**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

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

 

**For the quarterly periodended June 30, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For thetransition period from                     to                     **

 

**Commission FileNumber: **333-117633

** **

**SENECA GAMING CORPORATION**

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

 

**310Fourth StreetNiagara Falls, New York (Seneca Nation Territory) 14303(716) 299-1100(Address, including zip code, and telephone number,including area code, of registrant’s principal executive offices)**

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

Yes x   No o

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o   No x

At August 11, 2006, the registrant had no outstanding shares of commonstock. The registrant is wholly owned by the Seneca Nation of Indians.

 

 

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** **

**TABLE OF CONTENTS**
|                                                                                                                      | ** ** | **Page  Number** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART  I.   FINANCIAL  INFORMATION**                                                                      |       |             |
| Item  1.    Financial  Statements                                                                          |       | 1                |
| Consolidated  Balance Sheets as of June 30, 2006 (Unaudited) and September 30, 2005                                  |       | 1                |
| Consolidated Statements of Operations for the three  months and nine months ended June 30, 2006 and 2005 (Unaudited) |       | 2                |
| Consolidated Statements of Cash Flows for the nine  months ended June 30, 2006 and 2005 (Unaudited)                  |       | 3                |
| Notes to Condensed Consolidated Financial Statements                                                                 |       | 4                |
| Item 2.    Management’s  Discussion and Analysis of Financial Condition and Results of Operations     |       | 10               |
| Item 3.    Quantitative and  Qualitative Disclosures About Market Risk                                     |       | 26               |
| Item 4.    Controls and  Procedures                                                                        |       | 27               |
|                                                                                                                 |       |             |
| **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                                    |       | 31               |
| Item 3.    Defaults Upon  Senior Securities                                                                |       | 31               |
| Item 4.    Submission of  Matters to a Vote of Security Holders                                            |       | 31               |
| Item  5.    Other  Information                                                                             |       | 31               |
| Item 6.    Exhibits                                                                                        |       | 32               |
|    Signatures                                                                                              |       | 33               |

 

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**PART I. FINANCIAL INFORMATION**

**Item I.                     Financial Statements**

**SENECA GAMING CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                         | ** ** | **June 30,  2006**              | ** ** | **September 30,  2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                         | ** ** | ** **                           | ** ** | ** **                   | ** ** |
|                               |       |                                 |       |                         |       |
| Current assets:                    |       |                                 |       |                         |       |
| Cash and cash equivalents          | ** ** | $                                    | 83,270     |                         | $          | 142,467 | ** ** |
| Short-term investments             |       | 52,300                               |       | 96,091                       |       |
| Receivables from affiliates        |       | 231                                  |       | 875                          |       |
| Other receivables, net             |       | 1,658                                |       | 1,979                        |       |
| Inventories                        |       | 2,701                                |       | 2,095                        |       |
| Other current assets               |       | 6,756                                |       | 6,437                        |       |
| Total current assets               |       | 146,916                              |       | 249,944                      |       |
|                               |       |                                 |       |                         |       |
| Property and  equipment, net       |       | 560,308                              |       | 430,418                      |       |
| Restricted cash                    |       | 33,500                               |       | —                       |       |
| Other long-term  assets            |       | 29,412                               |       | 18,486                       |       |
| Total assets                       | ** ** | $                                    | 770,136    |                         | $          | 698,848 | ** ** |
|                               |       |                                 |       |                         |       |
| **Liabilities and Capital**        | ** ** | ** **                           | ** ** | ** **                   | ** ** |
|                               |       |                                 |       |                         |       |
| Current liabilities:               |       |                                 |       |                         |       |
| Trade payables                     |       | 4,474                                |       | 3,898                        |       |
| Construction payables — SCMC  |       | 35,722                               |       | 10,894                       |       |
| Construction payables — Other |       | —                               |       | 23,341                       |       |
| Exclusivity fees payable           |       | 6,954                                |       | 5,717                        |       |
| Accrued interest                   |       | 6,042                                |       | 14,218                       |       |
| Customer point  liability          |       | 11,981                               |       | 10,682                       |       |
| Accrued  regulatory expenses       |       | 12,212                               |       | 9,347                        |       |
| Other current liabilities          |       | 22,191                               |       | 17,974                       |       |
| Total current liabilities          |       | 99,576                               |       | 96,071                       |       |
|                               |       |                                 |       |                         |       |
| Long-term debt                     |       | 494,098                              |       | 493,352                      |       |
|                               |       |                                 |       |                         |       |
| Total liabilities                  |       | 593,674                              |       | 589,423                      |       |
|                               |       |                                 |       |                         |       |
| Capital:                           |       |                                 |       |                         |       |
| Retained  earnings                 |       | 176,462                              |       | 109,425                      |       |
|                               |       |                                 |       |                         |       |
| Total  liabilities and capital     | ** ** | $                                    | 770,136    |                         | $          | 698,848 | ** ** |

 

See accompanying notes toconsolidated financial statements.

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**SENECA GAMING CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**
| ** **                               | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **June 30,**                    | ** ** | **June 30,**               | ** ** |
| ** **                               | ** ** | **2006**                             | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
| **Revenues**                             | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming                                   |       | $                                    | 134,549    |                            | $          | 113,789 |   | $ | 371,203 |   | $ | 321,575 |   |
| Food and  beverage                       |       | 13,012                               |       | 10,806                          |       | 35,358 |   | 30,356 |   |
| Lodging                                  |       | 3,470                                |       | —                          |       | 5,052 |   | — |   |
| Retail,  entertainment and other         |       | 4,953                                |       | 4,308                           |       | 14,465 |   | 12,591 |   |
| Less:  Promotional allowances            |       | (21,677                              | )          | (13,811                         | )          | (53,599 | ) | (35,273 | ) |
| Net revenues                             |       | 134,307                              |       | 115,092                         |       | 372,479 |   | 329,249 |   |
|                                     |       |                                 |       |                            |       |   |   |   |   |
| **Expenses**                             | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming                                   |       | 33,341                               |       | 28,647                          |       | 94,240 |   | 85,199 |   |
| Food and  beverage                       |       | 11,325                               |       | 8,677                           |       | 31,700 |   | 25,714 |   |
| Lodging                                  |       | 2,168                                |       | —                          |       | 3,658 |   | — |   |
| Retail,  entertainment and other         |       | 2,747                                |       | 2,523                           |       | 8,522 |   | 7,715 |   |
| Advertising,  general and administrative |       | 33,420                               |       | 28,280                          |       | 97,268 |   | 87,147 |   |
| Pre-opening  costs                       |       | 2,369                                |       | 208                             |       | 7,301 |   | 391 |   |
| Depreciation and  amortization           |       | 13,026                               |       | 6,555                           |       | 28,389 |   | 19,391 |   |
|                                     |       |                                 |       |                            |       |   |   |   |   |
| Total operating  expenses                |       | 98,396                               |       | 74,890                          |       | 271,078 |   | 225,557 |   |
|                                     |       |                                 |       |                            |       |   |   |   |   |
| Operating income                         |       | 35,911                               |       | 40,202                          |       | 101,401 |   | 103,692 |   |
| Interest income                          |       | 1,420                                |       | 1,352                           |       | 4,248 |   | 3,364 |   |
| Interest expense                         |       | (9,073                               | )          | (59,413                         | )          | (23,979 | ) | (82,218 | ) |
|                                     |       |                                 |       |                            |       |   |   |   |   |
| Net income  (loss)                       |       | $                                    | 28,258     |                            | $          | (17,859 | ) | $ | 81,670 |   | $ | 24,838 |   |

 

See accompanyingnotes to consolidated financial statements.

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** **

**SENECA GAMING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                         | ** ** | **Nine Months Ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**                    | ** ** |
| ** **                                                                         | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash flows relating to  operating activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 81,670     |   | $ | 24,838 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 28,389                               |       | 19,391 |   |
| Amortization of deferred financing costs and debt  discount                        |       | 2,389                                |       | 2,022 |   |
| Write-off of deferred financing costs — term loan                             |       | —                               |       | 2,460 |   |
| Fair market value adjustment of interest rate cap                                  |       | —                               |       | 177 |   |
| Other, net                                                                         |       | 297                                  |       | 88 |   |
|                                                                               |       |                                 |       |   |   |
| Change in operating  assets and liabilities:                                       |       |                                 |       |   |   |
| Current assets                                                                     |       | (245                                 | )          | (1,119 | ) |
| Current liabilities                                                                |       | 2,018                                |       | (40,440 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash  provided by operating activities                                         |       | 114,518                              |       | 7,417 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  investing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Purchases of  property and equipment                                               |       | (156,804                             | )          | (124,179 | ) |
| Payments for  land acquisitions                                                    |       | (16,773                              | )          | (197 | ) |
| Sales  (purchases) of investments, net                                             |       | 43,791                               |       | (44,998 | ) |
| Deposit to  collateralize letter of credit                                         |       | (33,500                              | )          | — |   |
|                                                                               |       |                                 |       |   |   |
| Net cash used in  investing activities                                             |       | (163,286                             | )          | (169,374 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  financing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Payments to  sinking fund                                                          |       | —                               |       | (11,917 | ) |
| Proceeds from  long-term debt                                                      |       | —                               |       | 193,000 |   |
| Repayments of  long-term debt                                                      |       | —                               |       | (80,325 | ) |
| Payment of  deferred financing costs                                               |       | (682                                 | )          | (4,793 | ) |
| Proceeds from  sale of interest rate cap                                           |       | —                               |       | 683 |   |
| Dividends paid  to the Nation                                                      |       | (9,747                               | )          | (6,092 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash (used  in) provided by financing activities                               |       | (10,429                              | )          | 90,556 |   |
|                                                                               |       |                                 |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (59,197                              | )          | (71,401 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash and cash  equivalents balances:                                               |       |                                 |       |   |   |
| Beginning of period                                                                |       | 142,467                              |       | 211,595 |   |
| End of period                                                                      |       | $                                    | 83,270     |   | $ | 140,194 |   |
|                                                                               |       |                                 |       |   |   |
| Supplemental  disclosures of cash flow information                                 |       |                                 |       |   |   |
| Non-cash investing  activities:                                                    |       |                                 |       |   |   |
| Distribution of  acquired real property to the Nation                              |       | $                                    | (4,886     | ) | $ | (54 | ) |

 

See accompanying notes toconsolidated financial statements.

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**SENECA GAMING CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.            Organization and Basis ofPresentation**

The consolidated financial statements include theaccounts of Seneca Gaming Corporation, or SGC, and its wholly ownedsubsidiaries, or collectively, the Company. In consolidation, all intercompany balances and transactions have beeneliminated.  The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and notes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of the Company’s management,all adjustments, consisting of normal recurring accruals, considered necessaryfor a fair presentation have been included. Operating results for the three months and nine months ended June 30,2006 are not necessarily indicative of the results that may be expected for theyear ended September 30, 2006.  Forfurther information, reference is made to the consolidated financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 2005 (“2005 Form 10-K”), as well as our otherfilings with the Securities Exchange Commission (the “SEC”) pursuant to theSecurities Exchange Act of 1934, as amended, and the Securities Act of 1933.

SGC, which was formed on August 1, 2002, iswholly owned by the Seneca Nation of Indians, or the Nation, a federallyrecognized Indian tribe.  SGC wasorganized by the Nation to operate and manage its Class III gamingactivities pursuant 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, theNation entered into the Nation-State Gaming Compact with the State of New Yorkin August 2002, or the Compact, which has been approved by the Federal Bureauof Indian Affairs, Department of the Interior. The Compact provides the Nation the exclusive right to conductClass III gaming activities at three sites in the western region of theState of New York.

The Nation’s Constitution established the TribalCouncil, or the Council, to act as the Nation’s legislative authority.  The Council acts on the Nation’s behalf withrespect to SGC, and the Council established the Seneca Gaming Authority, orSGA, to regulate the gaming activities of SGC under the Compact.

The Council, at the request of the SGC Board ofDirectors, chartered three subsidiary corporations of SGC to operate the threesites authorized by the Compact.  Inaddition, the SGC Board of Directors hired the executive management of SGC,including the President and Chief Executive Officer, to oversee, develop, andmanage the three sites. The subsidiary corporations are as follows:

·              Seneca Niagara Falls GamingCorporation, or SNFGC

·              Seneca Territory GamingCorporation, or STGC

·              Seneca Erie Gaming Corporation, orSEGC

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SNFGC was formed on August 1, 2002 to operate theNation’s gaming activities in Niagara Falls, New York.  Operations at SNFGC’s casino, or SenecaNiagara Casino, commenced December 31, 2002.  On December 30, 2005, SNFGC officially openedthe first 10 of 26 floors of rooms of its luxury hotel, which includes 35,000square feet of additional gaming space, 3 new restaurants, 3 new retail storesand a 25,200 square-foot multi-purpose room and an additional 8,000 squarefeet of conference and banquet space.  OnMarch 31, 2006, the remaining 16 floors, including a penthouse floor featuringluxurious one and two bedroom suites with butler service, were officially opened,along with a full-service spa, salon, fitness center and pool.**** The luxury hotel isadjacent and connected to the Seneca Niagara Casino.  The entire complex, including the luxuryhotel and the Seneca Niagara Casino, is referred to as the Seneca NiagaraCasino and Hotel.

STGC was formed on September 20, 2003 to operatethe Nation’s gaming activities in Salamanca, New York on its existingterritorial land. Operations at STGC’s casino, or Seneca Allegany Casino,commenced May 1, 2004.  Constructionis progressing on a 220-room resort hotel including approximately 70,000 squarefeet of gaming space, three additional restaurants, and a spa and fitnesscenter.

SEGC was formed on August 9, 2003 to operate theNation’s gaming activities in Erie County, New York.  On October 3, 2005, the Nation acquiredapproximately nine acres of land in the historic inner-harbor district ofdowntown Buffalo.  SEGC commencedconstruction of its Seneca Buffalo Creek Casino on those nine acres onDecember 8, 2005.  The exclusive right,under the Compact, to establish and operate a third Class III gamingfacility in Erie County may terminate if the Nation or SEGC fails to commenceClass III gaming operations in Erie County by December 9, 2007.

**2.**                                      Long-Term Debt

Long-term debt, as described below, consists of the2004 and 2005 71⁄4% senior notes.

**71⁄4% Senior Notes**

On May 5, 2004, SGC issued $300.0 million in71⁄4% senior notes due 2012, or the 2004 senior notes.  The 2004 senior notes are guaranteed bySNFGC, STGC and SEGC or collectively, the Guarantors.  The $288.7 million net proceeds from the 2004senior notes were, or will be, used principally to fund in whole or in part (a)the repayment in May 2004 of vendor equipment financing, (b) SNFGC’sconstruction and equipping of the luxury hotel, (c) the acquisition of theremaining acreage in the 50-acre footprint in Niagara Falls, as provided for inthe Compact, (d) the payment of $22.0 million in August 2004 to satisfy theobligation to the Empire State Development Corporation in connection with thetransfer of certain property to the Nation for use as the Seneca NiagaraCasino, and (e) a $25.0 million distribution to the Nation, paid in 2004.

On May 23, 2005, SGC issued an additional $200.0million in 71⁄4% senior notes due 2012, Series B, or the 2005 senior notes.  The 2005 senior notes are treated as a singleclass with the 2004 senior notes and are identical to the 2004 senior notes,except for

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certain tax attributes and prior to November 1, 2005the amount of interest accrued thereon. Gross proceeds from the 2005 senior notes were approximately $193.0million.  The gross proceeds from the2005 senior notes, were, or will be, used to (a) pay in full and terminate onMay 23, 2005, the senior secured term loan, or the Term Loan, made by FreemantleLimited, or Freemantle, to SNFGC in November 2002, for a negotiated amount ofapproximately $126.7 million, representing $80.0 million in outstandingprincipal and approximately $46.7 million for interest on such principal, at aprescribed interest rate, that would have otherwise been payable if the TermLoan had not been paid on May 23, 2005, but was instead paid 181⁄2 months priorto its November 22, 2007 stated maturity, (b) to fund certain costs associatedwith the expansion of our operations, (c) to pay $5.2 million in fees andexpenses associated with the offering of the 2005 senior notes, including therelated exchange offer, and (d) for general corporate purposes.

Interest on the 2004 and 2005 senior notes is payablesemi-annually on May 1 and November 1. The 2004 and 2005 senior notes are unsecured and rank equally.  As of June 30, 2006, aggregate accruedinterest on the 2004 and 2005 senior notes was $6.0 million.

The Indenture governing the 2004 and 2005 senior notescontains certain financial and non-financial covenants.  The financial covenants include limitationson restricted payments and the incurrence of indebtedness, while thenon-financial covenants include reporting obligations and compliance with lawsand regulations.  As of June 30, 2006,SGC was in compliance with all covenants in the Indenture.

**Term Loan**

SNFGC entered into a five-year Term Loan withFreemantle on November 22, 2002. The Term Loan provided $80.0 million in financing for the initialconstruction of the Seneca Niagara Casino and other related costs.

As discussed above, on May 23, 2005, the Term Loan waspaid in full.  The negotiated payment infull of the Term Loan resulted in a charge to earnings in May 2005 on the earlyextinguishment of the Term Loan of approximately $49.2 million, including thewrite-off of $2.5 million of deferred financing costs.

**Derivative Instruments**

SGC is considered an “end user” of derivativeinstruments and has engaged in derivative transactions for risk managementpurposes only.  Effective on May 25,2004, SGC entered into two interest rate cap agreements for an aggregatenotional amount of $80.0 million, equal to the then outstanding balance ofthe Term Loan.  The instruments werepurchased for approximately $1.1 million each, $2.2 million intotal.  Periodic changes in the fairmarket value of the instruments were recorded as adjustments to interestexpense.  Both instruments were sold inthe third quarter of 2005 subsequent to the payment in full and termination ofthe Term Loan.  Gross proceeds from thesale of these instruments were $0.7 million.

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**3.****                                      Related-PartyTransactions**

**Land Leases from the Nation**

The Nation has entered into an operating leaseagreement (each a Head Lease) with each of SNFGC (dated October 25, 2002) andSTGC (effective as of May 1, 2004), for use of the land and/or buildings whichare currently used in operating the Seneca Niagara Casino and Hotel and theSeneca Allegany Casino, respectively. The STGC Head Lease is currently an oral agreement.  STGC is in the process of formalizing awritten agreement with the Nation.  Theseagreements expire at the end of the Compact, in 2023.  Monthly payments for both SNFGC and STGC wereinitially $1.0 million.  On March 1, 2005and June 1, 2005, respectively, the monthly payments for STGC and SNFGC wereincreased to $1.25 million.  The leasepayments may increase by 3% annually on each October 1 over the remaining leaselife.  Annual increases must beauthorized by the board of directors of SGC and, subject to compliance with theterms of the Indenture governing the senior notes, may exceed 3%.  Rent is payable only to the extent thatsufficient funds are available, measured on an annual basis, from the netproceeds derived from the operation of the casino facilities and other relatedoperations.  If on an annual basissufficient funds are not available, any shortfall in the rent amount does notaccumulate.  Due to the related partynature of these leases, which can be effectively modified by the Nation, theCompany records monthly lease expense equal to the required payment amount forthe respective month.  These leasescontain no renewal options or escalation clauses.

On April 18, 2006, the SGC board of directors approved3% increases to lease payments for both SNFGC and STGC, to $1.3 million,effective October 1, 2005.  The increasedexpense has been recorded during the 2006 fiscal year.

Effective April 1, 2006, SEGC leases the land uponwhich the planned Seneca Buffalo Creek Casino is expected to operate from theNation pursuant to an oral agreement, as authorized by the SGC board ofdirectors on April 18, 2006.  BeginningApril 1, 2006, SEGC makes monthly lease payments of $0.5 million to theNation.  SEGC is in the process offormalizing a written agreement with the Nation.

Expense resulting fromthe above lease agreements were as follows for the three and nine month periodsended June 30, 2006 and 2005:

|            | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
|------------|------------|---------------------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **June 30,**                           | ** ** | **June 30,**               | ** ** |
| ** ** | ** ** | **2006**                                    | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(In Millions of Dollars)** | ** ** |
| SNFGC      |       | $                                           | 3.9        |                            | $          | 3.3 |   | $ | 11.6 |   | $ | 9.3 |   |
|       |       |                                        |       |                            |       |   |   |   |   |
| STGC       |       | 3.9                                         |       | 3.8                             |       | 11.6 |   | 10.0 |   |
|       |       |                                        |       |                            |       |   |   |   |   |
| SEGC       |       | 1.6                                         |       | —                          |       | 1.6 |   | — |   |
|       |       |                                        |       |                            |       |   |   |   |   |
|       |       | $                                           | 9.4        |                            | $          | 7.1 |   | $ | 24.8 |   | $ | 19.3 |   |

 

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SNFGC and STGC bothrecord the lease costs as a component of advertising, general andadministrative costs in the accompanying consolidated statements ofoperations.  SEGC records the lease costas a component of pre-opening costs in the accompanying consolidated statementsof operations.

**Other Related Party Transactions**

SNFGC, STGC andSEGC have each entered into a construction management agreement with SenecaConstruction Management Corporation (SCMC) for the construction of the luxuryhotel project at Seneca Niagara Casino, the construction of the resort hotelproject at Seneca Allegany Casino, and the demolition of certain buildings onthe site for the planned SEGC casino. SCMC is wholly owned by the Nation. For the nine-month period ended June 30, 2006, SNFGC, STGC and SEGC havecollectively made payments to SCMC for construction management fees and othercosts of $6.0 million.  As of June 30,2006, the Company has recorded as receivables from affiliates $0.1 millionrelating to net advances made to SCMC. Construction management fees otherwise due SCMC will be applied to reducethese receivables.

As ofJanuary 1, 2005, the Company transferred all Class II operations tothe Nation, including its poker operations. The Company leases space within both Seneca Niagara Casino andHotel and Seneca Allegany Casino for operation of the poker rooms by theNation.  For the three-month periodsended June 30, 2006 and 2005, the Company recorded $0.2 million and $0.2million of rental income and fees, respectively.  For the nine-month periods ended June 30,2006 and 2005, the Company recorded $0.8 million and $0.4 million of rentalincome and fees, respectively. At June 30, 2006 and 2005, the Company hasrecorded $0.1 million and $0.6 million, respectively, as a receivable from theNation relating to poker room rentals and fees.

Forthe nine months ended June 30, 2006, the Company declared and paid cashdividends of $9.7 million to the Nation. During the nine months ended June 30, 2005, the Company declared andpaid cash dividends of $5.4 million, and also paid a cash dividend of $0.7million declared in a prior year.

Duringthe nine months ended June 30, 2006, SEGC distributed acquired real property of$4.9 million for use in its casino operations to the Nation.  Such distribution amount was based on theacquisition costs.

Inaddition, the Company has recorded approximately $15.8 million in landacquisitions as other long-term assets in the accompanying balance sheets as ofJune 30, 2006, which ultimately will be transferred to the Nation.

TheCompany is charged by the Nation for SGA costs, which are incurred by theNation.  SGA costs charged to the Companywere approximately $2.5 million and $2.3 million for the three months endedJune 30, 2006 and 2005, respectively, and $7.4 million and $6.4 million for thenine months ended June 30, 2006 and 2005, respectively.  The Company also incurs costs, which arepassed through to the Nation for New York State gaming regulatory services, NewYork State Police and Cattaraugus County Sheriff Department services.  The Company has recorded costs of approximately$1.7 million and $1.3

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millionfor the three-month periods ended June 30, 2006 and 2005, respectively, and$5.3 million and $5.5 million for the nine months ended June 30, 2006 and 2005,respectively, in connection with these services.  At June 30, 2006 and 2005, approximately$12.2 million and $8.9 million, respectively, of the SGA, other regulatory, andpolice costs were recorded as current liabilities.

Duringthe quarters ended June 30, 2006 and 2005, the Company purchased $3,000 and$62,000, respectively, of tobacco products from an entity in which the owner isa member of the Council.  Total purchasesfrom this vendor for the nine months ended June 30, 2006 and 2005 were $78,000and $211,000, respectively.

STGC leases officespace in a building owned by the brother of a member of the Company’s board ofdirectors.  For the three-month periodsended June 30, 2006 and 2005, such lease expense totaled $60,000 and $58,000,respectively.  For the nine-month periodsended June 30, 2006 and 2005, such lease expense totaled $179,000 and $148,000,respectively.

**4.**                                      Commitments and Contingencies

**The Seneca Nation Compact**

Under the Compact, the Nation has agreed to contributeto the State of New York a portion of the proceeds from the operation andconduct of each category of gaming device for which exclusivity exists, basedon the win of such machines (cash dropped into machines, after payouts butbefore expenses) and totaled on a cumulative quarterly basis to be adjustedannually at the end of the relevant calendar year.  The exclusivity fee to the State of New Yorkfor years 1-4 is 18.0% paid on an annual basis. Thereafter, the exclusivity fee is 22.0% for years 5-7 paid on a semi-annualbasis and 25.0% for years 8-14 paid on a quarterly basis.

Pursuant to the Compact, amounts due to New York Stateare payable by the Nation.  In February,2005, SNFGC and STGC commenced monthly payments to the Nation of each entity’sprior month’s exclusivity fees.  For thethree months ended June 30, 2006 and 2005, total exclusivity fees were $20.5million and $17.5 million, respectively. Of the $20.5 million exclusivity fee for the three months ended June 30,2006, $14.0 million was attributable to SNFGC and $6.5 million was attributableto STGC.  For the nine months ended June30, 2006 and 2005, total exclusivity fees were $56.2 million and $49.0 million,respectively.  Of the $56.2 millionexclusivity fee for the nine months ended June 30, 2006, $38.2 million wasattributable to SNFGC and $18.0 million was attributable to STGC.

**Planned Additional CasinoLocation and Current Expansion**

Asdescribed in Note 1, the Compact provides the Nation the exclusive right toconduct Class III gaming activities at three sites in the western regionof the State of New York.  The plannedconstruction of the third casino, in Erie County, as well as current expansionby STGC at Seneca Allegany Casino, will require significant capitaloutlays.  The amount and timing of thesecapital expenditures are dependent on various factors

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includingfinancing availability, certain Nation approvals, local governmentalcooperation, the effects of legal proceedings, construction timelines, and theperformance of the Company’s two operating casinos.

**OtherCommitments**

SGChas pledged $150,000 in charitable donations to the Seneca Diabetes Foundationfor the fiscal year ended September 30, 2006. SGC’s Board of Directors has authorized this donation.

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

You should read the following discussion and analysisin conjunction with the sections titled “Financial Statements” and “Notes toConsolidated Financial Statements” included elsewhere in this Form 10-Q.  References below to years are to fiscal yearsof SGC unless otherwise noted. SGC’s fiscal year is from October 1 throughSeptember 30.

**Forward-LookingStatements**

Whenused in this Quarterly Report on Form 10-Q, in other filings with the SEC, inour press releases or in our other public communications, the words “believe,” “estimate,”“anticipate,” “expect,” “contemplate,” “may,” “will” and similar expressionsare intended to identify forward-looking statements.  Statements looking forward in time areincluded in this Quarterly Report on Form 10-Q pursuant to the “safe harbor”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,including, but not limited to, the risk factors contained or referenced hereinand in our other reports filed with the SEC pursuant to the Securities ExchangeAct of 1934, as amended, including our 2005 Form 10-K.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation toupdate these forward-looking statements to reflect events or circumstancesoccurring after the date hereof.

**Overview**

SGC is wholly owned by the Nation and chartered tomanage and direct all of the Nation’s Class III gaming operations.   The Nation entered into a Compact with NewYork State on August 18, 2002 that provides the Nation with the right toestablish and operate three Class III gaming facilities in Western NewYork.  We opened our first Class IIIgaming facility on Nation Territory in the City of Niagara Falls, New York onDecember 31, 2002, featuring Class III slot machines, table games andkeno.  Our expanded facility, including a604-room luxury hotel with additional gaming space, three restaurants, amulti-purpose room, meeting rooms, and a spa and salon was substantially openat December 31, 2005 and completely open at March 31, 2006.  This facility is operated by our wholly ownedsubsidiary SNFGC.  On May 1, 2004,we opened our second Class III gaming facility, Seneca Allegany Casino, onthe Nation’s Territory in

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the City of Salamanca, New York.  This facility features Class III slotmachines and table games.  This facilityis operated by our wholly owned subsidiary STGC.

Under the Compact, the Nation also has an exclusiveright to establish and operate a third Class III gaming facility in ErieCounty, New York.  On October 3,2005, the Nation acquired approximately nine acres of land in the historicwaterfront district of downtown Buffalo. The Company commenced construction of its Seneca Buffalo Creek Casino onthose nine acres on December 8, 2005. The exclusive right, under the Compact, to establish and operate a thirdClass III gaming facility in Erie County may terminate if the Nation orSEGC fails to commence Class III gaming operations in Erie County byDecember 9, 2007.  See “ExecutiveSummary — Seneca Buffalo Creek Casino” and “Part II. Item 1. — Legal Proceedings”for information regarding the status of and litigation related to our SenecaBuffalo Creek Casino.

**Executive Summary**

*Our Current Operations.*    We currently operate two Class IIIgaming facilities, Seneca Niagara Casino and Hotel, on Nation territory locatedin the City of Niagara Falls, New York, and Seneca Allegany Casino, on Nationterritory located in the City of Salamanca, New York.  Our operations include gaming, dining,lodging, entertainment and retail.  Forthe three months and nine months ended June 30, 2006, approximately 94% of ournet revenue was derived from our gaming activities.

*Key Performance Indicators.*    Our operating results are dependent on thevolume of profitable patrons visiting our casinos, our ability to attract themfor repeat visits, our provision of superior service to our patrons, ourability to expand the number of mid to higher-end gaming patrons to support ourSeneca Niagara Hotel, and the expansion of and reinvestment in our facilities.

*SenecaNiagara Casino and Hotel. *  Seneca Niagara Casino and Hotel currently relies primarily on drive-in and buspatrons from the Buffalo, Niagara Falls, and Rochester areas in New York andsecondarily from the Erie, Pennsylvania area, Ohio and other parts of New York.  Since partial opening on December 31,2002, and with a more notable increase since final completion of the luxuryhotel and amenities, Seneca Niagara Casino and Hotel has experienced continuousgrowth in its patron base.  With ourrecently opened 604-room luxury hotel and related amenities, we intend toextend our geographic penetration, appeal to a more diverse demographic baseand increase visits of existing profitable patrons.  The cost to construct and equip the luxuryhotel was approximately $240.0 million. The luxury hotel includes:

·                  604 rooms, including 118 suites ofvarious sizes, with 10 floors officially opened on December 30, 2005, and theremaining floors opened on March 31, 2006;

·                  35,000 square feet of additionalgaming space featuring approximately 950 slot machines and 33 table games (12of which were relocated from the existing gaming areas), which additionalgaming space opened on December 15, 2005;

·                  a full-service luxury spa and salon,which opened on March 31, 2006;

 

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·                  a 25,200 square-foot multi-purposeroom and an additional 8,000 square feet of conference and banquet space, allof which opened on December 31, 2005;

·                  two specialty restaurants, a 24-hourcasual dining restaurant and a deli, with the specialty restaurants havingopened on December 27, 2005 and January 19, 2006, the casual diningrestaurant having opened on December 23, 2005, and the deli having  opened on December 15, 2005; and

·                  approximately 2,300 square feet ofretail space for three stores, with two stores having opened onDecember 15, 2005 and one having opened on December 30, 2005.

*Seneca Allegany Casino.*    Since opening on May 1, 2004, SenecaAllegany Casino has experienced steady growth in its patron base, net revenue,and profitability.  Seneca AlleganyCasino has attracted patrons from the southern portion of Western New York,Erie and Pittsburgh, Pennsylvania, and Ohio. From opening through June 30, 2006, approximately 67% of the casino’spatron base has come from outside of the State of New York.

In July 2005, we opened our 1,850-space parking garageand we are constructing a 220-room resort hotel and permanent casino at SenecaAllegany Casino.  In June 2006, wecompleted the structural steel framework of the resort hotel.  We believe this expansion is necessary toprovide a first-class gaming experience for our patrons and to maintain thecompetitive position of this facility in light of expected future casino gamingcompetition in Pennsylvania.  We expectthat the total cost of the resort hotel and permanent casino will be between$156.0 and $167.0 million, and we plan to continue to fund this expansionwith cash flows from operations at Seneca Allegany Casino and borrowings fromSGC.  We are targeting opening the hoteland permanent casino by late December 2006.

*SenecaBuffalo Creek Casino.    *Inaddition to Seneca Niagara Casino and Hotel and Seneca Allegany Casino, theNation has the exclusive right under the Compact to construct our thirdClass III gaming facility in Erie County, New York.  On October 3, 2005, the Nation acquiredapproximately nine acres of land in the historic inner-harbor district ofdowntown Buffalo.  In accordance with,and in satisfaction of our obligations under the Compact, we commencedconstruction of our Erie County gaming facility, which we refer to as theSeneca Buffalo Creek Casino, on those nine acres, constituting the Nation’sBuffalo Creek Territory, on December 8, 2005.

Due to the City ofBuffalo’s rejection of our final proposed draft agreement regarding the sale ofa two-block street bisecting our nine-acre site within the Seneca Buffalo CreekTerritory, our board of directors and the Nation’s tribal council on August 8and August 12, 2006, respectively, authorized us to immediately commenceconstruction of a temporary Class III gaming facility on the Seneca BuffaloCreek Territory.  The temporary gamingfacility will be approximately 5,000 square feet with approximately 120 slotmachines and a snack bar.  We expect toopen the temporary gaming facility in the Spring of 2007, long before theDecember 9, 2007 Compact requirement noted in the Overview above.

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Due to the City of Buffalo’s rejection of our finalproposed draft agreement as noted above, we also have been directed by theSeneca Gaming Corporation board of directors and our owner, the Seneca Nationof Indians, to finalize an alternative design and construction bid packages fora permanent gaming facility which does not contemplate the use of the two-blockstreet bisecting our nine-acre site.  Wehave commenced discussions with our architects to finalize drawings for thisalternative permanent gaming and entertainment facility.

The cost to construct andequip the Seneca Buffalo Creek Casino permanent facility is still expected tobe approximately $125.0 million, and would initially feature:

·                  1,900 to 2,200 slot machines;

·                  30 to 50 table games;

·                  a fine dining restaurant;

·                  a 24-hour casual dining restaurant;

·                  a bar;

·                  a multi-purpose room withentertainment seating for approximately 500 guests;

·                  one retail store; and

·                  a 2,500-space parking garage.

Although we do not currently believe this to be thecase, our cost estimate or casino features as outlined above may change as wefinalize the alternative design with our architects for our Seneca BuffaloCreek Casino.

The ability to complete the permanent facility for theSeneca Buffalo Creek Casino with a design to accommodate the features outlinedabove, however, will continue to depend on various factors, including the levelof cooperation received from local governmental officials forcertain infrastructure improvements to City-owned streets and rights of waysurrounding our nine acres and the effect of existing legal challenges byvarious plaintiffs (certain of which, if successful, could potentially resultin our inability to conduct gaming on our Buffalo Creek Territory). Reference is made to our Form 10-Q for the quarter ended March 31, 2006 andAmendment No. 4 to our Registration Statement on Form S-4 filed with the SEC onFebruary 3, 2006 for a full description of the legal proceedings related tothis matter.  See also “Part II, Item 1 —Legal Proceedings” for material developments regarding certain of these legalproceedings.  Any temporary or permanentcasino in Erie County will be owned and operated by SEGC.  We intend to(a) operate Seneca Buffalo Creek Casino in a manner that will complement both SenecaNiagara Casino and Hotel and Seneca Allegany Casino, (b) integrate themarketing of the permanent Seneca Buffalo Creek Casino with our existing twogaming facilities in

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Salamanca and Niagara Falls in an effort to maximizeour patron volumes at all three properties and to promote the Seneca brandname, and (c) manage the overall profitability of our three gaming facilities.

*Marketing.    *We use an integrated marketing strategy to attract andretain our patrons and to brand the Seneca name as the premier gaming andentertainment experience in Western New York. We coordinate our marketing events to maximize the quality and length ofstay of patron visits and, in the future will do so, to minimize competitionamong our gaming and entertainment facilities. With the recent opening of the luxury hotel and related amenities at theSeneca Niagara Casino and the planned December 2006 opening of the resort hotelat Seneca Allegany Casino, we have commenced and intend to continue to increaseour marketing efforts in the region, including areas of New York outside theNiagara and Salamanca metropolitan areas, Pennsylvania and Ohio, andToronto.  Upon its opening, the permanentSeneca Buffalo Creek Casino will be incorporated to benefit from our increasingpatron base from outside the immediate region.

*Current, Continued and Future Reliance on Cash Flow*.*    *Weintend to fund the maintenance of our facilities and our current and plannedexpansion projects from our cash flow and cash on hand.  We currently rely and will continue to relyon our ability to generate cash flow from operations to service our debtfinancing.

*Seasonality.*     Our results of operations have not beenseasonal in nature.

*Overall Outlook.*     As discussed in more detail above, sinceinception, we have invested heavily in our operations and plan to continue todo so during the remainder of fiscal 2006 and 2007.  We believe that investments in additionalgaming space and non-gaming amenities at our facilities, and our exclusiveability to offer Class III gaming in Western New York, have made us thepremier gaming and entertainment corporation in Western New York, and willenable us to capitalize on what we believe is an underserved market in WesternNew York, Pennsylvania and parts of Ohio, and to capture some of the marketshare from our competitors in this region and in southern Ontario, Canada.

**CriticalAccounting Policies and Estimates**

There have been no changes in critical accountingpolicies and estimates since the filing of our 2005 Form 10-K for the yearended September 30, 2005.

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**Operating Results - Three Months Ended June 30, 2006Compared to the Three Months Ended June 30, 2005**

*OperatingResults*

|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                                    | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net revenue                              |       | $                                                    | 134,307    |   | $ | 115,092 |   |
| ** **                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating  expenses:                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Gaming                                   |       | 33,341                                               |       | 28,647 |   |
| Food and  beverage                       |       | 11,325                                               |       | 8,677 |   |
| Lodging                                  |       | 2,168                                                |       | - |   |
| Retail, entertainment  and other         |       | 2,747                                                |       | 2,523 |   |
| Advertising,  general and administrative |       | 33,420                                               |       | 28,280 |   |
| Pre-opening  costs                       |       | 2,369                                                |       | 208 |   |
| Depreciation                             |       | 13,026                                               |       | 6,555 |   |
|                                     |       |                                                 |       |   |   |
| Operating income                         |       | $                                                    | 35,911     |   | $ | 40,202 |   |

 

The most important factors and trends contributing toour operating performance during the three months ended June 30, 2006 and 2005were:

·                  Ourcontinued expansion at and investment in both of our properties, most notablyour December 31, 2005 partial opening and March 31, 2006 complete opening ofthe luxury hotel expansion project at Seneca Niagara Casino and the July 1,2005 opening of the parking garage at Seneca Allegany Casino.

·                  Ourability to successfully market Seneca Niagara Casino and Hotel and SenecaAllegany Casino to our primary and secondary target markets located within 100miles and 175 miles, respectively, of such casinos.

·                  Ourability to enroll over 1.1 million patrons in our cross-property Seneca LinkPlayer’s Card program, which has increased our ability to use effective directmail and targeted marketing programs to establish patron loyalty to the Senecabrand at a profitable level.

·                  Ourmix of slot machines, which we believe is superior to our competition andincludes the latest product introductions by leading United States andinternational slot manufacturers.

·                  Ouruse of current information technology, including “ticket-in/ticket-out” slotmachines, automated jackpot payment machines, coinless slots, electronic slotbonusing and database programs to increase operating efficiencies.

·                  Ourability to operate at a high margin, which we achieve through the carefulmonitoring and control of labor costs and the effective use of our marketingand advertising expenditures.

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*Detailed Revenue Information*

|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                                    | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                     |       |                                                 |       |   |   |
| Gaming revenue:                          |       |                                                 |       |   |   |
| Slots                                    | ** ** | $                                                    | 118,447    |   | $ | 98,017 | ** ** |
| Table games                              |       | 15,973                                               |       | 15,649 |   |
| Keno                                     |       | 129                                                  |       | 123 |   |
|                                     |       |                                                 |       |   |   |
| Gaming revenue                           |       | 134,549                                              |       | 113,789 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue:                     |       |                                                 |       |   |   |
| Food and  beverage                       |       | 13,012                                               |       | 10,806 |   |
| Lodging                                  |       | 3,470                                                |       | — |   |
| Retail,  entertainment and other         |       | 4,953                                                |       | 4,308 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue                      |       | 21,435                                               |       | 15,114 |   |
| Less promotional  allowances and credits |       | (21,677                                              | )          | (13,811 | ) |
|                                     |       |                                                 |       |   |   |
| Net revenue                              | ** ** | $                                                    | 134,307    |   | $ | 115,092 | ** ** |

 

Our gaming revenue for the three months ended June 30,2006 increased relative to the comparable period in the prior year, due to (a)the opening of the additional gaming space at Seneca Niagara Casino and Hotelon December 15, 2005, which added approximately 950 slot machines and 21 tablegames to our operations, (b) Seneca Allegany Casino’s addition of 119 slotmachines, primarily during the fourth quarter of 2005, and (c) continued growthin our patron base.  The opening of ourluxury hotel at Seneca Niagara Casino and Hotel and the July 1, 2005 completionof our parking garage at Seneca Allegany Casino supported our increased gamingrevenue for the three months ended June 30, 2006 in relation to the prior yearquarter, enabling us to utilize more effective marketing and promotionalprograms.  As of June 30, 2006, ourgaming operations featured an aggregate 124 table games and 6,277 slotmachines, representing a net increase of 8 table games and 1,146 slot machinesfrom June 30, 2005.  During theseperiods, the number of patrons enrolled in our Seneca Link Player’s Cardprogram has steadily increased.  As ofJune 30, 2006, we had over 1.1 million patrons enrolled, an increase ofapproximately 0.3 million patrons, or 30% over the number of enrolled membersat June 30, 2005.

Our net gaming revenue, which excludes promotionalslot credits of $8.7 million and $4.8 million in the quarters ended June 30,2006 and 2005, respectively, increased $16.8 million, or 15%.  During the three months ended June 30, 2006,Seneca Niagara Casino and Hotel’s net gaming revenue increased $14.3 million,or 19%, principally attributable to the casino expansion and supported by thenew luxury hotel and amenities.  Of thisincrease, $13.2 million was due to increased net slot revenue.  The $3.9 million increase in promotional slotcredits was principally due to increased redemptions resulting from a marketingpromotion during May and June 2006 which allowed patrons to exchange a portionof their player’s club points for promotional slot credits.  Seneca Allegany Casino’s net gaming revenuefor the quarter ended June 30, 2006 was $37.9 million, an increase of $2.5million, or 7%, from the quarter ended June 30, 2005, mainly due to increasednet slot revenue between the two periods.

Our food and beverage revenue and retail revenue haveincreased in direct relation to our increase in gaming revenue.  There is a direct relationship between ourfood and beverage revenue and retail revenue to our gaming revenue because asignificant portion of this revenue is generated from players’ pointredemptions.

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For the three months ended June 30, 2006 and 2005, 58%and 59%, respectively, of our food and beverage revenue and 87% and 86% of ourretail revenue, respectively, represented players’ point redemptions.  For the three months ended June 30, 2006, ourconsolidated food and beverage revenue increased $2.2 million, or 20% over thesame period in 2005, to $13.0 million.

Seneca Niagara Casino and Hotel’s food and beveragerevenue for the quarter ended June 30, 2006 increased $2.0 million in relationto the comparable prior year period, mainly due to the net addition of threerestaurants and two full-service bars, in conjunction with the opening of ourexpanded gaming space and luxury hotel in December 2005.

For the three months ended June 30, 2006 SenecaAllegany Casino generated an additional $0.2 million or 5%, in food andbeverage revenue compared to the same prior year period, primarily due toincreased redemption of players’ points during 2006.

Lodging revenue represents rentals of rooms in theluxury hotel in Niagara Falls, which partially opened in December 2005, andcompletely opened on March 31, 2006.  Forthe three months ended June 30, 2006 our occupancy percentage was approximately70%, based upon the average number of rooms available during the period.  Complimentary rooms accounted forapproximately 70% of our occupied rooms.

For the three months ended June 30, 2006, our retail,entertainment and other revenue increased by $0.6 million in relation tothe comparable 2005 period.  This increasewas primarily attributable to higher entertainment revenue of $0.2 million atour Seneca Niagara Casino and Hotel, due to an increased number of headlineconcerts at the new Seneca Events Center during 2006, along with $0.2 millionof spa and salon revenue at Seneca Niagara Casino and Hotel.

*DetailedOperating Expenses Information*

|                                          | ** ** | **Three Months Ended**                     | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                                    | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                     |       |                                                 |       |   |   |
| Operating  expenses                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Gaming                                   |       | $                                                    | 33,341     |   | $ | 28,647 |   |
| Food and  beverage                       |       | 11,325                                               |       | 8,677 |   |
| Lodging                                  |       | 2,168                                                |       | — |   |
| Retail,  entertainment and other         |       | 2,747                                                |       | 2,523 |   |
| Advertising,  general and administrative |       | 33,420                                               |       | 28,280 |   |
| Pre-opening  costs                       |       | 2,369                                                |       | 208 |   |
| Depreciation and  amortization           |       | 13,026                                               |       | 6,555 |   |
| Operating expenses                       |       | $                                                    | 98,396     |   | $ | 74,890 |   |

 

Gaming expenses principally consist of costs incurredfrom operating our table games and slot machines, of which the primarycomponents are related payroll and employee benefit costs, and the slotexclusivity fee due to New York State pursuant to the Compact.   The slot exclusivity fee increased by $3.0million from $17.5 million for the three months ended June 30, 2005 to$20.5 million for the three months ended June 30, 2006, due to higher slotrevenues.  In addition, gaming-relatedwages increased $1.0 million in relation to the prior year quarter primarilydue to wage adjustments for certain table games personnel, and lease expense ofgaming equipment increased by $0.4 million.

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Food and beverage expenses are costs we incur for theoperation of our restaurants, snack bars and beverage outlets.  The primary components of these expenses arethe cost of food and beverage products and related payroll and employee benefitexpenses.  For the quarter ended June 30,2006, food and beverage product costs increased $0.5 million due to higherrevenue, mostly attributable to our additional new restaurants at SenecaNiagara Casino and Hotel.  Food andbeverage payroll and benefits increased $1.9 million in relation to the samequarter in the prior year, due to the increased staffing related to the openingof three additional restaurants, two additional bars and a nightclub, inconjunction with the luxury hotel expansion at Seneca Niagara Casino and Hotel.

Lodging expenses represent our costs to operateSNFGC’s luxury hotel.  The components ofthese expenses include payroll and other employee benefit expenses, guestamenity supplies, laundry and other expenses.

Retail, entertainment and other expenses represent ourcosts to operate our retail shops and entertainment offerings.  The components of these expenses includerelated payroll and employee benefit costs, the purchase of products offeredfor sale in our retail outlets, and contract costs for entertainers.  For the three months ended June 30, 2006,these costs increased approximately $0.2 million, or 9%, over the comparable2005 period, due principally to an increase in the number of headlineentertainment events in the current year’s quarter at the Seneca Niagara Casinoand Hotel.

Advertising, general and administrative expenses areincurred to support our operations.  These expenses consist primarily of related payroll and employeebenefits costs, regulatory, advertising, rent, marketing, insurance, legal andenergy costs.  For the three months endedJune 30, 2006 and 2005, such costs were $33.4 million and $28.3 million,respectively, an increase of $5.1 million, or 18%.  The increase was mainly attributable to a$1.2 million increase in related payroll and benefits costs, primarily in thefacilities and maintenance areas, $0.9 million increase in energy costs, a $0.7million increase in the head lease expense with the Nation, a $0.7 millionincrease in advertising costs, a $0.5 million increase in regulatory costs, a$0.3 million increase in charitable donations and a $0.3 million increase ininsurance costs.

Pre-opening expenses are non-recurring costs incurredto support the expected opening of new facilities.  For the three months ended June 30, 2006 and2005, such costs were $2.4 million and $0.2 million, respectively, an increaseof $2.2 million.  The increase was mainlydue to $1.6 million in head lease expense, which started in April 2006, relatedto SEGC’s  lease of land on the SenecaBuffalo Creek Territory for the construction and operation of the SenecaBuffalo Creek Casino.

For the three months ended June 30, 2006 and 2005,depreciation and amortization expense was $13.0 million and $6.6 million,respectively, an increase of $6.5 million, or 99%.  This increase is attributable to the openingof our additional gaming and retail space and luxury hotel at Seneca NiagaraCasino and Hotel, as well as the July 2005 opening of our parking garage atSeneca Allegany Casino.

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*Non-Operating Expenses*

The following tablesummarizes information related to interest on our long-term debt:

|                  | ** ** | **Three Months Ended**                     | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **June 30,**                                    | ** ** |
| ** **       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|             |       |                                                 |       |   |   |
| Interest expense |       | $                                                    | 9,073      |   | $ | 59,413 |   |
|                  |            |                                                      |            |  |  |  |  |

 

Our interest expense for the three months ended June30, 2006 decreased $50.3 million over the three months ended June 30,2005.  This decrease was primarilyattributable to the $46.7 million in interest paid in connection with thenegotiated payment in full and termination of our Term Loan in May 2005,partially offset by the interest on the $200.0 million 2005 senior notes, issued in May 2005.   Capitalized interest relating to constructionprojects for the quarters ended June 30, 2006 and 2005 was $1.6 million and $0.8million, respectively, and are recorded as components of net property andequipment within the accompanying consolidated balance sheets.

**Operating Results - Nine Months Ended June 30,2006 Compared to the Nine Months Ended June 30, 2005**

*OperatingResults*

|                                         | ** ** | **Nine Months Ended**                      | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                    | ** ** |
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                    |       |                                                 |       |   |   |
| Net revenue                             |       | $                                                    | 372,479    |   | $ | 329,249 |   |
|                                    |       |                                                 |       |   |   |
| Operating  expenses:                    |       |                                                 |       |   |   |
| Gaming                                  |       | 94,240                                               |       | 85,199 |   |
| Food and beverage                       |       | 31,700                                               |       | 25,714 |   |
| Lodging                                 |       | 3,658                                                |       | — |   |
| Retail, entertainment and other         |       | 8,522                                                |       | 7,715 |   |
| Advertising, general and administrative |       | 97,268                                               |       | 87,147 |   |
| Pre-opening costs                       |       | 7,301                                                |       | 391 |   |
| Depreciation                            |       | 28,389                                               |       | 19,391 |   |
|                                    |       |                                                 |       |   |   |
| Operating income                        |       | $                                                    | 101,401    |   | $ | 103,692 |   |

 

The most important factors and trends contributing toour operating performance during the nine months ended June 30, 2006 and 2005were similar to those noted above for the three month periods ended June 30,2006 and 2005.

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*DetailedRevenue Information*

|                                          | ** ** | **Nine Months Ended**                      | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                                    | ** ** |
| ** **                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                     |       |                                                 |       |   |   |
| Gaming revenue:                          |       |                                                 |       |   |   |
| Slots                                    |       | $                                                    | 321,534    |   | $ | 269,744 |   |
| Table games                              |       | 49,317                                               |       | 47,965 |   |
| Class II and  other                      |       | 352                                                  |       | 3,866 |   |
|                                     |       |                                                 |       |   |   |
| Gaming revenue                           |       | 371,203                                              |       | 321,575 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue:                     |       |                                                 |       |   |   |
| Food and beverage                        |       | 35,358                                               |       | 30,356 |   |
| Lodging                                  |       | 5,052                                                |       | — |   |
| Retail, entertainment and other          |       | 14,465                                               |       | 12,591 |   |
|                                     |       |                                                 |       |   |   |
| Non-gaming  revenue                      |       | 54,875                                               |       | 42,947 |   |
| Less promotional  allowances and credits |       | (53,599                                              | )          | (35,273 | ) |
|                                     |       |                                                 |       |   |   |
| Net revenue                              |       | $                                                    | 372,479    |   | $ | 329,249 |   |

 

Our gaming revenue for the nine months ended June 30,2006 increased relative to the comparable period last year due to (a) theopening of the additional gaming space at Seneca Niagara Casino and Hotel onDecember 15, 2005, which added approximately 950 slot machines and 21 tablegames to our operations, (b) the addition of 119 slot machines at SenecaAllegany Casino, (c) continued growth in our patron base, and (d) mild winterweather.  The opening of our luxury hoteland the July 1, 2005 completion of our parking garage, and increased marketingand promotional programs supported our increased gaming revenue for the ninemonths ended June 30, 2006 relative to the comparable period last year.  As of June 30, 2006, our gaming operationsfeatured an aggregate of 124 table games and 6,277 slot machines available toour patrons, representing a net increase of 8 table games and 1,146 slotmachines from June 30, 2005.  Duringthese periods, the number of patrons enrolled in our Seneca Link Player’s Cardprogram has steadily increased.  As ofJune 30, 2006, we had over 1.1 million patrons enrolled, an increase ofapproximately 0.3 million patrons, or 30% over the number of enrolled membersat June 30, 2005.

Our net gaming revenue, which excludes promotionalcredits of $20.6 million and $10.2 million in the nine-month periods ended June30, 2006 and 2005, respectively, increased $39.2 million, or 13%, for the ninemonths ended June 30, 2006 relative to the comparable nine-month period endedJune 30, 2005.  During the nine monthsended June 30, 2006, Seneca Niagara Casino and Hotel’s net gaming revenueincreased $27.9 million, or 13%, principally attributable to the casino expansionand supported by the new luxury hotel and its amenities.  Such amount includes a $1.4 million decreasein Class II revenues, which operations were transferred to the Nation onJanuary 1, 2005.  Seneca Allegany Casino’snet gaming revenue for the nine months ended June 30, 2006 was $107.8 million,an increase of $11.4 million, or 12%, from the nine months ended June 30,2005.  This increase was mainly due to a$13.8 million, or 17%, increase in net slot revenue between the two periods,partially offset by a decrease of $1.9 million in Class II revenues, whichoperations were also transferred to the Nation on January 1, 2005.

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Our food and beverage revenue and retail revenue haveincreased in direct relation to our increase in gaming revenue.  There is a direct relationship between ourfood and beverage revenue and retail revenue to our gaming revenue because asignificant portion of this revenue is generated from players’ pointredemptions.  For the nine months endedJune 30, 2006 and 2005, 58% and 55%, respectively, of our food and beverage revenueand 87% and 86% of our retail revenue, respectively, represented players’ pointredemptions.

For the nine months ended June 30, 2006, food andbeverage revenue increased $5.0 million, or 16% to $35.4 million.  Seneca Niagara Casino and Hotel’s food andbeverage revenue for the nine months ended June 30, 2006 increased $3.9million, or 18%, in relation to the comparable prior period, mainly due to thenet addition of three restaurants, two full-service bars and a nightclub, inconjunction with the opening of our luxury hotel in December 2005.  For the nine months ended June 30, 2006,Seneca Allegany Casino generated an additional $1.1 million in food andbeverage revenue compared to the prior period, primarily due to increasedredemption of players’ points during 2006.

Lodging revenue represents rentals of rooms in theluxury hotel in Niagara Falls, which partially opened in December 2005, andcompletely opened on March 31, 2006. Since opening, the hotel has generated an occupancy percentage ofapproximately 70%, based upon the average number of rooms available during theperiod.  Complimentary rooms accountedfor approximately 70% of our occupied rooms.

For the nine months ended June 30, 2006, our retail,entertainment and other revenue increased by $1.9 million in relation tothe comparable 2005 period.  Thisincrease was primarily attributable to a $0.7 million increase in retailrevenues at Seneca Allegany Casino, along with higher entertainment revenue of$0.8 million at our Seneca Niagara Casino and Hotel, due to an increased numberof headline concerts at the new Seneca Events Center during 2006, along with$0.2 million of spa and salon revenue.

*DetailedOperating Expenses Information*

|                                         | ** ** | **Nine Months Ended**                      | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                    | ** ** |
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                    |       |                                                 |       |   |   |
| Operating  expenses                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Gaming                                  |       | $                                                    | 94,240     |   | $ | 85,199 |   |
| Food and beverage                       |       | 31,700                                               |       | 25,714 |   |
| Lodging                                 |       | 3,658                                                |       | — |   |
| Retail, entertainment and other         |       | 8,522                                                |       | 7,715 |   |
| Advertising, general and administrative |       | 97,268                                               |       | 87,147 |   |
| Pre-opening costs                       |       | 7,301                                                |       | 391 |   |
| Depreciation and amortization           |       | 28,389                                               |       | 19,391 |   |
| Operating  expenses                     |       | $                                                    | 271,078    |   | $ | 225,557 |   |

 

Gaming expenses principally consist of costs incurredfrom operating our table games and slot machines, of which the primarycomponents are related payroll and employee benefit costs, and the slotexclusivity fee due to New York State pursuant to the Compact.  The slot exclusivity fee increased by $7.2million from $49.0 million for the nine months ended June 30, 2005 to$56.2 million for the nine months ended June 30, 2006.  In addition, gaming-related wages increased$1.7 million in relation to the prior year nine-month period primarily due towage adjustments for certain table games personnel, and lease expense of gamingequipment increased by $0.4 million. This was partially offset by a decrease in certain promotional expensesbetween the periods.

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Food and beverage expenses are costs we incur for theoperation of our restaurants, snack bars and beverage outlets.  The primary components of these expenses arethe cost of food and beverages and related payroll and employee benefitexpenses.  For the nine months ended June30, 2006, food and beverage product cost increased $1.8 million associated withour revenue increase, and food and beverage payroll and benefits increased $3.8million in relation to the nine months ended June 30, 2005, due to the increasedstaffing related to the addition of three restaurants, two additional bars anda nightclub, in conjunction with the opening of the luxury hotel at SenecaNiagara Casino and Hotel.

Lodging expenses represent our costs to operate SNFGC’sluxury hotel.  The components of theseexpenses include payroll and other employee benefit expenses, guest amenitysupplies, utilities and laundry and other expenses.

Retail, entertainment and other expenses represent ourcosts to operate our retail shops and entertainment offerings.  The components of these expenses includerelated payroll and employee benefit costs, the cost of products sold in ourretail outlets, and contract costs for entertainers.  For the nine months ended June 30, 2006 inrelation to the same period in 2005, these costs increased approximately $0.8million, or 10%, due mainly to an increase in headline entertainment events inthe current year at the Seneca Niagara Casino and Hotel.

Advertising, general and administrative expenses areincurred to support our operations.  These expenses consist primarily of related payroll and employeebenefits costs, regulatory, advertising, rent, marketing, insurance, legal andenergy costs.  For the nine months endedJune 30, 2006 and 2005, such costs were $97.3 million and $87.2 million,respectively, a $10.1 million increase, or 12%. The increase was mainly attributable to a $3.9 million increase in thehead lease expense with the Nation, a $2.7 million increase in related payrolland benefits, primarily in the facilities and maintenance areas, a $1.8 millionincrease in energy costs, a $0.8 million increase in regulatory costs, a $0.5million increase in insurance costs and a $0.5 million increase in charitabledonations and sponsorships.

Pre-opening expenses are non-recurring costs incurredto support the expected opening of new facilities.  For the nine months ended June 30, 2006 and2005, such costs were $7.3 million and $0.4 million, respectively, an increaseof $6.9 million.  The increase was mainlydue to $4.8 million related to the gaming expansion and luxury hotel at SenecaNiagara Casino and Hotel, and $2.1 million related to Seneca Buffalo CreekCasino, consisting primarily of $1.6 million in head lease expense for thelease of land on the Seneca Buffalo Creek Territory, which commenced in April2006, for the construction and operation of the Seneca Buffalo Creek Casino.

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For the nine months ended June 30, 2006 and 2005,depreciation and amortization expense was $28.4 million and $19.4 million,respectively, an increase of $9.0 million, or 46%.  This increase was attributable to the openingof our additional gaming and retail space and luxury hotel at Seneca NiagaraCasino and Hotel, as well as the July 2005 opening of our parking garage atSeneca Allegany Casino.

*Non-Operating Expenses*

The following tablesummarizes information related to interest on our long-term debt:

|                  | ** ** | **Nine Months Ended**                      | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **June 30,**                                    | ** ** |
| ** **       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
| ** **       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest expense |       | $                                                    | 23,979     |   | $ | 82,218 |   |
|                  |            |                                                      |            |  |  |  |  |

 

Our interest expense for the nine months ended June30, 2006 decreased $58.2 million over the nine months ended June 30, 2005.  This decrease was primarily attributable tothe $46.7 million in interest paid in connection with the negotiated payment infull and termination of our Term Loan in May 2005, partially offset byadditional interest expense relating to the $200.0 million additional 2005senior notes.  In addition, capitalizedinterest related to increased capital spending for our construction of theluxury hotel at Seneca Niagara Casino and the resort hotel and parking garageat Seneca Allegany Casino during the nine months ended June 30, 2006 and 2005,totaled $5.1 million and $3.4 million, respectively, and are recorded as componentsof net property and equipment within the accompanying consolidated balancesheets.

**Liquidityand Capital Resources**

*Cash Flows*

|                                                     | ** ** | **Nine Months Ended**                      | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                                    | ** ** |
| ** **                                          | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(Unaudited, Dollars in Thousands)** | ** ** |
|                                                |       |                                                 |       |   |   |
| Net cash  provided by operations                    |       | $                                                    | 114,518    |   | $ | 7,417 |   |
|                                                |       |                                                 |       |   |   |
| Cash flows  relating to investing activities:       |       |                                                 |       |   |   |
| Capital expenditures                                |       | (156,804                                             | )          | (124,179 | ) |
| Payments for land acquisitions                      |       | (16,773                                              | )          | (197 | ) |
| Payment to collateralize letter of credit           |       | (33,500                                              | )          | — |   |
| Sales (purchases) of investments, net               |       | 43,791                                               |       | (44,998 | ) |
| Net cash used in investing activities               |       | (163,286                                             | )          | (169,374 | ) |
|                                                |       |                                                 |       |   |   |
| Cash flows  relating to financing activities:       |       |                                                 |       |   |   |
| Payments to sinking fund, net                       | ** ** | **—**                                           |       | (11,917 | ) |
| Proceeds from long-term  debt                       | ** ** | **—**                                           |       | 193,000 |   |
| Repayment of long-term debt                         | ** ** | **—**                                           |       | (80,325 | ) |
| Payment of deferred financing costs                 |       | (682                                                 | )          | (4,793 | ) |
| Proceeds from sale of  interest rate cap            |       | **—**                                           |       | 683 |   |
| Dividends paid to the Nation                        |       | (9,747                                               | )          | (6,092 | ) |
| Net cash (used in) provided by financing activities |       | (10,429                                              | )          | 90,556 |   |
|                                                |       |                                                 |       |   |   |
| Net decrease in cash  and cash equivalents          |       | $                                                    | (59,197    | ) | $ | (71,401 | ) |

 

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*Cash Flows—Operating Activities.*    The increase in cash flows from operationsduring the nine months ended June 30, 2006 compared to the same period in 2005resulted principally from a $56.8 million increase in net income over the prioryear, principally due to the reduction of interest expense resulting from theprepayment in full of our Term Loan in May 2005, along with the effect of achange in payment frequency regarding state exclusivity fees.  In January 2005, the Company paid $57.1million in exclusivity fees to the Nation related to the entire 2004 calendaryear.  Subsequent to that payment, theCompany began paying exclusivity fees to the Nation on a monthly basis for theprior month’s fees due.

*Cash Flows—Investing Activities.*    Our capital expenditures of$156.8 million during the nine months ended June 30, 2006 were mainlycomprised of $116.0 million of costs associated with the construction andequipping of the luxury hotel at the Seneca Niagara Casino and $18.6 millionrelated to the construction of the Seneca Allegany Casino garage and resorthotel.  The remaining capital expenditureswere principally for the acquisition of equipment for the existing casinooperations, and constructing and equipping a cogeneration plant and a nightclubat Seneca Niagara Casino and Hotel. Sales and purchases of investments represent transactions in short-terminvestments of excess cash in instruments having a maturity of more than 90days.

On July 13, 2006, we acquired, through thecondemnation process, approximately 18 acres of land and trade fixturesappurtenant thereto from Fallsite, LLC (“Fallsite”) and Fallsville, LLC (“Fallsville”)for an aggregate initial advance payment of $18.0 million, which land is aportion of the land in the City of Niagara Falls, New York designated under theCompact for ownership by the Nation.  Weintend to acquire the remaining approximate five acres of the approximate 50acres in the City of Niagara Falls, New York so designated.  Under the Compact, the Nation is required tofund the acquisition of this property, including all related costs andexpenses.  As initial security for theNation’s obligations to pay site acquisition costs and in furtherance of theongoing condemnation proceeding, the Company was required to deliver, and hasdelivered, to the Empire State Development Corporation, or ESDC, a letter ofcredit in the amount of $33.5 million representing 150% of the then estimate ofthe total remaining site acquisition costs not yet paid by the Company.  If the estimate of such site acquisitioncosts increases or if certain other events occur, the Company may have toprovide an additional letter of credit or replace the existing one with one fora larger monetary amount or, if acceptable to the ESDC, provide a supplementalcash escrow amount.  The current requiredletter of credit amount is approximately $25.8 million. This outstandingletter of credit is 100% collateralized by a cash deposit in aninterest-bearing restricted account with a bank.  In conjunction with the Fallsite acquisitiontransaction referenced above, on July 10, 2006 $7.7 million was drawn under theletter of credit as partial funding of the purchase and the balance was paidfrom our operating cash.  Pursuant to theNew York State Eminent Domain Procedure Laws, the New York state courts willdetermine the final purchase price to be paid to Fallsite and

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Fallsville.  OnJuly 26, 2006, each of Fallsite and Fallsville filed notice of claims seeking$40 million and $35 million, respectively, for their land and tradefixtures.  We have been informed thatappraisals for the land and trade fixtures prepared by ESDC’s appraisers are$12.3 million and $5.2 million, respectively. If the New York state courts determine that the value for the land andtrade fixtures is higher than what ESDC has determined to be their values, thenwe would be liable for the difference and potentially also responsible forcertain additional costs and payments to Fallsite and Fallsville, such as theirattorney fees. The additional 18 acres of recently-acquired land has not yetbeen transferred to the Nation. We can provide no assurance that, upon transferof such land to the Nation, restricted fee status for such land will be soughtby the Nation or, if sought, approved.

*Cash Flows—Financing Activities.*     During the quarter ended December 31, 2004,the Company paid $12.0 million into a sinking fund related to the TermLoan.  In May 2005, the Term Loan wasterminated and the sinking fund balance (including accumulated earnings) wastransferred to cash and short-term investments.

*Principal Debt Arrangements.*    As of June 30, 2006, our long-term debtconsists of $300.0 million in 2004 senior notes and $200.0 million in 2005senior notes.  The notes carry a fixedannual interest rate of 71⁄4% and semi-annual interest payments are due on May 1and November 1.

On May 23, 2005, we issued an additional $200.0million in 71⁄4% senior notes due 2012, Series B, or the 2005 senior notes.  The 2005 senior notes are treated as a singleclass with the 2004 senior notes and are identical to the 2004 senior notes,except for certain tax attributes and prior to November 1, 2005 the amount ofinterest accrued thereon.  Gross proceedson the 2005 senior notes were approximately $193.0 million.  The gross proceeds of the 2005 senior noteswere, or will be, used to (a) pay in full and terminate on May 23, 2005, thesenior secured term loan, or the Term Loan, made by Freemantle Limited, orFreemantle, to SNFGC in November 2002, for a negotiated amount of approximately$126.7 million, representing $80.0 million in outstanding principal andapproximately $46.7 million for interest on such principal, at a prescribedinterest rate, that would have otherwise been payable if the Term Loan had notbeen paid on May 23, 2005, but was instead paid 181⁄2 months prior to itsNovember 22, 2007 stated maturity (resulting in a reduction of future interestpayments that would have otherwise been payable under the Term Loan if it hadnot been paid in full, by approximately $18.0 million), (b) to fund certaincosts associated with the expansion of our operations, (c) to pay $5.2 millionin fees and expenses associated with the offering of the 2005 senior notes,including the related exchange offer, and (d) for general corporatepurposes.  Interest on the 2004 and 2005senior notes is payable semi-annually on November 1 and May 1.  The 2004 and 2005 senior notes are unsecuredand rank equally.  As of June 30, 2006,aggregate accrued interest on the 2004 and 2005 senior notes was$6.0 million.

We expect cash generated from our operations,available cash and cash equivalents and short-term investments as of June 30,2006 to be sufficient to fund our expansion plans described below, service ourdebt, and meet our working capital requirements for the near future.  However, our ability to fund our operations,make planned capital expenditures and service our debt depends on our futureoperating performance, cash flow and cash distributions to our owner, theNation (which distributions are subject to the restrictions and limitations setforth in the indenture governing the 2004 and 2005 senior notes), which are inturn subject to prevailing economic conditions, and to financial, business andother factors, some of which are beyond our control.  Additionally, unlike traditional

25

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corporations, we are prohibited by law from generatingcash through an offering of equity securities. Also, our ability to incur additional indebtedness is limited under theterms of the indenture governing the 2004 and 2005 senior notes.

We are highly leveraged and have significant interestpayment requirements on our 2004 and 2005 senior notes.  As such, limitations on our capital resourcescould force us to delay or abandon capital projects as well as the constructionand development of new properties.

*Expansion Plans*

During the next 18 months, we plan to make substantialcapital improvements to our gaming facilities. In December 2005 we partially opened and in March 2006, we completelyopened our 604-room luxury hotel. The total cost to construct and equip theluxury hotel was approximately $240.0 million.

We constructed a 1,850 space-parking garage, whichopened July 1, 2005, and are constructing a 220-room resort hotel and permanentcasino at our Seneca Allegany Casino.  Weestimate the total cost to complete the resort hotel and permanent casino to bebetween $156.0 million and $167.0 million.  We are targeting opening the entire facilitylate December 2006.

We commenced construction of our Seneca Buffalo CreekCasino on December 8, 2005.  The cost toconstruct and equip the initial permanent facility is expected to beapproximately $125.0 million, and is planned to initially feature 1,900 to2,200 slot machines, 30 to 50 table games, a fine dining restaurant, a 24-hourcasual dining restaurant, a bar, a multi-purpose room for entertainment andother events, a retail store and a 2,500-space parking garage. As previouslynoted, we plan to open a temporary Class III gaming facility on the SenecaBuffalo Creek Territory in the Spring of 2007. Although there are existing legal challenges, we plan to commenceClass III gaming operations in Erie County by December 9, 2007.  See “Executive Summary — Seneca Buffalo CreekCasino” for a discussion of related matters.

**Item 3.**                                                           Quantitativeand Qualitative Disclosures About Market Risk

Reference is made to our 2005 Form 10-K for a completediscussion of the Company’s market risk. This market risk information has not materially changed in the interimperiod.

**Regulation**

Our operations are regulated by Nation laws, theCompact and federal statutes, most notably the Indian Gaming Regulatory Act, orIGRA.  Several bills have been proposedduring the current and recent sessions of U.S. Congress that could affectIndian gaming.  Notably, though itsproposed legislation has yet to be presented to Congress, the Policies andProcedures Subproject of the Bureau of Indian Affairs has proposed sweepingchanges to the federal laws concerning Indians. Certain of such bills, if enacted, could impair the ability of theNation and SGC to expand its gaming operations and adversely impact the futuregrowth of the Nation’s revenue base. In addition, from time to time, variousgovernment officials have proposed taxing Indian casino gaming or otherwise

26

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limiting or restricting the conduct of gamingoperations by Indian tribes.  Noassurance can be given that such legislation, if and when enacted by Congress,would not have a material adverse effect on the operations of SGC.  Senator John McCain, Chairman of the SenateIndian Affairs Committee, has held hearings regarding possible amendments toIGRA.  As it relates particularly tooff-reservation gaming, there have been several Congressional hearings held byboth the Seneca Indian Affairs Committee and the House ResourcesCommittee.  On October 31, 2005, HouseResources Committee Chairman Richard Pombo introduced H.R. 4893, a bill toamend Section 20 of the Indian Gaming Regulatory Act.    H.R. 4893 is designed to restrictoff-reservation gaming activities by tribes. The House Resources Committee has held a series of hearings inconnection with H.R. 4893.  H.R. 4893,now titled the “Restricting Indian Gaming to Homelands of Tribes Act of 2006”,was reported out of the House Resources Committee on July 26, 2006.  On November 18, 2005, Senate Indian AffairsCommittee Chairman McCain introduced S. 2078, the Indian Gaming Regulatory ActAmendments of 2005.  S. 2078 makes anumber of amendments to IGRA, including: (1) expanding the authority of theNational Indian Gaming Commission (“NIGC”) over “gaming-related contracts”, (2)authorizing the NIGC to regulate Class III gaming, (3) limiting the landseligible for gaming, and (4) making a number of technical amendments toIGRA.  The Senate Committee on IndianAffairs has held a series of hearings in connection with S. 2078.  S. 2078, now titled the “Indian GamingRegulatory Act Amendments of 2006”, was reported out of the Senate IndianAffairs Committee on March 29, 2006, and placed on the Senate LegislativeCalendar on June 6, 2006.  If Congresswere to enact comprehensive amendments to IGRA, such legislation could have amaterial adverse effect on the operations of SGC.  In addition, under federal law, gaming on theNation’s lands may be dependent upon the permissibility under New York law ofcertain forms of gaming or similar activities. If New York State were to make various forms of gaming illegal oragainst public policy (or the courts were to rule similarly), or otherwise totake a legal position adverse to the Compact or any of its provisions, suchactions could have a material adverse effect on the ability of our casinos toconduct their gaming operations as currently conducted.  Moreover, a 1996 U.S. Supreme Court decisionmay permit a state to avoid or refuse to negotiate amendments to existingcompacts such as the Compact.

**New AccountingPronouncements**

There are no accounting standards that have not yetbeen adopted which are expected to have a material impact on our financialreporting.

**Item 4.**                                                           Controlsand Procedures

**Evaluation of Disclosure Controls and Procedures**

We maintain disclosure controls and procedures (asthat term is defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, or the Exchange Act) that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our President and Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding required

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disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, have inherent limitations due to cost issues, the possibility ofhuman error, judgments and assumptions regarding the likelihood of futureevents, and the circumvention and overriding of the controls and procedures.   Accordingly, even effective disclosure ofcontrols and procedures can provide only reasonable assurance of achieving thedesired control objectives.

The Company’s management, under the supervision andwith participation of our President and Chief Executive Officer and ChiefFinancial Officer (as our principal executive officer and principal financialofficer, respectively), has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures.  Based on that evaluation, our President andChief Executive Officer and Chief Financial Officer have concluded that thedesign and operation of our disclosure controls and procedures as of June 30,2006 provided reasonable assurance that the disclosure controls and proceduresare effective to accomplish their objectives.

**Changes inInternal Control over Financial Reporting**

There has not been any change in our internal controlover financial reporting identified in connection with the evaluation requiredby Exchange Act Rules 13a-15 or 15d-15 or otherwise that occurred during thequarter ended June 30, 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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**Part II.     OTHER INFORMATION**

**Item 1.**                                                           LegalProceedings

A.           Reference is made toour Forms 10-Q for the quarters ended December 31, 2005 and March 31, 2006 andAmendment No. 4 to our Registration Statement on Form S-4 filed with the SEC onFebruary 3, 2006 for a full description of the legal proceedings pertaining toKlewin and BankNorth.

Consistent with information previously reported, onDecember 23, 2005, SNFGC and STGC filed a complaint against BankNorth seekingto recover the monies taken by BankNorth that were originally directed to thesubcontractors and the architect, along with an award of attorneys’ fees, underSection 77 of the New York Lien Law and under the theory of common lawconversion.  SNFGC and STGC havecommenced the action as assignees of the claims of the subcontractors and thearchitect.  The action was filed in theSupreme Court for the County of Niagara, State of New York bearing Index No.124716.  As a material development in thequarter ended June 30, 2006, on May 24, 2006 an order denying BankNorth’smotion to dismiss was filed and subsequently on June 29, 2006, BankNorth fileda notice of appeal.

B.             Consistent withinformation previously reported in our Form 10-Q for the quarter endedMarch 31, 2006 and Amendment No. 4 to our Registration Statement onForm S-4 filed with the SEC on February 3, 2006, in January 2006, anaction was filed in the United States District Court, Western District of NewYork by various plaintiffs against the United States Department of theInterior, the National Indian Gaming Commission and three individuals in theirofficial capacities as Secretary of the Interior, Acting Assistant Secretary ofthe Interior for Indian Affairs and Chairman of the National Indian GamingCommission (*Citizens Against Casino Gambling v. Norton,*1:06-cv-00001-WMS(WDNY)).  The action seeks declaratoryand injunctive relief under the Administrative Procedure Act, the DeclaratoryJudgements Act, the National Historic Preservation Act (NHPA), the NationalEnvironmental Policy Act (NEPA) and the Indian Regulatory Gaming Act (IGRA) andis principally directed at the decisions and actions of the defendants thatpermit the construction and operation of our Seneca Buffalo Creek Casino.  The plaintiffs claim that the defendants havefailed to comply with NEPA, NHPA and IGRA and have requested that the Courttake numerous actions including declaring that the lands acquired by the Nationpursuant to SNLCSA are not gaming eligible Indian lands within the meaning ofIGRA and declaring that the Compact violates IGRA.  If the plaintiffs are successful, the Nationwould be unable to conduct any gaming upon lands acquired pursuant toSNLCSA.  On April 26, the Defendantsfiled a motion to dismiss.  As a materialdevelopment, the County of Erie and Joel Giambra, individually and as CountyExecutive, have successfully intervened in this matter.  On July 27, 2006, the Plaintiffs and

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Intervenor-Plaintiffs filed a joint Memorandum of Lawin Opposition to Defendants’ Motion to Dismiss. On July 25, 2006, the Plaintiffs and Intervenor-Plaintiffs filed aMotion for Summary Judgement.  On August8, 2006, the Seneca Nation of Indians filed a Motion for Leave to File a BriefAmicus Curiae.

C.             Consistent withinformation previously reported in our Form 10-Q for the quarter endedMarch 31, 2006, on or about April 6, 2006, an action was filed in theUnited States District Court, Western District of New York by Daniel T. Warren,a pro se plaintiff, against the United States of America, the United StatesDepartment of the Interior, the National Indian Gaming Commission, and fiveindividuals in their official capacities as Acting Secretary of the Interior,Acting Assistant Secretary of the Interior for Indian Affairs and Chairman ofthe National Indian Gaming Commission, as well as Governor George E. Pataki, asGovernor of the State of New York, and Cheryl Ritchko-Buley, as Chairwoman ofthe New York State Racing and Wagering Board (*Warren v.United States,* 1:06-cv-00226-JTE (WDNY)).  The action seeks declaratory and injunctiverelief as to numerous matters previously reported.  If the plaintiffs are successful, the Nationwould be unable to conduct any gaming upon lands acquired pursuant toSNLCSA.  As a material development, onMay 31, 2006, the State Defendants filed a motion to dismiss.  On July 24, 2006, the Federal Defendantsfiled a motion to dismiss.

D.            Consistent withinformation previously reported in our Form 10-Q for the quarter endedMarch 31, 2006 and Amendment No. 4 to our Registration Statement onForm S-4 filed with the SEC on February 3, 2006, on or aboutFebruary 1, 2006, an action was filed in the New York Supreme Court,County of Erie by various plaintiffs against George E. Pataki, in hisofficial capacity as Governor of the State of New York; State Gaming Officialsof the New York State Wagering Board; City of Buffalo; Common Council of theCity of Buffalo; Anthony Masiello in his previous capacity as Mayor of Buffalo;Byron Brown in his capacity as Mayor of Buffalo; City of Buffalo Department ofPublic Works; Buffalo Sewer Authority; and Niagara Frontier TransportationAuthority (*Scott v. Pataki,* Sup Ct, Erie County,Index No. 001189/06).  The action seeksdirective and injunctive relief under the State Environmental Quality ReviewAct (SEQRA); the First Parks, Recreation, Historic Preservation Law (PRHPL);First City Environmental Review Ordinance (CERO); and Freedom of InformationLaw (FOIL) and is principally directed at the decisions and actions of thedefendants in connection with our Seneca Buffalo Creek Casino.  The plaintiffs claim that the defendants havefailed to comply with SEQRA, PRHPL, CERO, and FOIL and have requested that theCourt take numerous actions including directing compliance with SEQRA, PRHPL,CERO and FOIL and restraining further action relating to the development of ourSeneca Buffalo Creek Casino.  If theplaintiffs are successful, the Nation may be delayed in the completion of theSeneca Buffalo Creek Casino at this site or may be unable to complete theSeneca Buffalo Creek Casino at this site. Certain of these plaintiffs are also plaintiffs in the federal lawsuitfiled in January 2006 and referenced above.

**Item 1A.**                                                  RiskFactors

There are no material changes from the risk factorspreviously disclosed in our Annual Report on Form 10-K for the fiscal yearended September 30, 2005 except as disclosed in our Amendment No. 4 to Form S-4Registration Statement filed with the Securities and Exchange Commission onFebruary 3, 2006, in our Form 10-Q for the quarter ended March 31,2006, and as disclosed in this Form 10-Q, including without limitation, therisk factors relating to our Seneca Buffalo Creek Casino set forth in “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations” — “Executive Summary — Buffalo Creek Casino”.

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** **

**Item 2.**                                                           UnregisteredSales of Equity Securities and Use of Proceeds

Not applicable.

**Item 3.**                                                           DefaultsUpon Senior Securities

Not applicable.

**Item 4.**                                                           Submissionof Matters to a Vote of Security Holders

Not applicable.

**Item 5.**                                                           OtherInformation

As previously disclosed in a Current Report on Form8-K filed with the SEC on June 27, 2006, Joseph D’Amato, formerly SGC’s SeniorVice President for Finance and Administration and Chief Financial Officer, hasbeen appointed Chief Operating Officer for SGC and each of its subsidiaries,and has consented to serve as such, effective June 22, 2006.

Also, as previously disclosed in a Current Report onForm 8-K filed with the SEC on June 27, 2006, effective June 22, 2006, PatrickFox, formerly SGC’s Vice President of Finance, has been appointed ChiefFinancial Officer, and has been designated as SGC’s principal financial andaccounting officer.  Mr. Fox hasconsented to serve in all of the foregoing capacities.  Mr. Fox will also serve as Chief Financial Officerof each of SGC’s subsidiaries.

Also, as previously disclosed in a Current Report onForm 8-K filed with the SEC on August 10, 2006, John Pasqualoni will continueto serve as SGC’s President and Chief Executive Officer through September 30,2007, the end of the term of his original employment contract.  As previously disclosed in Current Reports onForm 8-K filed with the SEC on April 20, 2006, Mr. Pasqualoni was to resign hisduties effective July 31, 2006, which date was subsequently extended throughAugust 31, 2006.  SGC’s board ofdirectors has accepted the reinstatement of Mr. Pasqualoni as President andChief Executive Officer through September 30, 2007.

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** **

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

** **
|  (a) |   | Exhibits (listed according to the number assigned in  the table in Item 601 of Regulation S-K): |
|-----------|--------|-------------------------------------------------------------------------------------------------|

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                  | ** ** | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|            |       |                                                                                                                                                                                                                             |
|  31.1      |       | Certification of John  Pasqualoni, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934 (filed herewith).                                                                     |
|            |       |                                                                                                                                                                                                                             |
|  31.2      |       | Certification of  Patrick Fox, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934 (filed herewith).                                                                         |
|            |       |                                                                                                                                                                                                                             |
|  32.1      |       | Certification of John Pasqualoni, Principal  Executive Officer and Patrick Fox, Principal Financial Officer, pursuant to  18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act  of 2002 (filed herewith). |

 

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**SIGNATURES**

**SENECA GAMING CORPORATION**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

DatedAugust 11, 2006
|  /s/ John Pasqualoni                     |   |    |
|-----------------------------------------------|--------|--------------|
| John Pasqualoni                               |   |         |
| President and  Chief Executive Officer        |   |         |
| (Principal  Executive Officer)                |   |         |
|                                          |   |         |
|                                          |   |         |
|                                          |   |         |
|                                          |   |         |
|  /s/ Patrick M. Fox                      |   |         |
| Patrick M. Fox                                |   |         |
| Chief Financial  Officer                      |   |         |
| (Principal  Financial and Accounting Officer) |   |         |

 

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