master planning activities forthe remaining approximately 24 acres of undeveloped land contained in theNiagara Falls footprint.  During August 2008,these master planning activities were suspended and an impairment charge wasrecognized related to these activities in Fiscal 2009, in the amount ofapproximately $3.5 million.

 

*Seneca Allegany Casino and Hotel. *Construction on the next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200-room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of approximately $130million, was suspended and an impairment charge was recognized for costsincurred related to these activities in Fiscal 2009, in the amount ofapproximately $17.1 million. During the three months ended December 31,2009, an additional $38,000 was 

 

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recorded as an impairment of property and equipment.

 

*Seneca Buffalo Creek Casino.*Construction on the next phase ofdevelopment at Seneca Buffalo Creek Casino and Hotel, which was planned toinclude approximately 90,000 square feet of gaming space; 2,000 slot machines;45 table games; a 22-story all-suite hotel; four restaurants; a full-servicespa and salon; retail and other amenities; and a 2,200-space parking garage,for a total estimated cost of approximately $333 million, was suspended and animpairment charge was recognized related to these activities in Fiscal 2009, inthe amount of approximately $87.0 million. During the three months ended December 31,2009, an additional $17,000 was recorded as an impairment of property andequipment.

 

On October 19, 2009 SEGC began an expansion of the temporaryfacility, which will add approximately 5,300 square feet of gaming space to thefacility and will accommodate approximately an additional 212 slot machines.The expansion is due to be completed in Spring 2010.

 

*Seneca Hickory Stick Golf Club. *In July 2007, the Company commenced constructionof the Seneca Hickory Stick Golf Club, an 18-hole Robert Trent Jones IIdesigned golf course. The golf course is located in Lewiston, New York and isapproximately eight miles from the Seneca Niagara Casino and Hotel.  Completion of golf course construction andofficial course opening are currently scheduled for Summer 2010. As of December 31,2009, the Company has incurred $22.1 million for the purchase of land andconstruction, with a total cost to construct the golf course, clubhouse andrelated amenities estimated to be approximately $25.5 million.

 

**Legal Proceedings**

 

***Seneca Gaming Corporation v. Merrill Lynch PierceFenner & Smith Incorporated***

 

OnAugust 6, 2009, SGC filed suit in the United States District Court for theSouthern District of New York, alleging fraudulent conduct on the part ofMerrill Lynch in inducing SGC to purchase auction-rate securities.  The claim alleges that Merrill Lynchrepresented the securities as highly liquid and collateralized by residentialmortgages.  SGC discovered subsequentlythat the securities were illiquid and not collateralized by residentialmortgages, but rather, by complex derivative instruments, and that thesecurities had become worthless.  SGC’ssuit seeks $5 million in damages.

 

OnJanuary 4, 2010, Merrill Lynch filed a motion to dismiss thecomplaint.  SGC’s counsel is preparing areply.  No hearing date on the motion hasbeen set. At December 31, 2009, no amounts were recorded in SGC’sfinancial statements related to this proceeding.

 

**8.****                                 ****SubsequentEvents**

 

On Friday, January 22,2010, the SGC Board of Directors authorized the establishment of an internalsenior note repayment reserve, which restricts the use of funds placed, or tobe placed, into the reserve.

 

SGC has evaluated andappropriately disclosed all subsequent events from January 1, 2010 throughFebruary 4, 2010, the date the unaudited consolidated financial statementsincluded in our Quarterly Report on Form 10-Q for the quarterly periodended December 31, 2009 were filed with the Securities and ExchangeCommission.

 

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**Item 2.**                                                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

** **

You should read thefollowing discussion and analysis in conjunction with the section titled “FinancialStatements” and the accompanying “Notes to Consolidated Financial Statements”included elsewhere in this Quarterly Report on Form 10-Q.  References below to years are to fiscal yearsof Seneca Gaming Corporation, or SGC, unless otherwise noted.  SGC’s fiscal year is from October 1through September 30.

 

**Forward-Looking Statements**

 

When used in thisQuarterly Report on Form 10-Q, in other filings with the SEC, in our pressreleases or in our other public communications, the words “believe,” “estimate,”“anticipate,” “expect,” “contemplate,” “may,” “will,” “plan,” “project,” “willcontinue,” “will be,” “will continue,” “likely will result” and similarexpressions are intended to identify forward-looking statements.  Similarly, statements that describe ourplans, business, strategy or goals are all forward-looking statements.  Statements looking forward in time areincluded in this Quarterly Report on Form 10-Q pursuant to the “safeharbor” provision of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risksand uncertainties, which could cause actual results to differ materially fromthose expressed in or implied by these forward-looking statements, including,but not limited to, the risk factors contained or referenced herein and in ourother reports filed with the SEC pursuant to the Securities Exchange Act of1934, as amended, including in Item 1A of our 2009 Form 10-K.  In addition to the risk factors described inItem 1A of our 2009 Form 10-K, the following important factors, amongothers, could affect our future financial condition or results of operations,causing actual results to differ materially from those expressed in theforward-looking statements: the local, regional, national, or global economicclimate, our substantial indebtedness and ability to meet our financialobligations and operate in accordance with the restrictions pursuant to suchindebtedness, our incurrence of any additional indebtedness, the availabilityof financing, our failure to generate cash flows, increased competition,changes in federal Indian law, issues relating to the Nation-State GamingCompact, or the Compact, between the Seneca Nation of Indians and New YorkState, the control of our company by the Seneca Nation of Indians, or theNation, changes in the membership of the Nation’s Council (the Nation’slegislative body) or Nation policies, changes in gaming laws or regulations,ongoing or future litigation challenging our ability to conduct gamingoperations, changes in federal or state tax laws or the administration of suchlaws, our failure to retain existing management, fill current vacancies, andattract new personnel, our limited experience operating casinos, hotels, andthe golf course we intend to open, seasonality and weather-related factors,investigative reviews by regulatory authorities relating to our gamingrevenues, and acts of war or terrorism.

 

Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of their respective dates. We undertake no obligation to update these forward-looking statements toreflect events or circumstances occurring after their respective dates.

 

**Overview**

** **

SGC is wholly-owned bythe Nation and chartered to develop, manage and direct all of the Nation’s Class IIIgaming operations on the Nation’s territories in Western New York. SGC waschartered by the Nation in August 2002. In August 2002, the Nation entered into the Compact with New YorkState that provides the Nation with the right to establish and operate three Class IIIgaming facilities in Western New York.  Class IIIgaming, the most heavily regulated of the gaming classes includes, among otherthings, slot machines and table games.  We currently operate three Class III gaming facilities in WesternNew York—Seneca  Niagara Casino andHotel, which is located in the City of Niagara Falls, New York (NiagaraTerritory) and operated by Seneca Niagara Falls Gaming Corporation, or SNFGC,approximately 20 miles north of Buffalo, New York; Seneca Allegany Casino andHotel, which is located in the City of Salamanca, New York (Allegany Territory)and operated by Seneca Territory Gaming Corporation, or STGC, approximately 75miles northeast of Erie, Pennsylvania; and Seneca Buffalo Creek Casino, whichis located in the inner harbor district of Buffalo, New York (Buffalo CreekTerritory) and operated by Seneca Erie Gaming Corporation, or SEGC. SenecaNiagara Casino and Hotel opened on December 31, 2002 (initially, as theSeneca Niagara Casino).  Seneca AlleganyCasino and Hotel opened on May 1, 2004 (initially, as the Seneca AlleganyCasino).  Seneca Buffalo Creek Casinocommenced operations on July 3, 2007 in a temporary facility.  Our three casinos are located on land held inrestricted fee by the Nation, which, together with the rights under theCompact, allows us to conduct Class III gaming operations at theselocations in New York State and are the only casino resort gaming facilities inWestern New York State to offer both Class III slot machines and tablegames.

 

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**ExecutiveSummary**

 

***Our Current Operations.*****    We currently operate three Class IIIgaming facilities:  Seneca Niagara Casinoand Hotel, in the City of Niagara Falls, New York (Niagara Territory),featuring over 147,000 square feet of gaming space, 4,049 slot machines, 102table games and 604 hotel rooms; Seneca Allegany Casino and Hotel, in the Cityof Salamanca, New York (Allegany Territory), featuring over 63,500 square feetof gaming space, 2,182 slot machines, 32 table games and 212 hotel rooms; andthe Seneca Buffalo Creek Casino (slots only temporary facility), in the City ofBuffalo, New York (Buffalo Creek Territory), featuring 244 slot machines.  Our operations also include dining,entertainment, retail and spa and salon services.  For the three months ended December 31,2009 and 2008, approximately 92% of our net revenue was derived from our gamingactivities.

 

***Seneca Niagara Casino and Hotel****. *   Upon opening on December 31, 2002,Seneca Niagara Casino primarily relied on drive-in and bus patrons from theBuffalo, Niagara Falls, and Rochester areas in New York and secondarily fromErie, Pennsylvania, Ohio and other parts of New York.

 

In March 2006, SNFGC officially completed thephased opening of its luxury hotel expansion, which included a permanent147,000 square foot gaming facility (providing 35,000 square feet more gamingspace than the original 112,000 square feet), a 604-room luxury hotel with 118suites of various sizes, a full-service spa, salon, and fitness center, threefine dining restaurants and a 24 hour casual restaurant, three new retailstores, and a 25,200 square foot multi-purpose room and events center.  The expansion of Seneca Niagara Casino andHotel, including the addition of our luxury hotel and other amenities, hasenabled us to attract higher-end patrons, increase length of stay, and extendour geographic market penetration and appeal to a more diverse demographicbase.

 

In 2006, we beganmaster planning activities for the remaining approximately 24 acres ofundeveloped land contained in the approximately 50 acre Niagara Falls footprintdescribed in the Compact for ownership by the Nation.  During August 2008, these masterplanning activities were suspended due to the continuation of weak economicconditions, adverse credit market conditions and an uncertain economic outlook,and an impairment charge of $3.5 million was recognized during Fiscal 2009related to these activities.

 

***Seneca Allegany Casino and Hotel****.*   Since opening on May 1, 2004, Seneca Allegany Casino and Hotel hasattracted patrons from the southern portion of Western New York, Erie andPittsburgh, Pennsylvania and Ohio.  As ofDecember 31, 2009, approximately 69% of the casino’s patron base is fromoutside of the State of New York.

 

In March 2007, weopened a 212-room resort hotel, including two fine dining restaurants, a24-hour casual restaurant and certain other amenities after officially openingthe new permanent gaming floor in December 2006.  In March 2008, we completed theconversion of the former approximate 120,000 square foot temporary casinostructure into an events center with a seating capacity for 2,200 people, alongwith additional administrative office space and amenities.  We believe the resort hotel, permanent casinoand events center provide a first-class gaming experience for our patrons,encouraging longer patron length of stay and helping to maintain the competitiveposition of the facility in light of our closest and most immediate competitionin Pennsylvania, Presque Isle Downs, a relatively new gaming facility thatopened in late February 2007 in Erie, Pennsylvania approximately 80 milesfrom the Seneca Allegany Casino and Hotel. Presque Isle Downs has approximately 2,000 slot machines and offersdining and entertainment options that include a steakhouse, a buffet and fourlounges, but it does not offer table games or lodging.

 

Construction onour next phase of development at Seneca Allegany Casino and Hotel, which wasplanned to include an additional 200 room hotel tower, and up to 30,000 squarefeet of additional gaming space and related amenities, for a total estimatedcost of up to $130 million, was suspended for reasons including:  the economic recession; inability to obtainconstruction financing at reasonable interest rates; and operating and otherdemands on our available cash, such as our payments and distributions to theNation.  As of December 31, 2009,construction remained suspended indefinitely. As a result of thesecircumstances an impairment charge was recognized related to these activitiesin Fiscal 2009, in the amount of approximately $17.1 million.  During the three months ended December 31,2009, an additional $38,000 was recorded as an impairment of property andequipment.

 

***SenecaBuffalo Creek Casino****.    *On October 3, 2005, the Nationacquired approximately nine acres of land in the inner-harbor district ofBuffalo, New York.  On July 3, 2007,we began operating a temporary Class III gaming facility (approximately6,000 square feet) featuring 135 slot machines and a snack bar.  During the quarter ended March 31, 2008,the temporary facility was expanded to include an additional 109 slot machines.The current temporary facility is approximately 8,600 square feet, and features244 slot machines and a snack bar.

 

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On October 3, 2007,we formally announced our plans for a permanent casino and hotel complex on theBuffalo Creek Territory having an estimated cost of $333 million, featuringapproximately 90,000 square feet of gaming space; 2,000 slot machines; 45 tablegames; a 22-story all suite hotel; four restaurants; a full-service spa andsalon; retail and other amenities; and a 2,200-space parking garage.

 

We suspended constructionon the permanent Seneca Buffalo Creek Casino and Hotel in August 2008 forreasons including:  the economic recession;inability to obtain construction financing at reasonable interest rates; andoperating and other demands on our available cash, such as our payments to theNation.  As of December 31, 2009,construction remained suspended indefinitely. As a result of thesecircumstances an impairment charge was recognized related to these activitiesin Fiscal 2009, in the amount of approximately $87.0 million.  During the three months ended December 31,2009, an additional $17,000 was recorded as an impairment of property andequipment.

 

On October 19, 2009we broke ground on an expansion to the existing temporary facility, which willadd approximately 5,300 square feet of gaming space and will accommodate 200 to250 additional slot machines. The expansion is due to be completed in spring2010.

 

Our ability to continue to operate the Seneca BuffaloCreek Casino temporary facility will depend on various factors, includingexisting legal challenges. See “Item 3. Legal Proceedings,” included in our 2009 Form 10-K for adescription of the legal proceedings relating to the Seneca Buffalo CreekCasino.

 

***Seneca Hickory Stick Golf Club —Lewiston, New York****.  *In March 2006, we acquired 257 acresof land with the intent to design and build a championship level golf course inLewiston, New York, approximately eight miles from Seneca Niagara Casino andHotel.  We selected the Robert Trent Jones II firm to design the golfcourse.  Construction of the golf course commenced in July 2007 andit is anticipated that the official opening of the course will occur in Summer2010.  LGCC has engaged Kemper SportsManagement, Inc. to manage and operate the course. The total cost toconstruct the golf course, clubhouse and related amenities is estimated to beapproximately $25.5 million.

 

***Key Performance Indicators.*****   Our operating results are dependent on the volume of patrons at ourcasinos, our ability to attract patrons for repeat visits and our ability toincrease patron revenue per trip.

 

***Marketing.****    *We use an integrated marketing strategy to attract andretain our patrons and to brand the Seneca name.  We coordinate our marketing events tomaximize the quality and length of stay of patron visits and to minimizecompetition among our gaming facilities. The luxury hotel and related amenities at the Seneca Niagara Casino andHotel and the resort hotel and related amenities at Seneca Allegany Casino andHotel further enhance our marketing initiatives in the region, including areasof New York outside of the Niagara Falls and Salamanca areas, in Pennsylvania,Ohio, and Toronto, Canada and in areas outside the region including Michigan,Massachusetts, and Connecticut.

 

***Seasonality.***    We have generally observed seasonal increases in gaming activity duringthe spring and summer months and decreases in gaming activity during wintermonths associated with inclement weather.

 

***Overall Outlook****.*     SGC’s financial performance during the three monthsended December 31, 2009 reflects a measureable improvement over thequarter ended December 31, 2008, as evidenced by an increase in net incomeof 22.7%. While net revenues are approximately 2.6% lower than those generatedin the comparable period in Fiscal 2009, this percentage decrease reflects animprovement over the 7.6% decrease during the first quarter of Fiscal 2009 (ascompared to the first quarter of Fiscal 2008). Additionally, the three months ended December 31, 2009 highlightedthe cumulative effect of SGC’s ongoing cost savings and efficiency initiatives,with an improvement in our operating margins to 17.6%, from 15.2% for the threemonths ended December 31, 2008.

 

SGC also continues totake steps, and to work with the Nation, to improve SGC’s liquidityposition.  In October 2009, theNation reduced anticipated 2010 monthly distributions, exclusive of amountsrequired under the Distribution Agreement, to $30.0 million for Fiscal 2010,compared to $42.0 million for Fiscal 2009. As a result of these efforts, inconjunction with SGC’s efforts to create additional operating efficiencies, SGC’sdepository cash balances increased to approximately $60.5 million at December 31,2009 from $7.0 million, net of the $20.0 million proceeds drawn under theSenior Secured Revolving Loan Agreement, as of December 31, 2008. SGC hasalso implemented a strategy to fund a $125.0 million reserve prior to May 2012to reduce its future borrowing costs, while also maintaining adequate operatingcash reserves. Furthermore, the Company’s Board of Directors recently tookaction to establish an internally restricted senior note repayment reserve fundfor this purpose.

 

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SGC continues to believethat it is the premier gaming operator in Western New York State and in theareas of Northern Pennsylvania and Ohio located within its primary andsecondary markets. Since the December 31, 2002 opening of the SenecaNiagara Casino, SGC has invested significantly in the development, expansionand maintenance of its gaming facilities, including the completion of the hoteland gaming expansion projects at Seneca Niagara Casino and Hotel and SenecaAllegany Casino and Hotel, and the opening and expansion of the temporarycasino on the Seneca Buffalo Creek Territory. These investments have helped enable SGC to maintain its position as thepremier gaming operator in the region described above.  To help maintain its current market position,and to provide for expanded opportunities in the convention and tourismmarkets, SGC intends to continue to explore opportunities for its NiagaraFalls, Allegany and Buffalo facilities, subject to the availability ofnecessary funding. A principal goal is for the facilities to complement eachother, offering diverse hotel, entertainment and gaming experiences for ourguests.

 

The ongoing economicrecession and increased regional competition have continued to presentoperational challenges for SGC during the first quarter of Fiscal 2010, and weexpect that such challenges may continue. Despite these challenges, we believethat we are positioned to weather such challenges and conditions, based in partupon our efforts, and those of the Nation in working with SGC, to mitigate theimpact of these adverse developments.  Wealso continue to believe, notwithstanding these challenges, the Class IIIgaming exclusivity provided by the Compact will continue to present us with acompetitive advantage to serve the Western New York hotel, entertainment andgaming markets.  We continue to engage injoint planning initiatives with the Nation to assess our financial condition,and our liquidity and financing needs, and to help ensure cash generated fromoperations, available cash, cash equivalents and short-term investments are sufficientto service our debt, satisfy our other financial obligations and commitmentsand meet our working capital requirements for the remainder of the fiscal year.

 

***RecentDevelopment****s*.

 

On October 19, 2009we broke ground on a Buffalo Creek Casino temporary facility expansion, whichwill add approximately 5,300 square feet of gaming space to the facility andwill accommodate approximately an additional 212 slot machines. The expansionis due to be completed in spring 2010.

 

Also, during the threemonths ended December 31, 2009, 577 new slot machines were installed atthe Niagara Falls and Allegany properties furthering our goal of providing thebest and newest entertainment experiences for our patrons.

 

Effective December 18,2009, SGC amended its $50 million Senior Secured Revolving Loan Agreement toextend the maturity date from December 19, 2009 to December 31, 2011.Amounts borrowed under the Amended Senior Secured Revolving Loan Agreementcontinue to bear interest at either one, three or six-month LIBOR plus one andone quarter percent (1.25%), or the prime rate (as reported in The Wall StreetJournal) plus one quarter percent (0.25%), with any outstanding principalbalance to be paid by, or on, the new maturity date.  The $50.0 million commitment under theAmended Senior Secured Revolving Loan Agreement reduces in tandem with anyreduction in the letter of credit requirement imposed by the Empire StateDevelopment Corporation, or ESDC (relating to the ESDC’s efforts on behalf ofSGC in connection with ongoing condemnation proceedings in Niagara Falls, NY),up to an aggregate reduction of $10.0 million. The Amended Senior Secured Revolving Loan Agreement requires that SGCmaintain all of its deposit and investment accounts with the lender, subject tolimited exceptions for certain existing accounts. The Amended Senior SecuredRevolving Loan Agreement also modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12-month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.

 

On January 11, 2010,the Seneca Gaming Corporation’s Board of Directors appointed Kevin Seneca asthe new Chairman of the Board, and voted to appoint Richard K. Nephew to fillthe vacancy in the office of Treasurer created by Mr. Seneca’sappointment.  Each will serve in theirrespective capacities until the Board’s next annual meeting and until theirsuccessors are elected, or appointed and qualified, or until their earlierresignation or removal. The appointments did not affect the composition of theBoard, and the Directors each continue to serve on the Board for theirrespective terms as designated by the Nation’s Council.

 

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**CriticalAccounting Policies and Estimates**

** **

There have been no changesin critical accounting policies and estimates since the filing of our AnnualReport on Form 10-K for the fiscal year ended September 30, 2009, or2009 Form 10-K.

 

**Reclassifications**

 

Certain prior yearamounts have been reclassified to conform to current year presentation.

 

**OperatingResults - Three Months Ended December 31, 2009 Compared to the ThreeMonths Ended December 31, 2008**

** **

*Summaryof Operating Results*

 

Asof December 31, 2009, we own and operate the Seneca Niagara Casino andHotel in Niagara Falls, New York; the Seneca Allegany Casino and Hotel inSalamanca, New York; and the Seneca Buffalo Creek Casino in Buffalo, NewYork.  In addition, Lewiston Golf CourseCorporation was established to operate a golf course which is currently underconstruction in Lewiston, New York.  Allof our revenues are derived from our operations at our completed facilities.

 

Thefollowing table summarizes our results from operations by corporation and/orfacility:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **December 31,**                | ** ** |
| ** **                            | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Net revenues:                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 90,045     |   | $ | 94,307 |   |
| Seneca Allegany Casino and Hotel      |       | 34,145                               | ** ** | 35,580 |   |
| Seneca Buffalo Creek Casino           |       | 10,972                               |       | 8,832 |   |
| Total                                 |       | $                                    | 135,162    |   | $ | 138,719 |   |
|                                  |       |                                 |       |   |   |
| Operating expenses:                   |       |                                 |       | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 69,216     |   | $ | 72,136 |   |
| Seneca Allegany Casino and Hotel      |       | 33,772                               |       | 37,059 |   |
| Seneca Buffalo Creek Casino           |       | 8,030                                |       | 7,913 |   |
| Seneca Hickory Stick Golf Club        |       | 72                                   |       | 49 |   |
| Seneca Gaming Corporation             |       | 346                                  |       | 430 |   |
| Total                                 |       | $                                    | 111,436    |   | $ | 117,587 |   |
|                                  |       |                                 |       |   |   |
| Operating income (loss):              |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 20,830     |   | $ | 22,171 |   |
| Seneca Allegany Casino and Hotel      |       | 372                                  |       | (1,479 | ) |
| Seneca Buffalo Creek Casino           |       | 2,942                                |       | 919 |   |
| Seneca Hickory Stick Golf Club        |       | (72                                  | )          | (49 | ) |
| Seneca Gaming Corporation             |       | (346                                 | )          | (430 | ) |
| Total                                 |       | $                                    | 23,726     |   | $ | 21,132 |   |

 

The most importantfactors or trends contributing to our operating performance during the threemonths ended December 31, 2009 were:

 

·                  The reduction of expenses attributable toimplementation of operating initiatives, which included: a continued focus onhotel yield management; reduced food and beverage costs as a percentage of foodand beverage revenue; repricing of our food and beverage products; initiativesto increase our cash paying patrons; reduced marketing costs; and laborefficiencies achieved through active monitoring of scheduling activities and areduction in workforce;

 

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·                  A reduction in monthlydistributions to the Nation from $4 million per month to $2.5 million permonth, and a reduction in Head Leases payments for the three months ended December 31,2009 from $20.3 million to $19.0 million;

 

·                  Extension of hours of operation of theBuffalo Creek facility, effective February 2009;

 

·                  Relatively temperate weather at the Niagara Falls and BuffaloCreek properties;

 

·                  Selective maintenance capital investmentin both our Niagara Falls and Allegany properties;

 

·                  The ongoing economic recession, which hasreduced consumer spending and encouraged an apparent transition to gaming oflogistical convenience; and

 

·                  Adverse credit market conditions whichhave reduced the availability, and increased the cost, of capital for expansionprojects to generate additional revenues.

 

*GrossRevenues*

 

Gross revenuesconsisted of the following:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **December 31,**                | ** ** |
| ** **                      | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 135,377    |   | $ | 137,023 |   |
| Food and beverage               |       | 13,254                               |       | 14,204 |   |
| Lodging                         |       | 5,204                                |       | 6,296 |   |
| Retail, entertainment and other |       | 5,892                                |       | 6,440 |   |
| Total                           |       | $                                    | 159,727    |   | $ | 163,963 |   |

 

The table belowsummarizes the percentage of gross revenues from each revenue source:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **December 31,**            | ** ** |
| ** **                      | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Gaming                          |       | 84.7                             | %          | 83.6 | % |
| Food and beverage               |       | 8.3                              | %          | 8.7 | % |
| Lodging                         |       | 3.3                              | %          | 3.8 | % |
| Retail, entertainment and other |       | 3.7                              | %          | 3.9 | % |
| Total                           |       | 100.0                            | %          | 100.0 | % |

 

*GamingRevenue*

 

Our gaming revenue forthe three months ended December 31, 2009 decreased from $137.0 million to$135.4 million when compared to the same period in the prior year, primarilydue to the ongoing impact of adverse economic conditions on consumer demand forgaming and entertainment offerings.

 

Our net gaming revenue,net of promotional credits of $11.3 million and $10.0 million in the threemonths ended December 31, 2009 and 2008, respectively, decreased $2.9million, or 2%, when comparing these periods. During the three months ended December 31, 2009, Seneca NiagaraCasino and Hotel’s net gaming revenue decreased $3.6 million, or 4%; SenecaAllegany Casino and Hotel’s net gaming revenue decreased $1.4 million, or 4%;and Seneca Buffalo Creek Casino’s net gaming revenue increased $2.1 million, or24% when comparing these same periods.

 

Revenues from slotmachines are the largest component of our gaming revenues. The following tablepresents data related to slot revenues (in thousands, except where noted):

 

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| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **December 31,**            | ** ** |
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Slot handle                                          |       | $                                | 1,454,334  |   | $ | 1,472,236 |   |
| Gross slot revenue                                   |       | $                                | 123,480    |   | $ | 124,863 |   |
| Net slot revenue                                     |       | $                                | 109,673    |   | $ | 111,576 |   |
| Weighted average number of slot machines (in  units) |       | 6,514                            |       | 6,680 |   |
| Gross slot hold percentage                           |       | 8.5                              | %          | 8.5 | % |
| Gross slot win per unit per day (in dollars)         |       | $                                | 206        |   | $ | 203 |   |

 

Net slot revenuedecreased $1.9 million, or 2%, when comparing the three months ended December 31,2009 to the three months ended December 31, 2008.

 

Slotpromotional credits, which are recorded in gross slot revenues and promotionalallowances, amounted to $7.5 million and $7.8 million at Seneca Niagara Casinoand Hotel during the three months ended December 31, 2009 and 2008,respectively, and $3.7 million and $2.2 million at Seneca Allegany Casino andHotel during the three months ended December 31, 2009 and 2008,respectively. The increase in slot promotional credit play at Seneca AlleganyCasino and Hotel during the three months ended December 31, 2009 was primarily due toincreased marketing promotions offering slot promotional credits. The decreasein slot promotional credit play at Seneca Niagara Casino and Hotel was due toslightly lower patron participation in slot promotional programs during thethree months ended December 31, 2009, whencompared to the three months ended December 31, 2008.

 

The following tablepresents data related to table game revenues (in thousands, except wherenoted):

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **December 31,**            | ** ** |
| ** **                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Table games drop                                         |       | $                                | 84,665     |   | $ | 92,355 |   |
| Net table games revenue                                  |       | $                                | 14,348     |   | $ | 15,297 |   |
| Weighted average number of table games (in units)        |       | 141                              |       | 142 |   |
| Table games hold percentage                              |       | 17.0                             | %          | 16.6 | % |
| Gross table games revenue per unit per day (in  dollars) |       | $                                | 1,111      |   | $ | 1,174 |   |

 

Net table games revenuedecreased $0.9 million, or 6%, when comparing the three months ended December 31,2009 to the three months ended December 31, 2008.  The decrease was principally due to thosefactors previously noted, offset by a slight increase in the table games holdpercentage when comparing these same periods.

 

*Food andBeverage Revenue*

 

The following tablepresents data related to food and beverage revenue (in thousands, except wherenoted):

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **December 31,**            | ** ** |
| ** **                 | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Covers                     |       | 902                              |       | 934 |   |
| Average check (in dollars) |       | $                                | 14.70      |   | $ | 15.20 |   |
|                            |            |                                  |            |  |  |  |  |

 

During the three monthsended December 31, 2009, our consolidated food and beverage revenue decreased$1.0 million, or 7% when compared to the same period in 2008, due primarily tothe ongoing economic conditions causing a widespread decrease in overallconsumer spending for leisure and entertainment purposes.  Seneca Niagara Casino and Hotel’s food andbeverage revenue accounted for $0.8 million of the decrease; Seneca AlleganyCasino and Hotel’s and food and beverage revenue accounted for $0.2 million ofthe decrease; and Seneca Buffalo Creek Casino’s food and beverage revenueapproximated the revenue for the same quarter in the prior year.  During the three months ended December 31,2009 and 2008, 52% and 53%, respectively, of our food and beverage revenue werethe result of Seneca Link Player’s Card point redemptions.

 

*LodgingRevenue*

 

The following tablepresents data related to lodging revenue:

 

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| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **December 31,**            | ** ** |
| ** **                          | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Occupied rooms                      |       | 62,775                           |       | 68,095 |   |
| Average daily room rate (ADR)       |       | $                                | 82.89      |   | $ | 92.45 |   |
| Occupancy rate                      |       | 90.0                             | %          | 92.8 | % |
| Revenue per available room (REVPAR) |       | $                                | 74.64      |   | $ | 85.75 |   |

 

During the three monthsended December 31, 2009, our lodging revenue decreased by $1.1 million, or17%, when compared to the three months ended December 31, 2008, due to adecrease in the number of occupied rooms and average rate per occupied roomresulting from ongoing economic conditions. Seneca Niagara Casino and Hotel’slodging revenue accounted for $1.0 million of the decrease and Seneca AlleganyCasino and Hotel’s lodging revenue accounted for $0.1 million of thedecrease.  During the three months ended December 31,2009 and 2008, 71% and 74%, respectively, of our lodging revenue were theresult of Seneca Link Player’s Card point redemptions.

 

*Retail,Entertainment and Other Revenue*

 

During the three monthsended December 31, 2009, our retail, entertainment and other revenuedecreased $0.5 million, or 9%, when compared to the same period in 2008,primarily due to the impact of $0.4million of other revenue from supplier refunds during the three months ended December 31,2008. Additionally, during the three months ended December 31, 2009,retail revenue decreased $0.2 million and entertainment revenue increased $0.1million when compared to the same period in 2008. During the three months endedDecember 31, 2009 and 2008, 79% and 82%, respectively, of our retailrevenue, and 50% and 61% of our entertainment revenue, respectively, was attributableto Seneca Link Player’s Card point redemptions.

 

*PromotionalAllowances*

 

SGC operates a complimentary program in which food andbeverage, retail, entertainment, and other services are provided to patronsbased on points earned through the Seneca Link Player’s Card.  The retail value of these complimentary itemsis included in gross revenues and then deducted as promotional allowances toarrive at net revenues.

 

The retail value of providing such promotionalallowances was included in revenues as follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **December 31,**                | ** ** |
| ** **                      | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 11,264     |   | $ | 10,037 |   |
| Food and beverage               |       | 6,920                                |       | 7,495 |   |
| Lodging                         |       | 3,663                                |       | 4,650 |   |
| Retail, entertainment and other |       | 2,718                                |       | 3,062 |   |
| Total                           |       | $                                    | 24,565     |   | $ | 25,244 |   |

 

Theestimated cost of providing such promotional allowances was as follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **December 31,**                | ** ** |
| ** **                      | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | $                                    | 5,373      |   | $ | 5,782 |   |
| Lodging                         |       | 2,240                                |       | 2,915 |   |
| Retail, entertainment and other |       | 2,213                                |       | 2,620 |   |
| Total                           |       | $                                    | 9,826      |   | $ | 11,317 |   |

 

Promotional allowances as a percentage of gamingrevenue were 18.1% and 18.4% during the three months ended December 31,2009 and 2008, respectively.  Promotionalallowances decreased $0.7 million, or 3%, when comparing the three months endedDecember 31, 2009 to the same period in 2008. As shown in the table above,gaming promotional allowances increased $1.2 million while food and beverage,lodging, and retail, entertainment 

 

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and other promotional allowances decreased $0.6million, $1.0 million and $0.3 million, respectively.

 

*DetailedOperating Expense Information*

 
| ** **                              | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **December 31,**                | ** ** |
| ** **                              | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
|                                    |       |                                 |       |   |   |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | $                                    | 35,722     |   | $ | 37,225 |   |
| Food and beverage                       |       | 10,600                               |       | 11,207 |   |
| Lodging                                 |       | 2,985                                |       | 3,032 |   |
| Retail, entertainment and other         |       | 4,171                                |       | 3,978 |   |
| Advertising, general and administrative |       | 47,101                               |       | 49,500 |   |
| Pre-opening costs                       |       | 72                                   |       | 58 |   |
| Depreciation                            |       | 10,730                               |       | 12,587 |   |
| Impairment of property and equipment    |       | 55                                   |       | — |   |
| Total operating expenses                |       | $                                    | 111,436    |   | $ | 117,587 |   |

 

*GamingExpenses*

 

Gaming expensesprincipally consist of costs incurred from operating our table games and slotmachines, of which the primary components are payroll and payroll related costsand the slot exclusivity fee paid to New York State pursuant to the Compact.

 

The following tablesummarizes the exclusivity fees expense by property:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **December 31,**                | ** ** |
| ** **                            | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 15,937     |   | $ | 16,573 |   |
| Seneca Allegany Casino and Hotel      |       | 6,268                                |       | 6,599 |   |
| Seneca Buffalo Creek Casino           |       | 2,365                                |       | 1,909 |   |
| Total                                 |       | $                                    | 24,570     |   | $ | 25,081 |   |

 

The slot exclusivity feedecreased $0.3 million, from $25.1 million for the three months ended December 31,2008 to $24.8 million for the three months ended December 31, 2009, due tolower net slot revenues.  Gaming expensesas a percentage of gross gaming revenues were 26.4% and 27.2% for the threemonths ended December 31, 2009 and 2008, respectively.  Starting January 1, 2010, the slotexclusivity fee payable to New York State will increase from 22% to 25%.

 

*Food andBeverage Expenses*

 

Food and beverageexpenses represent those costs incurred for the operation of our restaurants,snack bars and beverage outlets.  Theprimary components of these expenses are the cost of food and beverage productsand payroll and payroll related expenses for team members providing theservice.  During the three months ended December 31,2009, food and beverage costs decreased $0.6 million, or 5%, when compared tothe same period in 2008, due to lower volumes, reflected as a decrease incovers (as discussed above), and a continued concerted effort to reduce allcomponents of such costs, while maintaining superior product offerings to ourpatrons. The decrease in the number of covers, reduced food costs and reducedpayroll expenses each contributed approximately $0.2 million to the decrease.Food and beverage expenses as a percentage of food and beverage revenues were80.0% and 78.9% for the three months ended December 31, 2009 and 2008,respectively.

 

*LodgingExpenses*

 

Lodging expensesrepresent those costs incurred for the operation of our luxury hotel at SenecaNiagara Casino and Hotel and our resort hotel at Seneca Allegany Casino andHotel.  The components of these expensesinclude payroll and payroll related expenses, guest amenity supplies, laundryand other expenses.  During the threemonths ended 

 

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December 31, 2009,lodging expenses were consistent when compared to the three months ended December 31,2008.  Lodging expenses as a percentageof lodging revenues were 57.4% and 48.2% for the three months ended December 31,2009 and 2008, respectively. The increase in this percentage is due to thedecrease in lodging revenues, discussed above.

 

*Retail,Entertainment and Other Expenses*

 

Retail, entertainment andother expenses primarily represent those costs incurred for the operation ofour retail shops and spas and our entertainment offerings.  The components of these expenses includepayroll and payroll related costs, the purchase of products offered for sale inour retail outlets and spas and contract costs for entertainers.  For the three months ended December 31,2009, these costs increased approximately $0.2 million, or 5%, over thecomparable 2008 period, due to a $0.1 million increase in retail cost of goodssold and a $0.1 million increase in payroll and headline entertainmentcosts.  Retail, entertainment and otherexpenses as a percentage of retail, entertainment and other revenues were 70.8%and 61.8%, for the three months ended December 31, 2009 and 2008,respectively. The increase in this percentage is due to the decrease in retail,entertainment and other revenues, discussed above.

 

*Advertising,General and Administrative Expenses*

 

Advertising, general andadministrative expenses consist primarily of payroll and payroll relatedexpenses, regulatory fees, advertising and marketing costs, Head Lease expense,insurance, legal and utility costs.  Forthe three months ended December 31, 2009, such costs decreased $2.4million, or 5%, from the same period in 2008. The decrease was primarily due to a decrease of $2.3 million in payrolland related expenses, a decrease of $1.3 million in Head Lease expense, adecrease of $0.5 million in utilities expenses and decreases of $0.2 million ininsurance and other operating expenses. These decreases were partially offsetby increases of $0.9 million, $0.8 million and $0.4 million in professional servicesexpenses, regulatory expenses and advertising expenses, respectively.Advertising, general and administrative expenses as a percentage of grossrevenues were 29.5% and 30.2%, for the three months ended December 31,2009 and 2008, respectively.

 

*Pre-openingExpenses*

 

Pre-opening expenses arenon-recurring costs incurred to support the expected opening of newfacilities.  During the three monthsended December 31, 2009 and 2008, pre-opening expenses incurred wereprimarily related to the preparation of the Seneca Hickory Stick Golf Club, tobe operated by the Lewiston Golf Course Corporation.

 

*DepreciationExpense*

 

During the three monthsended December 31, 2009 and 2008, depreciation expense was $10.7 millionand $12.6 million, respectively, a decrease of $1.9 million, or 15%.

 

*Impairmentof Property and Equipment*

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, as previously described, were suspendedfor reasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on our available cash, such as ourpayments and distributions to the Nation. Furthermore, certain master planning efforts related to the futureexpansion of the Seneca Niagara Falls property were suspended for the samereasons.  As a result of the ongoingsuspension, an impairment charge of approximately $55,000 was recorded duringthe three months ended December 31, 2009, in addition to the impairmentcharge of $107.6 million recognized during Fiscal 2009.

 

*OtherNon-Operating Expenses*

 

Thefollowing table summarizes information related to other non-operating expenses:

 
| ** **             | ** ** | **Three Months Ended**     | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **December 31,**                | ** ** |
| ** **             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)** | ** ** |
|                   |       |                                 |       |   |   |
| Non-operating expenses |       | $                                    | 112        |   | $ | 113 |   |
|                        |            |                                      |            |  |  |  |  |

 

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During the three monthsended December 31, 2009 and 2008, we recorded an other-than-temporary loss on onespecific investment of $0.1 million as other non-operating expense. The costbasis of this investment has been reduced by the amount of theother-than-temporary loss recorded.

 

*Interest Income*

 

Interest income was approximately $11,000 and $58,000,respectively, for the three months ended December 31, 2009 and 2008.

 

*Interest Expense*

 

The following tablesummarizes information related to interest on our long-term debt and SeniorSecured Revolving Loan Agreement:

 
| ** **       | ** ** | **Three Months Ended**     | ** ** |
|------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **December 31,**                | ** ** |
| ** **       | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)** | ** ** |
|             |       |                                 |       |   |   |
| Interest expense |       | $                                    | 9,541      |   | $ | 9,603 |   |
|                  |            |                                      |            |  |  |  |  |

 

During the three monthsended December 31, 2009, interest expense consisted of interest on our$500 million aggregate principal amount of 71⁄4% senior notes, including $0.8million of amortization related to financing costs and discount, which waspartially offset by $0.3 million of capitalized interest on our constructionactivities for our Seneca Hickory Stick Golf Club during the three months endedDecember 31, 2009, and $0.4 million during the three months ended December 31,2008.

 

*Net Income*

 

Netincome for the three months ended December 31, 2009 was $14.1 million,compared to net income of $11.5 million for the three months ended December 31, 2008, anincrease of $2.6 million, for the reasons stated above.

 

**Liquidityand Capital Resources**

 

Our seniormanagement continues to monitor, and review with SGC’s Board of Directors andits owner, the Seneca Nation of Indians, our financial condition and liquidityneeds to help ensure appropriate strategic plans are developed and implementedto meet ongoing economic challenges and to address our ongoing liquidityrequirements.

 

In addition, we intend tocontinue to work closely with the Nation to help ensure cash generated from ouroperations, available cash and cash equivalents, short-term investments andcash available under our Amended Senior Secured Revolving Loan Agreement aresufficient to service our debt, satisfy our other financial obligations andcommitments and to meet our working capital requirements for the remainder ofthe current fiscal year.  In October 2009,the Nation reduced anticipated 2010 monthly distributions, exclusive of amountsrequired under the Distribution Agreement, to $30.0 million for Fiscal 2010,compared to $42.0 million for Fiscal 2009. As a result of these efforts, in conjunction with our efforts to createadditional operating efficiencies, SGC’s depository cash balances increased toapproximately $60.5 million at December 31, 2009 from $7.0 million, net ofthe $20.0 million proceeds drawn under the Senior Secured Revolving LoanAgreement, as of December 31, 2008.

 

Our ability to fund ouroperations, make planned capital expenditures, service our debt and satisfy ourother financial obligations and commitments depends on our future operatingperformance and cash flow, which are in turn subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond our control.  Additionally, unliketraditional corporations, we are prohibited by law from obtaining capitalthrough an offering of equity securities and our ability to incur additionalindebtedness is limited under the terms of the Indenture governing the seniornotes, the Distribution Agreement and the Amended Senior Secured Revolving LoanAgreement.

 

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We are leveraged, havesignificant interest payment requirements under the Senior Notes Indenture,distribution obligations under the Distribution Agreement and other commitmentsfrom time to time to the Nation. We make distributions to the Nation pursuantto declarations by our Board of Directors. During the three months ended December 31, 2009, we distributed$7.5 million to the Nation pursuant to such declarations.  We distributed an additional $3.7 million tothe Nation during the three months ended December 31, 2009 pursuant to theDistribution Agreement.  As such,limitations on our capital resources could force us to delay or abandon capitalprojects as well as the construction and development of suspended expansionprojects when and if resumed.

 

*CashFlows*

 
| ** **                                             | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **December 31,**                | ** ** |
| ** **                                             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                                             | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net cash provided by operations                        |       | $                                    | 17,673     |   | $ | 20,915 |   |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to investing activities            |       |                                 |       |   |   |
| Purchases of property and equipment                    |       | (3,469                               | )          | (21,909 | ) |
| Land acquisition costs                                 |       | (83                                  | )          | (497 | ) |
| Net cash used in investing activities                  |       | (3,552                               | )          | (22,406 | ) |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to financing activities            |       |                                 |       |   |   |
| Contribution received from the Nation                  |       | 5,101                                |       | — |   |
| Proceeds from senior secured revolving loan  agreement |       | —                               |       | 20,000 |   |
| Distributions paid to the Nation                       |       | (11,217                              | )          | (20,506 | ) |
| Net cash used in financing activities                  |       | (6,116                               | )          | (506 | ) |
|                                                   |       |                                 |       |   |   |
| Net increase (decrease) in cash and cash  equivalents  |       | $                                    | 8,005      |   | $ | (1,997 | ) |

 

*CashFlows—Operating Activities*

 

The $3.2 million decreasein cash flows from operations during the three months ended December 31,2009 as compared to the three months ended December 31, 2008 was due tocash outflows from the change in current liabilities of $5.5 million and lowerdepreciation expense of $1.9 million, partly offset by higher net income of$2.6 million and the change in current assets of $1.5 million.

 

*CashFlows—Investing Activities*

 

During the three monthsended December 31, 2009, cash flows used in investing activities wereapproximately $3.6 million, compared to $22.4 million during the three monthsended December 31, 2008.  Thedecrease of $18.9 million was due primarily to a decrease in cash paid forproperty and equipment of $18.4 million resulting primarily from the suspensionof construction activities at the permanent Seneca Buffalo Creek Casino andHotel and the additional hotel tower at the Seneca Allegany Casino and Hotel.

 

During the three monthsended December 31, 2009, capital expenditures were $3.5 million andconsisted of: $1.6 million related to construction of the Seneca Hickory StickGolf Club; and $0.4 million for the expansion of the temporary gaming facilityat the Seneca Buffalo Creek Casino.  Theremaining $1.5 million in capital expenditures were principally for theacquisition of equipment for existing casino operations.  Our land acquisitions of $0.1 million includelegal expenses and other acquisition costs related to certain parcels withinthe 50 acre “footprint” described in the Compact with New York State anddesignated for ownership by the Nation.

 

*CashFlows—Financing Activities*

 

During the three months ended December 31, 2009, net cash used infinancing activities was $6.1 million, compared to $0.5 million during thethree months ended December 31, 2008, an increase of $5.1 million.  During the three months ended December 31,2009 these activities included a $5.1 million contribution received from theNation and cash distributions paid to the Nation of $11.2 million. During thethree months ended December 31, 2008 these activities included cashdistributions to the Nation of $20.5 million offset by proceeds from borrowingsunder the senior secured revolving loan agreement of $20.0 million.

 

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*PrincipalDebt Arrangements*

 

As of December 31,2009, our debt instruments and facilities consisted of the 2004 and 2005 seniornotes on which we pay a fixed interest rate of 71⁄4%, and the $50.0 millionAmended Senior Secured Revolving Loan Agreement, which matures on December 31,2011.  Following is a summary of certainmaterial terms of the senior notes and the Amended Senior Secured RevolvingLoan Agreement.

 

The Senior Notes.  On May 5, 2004 and May 23, 2005, SGC issued $300.0 million and$200.0 million, respectively, in senior notes with fixed interest payable at arate of 71⁄4% per annum due 2012, which we refer to collectively as the SeniorNotes, under the Indenture.  The SeniorNotes are currently guaranteed by SNFGC, STGC, SEGC, and LGCC.  Interest on the Senior Notes is payablesemi-annually on May 1 and November 1.  The Senior Notes mature on May 1,2012.  The Senior Notes are unsecuredgeneral obligations.  As of December 31,2009 and September 30, 2009, accrued interest on the Senior Notes was$6.0 million and $15.1 million, respectively.  The indenture contains certain covenants,including limitations on restricted payments and the incurrence ofindebtedness, and reporting obligations. As of December 31, 2009, SGC was in compliance with all covenantsin the Indenture.

 

Amended Senior SecuredRevolving Loan Agreement.  On December 18, 2009, SGCamended its $50.0 million Senior Secured Revolving Loan Agreement to extend thematurity date from December 19, 2009 to December 31, 2011. Amountsborrowed under the Amended Senior Secured Revolving Loan Agreement continue tobear interest at either one, three or six-month LIBOR plus one and one quarterpercent (1.25%), or the prime rate (as reported in The Wall Street Journal)plus one quarter percent (0.25%), with any outstanding principal balance to bepaid by, or on, the new maturity date. The $50.0 million commitment under the Amended Senior Secured RevolvingLoan Agreement reduces in tandem with any reduction in the letter of creditrequirement imposed by ESDC (relating to the ESDC’s efforts on behalf of SGC inconnection with ongoing condemnation proceedings in Niagara Falls, NY),), up toan aggregate reduction of $10.0 million. The Amended Senior Secured Revolving Loan Agreement requires that SGCmaintain all of its deposit and investment accounts with the lender, subject tolimited exceptions for certain existing accounts.

 

SGC’s obligations under the Amended Senior SecuredRevolving Loan Agreement continue to be secured by substantially all gaming andrelated assets (including substantially all gaming revenues) not constitutingreal property or improvements. SGC’s obligations are guaranteed by SNFGC, STGC,SEGC and LGCC, and the guarantors’ obligations continue to be secured bysubstantially all of each guarantor’s gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. The Amended Senior Secured Revolving Loan Agreement modifiescertain of the financial covenants contained in the Senior Secured RevolvingLoan Agreement, including reducing the minimum consolidated EBITDA covenantfrom $160 million to $145 million (on a rolling 12-month basis) as well asmodifying the total leverage ratio (of total funded debt to EBITDA) to a limitof 3.5 to 1.0.  The Amended Senior SecuredRevolving Loan Agreement also continues to contain additional customarycovenants, including covenants restricting the incurrence of additionalindebtedness, the creation of additional liens and the disposition of assets.As of December 31, 2009, SGC was in compliance with all covenants in theAmended Senior Secured Revolving Loan Agreement.

 

As of December 31, 2009, at SGC’s request, thelender under the Amended Senior Secured Revolving Loan Agreement had issuedletters of credit (as required by ESDC) totaling $19.6 million, $13.2 millionof which may be drawn upon to fund the purchase of certain parcels within the50 acre “footprint” described in the Compact with New York State and designatedfor ownership by the Nation, with the remaining $6.4 million issued inconnection with worker’s compensation policies and certain other contracts, asrequired.

 

*DistributionAgreement Obligations*

 

On April 27, 2007,SGC entered into a Distribution Agreement among the Nation, the Seneca Nationof Indians Capital Improvements Authority, or the Authority, SGC and WellsFargo Bank, as Trustee, in connection with the Authority’s issuance in twoseries (one tax exempt and the other taxable) of an aggregate principal amountof $159,495,000 special obligation bonds, or the 2007 Nation Bonds.  The Distribution Agreement obligates SGC,subject to any contractual restrictions applicable to SGC (including, but notlimited to, those contained in the Senior Notes Indenture) to make monthlydistributions to the Nation at the times and in the amounts necessary to enablethe Authority to pay the debt service on the 2007 Nation Bonds as requiredunder the Authority’s indenture.  At thedirection of the Nation and the Authority, SGC pays such distributions directlyto the Trustee.  The Authority’s debtservice commenced on June 1, 2007. For the period from June 1, 2007 through November 1, 2007, theAuthority’s 

 

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debt service averaged approximately$0.9 million per month.  For theperiod December 1, 2007 through June 1, 2008, the Authority’s debtservice averaged approximately $1.7 million per month.  In June 2008, it was determined that theamortization (debt service) schedule provided, upon which the foregoing $1.7million monthly payments was made, was incorrect.  A corrected amortization schedule wasprovided and, after giving effect to a resulting credit for amounts overpaid,for the period from January 1, 2008 through December 1, 2023, theAuthority’s debt service averages approximately $1.2 million permonth.  The foregoing debt serviceaverages are based on scheduled payments of interest and principal under theAuthority’s indenture and bonds and do not address the effects of any earliercall for redemption, by acceleration or otherwise.  The Distribution Agreement provides thatneither the Trustee nor the Authority’s bondholders will have any recourseunder the Distribution Agreement to any revenues, assets or property of SGC orits subsidiaries should SGC fail to comply with our distributionobligations.  During the three monthsended December 31, 2009 and 2008, SGC distributed to the Nation $3.7million and $3.3 million, respectively, for the Authority’s debt service on thespecial obligation bonds.

 

In October 2009, theNation reduced anticipated 2010 monthly distributions, exclusive of amountsrequired under the Distribution Agreement, to $30.0 million for Fiscal 2010,compared to $42.0 million for Fiscal 2009..

 

*OtherCommitments*

 

In 2002 and pursuant tothe Compact, the Nation acquired from the State of New York approximately 24acres of land and related improvements in the City of Niagara Falls, New York,including the then-Niagara Falls Convention Center.  The State of New York further agreed in theCompact to assist the Nation in whatever manner appropriate, including throughthe exercise of its power of eminent domain, to acquire the remaining acreagewithin the approximate 50-acre footprint in the City of Niagara Falls, NewYork, designated by New York State under the Compact for ownership by theNation. The Compact specifically excluded approximately 1.5 acres of landwithin the footprint owned by a Roman Catholic Church.  Additionally, in July 2006, the Nationagreed to waive its right to acquire approximately one half acre of additionalland within the footprint owned by End Time Handmaidens, Inc., a religiousorganization.  In return for the waiver,the Nation obtained a right of first negotiation and refusal with respect tothe future sale of the parcels.  As aresult of the carve-out relating to the parcels owned by the Roman CatholicChurch, and the Nation’s agreement with End Time Handmaidens, the total acreageof the Niagara Territory upon completion of the condemnation process isanticipated to be approximately 48 acres.

 

We have obtainedpossession of, either through eminent domain proceedings or private purchase,substantially all of the remaining acreage within the footprint, other thancertain streets and alleys owned by the City of Niagara Falls providing accessto the above church parcels, and a bicycle path owned by the New York StateDepartment of Transportation (NYSDOT). We expect to acquire the above NiagaraFalls city street and alley parcels during the second quarter of Fiscal 2010,with acquisition of the NYSDOT bike path requiring further dialogue with NewYork State.

 

Substantially all of thepost-2002 real property acquisitions in Niagara Falls, NY have been pursuant toNew York State Eminent Domain Procedure Law, or EDPL, using the State’s powerof eminent domain (through the ESDC). The amounts paid to condemnees from whom the ESDC has acquired propertyare deemed to be advance payments, in that property owners are entitled toreserve their rights to challenge the land and improvement values determined bythe condemnor’s appraisers.  The ESDC hasmade advanced payments under the EDPL of approximately $31.5 million for thecondemned parcels within the footprint including, in particular, approximately18 acres of land and related fixtures (a former water park) for an aggregateadvanced payment of $18.0 million, and another hotel property for an aggregateadvanced payment of $8.2 million (excluding fixtures).

 

Pursuant to the EDPL, NewYork state courts will determine the final purchase price to be paid tocondemnees who elect to challenge the initial appraised value of theirproperty.  To date, all record ownersfrom whom property was acquired pursuant to the EDPL have reserved rights toclaim additional compensation.  Mostrecord owners have filed notices of claim to initiate proceedings challengingthe fair market value appraisals utilized by ESDC. The most significant pendingvaluation proceedings continue to be those involving Fallsite LLC andFallsville Splash, LLC, which have filed notices of claim in the amounts of$40.0 million and $35.0 million for land and trade fixtures, respectively,relating to a former water park within the footprint.  ESDC’s fair market appraisal value for theforegoing was approximately $17.0 million. The valuation trial proceedings withregard to the former water park are complete. The decision of the court ispending and is expected during the second quarter of Fiscal 2010. IntertrustDevelopment had filed a notice of claim for $15.8 million for land and tradefixtures associated with a former Holiday Inn hotel within the footprint. ESDC’sfair market appraisal value for the foregoing was $8.2 million (excludingfixtures).  We agreed to a settlement ofthis matter with Intertrust, whereby Intertrust has received an additional $3.8million in addition to the appraisal value of $8.2 million, and whereby we haveagreed to purchase, 

 

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for business promotionaluse, tickets to Fallsview Waterpark, an affiliate of Intertrust, for $2.5million to be paid in three installments over three years.

 

Another former landowner,JFD Holdings has filed a notice of claim for $1.1 million for a parcel of landat 621 Niagara Street within the footprint. ESDC’s fair market appraisal for the foregoing is approximately$550,000.  No trial date has yet beenset. Also, three individuals have filed notices of claim with respect to fourparcels within the footprint seeking $955,000, in aggregate, for the fourparcels.  ESDC’s fair-market appraisalfor the four properties, in aggregate, is $185,000.  No trial dates have been set.

 

If a court determinesthat the value for the land and improvements is higher than the appraised valuepaid to a condemnee, then SGC may be liable to the condemnee for the differenceand potentially also responsible for certain additional costs and payments tothe condemnee, such as attorneys’ fees. As of December 31, 2009, $1.7 million of the previously recordedreserve of $6.4 million remained for such matters and is included in the othercurrent and long-term liabilities sections on SGC’s consolidated balancesheet.  Should the liability be greaterthan our reserve for such matters, it could have a negative impact on incomeand financial condition.

 

*Expansionand Development Plans*

 

During the next12 months, due to liquidity concerns, ongoing demands on our cash, and thestate of the capital markets, it is unlikely that we will make substantialcapital investments in our gaming facilities from cash on hand, other thancompletion of the ongoing expansion of our Seneca Buffalo Creek Casinotemporary facility, and completion of the Seneca Hickory Stick Golf Club, eachdescribed below.

 

On August 27,2008, the construction activities at Seneca Allegany Casino and Hotel andSeneca Buffalo Creek Casino, each described below, were suspended for reasonsincluding:  the economic recession;inability to obtain construction financing at reasonable interest rates; andoperating and other demands on available cash, such as payments to theNation.  As of December 31, 2009,construction remained suspended indefinitely. Furthermore, certain planning efforts related to the future expansion ofthe Seneca Niagara Falls property were suspended for the same reasons.  As a result of these circumstances animpairment charge of $107.6 million was recognized during Fiscal 2009. Duringthe three months ended December 31, 2009, an additional $55,000 wasrecorded as an impairment of property and equipment. Nonetheless, SGC willcontinue to explore alternative future expansion and development options.

 

*SenecaNiagara Falls Casino and Hotel. *In 2006, we began master planningactivities for the remaining approximately 24 acres of undeveloped landcontained in the Niagara Falls footprint. During August 2008, these master planning activities were suspendedand an impairment charge was recognized in Fiscal 2009 related to theseactivities, in the amount of approximately $3.5 million.

 

*SenecaAllegany Casino and Hotel. *Construction on the next phase ofdevelopment at Seneca Allegany Casino and Hotel, which was planned to includean additional 200-room hotel tower, and up to 30,000 square feet of additionalgaming space and related amenities, for a total estimated cost of approximately$130 million, was suspended and an impairment charge was recognized in Fiscal2009 related to these activities, in the amount of approximately $17.1 million.During the three months ended December 31, 2009, an additional $38,000 wasrecorded as an impairment of property and equipment.

 

*SenecaBuffalo Creek Casino.*Construction on the next phase of development at Seneca Buffalo CreekCasino and Hotel, which was planned to include approximately 90,000 square feetof gaming space; 2,000 slot machines; 45 table games; a 22-story all-suitehotel; four restaurants; a full-service spa and salon; retail and otheramenities; and a 2,200-space parking garage, for a total estimated cost ofapproximately $333 million, was suspended and an impairment charge wasrecognized in Fiscal 2009 related to these activities, in the amount ofapproximately $87.0 million. During the three months ended December 31,2009, an additional $17,000 was recorded as an impairment of property andequipment.

 

On October 19,2009 we began an expansion of the Seneca Buffalo Creek temporary facility,which will add approximately 5,300 square feet of gaming space to the facilityand will accommodate approximately an additional 212 slot machines. Theexpansion is due to be completed in spring 2010.

 

*Seneca Hickory Stick Golf Club. *In July 2007,the Company commenced construction of the Seneca Hickory Stick Golf Club, an18-hole Robert Trent Jones II designed golf course. The golf course is locatedin Lewiston, New York 

 

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andis approximately eight miles from the Seneca Niagara Casino and Hotel.  Completion of golf course construction andofficial course opening are currently scheduled for Summer 2010. As of December 31,2009, the Company has incurred $22.1 million for the purchase of land andconstruction, with a total cost to construct the golf course, clubhouse andrelated amenities estimated to be approximately $25.5 million.

 

**Regulation**

 

Our operations areregulated by Nation laws, the Compact and federal statutes, most notably theIndian Gaming Regulatory Act, or IGRA. Several bills were proposed during past sessions of Congress that wouldhave affected Indian gaming but were not enacted into law.  While bills may be introduced that arerelevant to Indian gaming in the 111th Congress, leaders from the committees thathave jurisdiction over the IGRA have not made any indications that gamingregulation will be an agenda item for the 111th Congress. It remains unclear whether the administration will pursue legislativeinitiatives related to the topic of Indian gaming.

 

The Department of theInterior published final regulations effective August 25, 2008 governingthe conduct of gaming on lands taken into trust after October 17,1988.  The regulations on their face donot purport to impair the ability of the Nation and SGC to expand its gamingoperations.  Future gaming legislation orcourt decisions construing the new regulations could adversely impact expansionof SGC gaming operations and the future growth of the Nation’s revenue base. Inaddition, from time to time, various government officials have proposed taxingIndian casino gaming or otherwise limiting or restricting the conduct of gamingoperations by Indian tribes. No assurance can be given that such legislation,if and when enacted by Congress, would not have a material adverse effect onthe operations of SGC. If Congress were to enact comprehensive amendments tothe IGRA, such legislation could have a material adverse effect on theoperations of SGC. In addition, under federal law, gaming on the Nation’s landsmay be dependent upon the permissibility under New York law of certain forms ofgaming or similar activities. If New York State were to make various forms ofgaming illegal or against public policy (or the courts were to similarly rule),or otherwise to take a legal position adverse to SGC, such actions could have amaterial adverse effect on our ability to conduct our gaming operations ascurrently conducted. Moreover, a 1996 U.S. Supreme Court decision may permit astate to avoid or refuse to negotiate amendments to existing compacts such asthe Compact.

 

**Recent Accounting Pronouncements**

** **

**A variety of proposed or otherwise potential accountingstandards are currently under study by standard-setting organizations andcertain regulatory agencies. Because of the tentative and preliminary nature ofsuch proposed standards, SGC has not yet determined the effect, if any, thatthe implementation of such proposed standards would have on the consolidatedfinancial statements.**

** **

**Item 3.   Quantitative and Qualitative DisclosuresAbout Market Risk**

** **

There have been nomaterial changes in our market risk exposures since September 30,2009.  For more information, refer to “Item7A.  Quantitative and QualitativeDisclosures About Market Risk” included in our 2009 Form 10-K.

 

**Item4T.          Controls andProcedures**

** **

**Evaluationof Disclosure Controls and Procedures**

 

We maintain disclosurecontrols and procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act)that are designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, have inherent limitationsdue to cost issues, the possibility of human error, judgments and assumptionsregarding the likelihood of future events, and the circumvention and overridingof the controls and procedures.  Accordingly, even effective disclosure of controls and procedures canprovide only reasonable assurance of achieving the desired control objectives.

 

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SGC’s management, withthe participation of our Chief Operating Officer and Chief Financial Officer(as our principal executive officer and principal financial officer,respectively), has evaluated the effectiveness of the design and operation ofour disclosure controls and procedures. Based on that evaluation, our Chief Operating Officer and Chief FinancialOfficer have concluded that the design and operation of our disclosure controlsand procedures as of December 31, 2009 provided reasonable assurance thatthe disclosure controls and procedures are effective to accomplish theirobjectives.

 

**Changesin Internal Control over Financial Reporting**

** **

There have been nochanges in our internal control over financial reporting identified inconnection with the evaluation required by Exchange Act Rules 13a-15 or15d-15 or otherwise that occurred during the quarter ended December 31,2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Part II.     OTHER INFORMATION**

 

**Item 1.**            Legal Proceedings

** **

Otherthan as described below, there have been no material changes in our legalproceedings since September 30, 2009. For more information, refer to “Item 3. Legal Proceedings” in our 2009 Form 10-K.

 

***SenecaGaming Authority Proposed Notices of Violation issued to the Seneca GamingCorporation and Employees dated July 13, 2009.***

 

**Summary**

 

On July 14,2009, SGC received a proposed Notice of Violation dated July 13, 2009, orthe 2009 NOV, from the Seneca Gaming Authority, or the SGA, alleging fifteenviolations of certain sections of the Class III Gaming Ordinance and theCompact, as well as our Charter.  Inaddition to SGC, eleven employees received similar notices arising out of thesame set of facts, alleging from five to twelve violations of the provisionsnoted above. Each of the alleged violations is attributable to SGC’s accountingtreatment of an alleged table games inventory (i.e., gaming chips) discrepancyof $25,971 that arose due to a single human error during an ordinary coursetable games move on April 3, 2009. The initial notices from the SGA indicated that each of the alleged violationscarried with it a potential fine of $500 per day per violation imposed from thedate of the initial alleged infraction, April 3, 2009, or approximately$1,000,000 for the SGC and approximately $8,000,000 in the aggregate for theeleven individuals as of August 14, 2009. On August 17, 2009, SGC andeach of the affected employees received a proposed final assessment, whichincluded proposed fines of $10,000 payable by SGC, and proposed fines payableby four out of the eleven individual employees cited originally, ranging from$500 to $2,500.

 

On December 18,2009, the SGA Commission determined that the SGA’s action with respect to sevenof the affected individuals did not constitute a “Notice of Violation” and thatthe matter had been settled from the SGA’s perspective (confirming that thematter would not have any negative licensing implications for theindividuals).  Also on that date, the SGCand the SGA entered into a settlement agreement pursuant to which the proposedNotices of Violation issued to the four remaining individuals (with proposedfines ranging from $500 to $2,500) were vacated and dismissed in theirentirety, while the SGA agreed that the proposed Notice of Violation issued toSGC would be vacated and dismissed without further action of the SGA on March 15,2010.  The settlement agreement requiresthat the SGC engage in certain compliance-related efforts, and remit to the SGAan administrative fine of $10,000 to cover SGA costs.  In connection with this SGA enforcementmatter, the SGC indemnified the affected employees for their defense costspursuant to mandatory Charter indemnification provisions and action of the SGCBoard of Directors.

 

***SenecaGaming Corporation v. Merrill Lynch Pierce Fenner & Smith Incorporated***

 

OnAugust 6, 2009, SGC filed suit in the United States District Court for theSouthern District of New York, alleging fraudulent conduct on the part ofMerrill Lynch in inducing SGC to purchase auction-rate securities.  The claim alleges that Merrill Lynchrepresented the securities as highly liquid and collateralized by residentialmortgages.  SGC discovered subsequentlythat the securities were illiquid and not collateralized by residentialmortgages, but rather, by complex derivative instruments, and that thesecurities had become worthless.  SGC’ssuit seeks $5 million in damages.

 

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On January 4,2010, Merrill Lynch filed a motion to dismiss the complaint.  SGC’s counsel is preparing a reply.  No hearing date on the motion has been set.

 

**Item 1A.**                                                  Risk Factors

** **

Our results of operationsand financial condition are subject to numerous risks and uncertaintiesdescribed in “Item 1A.  Risk Factors”included in our 2009 Form 10-K.  Therisk factors identified therein have not materially changed.

 

**Item 2.**                                                           Unregistered Sales of Equity Securitiesand Use of Proceeds

** **

Not applicable.

 

**Item 3.**                                                           Defaults Upon Senior Securities

** **

Not applicable.

 

**Item 4.**                                                           Submission of Matters to a Vote ofSecurity Holders

** **

Not applicable.

 

**Item 5.**                                                           Other Information

** **

Not applicable.

 

**Item 6.****                                                          ****Exhibits**

 

(a)              Exhibits(listed according to the number assigned in the table in Item 601 of RegulationS-K):

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                   |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | First  Amendment to Loan Agreement by and among Seneca Gaming Corporation and  KeyBank National Association dated as of December 18, 2009 (incorporated  by reference to Exhibit 10.29 to SGC’s Annual Report on Form 10-K  filed on December 23, 2009). |
|             |       |                                                                                                                                                                                                                                                                              |
| 31.1             |       | Certification  of Catherine Walker, principal executive officer, pursuant to  Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (filed  herewith).                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                              |
| 31.2             |       | Certification  of David Sheridan, principal financial officer, pursuant to Rule 13a-14  and 15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                              |
| 32.1             |       | Certification  of Catherine Walker, principal executive officer, and David Sheridan,  principal financial officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith).                     |

 

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**SIGNATURES**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                         | **SENECA  GAMING CORPORATION**                |
|------------------------------|-----------------------------------------------|
|                         |                                          |
|                         |                                          |
| Date:  February 4, 2010 | /s/  Catherine Walker                         |
|                         | Catherine  Walker                             |
|                         | Chief  Operating Officer                      |
|                         | (Principal  Executive Officer)                |
|                         |                                          |
|                         |                                          |
| Date:  February 4, 2010 | /s/  David Sheridan                           |
|                         | David  Sheridan                               |
|                         | Chief  Financial Officer                      |
|                         | (Principal  Financial and Accounting Officer) |

 

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