**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                 | ** ** | ** **                                                                                              |
| **For the  Quarterly Period Ended December 31, 2007** |
| ** **                                                 | ** ** | ** **                                                                                              |
| **OR**                                                     |
| ** **                                                 | ** ** | ** **                                                                                              |
| **o**                                                      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from         to**

 

**Commission File Number:333-117633**

 

**SENECA GAMING CORPORATION**

(Exact name of registrant as specified in its charter)

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

 

**310Fourth Street**

**NiagaraFalls, 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

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

 

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

 

At February 14, 2008, the registrant had nooutstanding shares of common stock.  Theregistrant is wholly owned by the Seneca Nation of Indians.

 

 

 

 

 

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**TABLE OF CONTENTS**

 
|              |       |                                                                                                           |   |   |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------|--------|--------|
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                     |   |   |
| Item 1.           |       | Financial Statements                                                                                           |   | 1      |
|              |       | Consolidated  Balance Sheets as of December 31, 2007 (Unaudited) and September 30,  2007             |   | 1      |
|              |       | Consolidated  Statements of Operations for the three months ended December 31, 2007  and 2006 (Unaudited) |   | 2      |
|              |       | Consolidated  Statements of Cash Flows for the three months ended December 31, 2007  and 2006 (Unaudited) |   | 3      |
|              |       | Notes to  Condensed Consolidated Financial Statements                                                          |   | 4      |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |   | 9      |
| Item 3.           |       | Quantitative  and Qualitative Disclosures About Market Risk                                                    |   | 21     |
| Item 4T.          |       | Controls and  Procedures                                                                                       |   | 21     |
|              |       |                                                                                                           |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                          |   | 21     |
| Item  1.          |       | Legal  Proceedings                                                                                             |   | 21     |
| Item  1A.         |       | Risk  Factors                                                                                                  |   | 24     |
| Item 2.           |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   |   | 24     |
| Item 3.           |       | Defaults Upon  Senior Securities                                                                               |   | 24     |
| Item 4.           |       | Submission of  Matters to a Vote of Security Holders                                                           |   | 24     |
| Item  5.          |       | Other  Information                                                                                             |   | 24     |
| Item  6.          |       | Exhibits                                                                                                       |   | 24     |
|              |       | Signatures                                                                                                     |   |   |

 

 

 

ii

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** **

**PART I. FINANCIAL INFORMATION**

 

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

 

**SENECAGAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                        | ** ** | **December 31,**

** 2007** | ** ** | **September 30,**

** 2007** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **(Dollars in Thousands)**  | ** ** |
| **Assets**                        | ** ** | ** **                            | ** ** | ** **                             | ** ** |
| Current assets:                   |       |                                  |       |                                   |       |
| Cash and cash equivalents         |       | $                                     | 74,549     |                                   | $          | 78,662 |   |
| Short-term investments            |       | 750                                   |       | 19,100                                 |       |
| Receivables from affiliates       |       | 179                                   |       | 58                                     |       |
| Other receivables, net            |       | 3,367                                 |       | 3,585                                  |       |
| Inventories                       |       | 4,120                                 |       | 4,421                                  |       |
| Other current assets              |       | 7,274                                 |       | 8,194                                  |       |
| Total current assets              |       | 90,239                                |       | 114,020                                |       |
|                              |       |                                  |       |                                   |       |
| Property and equipment,  net      |       | 702,166                               |       | 699,381                                |       |
| Restricted cash                   |       | 15,428                                |       | 14,579                                 |       |
| Other long-term assets            |       | 59,591                                |       | 57,980                                 |       |
|                              |       |                                  |       |                                   |       |
| Total assets                      |       | $                                     | 867,424    |                                   | $          | 885,960 |   |
|                              |       |                                  |       |                                   |       |
| **Liabilities and Capital**       | ** ** | ** **                            | ** ** | ** **                             | ** ** |
| Current liabilities:              |       |                                  |       |                                   |       |
| Trade payables                    |       | 5,336                                 |       | 6,194                                  |       |
| Construction payables — SCMC |       | 11,938                                |       | 21,201                                 |       |
| Distributions payable to Nation   |       | 36,000                                |       | 48,000                                 |       |
| Exclusivity fees payable          |       | 8,501                                 |       | 9,279                                  |       |
| Accrued interest                  |       | 6,042                                 |       | 15,104                                 |       |
| Customer point liability          |       | 9,896                                 |       | 9,578                                  |       |
| Accrued regulatory  expenses      |       | 24,831                                |       | 23,240                                 |       |
| Other current liabilities         |       | 31,257                                |       | 27,773                                 |       |
| Total current liabilities         |       | 133,801                               |       | 160,369                                |       |
|                              |       |                                  |       |                                   |       |
| Long-term debt                    |       | 495,598                               |       | 495,347                                |       |
|                              |       |                                  |       |                                   |       |
| Total liabilities                 |       | 629,399                               |       | 655,716                                |       |
|                              |       |                                  |       |                                   |       |
| Capital:                          |       |                                  |       |                                   |       |
| Retained earnings                 |       | 238,025                               |       | 230,244                                |       |
|                              |       |                                  |       |                                   |       |
| Total liabilities and capital     |       | $                                     | 867,424    |                                   | $          | 885,960 |   |

 

See accompanyingnotes to consolidated financial statements.

 

 

1

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                               | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                              |
| ** **                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**                              | ** ** |
| **Revenues**                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| ** **                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Gaming                                   |       | $                                                       | 150,080    |   | $ | 141,273 |   |
| Food and beverage                        |       | 14,814                                                  |       | 13,269 |   |
| Lodging                                  |       | 7,313                                                   |       | 4,658 |   |
| Retail, entertainment and  other         |       | 6,671                                                   |       | 5,245 |   |
| Less: Promotional allowances             |       | (28,678                                                 | )          | (24,266 | ) |
| Net revenues                             |       | 150,200                                                 |       | 140,179 |   |
|                                     |       |                                                    |       |   |   |
| **Expenses**                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
|                                     |       |                                                    |       |   |   |
| Gaming                                   |       | 41,438                                                  |       | 32,980 |   |
| Food and beverage                        |       | 12,616                                                  |       | 11,297 |   |
| Lodging                                  |       | 3,763                                                   |       | 2,367 |   |
| Retail, entertainment and  other         |       | 3,843                                                   |       | 3,570 |   |
| Advertising, general and  administrative |       | 49,523                                                  |       | 35,258 |   |
| Pre-opening costs                        |       | 93                                                      |       | 4,679 |   |
| Depreciation and  amortization           |       | 13,642                                                  |       | 11,076 |   |
|                                     |       |                                                    |       |   |   |
| Total operating expenses                 |       | 124,918                                                 |       | 101,227 |   |
|                                     |       |                                                    |       |   |   |
| Operating income                         |       | 25,282                                                  |       | 38,952 |   |
| Other non-operating  expenses            |       | (3,750                                                  | )          | (286 | ) |
| Interest income                          |       | 748                                                     |       | 1,403 |   |
| Interest expense                         |       | (9,871                                                  | )          | (8,563 | ) |
|                                     |       |                                                    |       |   |   |
| Net income                               |       | $                                                       | 12,409     |   | $ | 31,506 |   |

 

See accompanyingnotes to consolidated financial statements.

 

 

 

2

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | ** **                                              |
| ** **                                                                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)**                    | ** ** |
| **Cash flows relating to  operating activities:**                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                       | 12,409     |   | $ | 31,506 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                      |       | 13,642                                                  |       | 11,076 |   |
| Amortization of deferred financing costs and debt discount                         |       | 809                                                     |       | 808 |   |
| Other than temporary decline in investments                                        |       | 3,750                                                   |       | — |   |
| Provision for bad debts                                                            |       | 90                                                      |       | 77 |   |
| Loss on disposal of assets                                                         |       | 63                                                      |       | — |   |
|                                                                               |       |                                                    |       |   |   |
| Change in operating assets  and liabilities:                                       |       |                                                    |       |   |   |
| Current assets                                                                     |       | 1,228                                                   |       | (695 | ) |
| Long-term assets                                                                   |       | (3                                                      | )          | (10 | ) |
| Current liabilities                                                                |       | (5,305                                                  | )          | (11,638 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net cash provided by  operating activities                                         |       | 26,683                                                  |       | 31,124 |   |
|                                                                               |       |                                                    |       |   |   |
| **Cash flows relating to  investing activities:**                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchases of property and  equipment                                               |       | (24,353                                                 | )          | (68,399 | ) |
| Land acquisition costs                                                             |       | (3,566                                                  | )          | (2,125 | ) |
| Sales of investments, net                                                          |       | 14,600                                                  |       | 22,700 |   |
| Deposit to restricted  cash, net                                                   |       | (849                                                    | )          | (240 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net cash used in investing  activities                                             |       | (14,168                                                 | )          | (48,064 | ) |
|                                                                               |       |                                                    |       |   |   |
| **Cash flows relating to  financing activities:**                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Distributions paid to the  Nation                                                  |       | (16,628                                                 | )          | (8,000 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net cash used in financing  activities                                             |       | (16,628                                                 | )          | (8,000 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net decrease in cash                                                               |       | (4,113                                                  | )          | (24,940 | ) |
|                                                                               |       |                                                    |       |   |   |
| Cash balances:                                                                     |       |                                                    |       |   |   |
| Beginning of period                                                                |       | 78,662                                                  |       | 78,195 |   |
| End of period                                                                      |       | $                                                       | 74,549     |   | $ | 53,255 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

 

3

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**SENECAGAMING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.**                                      Organizationand Basis of Presentation

** **

The consolidatedfinancial statements include the accounts of Seneca Gaming Corporation, or SGC,and its wholly owned subsidiaries, or, collectively, the Company.  In consolidation, all intercompany balancesand transactions have been eliminated. The accompanying unaudited consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles forinterim financial information. Accordingly, they do not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion of SGC’smanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation have been included.  Operating results for the three months ended December 31,2007 are not necessarily indicative of the results that may be expected for theyear ended September 30, 2008.  Forfurther information, reference is made to the consolidated financial statementsand notes thereto included in SGC’s Annual Report on Form 10-K for thefiscal year ended September 30, 2007, or 2007 Form 10-K, as well asSGC’s other filings with the Securities and Exchange Commission, or SEC,pursuant to the Securities Exchange Act of 1934, as amended, and the SecuritiesAct of 1933, as amended.

 

SGC, which was formed on August 1,2002, is wholly owned by the Seneca Nation of Indians, or the Nation, afederally recognized Indian nation.  SGCwas organized by the Nation to operate and manage its Class III gamingactivities on the Nation’s territories pursuant to the Indian Gaming RegulatoryAct of 1988, or IGRA.  Under IGRA,federally recognized Indian tribes are permitted to conduct full-scale casinogaming operations on tribal land, subject to, among other things, thenegotiation of a compact with the affected state.  Pursuant to IGRA, the Nation entered into theNation-State Gaming Compact with the State of New York in August 2002, orthe Compact, which has been approved by the Federal Bureau of Indian Affairs,Department of the Interior.  The Compactexpires in December 2016 and automatically renews for an additional sevenyear period unless either the Nation or the State of New York objects inwriting, in which case the parties are required to negotiate in good faith toaddress the objecting party’s concerns, with only the issue of a party’s goodfaith subject to third party dispute resolution.  The Compact provides that its terms willremain in effect during the pendency of such negotiations. The Compact providesthe Nation the right to conduct Class III gaming activities at three sitesin the western region of the State of New York. The right is exclusive, subject to certain limited exceptions.

 

The Nation’s Council, orthe Council, acts as the Nation’s legislative authority, and acts on the Nation’sbehalf with respect to SGC.  The Councilenacted a gaming ordinance which established the Seneca Gaming Authority, orSGA, to regulate the gaming activities of SGC under the Compact.

 

The Council, at therequest of the SGC Board of Directors, chartered three subsidiary corporationsof SGC to operate the three sites authorized by the Compact. In addition, theSGC Board of Directors hired the executive management of SGC, including thePresident and Chief Executive Officer, to oversee, develop, and manage thethree sites. The subsidiary corporations that operate the three sitesauthorized by the Compact are as follows:

 

·              Seneca Niagara Falls GamingCorporation, or SNFGC

 

·              Seneca Territory GamingCorporation, or STGC

 

·              Seneca Erie Gaming Corporation, orSEGC

 

 

4

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SNFGC was formed on August 1,2002 to operate the Nation’s Class III gaming facilities in Niagara Falls,New York.  Operations at SNFGC’s casino,the Seneca Niagara Casino, commenced December 31, 2002.  On March 31, 2006, SNFGC officiallycompleted the phased opening of its luxury hotel expansion, which included a604 room luxury hotel with 118 suites of various sizes, a full-service spa,salon, and fitness center, 35,000 square feet of additional gaming space, threenew restaurants, three new retail stores, and a 25,200 square-footmulti-purpose room and event center.  Theluxury hotel is adjacent 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 operate the Nation’s Class III gaming facilities near Salamanca,New York on its existing territorial land. Operations at STGC’s casino, theSeneca Allegany Casino, commenced May 1, 2004.  On March 30, 2007, the phased opening ofthe permanent gaming facility and resort hotel was completed, which included apermanent 92,000 square foot gaming facility (providing 37,000 square feet moregaming space than the original 55,000 square foot temporary gaming facility), a212-room resort hotel, two fine dining restaurants, a 24 hour casualrestaurant, a spa and fitness center, and retail and other amenities.  As of December 31, 2007, the conversionof the former approximate 120,000 square foot temporary casino structure intoan events center with a seating capacity for 1,700 people, along withadditional administrative and support space was substantially complete.  An official opening of the new events centeris planned for March 2008.  Theentire complex, including the Seneca Allegany Casino and resort hotel, isreferred to as the Seneca Allegany Casino and Hotel.

 

SEGC was formed on August 9,2003 to operate the Nation’s Class III gaming facility in Erie County, NewYork.  On October 3, 2005, theNation acquired approximately nine acres of land in the inner-harbor districtof downtown Buffalo.  SEGC commencedconstruction of its Seneca Buffalo Creek Casino on those nine acres on December 8,2005 and on July 3, 2007 commenced Class III gaming on such property,in a temporary facility, in fulfillment of the requirement set forth in theNation’s Compact with the State of New York. The Nation’s exclusive right,under the Compact, to establish and operate a third Class III gamingfacility in Erie County, New York may have terminated if the Nation or SEGC hadfailed to commence Class III gaming operations in Erie County by December 9,2007.

 

During Fiscal 2007, theNation’s Council also chartered, at the request of the SGC Board of Directors,two additional subsidiary corporations, Lewiston Golf Course Corporation, orLGCC, a subsidiary of SNFGC and Seneca Massachusetts Gaming Corporation, orSMGC, a subsidiary of SGC.

 

LGCC was formed on July 18,2007 by the Nation’s Council as a new wholly-owned subsidiary of SNFGC to own,develop and operate SNFGC’s planned golf course amenity in Lewiston, New York.

 

SMGC was formed on August 11,2007 by the Nation’s Council, as a new wholly-owned subsidiary of SGC toexplore development opportunities related to gaming in the Commonwealth ofMassachusetts.

 

**2.             Short-Term Investments**

 

Short-term investments are classified as available forsale as defined in SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Investments are stated at fair value.  The Company evaluates investmentsfor conditions that may indicate that an other-than-temporary decline in marketvalue has occurred. In conducting this review, numerous factors are consideredwhich, individually or in combination, may indicate that a decline isother-than-temporary. Based on this evaluation, an other-than-temporary loss onone specific investment of $3.75 million was recorded in the first quarter 2008as other non-operating expense. The cost basis of this investment has beenreduced by the amount of the other-than-temporary loss recorded.

 

**3.**                                      Long-Term Debt

** **

Long-term debt, as describedbelow, consists of the 2004 and 2005 71⁄4% senior notes.

 

**71⁄4%Senior Notes**

** **

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

 

 

5

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The 2004 and 2005 seniornotes are guaranteed by SNFGC, STGC, SEGC and LGCC. The 2005 senior notes aretreated as a single class with the 2004 senior notes and are identical to the2004 senior notes, except for certain tax attributes and prior to November 1,2005 the amount of interest accrued thereon.   Interest on the 2004and 2005 senior notes is payable semi-annually on May 1 and November 1. The 2004 and 2005 senior notes are unsecured and rank equally.  As of December 31,2007, aggregate accrued interest on the 2004 and 2005 senior notes was$6.0 million. The senior notes, which mature on May 1, 2012, areredeemable at SGC’s option in whole or in part at any time after May 1,2008 at the redemption prices set forth in SGC’s Indenture, are subject toredemption requirements imposed by gaming laws and regulations and are requiredto be repurchased by SGC at the option of holders upon certain change ofcontrol events.

 

The Indenture governingthe 2004 and 2005 senior notes contains certain financial and non-financialcovenants.  The financial covenants include limitations on restrictedpayments, the incurrence of indebtedness and affiliate transactions, while thenon-financial covenants include reporting obligations and compliance with lawsand regulations.  As of December 31, 2007, SGC was in compliance withall covenants in the Indenture.

 

**4.****                                     ****Related-Party Transactions**

 

**OperatingLease Agreements with the Nation**

** **

The Nation has enteredinto operating lease agreements (each a Head Lease) with each of SNFGC, STGCand SEGC.  Due to the related partynature of these leases, which can be effectively modified by the Nation, SGCrecords monthly lease expense equal to the required payment amount for therespective month.  Lease paymentincreases under the Head Leases are restricted under the terms of the Indenturegoverning the senior notes and the Distribution Agreement referenced in Note 5.  These leases contain no renewal options orescalation clauses.

 

The SNFGC Head Lease(dated October 25, 2002) has a term of 21 years and covers use of the landand certain improvements existing at the commencement of such lease,principally including structures formerly known as the Niagara Falls ConventionCenter and Lackey Plaza.  As of October 1,2005, monthly lease payments under the SNFGC Head Lease were $1,287,500.  The lease payments were increased by 3%,effective October 1, 2006, to $1,326,125 per month, and an additional 3%,effective October 1, 2007, to $1,365,909 per month in each case, asapproved by the board of directors of each of SGC and SNFGC.  The lease payments may be further increasedby up to 3% each October 1, subject to approval by the Board of Directorsof SNFGC, compliance with the terms of the Indenture governing SGC’s seniornotes and compliance with the Distribution Agreement.  Lease payments under the SNFGC Head Lease arepayable only to the extent that sufficient funds are available, measured on anannual basis, from the net proceeds derived from casino and other relatedoperations at those facilities.  If on anannual basis sufficient funds are not available, any shortfall in the rentamount does not accumulate.

 

The STGC and SEGC HeadLeases were effective as of May 1, 2004 and April 1, 2006 respectively.  Both of these Head Leases cover use of theland which is currently being used in operating the Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, respectively.  The STGC and SEGC Head Leases are effectiveuntil the date 21 years after the commencement of the Nation’s Class IIIgaming operations under the Compact. With respect to the STGC Head Lease, as of October 1, 2005 monthlylease payments were $1,287,500.  Paymentswere increased by 3%, effective October 1, 2006, to $1,326,125 per month,and by an additional 3%, effective October 1, 2007, to $1,365,909 permonth in each case, as approved by the board of directors of STGC.  With respect to the SEGC Head Lease, for thefirst six months of the term, SEGC made monthly lease payments of $520,000 tothe Nation.  Payments were increased,effective October 1, 2006, to $1,250,000, and by an additional 3%,effective October 1, 2007, to $1,287,500 in each case as approved by theBoard of Directors of SEGC.  Each October 1annual rent under both the STGC and SEGC Head Leases will increase to 103% ofthe prior year’s annual rent, provided that no increase in annual rent will beeffective if it violates or results in a default under, any agreement,indenture, instrument or other commitment legally binding upon STGC or SEGC (orthe Nation), or to which the leased premises are subject.  If on an annual basis sufficient funds arenot available, any shortfall in the rent amount does not accumulate.

 

The Nation has providednotice of its intent to increase by $14 million the aggregate annual amount ofthe payments payable to the Nation by SNFGC, STGC, and SEGC under the HeadLease agreements, subject to compliance with all applicable commitments,obligations and restrictions binding upon SGC, such SGC subsidiaries and theNation, or to which the leased premises are subject.  The projected aggregate Head Lease paymentsafter the increase are 

 

 

6

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$62 million for fiscalyear 2008.  In connection with suchaggregate $14 million increase, a written opinion of an independent financialadvisor will be obtained stating that the terms of these proposed lease amendmentseffecting the referenced lease payment increases are fair, from a financialpoint of view, to each company involved. Such opinion will be provided to the trustee under the Indenturegoverning SGC’s senior notes.  TheCompany believes that it is probable that, effective October 1, 2007, itsaggregate rent under the Head Lease agreements will increase by $14 million forfiscal 2008, and accordingly, during the quarter ended December 31, 2007,the Company commenced recording rent expense utilizing the expected annualrental amount.

 

Lease expense resultingfrom the above agreements was as follows for the three month period ended December 31,2007 and 2006:

 
| ** ** | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | ** **                                              |
| ** ** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|       | ** ** | **(In  millions of dollars)**                           | ** ** |
| SNFGC      |       | $                                                       | 6.4        |   | $ | 4.0 |   |
|       |       |                                                    |       |   |   |
| STGC       |       | 5.2                                                     |       | 4.0 |   |
|       |       |                                                    |       |   |   |
| SEGC       |       | 3.9                                                     |       | 3.8 |   |
|       |       | $                                                       | 15.5       |   | $ | 11.8 |   |

 

SNFGC,STGC, and SEGC record the lease costs as a component of advertising, generaland administrative costs in the accompanying consolidated statements ofoperations.  Prior to opening thetemporary facility, SEGC recorded the lease cost as a component of pre-openingcosts in the accompanying consolidated statements of operations.

 

**OtherRelated Party Transactions**

 

SNFGC,STGC and SEGC have each entered into construction management agreements withSeneca Construction Management Corporation, or SCMC, for certain renovationsand capital improvements at Seneca Niagara Casino and Hotel, Seneca AlleganyHotel and Casino, and Seneca Buffalo Creek Casino, respectively.  SCMC is wholly owned by the Nation.  For the three-month period ended December 31,2007, SNFGC, STGC and SEGC have collectively made payments to SCMC forconstruction management fees and other related costs of $0.7 million.

 

SNFGCand STGC lease space within both Seneca Niagara Casino and Hotel andSeneca Allegany Casino and Hotel, respectively, for operation of poker rooms bySeneca Gaming & Entertainment, a Class II business enterprise ofthe Nation.  For the three-month periodsended December 31, 2007 and 2006, SGC recorded $0.3 million and $0.3million of poker room rental income and fees, respectively.  At December 31, 2007 and September 30,2007, SGC has recorded $0.2 million and $0.1 million, respectively, as areceivable from the Nation relating to poker room rentals and fees.

 

Effective September 1, 2006, SGC declared cash distributions tothe Nation totaling $26.0 million, payable in thirteen equal monthly paymentsof $2.0 million beginning September 2006. Effective December 1, 2006, SGC declared additional cashdistributions to the Nation totaling $20.0 million, payable in ten equalmonthly payments of $2.0 million beginning December 2006. SGC declaredcash distributions to the Nation totaling $48 million, payable in twelve equalmonthly payments of $4.0 million beginning October 2007.   For the three months ended December 31,2007, SGC paid cash distributions of $12.0 million to the Nation pursuant tothe foregoing distribution declarations. The remaining declared cashdistributions of $36.0 million which are payable on future payment dates areshown as ‘Distributions payable to Nation’ on the accompanying consolidatedbalance sheets.  In addition to thedeclared cash distributions, SGC distributed $4.4 million to the Nation underthe Distribution Agreement, dated April 27, 2007, relating to the SenecaNation of Indians Capital Improvements Authority’s special obligation bonds,and $0.2 million for traffic signal designs in Allegany, for the three monthsended December 31, 2007.

 

 

 

7

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During the three months ended December 31, 2007 and 2006, SGCdistributed to the Nation acquired real property of $0 and $0.6 million,respectively, for use in its casino and other related entertainmentoperations.  Such distribution amountswere based on the acquisition cost of the real property.

 

In addition, SGC has recorded approximately $49.4 million in land andrelated acquisition costs as ‘Other long-term assets’ in the accompanyingbalance sheets as of December 31, 2007, which are expected to betransferred to the Nation.

 

SGC is charged by the Nation for SGA costs, which are incurred by theNation.  SGA costs charged to SGC wereapproximately $2.5 million and $2.4 million for the three months ended December 31,2007 and 2006, respectively.  SGC alsoincurs costs, which are passed through to the Nation for New York State gamingregulatory services, New York State Police, Seneca Nation of Indians Marshalls,Buffalo Police****and Cattaraugus County SheriffDepartment services.  SGC recorded costsof approximately $2.8 million and $2.1 million for the three-month periodsended December 31, 2007 and 2006, respectively, in connection with theseservices.  At December 31, 2007 and September 30,2007, approximately $24.8 million and $23.2 million, respectively, of SGA,other regulatory, and police costs were recorded as current liabilities.

 

STGCleases office space in a building owned by the brother of a member of SGC’sboard of directors.  For the three-monthperiods ended December 31, 2007 and 2006, such lease expense totaled$65,000 and $61,000, respectively.

 

SNFGC,STGC, and SEGC, through a competitive bidding process, have purchased goods andservices from DRJ Enterprises, which is owned by the brother-in-law of the SGCChairman.  Payments to DRJ Enterprisesfor the three-month periods ended December 31, 2007 and 2006 totaled $186,000and $76,000, respectively.

 

**5.**                                      Commitmentsand Contingencies

** **

**TheSeneca Nation Compact**

** **

As part of its Compact,the Nation agrees to contribute to the State of New York a portion of theproceeds from the operation and conduct of each category of gaming device forwhich exclusivity exists, based on the win of such machines (cash dropped intomachines, after payouts but before expenses) and totaled on a cumulativequarterly basis to be adjusted annually at the end of the relevant calendaryear.  The exclusivity fee to the Stateof New York for years 1-4 (through December 31, 2006) was 18.0% payable onan annual basis.  Thereafter, theexclusivity fee is 22.0% for years 5-7 (through December 31, 2009) payableon a semi-annual basis, and 25.0% for years 8-14 (through December 31,2016) payable on a quarterly basis.

 

Pursuant to the Compact,amounts due to New York State are payable by the Nation.  In February 2005, SNFGC and STGCcommenced monthly payments to the Nation of each entity’s prior month’s exclusivityfees.  For the three months ended December 31,2007 and 2006, total exclusivity fees paid to the Nation were $27.1 million and$20.7 million, respectively.  Of the$27.1 million exclusivity fee for the three months ended December 31,2007, $18.5 million was attributable to SNFGC, $7.2 million was attributable toSTGC, and $1.4 million was attributable to SEGC.

 

** **

 

8

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**PermanentBuffalo Casino and Other Expansion**

** **

As described in Note 1,the Compact provides the Nation the right to conduct Class III gamingactivities at three sites in the western region of the State of New York.  The conversion of the former temporary casinoat the Seneca Allegany Casino and Hotel into a 120,000 square foot eventscenter, and additional administration space was substantially complete on December 31,2007.  Exterior landscaping and façadeenhancements are expected to be completed in Summer 2008 and 2009,respectively. The estimated cost of this project, plus exterior landscaping andfaçade enhancements, is approximately $40.0 million. The Company also intendsto commence construction of the next phase of development at Seneca AlleganyCasino and Hotel in Spring 2008, which will include an additional 179 to 204room hotel tower, and up to 31,000 square feet of additional gaming space andrelated amenities, for a total estimated cost of up to $130 million, with suchexpansion estimated for completion in Fall 2009.

 

The Company has begunsite preparation and is also finalizing the design and construction bidpackages for a permanent Class III gaming facility and hotel on the SenecaBuffalo Creek Territory, with such expansion estimated for completion in Summer2010. The cost to construct and equip the Seneca Buffalo Creek Casino permanentfacility is currently expected to be approximately $333.0 million.  The Company also intends to expand thecurrent temporary gaming facility to include an additional 109 slot machines ata cost of approximately $2.2 million including equipment and furnishings, withsuch expansion estimated for completion in Spring 2008.

 

The planned construction of the permanent full service Seneca BuffaloCreek Casino and Hotel on the Nation’s Buffalo Creek Territory, as well as theexpansion at Seneca Allegany Casino and Hotel, will require significant capitaloutlays.  The timing of these capitalexpenditures and the ability to complete these projects are dependent onvarious factors including certain Nation and other governmental approvals, theeffects of legal and/or administrative proceedings, construction timelines, theperformance of SGC’s casinos, and with regard to the planned permanent SenecaBuffalo Creek Casino and Hotel, financing availability.

 

**DistributionAgreement Obligations**

 

On April 27, 2007,SGC entered into a Distribution Agreement among the Nation, the Seneca Nationof Indians Capital Improvements Authority, or the Authority, SGC and WellsFargo Bank, as Trustee, in connection with the Authority’s issuance in twoseries (one tax exempt and the other taxable) of an aggregate principal amountof $159,495,000 special obligation bonds, or the 2007 Bonds.  TheDistribution Agreement obligates SGC, subject to any contractual restrictionsapplicable to SGC (including, but not limited to, those contained in theIndenture governing SGC’s 2004 and 2005 senior notes), to make monthlydistributions to the Nation at the times and in the amounts necessary to enablethe Authority to pay the debt service on the 2007 Bonds as required under theAuthority’s indenture.  At the direction of the Nation and the Authority,SGC will pay such distributions directly to the Trustee.  The Authority’sdebt service commenced on June 1, 2007.  For the period from June 1,2007 through December 1, 2007, the Authority’s debt service averagedapproximately $0.9 million per month. For the period from January 1, 2008through December 1, 2013, the Authority’s debt service averagesapproximately $1.8 million per month. For the period from June 1, 2014through December 1, 2023, the Authority’s debt service averagesapproximately $1.2 million per month. The foregoing debt service averagesare based on scheduled payments of interest and principal under the Authority’sindenture and bonds and do not address the effects of any earlier call forredemption, by acceleration or otherwise.  The Distribution Agreementprovides that neither the Trustee nor the Authority’s bondholders will have anyrecourse under the Distribution Agreement to any revenues, assets or propertyof SGC or its subsidiaries should SGC fail to comply with its distributionobligations.  For the three months ended December 31,2007, SGC distributed to the Nation $4.4 million for the Authority’s debtservice on the special obligation bonds.

 

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

** **

You should read thefollowing discussion and analysis in conjunction with the sections titled “FinancialStatements” and “Notes to Consolidated Financial Statements” included elsewherein this Quarterly Report on Form 10-Q. References below to years are to fiscal years of SGC unless otherwisenoted. SGC’s fiscal year is from October 1 through September 30.

 

9

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**Forward-LookingStatements**

 

When used in thisQuarterly Report on Form 10-Q, in other filings with the SEC, in our pressreleases or in our other public communications, the words “believe,” “estimate,”“anticipate,” “expect,” “contemplate,” “may,” “will” 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 “safeharbor” provision of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risksand uncertainties, which could cause actual results to differ materially,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 2007 Form 10-K.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of theirrespective dates.  We undertake noobligation to update these forward-looking statements to reflect events orcircumstances occurring after their respective dates.

 

**Overview**

** **

SGC is wholly owned bythe Nation and chartered to develop, manage and direct all of the Nation’s Class IIIgaming operations on the Nation’s territories in Western New York. SGC waschartered by the Nation in August 2002. In August 2002, the Nation entered into the Compact with New YorkState that provides the Nation with the right to establish and operate three Class IIIgaming facilities in Western New York. We currently operate three Class III gaming facilities in WesternNew York—Seneca  Niagara Casino andHotel, which is located in the City of Niagara Falls, New York (NiagaraTerritory) and operated by SNFGC, approximately 20 miles north of Buffalo, NewYork, Seneca Allegany Casino and Hotel, which is located in the City ofSalamanca, New York (Allegany Territory) and operated by STGC, approximately 75miles northeast of Erie, Pennsylvania, and Seneca Buffalo Creek Casino, whichis located in the inner harbor district of Buffalo, New York (Buffalo CreekTerritory) and operated by SEGC. Seneca Niagara Casino and Hotel opened on December 31,2002 (initially, as the Seneca Niagara Casino). Seneca Allegany Casino and Hotel opened on May 1, 2004 (initially,as the Seneca Allegany Casino).  SenecaBuffalo Creek Casino commenced operations on July 3, 2007 in a temporaryfacility.  Our three casinos are locatedon land held in restricted fee by the United States, which, together with therights under the Compact, allows us to conduct Class III gaming operationsat these locations in New York State and to operate the only gaming facilitiesin New York State offering both Class III slot machines and table games.

 

As of December 31,2007, Seneca Niagara Casino and Hotel featured over 147,000 square feet ofgaming space, 4,199 slot machines, 102 table games and 604 hotel rooms, andSeneca Allegany Casino and Hotel featured over 68,000 square feet of gamingspace, 2,336 slot machines, 41 table games and 212 hotel rooms.

 

Under the Compact, theNation has the right to establish and operate a third Class III gamingfacility in Erie County, New York.  On July 3,2007, we opened our Seneca Buffalo Creek Casino in a temporary facility.  The casino currently has 135 Class IIIslot machines, and no table games.  Weplan to open our permanent Class III gaming facility and hotel on thissite in 2010.  See “Executive Summary —Seneca Buffalo Creek Casino,” “Part II. Item 1. — Legal Proceedings,” and “2007Form 10-K Item 3. — Legal Proceedings” for information regarding thestatus of, and litigation related to, our Seneca Buffalo Creek Casino.

 

**ExecutiveSummary**

 

*OurCurrent Operations.*    We currently operate three Class IIIgaming facilities, Seneca Niagara Casino and Hotel on the Niagara Territory,Seneca Allegany Casino and Hotel on the Nation’s Allegany Territory, and theSeneca Buffalo Creek Casino (slots only temporary facility) on the Nation’sBuffalo Creek Territory.  Our casinooperations include gaming, dining, lodging, entertainment and retail.  For the three months ended December 31,2007, approximately 92% and 94%, respectively, of our net revenue was derivedfrom our gaming activities.

 

*KeyPerformance Indicators.*    Our operating resultsare dependent on the volume of patrons at our casinos and our ability toattract them for repeat visits.

 

*Seneca Niagara Casino andHotel. *  Prior to the opening of our luxury hotel, Seneca Niagara Casino primarilyrelied on drive-in and bus patrons from the Buffalo, Niagara Falls, andRochester areas in New York and secondarily from the Erie, Pennsylvania area,Ohio and other parts of New York.  Sincecompletion of the phased  opening of ournew luxury hotel, expanded gaming floor and related amenities in March 2006,Seneca Niagara Casino and Hotel has experienced continuous growth in its patronbase. The expansion of Seneca Niagara Casino and Hotel, including the additionof our luxury hotel and other amenities, has enabled us to increase 

 

 

10

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higher-end patron volume, gaming activity and lengthof stay, and extend our geographic penetration and appeal to a more diversedemographic base.  The total cost of theluxury hotel expansion project was approximately $234.0 million.

 

*SenecaAllegany Casino and Hotel.*    Since opening on May 1, 2004, SenecaAllegany Casino and Hotel has experienced steady growth in its patron base andnet revenue.  Seneca Allegany Casino andHotel has attracted patrons from the southern portion of Western New York, Erieand Pittsburgh, Pennsylvania, and Ohio. From opening through December 31, 2007, approximately 69% of thecasino’s patron base has come from outside of the State of New York.

 

In March 2007, weopened a 212-room resort hotel, including two fine dining restaurants, a24-hour casual restaurant and other certain amenities, at Seneca AlleganyCasino and Hotel after officially opening the new permanent gaming floor in December 2006.  The total cost to construct and equip theresort hotel and permanent casino was approximately $169.0 million.  As of December 31, 2007, we havecapitalized approximately $168.3 million of costs related to this expansionproject.  We have substantially completedthe conversion of the former approximate 120,000 square foot temporary casinostructure into an events center with a seating capacity for 1,700 people, alongwith additional administrative and support space, and are planning for anofficial opening in March 2008.  Weestimate that the cost of this conversion, including extensive landscaping and façadeenhancements, will be approximately $40 million. We estimate that the landscapeand facade enhancements will be completed in Summer 2008 and 2009,respectively.  We plan to fund thisadditional construction with cash flow from operations and cash on hand.    We believe the new resort hotel, permanentcasino and events center will provide a first-class gaming experience for ourpatrons, increase their length of stay and maintain the competitive position ofthis facility in light of competition in Pennsylvania, consisting principallyof a new gaming facility that opened in late February 2007 in Erie,Pennsylvania (Presque Isle Downs), approximately 80 miles from the SenecaAllegany Casino and Hotel and 120 miles from the Seneca Niagara Casino andHotel.  Presque Isle Downs does notprovide table games or lodging, but currently provides approximately 2,000 slotmachines and dining and entertainment options that include a steakhouse, abuffet and four lounges.

 

As the next phase ofdevelopment at Seneca Allegany Casino and Hotel, we have commenced design,development and pre-construction of an additional 179 to 204 room hotel tower,up to 31,000 square feet of additional gaming space and related amenities, foran estimated cost of up to $130 million. The completion date for this phase ofconstruction is now targeted for Fall 2009.

 

*SenecaBuffalo Creek Casino.    *On October 3, 2005, the Nationacquired approximately nine acres of land in the inner-harbor district ofBuffalo, New York.  On July 3, 2007we began operating the temporary Class III gaming facility.  This temporary facility is approximately6,000 square feet, and features 135 slot machines and a snack bar.  The total cost to construct and equip thetemporary facility was approximately $6.8 million.  We intend to expand the temporary facility toinclude an additional 109 slot machines at a cost of approximately $2.2 millionincluding equipment and furnishings, with such expansion scheduled forcompletion in Spring 2008.

 

In October 2007, weformally announced our plans for a permanent casino and hotel complex on theBuffalo Creek Territory having an estimated cost of $333.0 million.  The permanent Seneca Buffalo Creek Casino andHotel is expected to initially feature 90,000 square feet of gaming space,2,000 slot machines, 45 table games, four restaurants, a 22-story all suitehotel with approximately 200 rooms, a full-service spa and salon, a 2,500-spaceparking garage and retail and other amenities. The estimated completion datefor the permanent Seneca Buffalo Creek Casino and Hotel is Summer 2010. Weintend to operate the permanent Seneca Buffalo Creek Casino and Hotel in amanner that will complement both Seneca Niagara Casino and Hotel and SenecaAllegany Casino and Hotel.

 

Our ability to continue to operate the temporarySeneca Buffalo Creek Casino gaming facility, and our ability to complete thepermanent gaming facility, as well as the timing of the opening of thepermanent Seneca Buffalo Creek Casino, will depend on various factors,including existing legal challenges, and our ability to obtain financing.Reference is made to our 2007 Form 10-K for a description of the legalproceedings relating to the Seneca Buffalo Creek Casino.  See also “Part II. Item 1 - LegalProceedings” for material developments regarding certain of these proceedings.

 

*Lewiston Golf Course. *In March 2006, weacquired 257 acres of land with the intent to design and build a championshiplevel golf course in Lewiston, New York, approximately eight miles from SenecaNiagara Casino and Hotel.  We selected the Robert Trent Jones II firm todesign the golf course.  Construction of the golf course commenced in July 2007,with an anticipated opening in Summer 2009, and at an approximate cost of $26.0million.  

 

 

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The Nation formed the Lewiston Golf CourseCorporation, as a subsidiary of the Seneca Niagara Falls Gaming Corporation, todevelop, own and operate the golf course.

 

*Marketing.    *We use an integrated marketing strategy to attract andretain our patrons and to brand the Seneca name.  We coordinate our marketing events tomaximize the quality and length of stay of patron visits and to minimizecompetition among our gaming facilities. With the opening of the luxury hotel and related amenities at the SenecaNiagara Casino and Hotel and the resort hotel and related amenities at SenecaAllegany Casino and Hotel, we have increased and intend to further increase ourmarketing efforts in the region, including areas of New York outside of theNiagara Falls and Salamanca areas, in Pennsylvania, Ohio, and Toronto, Canadaand in areas outside the region including Michigan, Massachusetts, andConnecticut.

 

*Current,Continued and Future Reliance on Cash Flow*. *    *We intend to fund themaintenance of our facilities and our current expansion projects on theAllegany Territory from our cash flows from operations and cash on hand.  We currently rely and will continue to relyon our ability to generate cash flow from operations to meet our debt and otherobligations.

 

The construction of thepermanent Seneca Buffalo Creek Casino and Hotel, at an estimated cost of $333.0million, is expected to be funded one-third from operating cash flow andtwo-thirds through debt financing.  Thesuccessful completion of the permanent Seneca Buffalo Creek Casino and Hotelwill depend upon our cash flow from operations and our ability to securenecessary financing on acceptable terms.

 

*Seasonality.*    Due to factors including continued construction and expansion activityduring our initial years of operation, we have not yet been able to clearlydetermine the effect of seasonality on our operations.

 

*OverallOutlook.*     SGCbelieves that it is the premier gaming operator in Western New York State andin the areas of Northern Pennsylvania and Ohio located within its primary andsecondary markets. Since the December 31, 2002 opening of the SenecaNiagara Casino, SGC has invested significantly in the development, expansionand maintenance of its gaming facilities, including investments made in thecompleted hotel and gaming expansion projects at Seneca Niagara Casino andHotel and Seneca Allegany Casino and Hotel, and the opening of the temporarycasino on the Seneca Buffalo Creek Territory. Investments are planned tocontinue in 2008 with the completion of the conversion of the former temporarySeneca Allegany Casino into an events center with related amenities, the startof construction on the second hotel tower at Seneca Allegany Casino and Hotel,the completion of the expansion of the temporary facility at the Seneca BuffaloCreek Casino, and the start of construction of the permanent gaming facility onthe Seneca Buffalo Creek Territory. These planned investments are expected toenable SGC to maintain its position as the premier gaming operator in the regiondescribed above.  To further thatobjective, and to provide for expanded opportunities in the convention andtourism markets, we continue to proceed with a master planning process withrespect to the Niagara Falls, Allegany and Buffalo gaming and relatedfacilities. A principal goal is for the facilities to complement each other,offering diverse hotel, entertainment and gaming experiences for our guests.

 

SGC believes theWestern New York hotel, entertainment and gaming markets are underserved, andthat the exclusivity provided by the Compact gives SGC the opportunity to servethese markets by providing patrons with unique entertainment and gamingexperiences.

 

**CriticalAccounting Policies and Estimates**

** **

There have been nochanges in critical accounting policies and estimates since the filing of our2007 Form 10-K.

 

** **

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** **

**OperatingResults - Three Months Ended December 31, 2007 Compared to the ThreeMonths Ended December 31, 2006**

** **

*Operating Results*

 
| ** **                               | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                              |
| ** **                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands  )**  | ** ** |
| ** **                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net revenue                              |       | $                                                       | 150,200    |   | $ | 140,179 |   |
| ** **                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Operating expenses:                      |       |                                                    |       |   |   |
| Gaming                                   |       | 41,438                                                  |       | 32,980 |   |
| Food and beverage                        |       | 12,616                                                  |       | 11,297 |   |
| Lodging                                  |       | 3,763                                                   |       | 2,367 |   |
| Retail, entertainment and other          |       | 3,843                                                   |       | 3,570 |   |
| Advertising, general and  administrative |       | 49,523                                                  |       | 35,258 |   |
| Pre-opening costs                        |       | 93                                                      |       | 4,679 |   |
| Depreciation                             |       | 13,642                                                  |       | 11,076 |   |
|                                     |       |                                                    |       |   |   |
| Operating income                         |       | $                                                       | 25,282     |   | $ | 38,952 |   |

 

The most importantfactors and trends contributing to our operating performance during the threemonths ended December 31, 2007 and 2006 were:

 

*Positivefactors and trends*

 

·                  The opening of our temporary gamingfacility on the Buffalo Creek Territory on July 3, 2007.

 

·                  Our opening of the luxury hotel at SenecaNiagara Casino and Hotel, enabling us to better attract higher-end gamingpatrons, extend the stay of our guests and expand our geographic marketingreach.

 

·                  Our opening of the Seneca Events Centerat Seneca Niagara Casino and Hotel, resulting in increased entertainmentofferings for our guests.

 

·                  Our opening of the resort hotel andpermanent gaming floor at Seneca Allegany Casino and Hotel.

 

·                  Our ability to enroll approximately 1.5million patrons in our cross-property Seneca Link Player’s Card program, whichhas increased our ability to use effective direct mail and targeted marketingprograms to establish patron loyalty to the Seneca brand at a profitable level.

 

·                  Our mix of slot machines, which webelieve is superior to our competition and includes the latest productintroductions by leading United States and international slot manufacturers.

 

·                  Our use of current informationtechnology, including “ticket-in/ticket-out” slot machines, automated ticketredemption machines, player tracking system enhancements and the on-goingdevelopment of a Seneca brand inter-property progressive link.

 

·                  Our ability to operate at a high margin,which we achieve through careful monitoring and control of labor costs and theeffective use of our marketing and advertising expenditures.

 

·                  Our continued expansion at andreinvestment in both our Niagara Falls and Allegany properties.

 

·                  The smoking ban in Canada and the strongCanadian dollar, which have helped to increase the number of patrons fromCanada.

 

 

 

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*Negative factors and trends*

 

·                  A four percentage point increase in theslot exclusivity fee rate from 18% to 22%, effective January 1, 2007,pursuant to the Compact.

 

·                  The opening in February 2007 of acompeting gaming facility at Presque Isle Downs in Erie, Pennsylvaniaapproximately  80 miles from the SenecaAllegany Casino and Hotel and 120 miles from the Seneca Niagara Casino andHotel, offering approximately 2,000 slot machines.

 

*DetailedRevenue Information*

 
| ** **                               | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                              |
| ** **                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands  )**  | ** ** |
|                                     |       |                                                    |       |   |   |
| Gaming revenue:                          |       |                                                    |       |   |   |
| Slots                                    |       | $                                                       | 131,645    |   | $ | 121,185 |   |
| Table games                              |       | 18,325                                                  |       | 20,002 |   |
| Keno                                     |       | 110                                                     |       | 86 |   |
|                                     |       |                                                    |       |   |   |
| Gaming revenue                           |       | 150,080                                                 |       | 141,273 |   |
|                                     |       |                                                    |       |   |   |
| Non-gaming revenue:                      |       |                                                    |       |   |   |
| Food and beverage                        |       | 14,814                                                  |       | 13,269 |   |
| Lodging                                  |       | 7,313                                                   |       | 4,658 |   |
| Retail, entertainment and  other         |       | 6,671                                                   |       | 5,245 |   |
|                                     |       |                                                    |       |   |   |
| Non-gaming revenue                       |       | 28,798                                                  |       | 23,172 |   |
| Less promotional  allowances and credits |       | (28,678                                                 | )          | (24,266 | ) |
|                                     |       |                                                    |       |   |   |
| Net revenue                              |       | $                                                       | 150,200    |   | $ | 140,179 |   |

 

Our gaming revenue forthe three months ended December 31, 2007 increased relative to thecomparable period in the prior year, due to (a) the opening of our BuffaloCreek temporary gaming facility (b) higher number of occupied rooms forthe three months ended December 31, 2007 compared to the same period endedDecember 31, 2006, (c) the opening of our Seneca Allegany Casino andHotel gaming floor on December 28, 2006 and hotel on March 30, 2007, (d) additionalmarketing programs to attract more higher level gaming patrons, and (e) continuedgrowth of our player database.  As of December 31,2007, our gaming operations featured an aggregate 142 table games and 6,682slot machines, representing a net increase of 71 table games and an increase of436 slot machines from December 31, 2006. During these periods, the numberof patrons enrolled in our Seneca Player’s Club program has steadilyincreased.  As of December 31, 2007,we had approximately 1.5 million patrons enrolled compared to 1.2 millionpatrons enrolled at December 31, 2006, an increase of 0.3 million or 25%.

 

Our net gaming revenue,which excludes promotional slot credits of $12.1 million and $9.4 million inthe quarters ended December 31, 2007 and 2006, respectively, increased$6.1 million, or 5%.  The $2.7 millionincrease in promotional slot credits was principally due to increased slotplay, along with substantially higher redemptions resulting from our *“Great Exchange”* marketing promotion which alternatedbetween our Seneca Niagara and Seneca Allegany casinos each month during thethree months ended December 31, 2007, and allowed patrons to exchange aportion of Seneca Player’s Club points for promotional slot credits.  During the three months ended December 31,2007, Seneca Niagara Casino and Hotel’s net gaming revenue decreased $1.2million, or 1.0%. This decrease reflected a $0.7 million increase in net slotrevenue, and a $1.9 million decrease in net table games revenue**,**attributable to higher slot volumes and lower table dropvolume in relation to the comparable quarter in the prior year.** **Seneca AlleganyCasino and Hotel’s net gaming revenue for the quarter ended December 31,2007 was $36.0 million, an increase of $0.6 million, or 2%, from the quarterended December 31, 2006.  This wasdue to a $0.4 million increase in net slot revenue driven by higher slotvolume, and a $0.2 million increase in net table games

 

 

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revenue, due to a highertable games hold percentage during the 2007 quarter. Seneca Buffalo CreekCasino, which opened July 3, 2007, generated $6.6 million in net gamingrevenue, all attributable to slot play.

 

Our food and beveragerevenue has increased in direct relation to our increase in gamingrevenue.  There is a direct relationshipbetween our food and beverage revenue and our gaming revenue because asignificant portion of this revenue is generated from players’ pointredemptions.

 

For the three monthsended December 31, 2007 and 2006, 55% and 59%, respectively, of our foodand beverage revenue and 73% and 85% of our retail revenue, respectively,represented players’ point redemptions. For the three months ended December 31, 2007, our consolidated foodand beverage revenue increased $1.5 million, or 12% over the same period in2006, to $14.8 million.

 

Seneca Niagara Casino andHotel’s food and beverage revenue for the quarter ended December 31, 2007increased $0.7 million, or 6%, in relation to the comparable prior yearperiod.   Seneca Allegany Casino andHotel’s food and beverage revenue for the quarter ended December 31, 2007increased $0.8 million, or 27% compared to the same period in 2006, reflectingthe opening of two fine dining restaurants and a twenty-four hour casualrestaurant on March 30, 2007.

 

Lodging revenuerepresents rentals of rooms in the luxury hotel in Niagara Falls, whichpartially opened in late December 2005, and completely opened on March 31,2006, and includes revenue from the resort hotel at Seneca Allegany Casino andHotel, which officially opened on March 30, 2007**. **For the three months ended December 31,2007 and 2006, 75% and 76%, respectively, of our lodging revenue representedcomplimentary revenue.

 

For the three monthsended December 31, 2007, our retail, entertainment and other revenueincreased $1.4 million, or 140%, in relation to the comparable 2006period.  This increase was primarilyattributable to higher commissions received on ATM and credit card cash advanceservices.

 

*Detailed Operating Expenses Information*

 
| ** **                               | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                              |
| ** **                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(Unaudited, Dollars in Thousands  )**  | ** ** |
|                                     |       |                                                    |       |   |   |
| Operating expenses:                      |       |                                                    |       |   |   |
| Gaming                                   |       | $                                                       | 41,438     |   | $ | 32,980 |   |
| Food and beverage                        |       | 12,616                                                  |       | 11,297 |   |
| Lodging                                  |       | 3,763                                                   |       | 2,367 |   |
| Retail, entertainment and  other         |       | 3,843                                                   |       | 3,570 |   |
| Advertising, general and  administrative |       | 49,523                                                  |       | 35,258 |   |
| Pre-opening costs                        |       | 93                                                      |       | 4,679 |   |
| Depreciation and  amortization           |       | 13,642                                                  |       | 11,076 |   |
| Total Operating expenses                 |       | $                                                       | 124,918    |   | $ | 101,227 |   |

 

Gaming expensesprincipally consist of costs incurred from operating our table games and slotmachines, of which the primary components are related payroll and employeebenefit costs, and the slot exclusivity fee due to New York State pursuant tothe Compact.   The slot exclusivity fee increased $6.4million from $20.7 million for the three months ended December 31,2006 to $27.1 million for the three months ended December 31, 2007, due tohigher net slot revenues, along with a four percentage point increase in theslot exclusivity fee rate from 18% to 22%, effective January 1, 2007,pursuant to the Compact. Approximately $4.7 million of the $6.4 millionincrease in slot exclusivity fees was due to the 4% increase in the rate underthe Compact. Gaming expenses related to our Buffalo Creek facility, whichopened on July 3, 2007, totaled $0.3 million, excluding Slot ExclusivityFees.

 

Food and beverageexpenses are costs we incur for the operation of our restaurants, snack barsand beverage outlets.  The primary componentsof these expenses are the cost of food and beverage products and relatedpayroll and employee benefit expenses. For the quarter ended December 31, 2007, food and beverage productcosts increased $0.3 million, due to the increase in food and beveragerevenues.  Food and beverage laborincreased $1.0 million due to additional outlets opened on March 30, 2007as part of the resort expansion at Seneca Allegany Casino and Hotel.

 

 

 

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Lodging expensesprimarily represent our costs to operate Seneca Niagara Casino and Hotel’sluxury hotel and the newly opened resort hotel at Seneca Allegany Casino andHotel.  The components of these expensesinclude payroll and other employee benefit expenses, guest amenity supplies,laundry and other expenses.  For thethree months ended December 31, 2007, lodging expenses increased $1.4million, or 59%.  $0.3 million of theincrease is due to higher occupancy at the hotel in Niagara Falls for the threemonth period ended December 31, 2007 compared to the same period ended December 31,2006, and $1.1 million of the increase in cost is due to the resort hotel atSeneca Allegany Casino which opened on March 30, 2007.

 

Retail, entertainment andother expenses represent our costs to operate our retail shops and entertainmentofferings.  The components of theseexpenses include related payroll and employee benefit costs, the cost ofproducts offered for sale in our retail outlets, and contract costs forentertainers.  For the three months endedDecember 31, 2007, these costs increased approximately $0.2 million, or8%, over the comparable 2006 period, due principally to a $0.1 million increasein headline entertainment costs in the current year’s quarter at the SenecaNiagara Casino and Hotel.  Retail payrollincreased $0.1 million due to additional outlets opened in November 2007for the holiday season**.**

 

Advertising, general andadministrative expenses are incurred to support our operations.   These expenses consist primarily of relatedpayroll and employee benefits costs, regulatory, advertising, rent, marketing,insurance, legal and energy costs.  Forthe three months ended December 31, 2007 and 2006, such costs were $49.1million and $35.3 million, respectively, an increase of $13.8 million, or39%.  The increase was mainly attributableto a $3.0 million increase in related payroll and benefits costs primarily inthe facilities and maintenance areas, a $7.5 million increase in Head Leaseexpense, $0.9 million in increased regulatory costs, $0.5 million increase inrepairs and maintenance costs, $0.7 million increase in promotional expenses,$0.8 million increase in energy costs and $0.4 million increase in variousother operating expenses, which was due to the March 30, 2007 opening ofthe Seneca Allegany resort hotel and related amenities and the July 3,2007 opening of the Seneca Buffalo Creek Casino temporary facility.

 

Pre-opening expenses arenon-recurring costs incurred to support the expected opening of newfacilities.  For the three months ended December 31,2007 and 2006, such costs were $0.1 million and $4.7 million, respectively, adecrease of $4.6 million.  The decreasewas primarily due to the $3.8 million of Head Lease payments related to ourBuffalo Creek Casino for the three months ended December 31, 2006, being treatedas pre-opening expenses and $0.9 million of pre-opening expenses for the threemonths ended December 31, 2006 related to the preparation for the openingof Seneca Allegany Casino and Hotel’s permanent gaming floor on December 28,2006.

 

For the three monthsended December 31, 2007 and 2006, depreciation and amortization expensewas $13.6 million and $11.1 million, respectively, an increase of $2.5 million,or 23%.  This increase was attributableto the opening of our resort hotel at Seneca Allegany Casino and Hotel on March 30,2007,****and the opening of the temporarygaming floor at Seneca Buffalo Creek Casino on July 3, 2007.

 

*Non-OperatingExpenses*

 

Thefollowing table summarizes information related to interest on our long-termdebt:

 
| ** **       | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|------------------|------------|---------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                              |
| ** **       | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **       | ** ** | **(Unaudited, Dollars in Thousands  )**  | ** ** |
|             |       |                                                    |       |   |   |
| Interest expense |       | $                                                       | 9,871      |   | $ | 8,563 |   |
|                  |            |                                                         |            |  |  |  |  |

 

Our interest expense forthe three months ended December 31, 2007 increased $1.3 million over thethree months ended December 31, 2006. This increase was primarily attributable to a $1.3 million reduction inthe amount of interest capitalized in the quarter ended December 31, 2007in relation to the 2006 quarter. Capitalized interest relating to construction projects for the quartersended December 31, 2007 and 2006 was $0 and $1.3 million, respectively,and are recorded as components of net property and equipment within theaccompanying consolidated balance sheets.

 

 

 

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** Liquidity and CapitalResources**

 

*Cash Flows*

 
| ** **                                    | ** ** | **Three Months Ended**

**December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                              |
| ** **                                    | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(Unaudited, Dollars in Thousands  )**  | ** ** |
| ** **                                    | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net cash provided by  operations              |       | $                                                       | 26,683     |   | $ | 31,124 |   |
|                                          |       |                                                    |       |   |   |
| Cash flows relating to  investing activities: |       |                                                    |       |   |   |
| Capital expenditures                          |       | (24,353                                                 | )          | (68,399 | ) |
| Payments for land acquisitions                |       | (3,566                                                  | )          | (2,125 | ) |
| Deposit to restricted cash, net               |       | (849                                                    | )          | (240 | ) |
| Sales of short-term investments, net          |       | 14,600                                                  |       | 22,700 |   |
| Net cash used in investing activities         |       | (14,168                                                 | )          | (48,064 | ) |
|                                          |       |                                                    |       |   |   |
| Cash flows relating to  financing activities: |       |                                                    |       |   |   |
|                                          |       |                                                    |       |   |   |
| Distributions paid to the Nation              |       | (16,628                                                 | )          | (8,000 | ) |
| Net cash used in financing activities         |       | (16,628                                                 | )          | (8,000 | ) |
|                                          |       |                                                    |       |   |   |
| Net decrease in cash and  cash equivalents    |       | $                                                       | (4,113     | ) | $ | (24,940 | ) |

 

*Cash Flows—Operating Activities.*    The $4.4 million decrease in cash flows fromoperations during the three months ended December 31, 2007 compared to thesame period in 2006 resulted principally from a $19.1 million decrease in netincome compared to the prior year, offset by a $6.3 million decrease in currentliabilities, a $2.6 million increase in depreciation expense and a $3.8 millionother than temporary decline in the value of a specific short-term investment.

 

*Cash Flows—Investing Activities.*    Our capital expenditures of$24.4 million during the three months ended December 31, 2007****were mainly comprised of $19.3 million of costs associatedwith the construction and equipping of the resort hotel, permanent gaming floorand amenities at the Seneca Allegany Casino and Hotel, and $1.6 million forpre-construction for the permanent Seneca Buffalo Creek gaming facility inBuffalo, New York.  The remaining $3.5million in capital expenditures were principally for the acquisition ofequipment for existing casino operations. Sales of short-term investments represent transactions in short-terminvestments of excess cash in instruments having a maturity of more than 90days.

 

The Compact designatesapproximately 50 acres of land in the City of Niagara Falls, New York, forownership by the Nation.  Except for certainstreets owned by the City of Niagara Falls, New York, and a bike path owned bythe New York State Department of Transportation, the acquisition of which isongoing, SNFGC has acquired (for purposes of sale and transfer to the Nation),either through direct negotiated purchase from the owner(s) or throughcondemnation proceedings with the assistance of the Empire State DevelopmentCorporation, or ESDC, substantially all of the land designated in Appendix I ofthe Compact for potential acquisition by the Nation. Under the Compact, theNation is required to fund the acquisition of this property, including allrelated costs and expenses.  As initialsecurity for the Nation’s obligations to pay site acquisition costs and infurtherance of ongoing condemnation proceedings, we were required to deliver tothe ESDC, and delivered, to the Empire State Development Corporation, or ESDC,a letter of credit in the amount of $33.5 million, representing 150% of thethen

 

 

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estimateof the total remaining site acquisition costs not yet paid by SNFGC.  If the estimate of such site acquisitioncosts increases or if certain other events occur, SGC must provide anadditional letter of credit or replace the existing one with one for a largermonetary amount or, if acceptable to the ESDC, provide a supplemental cashescrow amount.  In July 2006, weacquired through condemnation approximately 18 acres of land and related tradefixtures from Fallsite, LLC or Fallsite, and Fallsville, LLC for an aggregateinitial advance payment of $18.0 million. In conjunction with the Fallsite acquisition referenced above, in July 2006,$7.7 million was drawn under the letter of credit as partial funding of thepurchase and the balance was paid from our operating cash.  In March 2007, an additional $11.5million was drawn under the letter of credit to fund the acquisition of 18additional parcels of land and certain improvements.  In December 2007, an additional $3.2million was drawn under the letter of credit to fund the acquisition of sevenadditional parcels of land owned by the City of Niagara Falls.  Thecurrent letter of credit amount has been reduced to approximately$11.2 million. If the estimate of such site acquisition costs increases orif certain other events occur, the Nation may have to provide an additionalletter of credit or replace the existing one with one for a larger monetaryamount or, if acceptable to the ESDC, provide a supplemental cash escrowamount.  This outstanding letter of credit is 100% collateralized by a cashdeposit in an interest-bearing restricted account with a bank.

 

*Cash Flows—Financing Activities.*     Effective September 1, 2006, SGCdeclared a cash distribution of $26.0 million to the Nation, payable inthirteen equal installments of $2.0 million, beginning in September 2006.  Effective December 11, 2006, SGCdeclared an additional cash distribution of $20.0 million to the Nation,payable in ten equal installments of $2.0 million, beginning in December 2006.SGC declared cash distributions to the Nation totaling $48 million, payable intwelve equal monthly payments of $4.0 million beginning October 2007.   For the three months ended December 31,2007, SGC paid cash distributions of $12.0 million to the Nation pursuant tothe foregoing distribution declarations. The remaining declared cashdistributions of $36.0 million which are payable on future payment dates areshown as ‘Distributions payable to Nation’ on the accompanying consolidatedbalance sheets.  In addition to thedeclared cash distributions, SGC distributed $4.4 million under itsDistribution Agreement, dated April 27, 2007, relating to the SenecaNation of Indians Capital Improvements Authority’s special obligation bonds,and $0.2 million for traffic signal designs in Allegany, for the three monthsended December 31, 2007.  During thethree months ended December 31, 2007 and 2006, SGC distributed to theNation acquired real property of $0 and $0.6 million, respectively, for use inits casino and other related entertainment operations.  Such distribution amounts were based on theacquisition cost of the real property.

 

*Principal Debt Arrangements.*    Asof December 31, 2007, our long-term debt consists of $300.0 million in2004 senior notes and $200.0 million in 2005 senior notes.  The senior notes carry a fixed annualinterest rate of 71⁄4% and semi-annual interest payments are due on May 1and November 1.

 

The2004 and 2005 senior notes are unsecured and rank equally.  As of December 31, 2007, aggregateaccrued interest on the 2004 and 2005 senior notes was $6.0 million.  The senior notes mature on May 1, 2012,are redeemable at our option in whole or in part at any time after May 1,2008, at the redemption prices set forth in our Indenture, are subject toredemption requirements imposed by gaming laws and regulations and are requiredto be repurchased by us at the option of the holders upon certain change ofcontrol events.

 

*ExpansionPlans. *During the next 18 months, we plan to makesubstantial capital investments in our gaming facilities.

 

We continueto proceed with development at the Seneca Allegany Casino and Hotel, with theconversion of the former original casino into an approximate 1,700 seat eventscenter with additional administrative and support space, and certain exteriorimprovements to the original casino, and the hotel and parking garage,including landscaping and other cosmetic improvements, at a total estimatedcost of up to $40 million.  We havesubstantially completed the interior components of the temporary casinoconversion, and an official opening is planned for March 2008.   Exterior landscaping and façade enhancementsare scheduled for completion in Summer 2008 and 2009, respectively.

 

Wehave also commenced development of the next phase of construction at the SenecaAllegany Casino and Hotel, which involves the design, development andconstruction of an additional 179 to 204 room hotel tower, and up to 31,000square feet of additional gaming space and related amenities, for an estimatedcost of up to $130 million. The completion date for this phase ofconstruction is estimated to be Fall 2009.

 

 

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Weintend to expand the temporary facility at Seneca Buffalo Creek Casino toinclude an additional 109 slot machines at a cost of approximately $2.2 millionincluding equipment and furnishings, with such expansion estimated forcompletion in Spring 2008.  We furtherintend to commence construction in early 2008 of our permanent Seneca BuffaloCreek Casino on the Buffalo Creek Territory, at an estimated cost of $333.0million.  The Seneca Buffalo Creek Casinopermanent facility is expected to initially feature 90,000 square feet ofgaming space, 2,000 slot machines, 45 table games, four restaurants, a 22-storyall suite hotel with approximately 200 rooms, a full-service spa and salon, a2,500-space parking garage and retail and other amenities.  Reference is made to our Annual Report on Form 10-Kfor the year ended September 30, 2007 for a description of certain legalproceedings relating to our planned Seneca Buffalo Creek Casino.  See also “Part II. Item 1 — LegalProceedings” for material developments regarding certain of these proceedings.

 

Wecommenced construction in July 2007 of a Robert Trent Jones II design golfcourse in Lewiston, New York, at an estimated cost of $26.0 million.  Construction is projected to be completed inFall 2008, with an opening during Summer 2009.

 

Weexpect cash generated from our operations, available cash and cash equivalentsand short-term investments as of December 31, 2007 to be sufficient tofund our expansion plans on the Allegany Territory described above, theLewiston Golf Course project, and approximately one-third of our Buffalo Creekexpansion, to service our debt and satisfy our other financial obligations, andto meet our working capital requirements for the remainder of the currentfiscal year. However, our ability to fund our operations, make planned capitalexpenditures, service our debt and satisfy our other financial obligationsdepends on our future operating performance and cash flow, which are in turnsubject to prevailing economic conditions and to financial, business and otherfactors, some of which are beyond our control. Completion of the permanentSeneca Buffalo Creek facility will also depend upon our ability to obtainexternal debt financing with acceptable terms. Additionally, unlike traditionalcorporations, we are prohibited by law from generating cash through an offeringof equity securities and our ability to incur additional indebtedness islimited under the terms of the Indenture governing the senior notes and theDistribution Agreement. Reference is made to our Annual Report on Form 10-Kfor the year ended September 30, 2007 for a description of certain riskfactors discussing SGC’s ability to generate cash flow to complete itsexpansion projects.

 

We arehighly leveraged and have significant interest payment requirements under thesenior notes, and distribution obligations under the Distribution Agreement. Assuch, limitations on our capital resources could force us to delay or abandoncapital projects as well as the construction and development of proposedexpansion projects.

 

*DistributionAgreement Obligations*

 

On April 27,2007, we entered into a Distribution Agreement among the Nation, the SenecaNation of Indians Capital Improvements Authority, or the Authority, SGC andWells Fargo Bank, as Trustee, in connection with the Authority’s issuance intwo series (one tax exempt and the other taxable) of an aggregate principalamount of $159,495,000 special obligation bonds, or the 2007 Bonds.  The Distribution Agreement obligates us,subject to any contractual restrictions applicable to us (including, but notlimited to, the Indenture governing our 2004 and 2005 senior notes) to make monthlydistributions to the Nation at the times and in the amounts necessary to enablethe Authority to pay the debt service on the 2007 Bonds as required under theAuthority’s indenture. At the direction of the Nation and the Authority, wewill pay such distributions directly to the Trustee. The Authority’s debtservice commenced on June 1, 2007. For the period from June 1, 2007 through December 1, 2007, theAuthority’s debt service averages approximately $0.9 million per month.For the period from January 1, 2008 through December 1, 2013, the Authority’sdebt service averages approximately $1.8 million per month. For the periodfrom June 1, 2014 through December 1, 2023, the Authority’s debtservice averages approximately $1.2 million per month. The foregoing debtservice averages are based on scheduled payments of interest and principalunder the Authority’s indenture and bonds and do not address the effects of anyearlier call for redemption, by acceleration or otherwise.  The Distribution Agreement provides thatneither the Trustee nor the Authority’s bondholders will have any recourseunder the Distribution Agreement to any revenues, assets or property of SGC orits subsidiaries should we fail to comply with our distribution obligations.

 

Referenceis made to the Indenture governing SGC’s senior notes and the DistributionAgreement for an understanding of all terms of such financing arrangements.

 

 

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*Other**Commitments*

 

Wehave acquired approximately 45 acres in the City of Niagara Falls, New York,designated by New York State under the Compact for ownership by the Nation, andintend to acquire approximately three additional acres. Under the Compact, theNation is required to fund the acquisition of this property, including allrelated costs and expenses. As initial security for the Nation’s obligations topay site acquisition costs and in furtherance of the ongoing condemnationproceeding, the Nation was required to deliver, and has delivered, to theEmpire State Development Corporation, (ESDC) a letter of credit in the amountof $33.5 million representing 150% of the then estimate of the total remainingsite acquisition costs not yet paid by the Nation.  On July 13, 2006, we acquired, throughthe condemnation process, approximately 18 acres of land and improvements(including fixtures) from Fallsite, LLC, or Fallsite and Fallsville, LLC, orFallsville, for an aggregate initial advance payment of $18.0 million, whichland is a portion of the land in the City of Niagara Falls, New York designatedunder the Compact for ownership by the Nation. Of this amount, $7.7 million wasdrawn on the letter of credit as part of the consideration for the purchase.  In March 2007, an additional $11.5million was drawn under the letter of credit to fund the acquisition of 18additional parcels of land and certain improvements.    In December 2007, an additional $3.0million was drawn under the letter of credit to fund the acquisition of sevenadditional parcels of land owned by the City of Niagara Falls.  The current letter of credit amount has beenreduced to approximately $11.2 million. If the estimate of such siteacquisition costs increases or if certain other events occur, the Nation mayhave to provide an additional letter of credit or replace the existing one withone for a larger monetary amount or, if acceptable to the ESDC, provide asupplemental cash escrow amount.  Thisoutstanding letter of credit is 100% cash collateralized (with cash and cashequivalents) by us.

 

Theamounts paid to condemnees from whom we have acquired property are deemed to beadvance payments. Pursuant to the New York State Eminent Domain Procedure Law,the New York state courts will determine the final purchase price to be paid tosuch condemnees.   If the New York statecourts determine that the value for the land and improvements, including tradefixtures, is higher than what ESDC has determined to be their values, then wewould be liable for the difference and potentially also responsible for certainadditional costs and payments to the applicable condemnee(s), such as theirattorney fees. Reference is made to “Part II. Item 1. – Legal Proceedings” ofour Annual Report on Form 10-K for the year ended September 30, 2007, for adescription of the ongoing eminent domain proceedings, including advancedpayment amounts, and additional amounts being sought. The additional land werecently acquired has not yet been transferred to the Nation. We can provide noassurance that, upon transfer of such land to the Nation, restricted fee statusfor such land will be sought by the Nation or, if sought, approved.

 

**Regulation**

 

Our operations areregulated by Nation laws, the Compact and federal statutes, most notably theIndian Gaming Regulatory Act, or IGRA. Several bills have been proposed duringpast sessions of Congress that could affect Indian gaming.  Most notablySenator McCain’s S. 2078, the Indian Gaming Regulatory Act Amendments of 2006and Congressman Pombo’s (R-CA) H. 4893, Restricting Indian Gaming to Homelandsof Tribes Act of 2006, proposed additional regulations for tribes and morerestrictions on “off-reservation” gaming.   With new leadership inthe committees of jurisdiction over Indian Affairs in the 110th Congress,Indian gaming has received very limited attention.  In fact, fewer Indiangaming related bills have been introduced and few, if any, committee hearingshave been held related to Indian gaming.

 

The administration alsohas published proposed regulations relative to off-reservation gaming. Certain of such bills and regulations, if enacted, could impair the ability ofthe Nation and SGC to expand its gaming operations and adversely impact thefuture growth of the Nation’s revenue base. In addition, from time to time,various government officials have proposed taxing Indian casino gaming orotherwise limiting or restricting the conduct of gaming operations by Indiantribes. No assurance can be given that such legislation, if and when enacted byCongress, would not have a material adverse effect on the operations of SGC. IfCongress were to enact comprehensive amendments to the IGRA, such legislationcould have a material adverse effect on the operations of SGC. In addition,under federal law, gaming on the Nation’s lands may be dependent upon thepermissibility under New York law of certain forms of gaming or similaractivities. If New York State were to make various forms of gaming illegal oragainst public policy (or the courts were to similarly rule), or otherwise totake a legal position adverse to SGC, such actions could have a materialadverse effect on our ability to conduct our gaming operations as currentlyconducted. Moreover, a 1996 U.S. Supreme Court decision may permit a state toavoid or refuse to negotiate amendments to existing compacts such as theCompact.

 

**New Accounting Pronouncements**

** **

Thereare no accounting standards that have not yet been adopted which are expectedto have a material impact on our financial reporting.

 

 

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

** **

Referenceis made to our 2007 Annual Report on Form 10-K for a complete discussionof our market risk.  This market riskinformation has not materially changed in the interim period.

 

**Item 4T. Controls andProcedures**

** **

**Evaluationof Disclosure Controls and Procedures**

 

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

 

SGC’smanagement, under the supervision and with participation of our President andChief Executive Officer and Chief Financial Officer (as our principal executiveofficer and principal financial officer, respectively), has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures.  Based on that evaluation,our President and Chief Executive Officer and Chief Financial Officer haveconcluded that the design and operation of our disclosure controls andprocedures as of December 31, 2007 provided reasonable assurance that thedisclosure controls and procedures are effective to accomplish theirobjectives.

 

**Changes in InternalControl over Financial Reporting**

** **

Therehas not been any change in our internal control over financial reportingidentified in connection with the evaluation required by Exchange Act Rules 13a-15or 15d-15 or otherwise that occurred during the quarter ended December 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Part II.     OTHER INFORMATION**

 

**Item 1.**            Legal Proceedings

** **

***CitizensAgainst Casino Gambling in Erie County v. Norton (1:06-cv-00001-WMS (WDNY)) (“CACGECI”)***

 

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 Interior,the National Indian Gaming Commission and three individuals in their officialcapacities as Secretary of the Interior, Acting Assistant Secretary of theInterior for Indian Affairs and Chairman of the NIGC.  The action seeks declaratory and injunctiverelief under the Administrative Procedure Act, the Declaratory Judgments Act,the National Historic Preservation Act (“NHPA”), the National EnvironmentalPolicy Act (“NEPA”) and the Indian Regulatory Gaming Act and is principallydirected at the decisions and actions of the defendants that permit theconstruction 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 Indian lands within the meaning of IGRA anddeclaring that the Nation’s Compact violates IGRA. On November 1, 2006,oral argument was heard on the defendant’s motion to dismiss for lack ofjurisdiction, on the Nation’s amicus motion to dismiss based upon failure tojoin the Nation as a necessary party and sovereign immunity, and on theplaintiff’s motion for summary judgment.

 

 

 

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On January 12, 2007,the district court vacated the NIGC’s approval of the Nation’s 2002 gamingordinance as it pertains to gaming conducted on the Buffalo Creek Territory andremanded the decision to the NIGC to determine whether the Buffalo CreekTerritory constitutes “Indian Lands” under IGRA.  The court also granted the defendant’s motionto dismiss for lack of subject matter jurisdiction, denied the Nation’s motionto dismiss (holding, in part, that the Nation was not a necessary party becausethe U.S. government’s interests were aligned with those of the Nation and thatthe U.S. government (through the U.S. Department of Justice) was vigorouslydefending the case), and denied, as moot, the plaintiff’s motion for summaryjudgment.  In reaching its decision todismiss on the basis of a lack of subject matter jurisdiction, the courtdetermined that, notwithstanding the U.S. Department of Interior’s priordetermination that the Nation’s Buffalo Creek Territory constitutes “IndianLands” within the meaning of the IGRA, the NIGC must make its own “Indian Lands”determination, and ordered that the Nation’s 2002 gaming ordinance (which hadbeen approved by the NIGC) be vacated insofar as it permits Class IIIgaming on the Nation’s Buffalo Creek Territory. The court specifically limitedits holding to the Nation’s Buffalo Creek Territory. After the court denied thegovernment’s motion for reconsideration, both the plaintiffs and the defendantsappealed.  On January 29, 2007, the U.S.Department of Justice filed a motion for reconsideration, which was denied bythe court on April 20, 2007, noting that the government asserted no newarguments.

 

On June 9, 2007, theNation enacted and submitted to the NIGC an amended gaming site-specific Class IIIgaming ordinance.  The amended ordinancewas identical to the prior approved ordinance, except the new Ordinance’sdefinition of “Nation Lands” now contains a site-specific legal description ofthe Buffalo Creek Territory.  Thedefinition also states that the land specified is held by the Nation inrestricted fee pursuant to the Seneca Nation Land Claims Settlement Act of 1990(SNLCSA).  On June 19, 2007, thedefendants and plaintiffs filed notices of appeal.  On June 25, 2007, the plaintiffs filed amotion for a stay of the proceedings remanded to the NIGC pending the outcomeof the appeal.  The NIGC approved the newordinance on July 2, 2007.  On July 3,2007, the defendants filed a notice of NIGC approval of the ordinance revisingthe definition of “Nation Lands”.  OnAugust, 6, 2007, the defendants filed a response to the plaintiffs’ motion tostay, stating that the gaming ordinance at issue in this case is superseded bythe Nation’s June 9, 2007, site-specific ordinance, approved by the NIGCon July 2, 2007.  This, the U.S.argues, moots the case as to the NIGC and moots the motion for a stay pendingappeal.  The U.S. Department of Justicehas discontinued its appeal of the January 12, 2007 order in this suit.

 

As a material developmentfor the quarter ended December 31, 2007, on November 9, 2007, theSecond Circuit Court of Appeals stayed the plaintiffs’ appeal pending theresolution of CACGEC II, described below.

 

Although the courtpermitted the Nation to file a brief as amicus curiae, the Nation is not aparty to this action, and as such, neither it nor SGC has the ability to director control any aspect of the litigation. If the plaintiffs are successful, the Nation could be unable to conductany gaming upon lands acquired by the Nation pursuant to the SNLCSA.

 

***CitizensAgainst Casino Gambling in Erie County v. Kempthorne (1:07-cv-00451-WMS (WDNY (“CACGECII”))***

 

On July 12, 2007,Citizens Against Casino Gambling in Erie County (CACGEC) filed a second action in the United States District Court,Western District of New York against the United States Department of Interior,the NIGC and two individuals in their official capacities as Secretary of theInterior and Chairman of the National Indian Gaming Commission, respectively.

 

The action seeksdeclaratory and injunctive relief under the Administrative Procedure Act, theDeclaratory Judgments Act, and the Indian Regulatory Gaming Act and isprincipally directed at the decisions and actions of the defendants inapproving the Nation’s class III gaming ordinance, and the Indian land opinionissued by the Chairman relative to that approval.  The plaintiffs claim that the defendants havefailed to comply with federal law and have requested that the Court takenumerous actions including declaring that the lands acquired by the Nationpursuant to SNLCSA are not Indian lands within the meaning of IGRA.

 

Both parties have movedfor summary judgment.

 

As material developmentsin the case, the Nation has been given permission to file an amicus brief on the“Indian Lands” issues, and plaintiffs County of Erie and Joel A. Giambra havewithdrawn as plaintiffs.

 

 

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Briefing is now complete,but the motions have not yet been decided.

 

The Nation is not a partyto this action, and as such, neither it nor SGC has the ability to direct orcontrol any aspect of the litigation.

 

If the plaintiffs aresuccessful, the Nation could be unable to conduct any gaming upon landsacquired by the Nation pursuant to the SNLCSA.

 

SGC intends to commenceconstruction of the permanent facility at Seneca Buffalo Creek Casinonotwithstanding the pendency of the foregoing litigation, but SGC may bedelayed in the opening of its permanent Seneca Buffalo Creek Casino, or unableto conduct Class III gaming on the Buffalo Creek Territory, based upon thestatus and outcome of such litigation.

 

***Countyof Erie v. City of Buffalo (NYS Supreme Court, Index No. 2006-10440).***

 

On November 6, 2006,a suit was brought in New York Supreme Court, County of Erie, by the County ofErie, New York, Joel Giambra (as County Executive), and Andrew Eszak (asCommissioner of the County of Erie Department of Environment and Planning),against the City of Buffalo, Mayor Byron Brown and the Buffalo Common Councilseeking to invalidate the agreement pursuant to which SEGC acquired the twoblock section of Fulton Street (bisecting the Buffalo Creek Territory) on thebasis that the City failed to refer the agreement to the County under Section 239-mof the New York State General Municipal Law. If the plaintiffs are successful, the Nation could be unable to conductany gaming upon lands acquired by the Nation pursuant to the SNLCSA.

 

As a materialdevelopment, upon taking office on January 1, 2008, the newly elected ErieCounty Executive withdrew the County of Erie from the suit, and the action wasdismissed on January 4, 2008.

 

***Warrenv. United States (1:06-c-00226-JTE (WDNY))***

 

On or about April 6,2006, an action was filed in the United States District Court, Western Districtof New York, by Daniel T. Warren, a pro se plaintiff, against the United Statesof America, the United States Department of the Interior, the National IndianGaming Commission, and five individuals in their official capacities as ActingSecretary of the Interior, Acting Assistant Secretary of the Interior forIndian Affairs and Chairman of the National Indian Gaming Commission, as wellas Governor George E. Pataki, as Governor of the State of New York, and CherylRitchko-Buley, as Chairwoman of the New York State Racing and Wagering Board.    The action initially sought declaratory andinjunctive relief as to numerous matters including declaring that IGRA isunconstitutional, that the Compact violates IGRA, that the New YorkConstitution is not preempted by IGRA, that New York does not have theauthority under state law to enter into a tribal state compact under IGRA, thatcertain actions of the defendants were not in accordance with law, and thatcertain lands purchased by the Nation were not subject to being taken intotrust or restricted fee status under the SNLCSA or were not pursuant tosettlement of a land claim within the meaning of IGRA; and enjoining thedefendants from taking actions which would further casino gambling in the Stateof New York under IGRA or on any lands acquired by the Nation pursuant toSNLCSA. On August 16, 2006, the plaintiff amended his complaint bringing:a Tenth Amendment challenge to IGRA; a claim that the Compact violates IGRA byproviding for gaming which is not otherwise lawful in New York; a claim thatboth the Compact and the statute authorizing the Governor of New York to enterinto the Compact violate various provisions of the New York State Constitution;and a claim that the United States has failed to promulgate regulations forgaming on off-reservation territory, in violation of its statutory duties.  The effect of such amendment was to limit theclaims remaining in the case, by dropping many of the federal law claims in theoriginal complaint.

 

On December 1, 2006,the court heard argument on the plaintiff’s motion to join (1) Barry E.Snyder, Sr., as President of the Seneca Nation of Indians; (2) JohnPasqualoni, as President and CEO of the Seneca Gaming Corporation; (3) theSeneca Nation of Indians; and/or (4) the Seneca Gaming Corporation, asadditional defendants.

 

As a material developmentfor the quarter ended December 31, 2007, on October 5, 2007, theplaintiff filed a motion to further amend the complaint to include asdefendants (1) Maurice John, as President of the Seneca Nation of Indians;(2) E. Brian Hansberry, as the new President and CEO of the Seneca GamingCorporation (replacing John

 

 

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Pasqualoni); (3) theSeneca Nation of Indians; and (4) the Seneca Gaming Corporation.  On October 25, 2007, the Seneca Nationof Indians filed a response in opposition to that motion asserting that (1) thatthe motion to amend the complaint was not properly before the court because itis premised upon a finding that the Nation is a necessary and indispensibleparty, and (2) that the motion to amend is futile because the Nation andits officers are protected by sovereign immunity.  As of February 7, 2008, the court hadnot ruled on this motion.

 

Dispositive motions todismiss on behalf of both the plaintiff and the defendants have not yet beenheard by the court.  In addition, stillpending before the court is the motion on behalf of the Seneca entities and officersin opposition to being joined as defendants to the lawsuit on, among otherthings, sovereign immunity grounds.  Ifthe plaintiff is successful in this lawsuit, the Nation would be unable toconduct any gaming upon lands acquired pursuant to SNLCSA.

 

**Item 1A.**                                                  RiskFactors

** **

There are no materialchanges from the risk factors previously disclosed in our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2007.

 

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

** **

Notapplicable.

 

**Item 3.**                                                           DefaultsUpon Senior Securities

** **

Notapplicable.

 

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

** **

Notapplicable.

 

**Item 5.**                                                           OtherInformation

** **

Notapplicable.

 

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

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

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1              |       | Second Supplemental Indenture dated as of December 28,  2007, among Seneca Gaming Corporation, the existing subsidiary guarantors  party thereto, Lewiston Golf Course Corporation and Wells Fargo Bank,  National Association, as trustee under the Indenture (incorporated by  reference to Exhibit 4.1 to SGC’s Current Report on Form 8-K filed  on January 8, 2008). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1             |       | Certification of E. Brian Hansberry, 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 M. 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 E. Brian Hansberry, Principal  Executive Officer and Patrick M. 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**

**SENECAGAMING 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.

 

Dated February 14,2008

 
| /s/ E. Brian Hansberry                       |   |
|----------------------------------------------|--------|
| E. Brian Hansberry                           |   |
| 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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