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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

**x**      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the quarterly period ended March 31, 2010**

** **

**OR**

** **

**o**         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **

**For thetransition period from                     to                      **

 

**Commission File Number: **333-117633

** **

**SENECA GAMING CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**310 Fourth StreetNiagara Falls, New York (Seneca Nation Territory) 14303(716) 299-1100**

(Address, including zip code, and telephonenumber,

including area code, of registrant’sprincipal executive offices)

 

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

 

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

 

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

 

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

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

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

 

At May 7,2010, the registrant had no outstanding shares of common stock. The registrantis wholly owned by the Seneca Nation of Indians.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I.  FINANCIAL  INFORMATION** |                                                                                                                                          |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                            | Financial Statements                                                                                                                          | 2 |
|                                               | Consolidated  Balance Sheets as of March 31, 2010 (Unaudited) and September 30,  2009                                               | 2 |
|                                               | Consolidated  Statements of Income and Changes in Capital for the three months and six  months ended March 31, 2010 and 2009 (Unaudited) | 3 |
|                                               | Consolidated  Statements of Cash Flows for the six months ended March 31, 2010 and 2009  (Unaudited)                                     | 4 |
|                                               | Notes to Unaudited Consolidated Financial Statements                                                                                          | 5 |
| Item 2.                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                   | 16 |
| Item 3.                                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                   | 37 |
| Item 4.                                            | Controls and  Procedures                                                                                                                      | 38 |
|                                               |                                                                                                                                          |   |
| **PART II.  OTHER  INFORMATION**    |                                                                                                                                          |
| Item 1.                                            | Legal Proceedings                                                                                                                             | 39 |
| Item 1A.                                           | Risk Factors                                                                                                                                  | 40 |
| Item 6.                                            | Exhibits                                                                                                                                      | 41 |
|                                               | Signatures                                                                                                                                    | 42 |

 

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**PART I. FINANCIAL INFORMATION**

 

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

 

**SENECA GAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                               | ** ** | **March 31,**                   | ** ** | **September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2010**                             | ** ** | **2009**               | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                               | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current assets:                          |       |                                 |       |                   |       |
| Cash and cash equivalents                |       | $                                    | 78,291     |                   | $          | 83,230 |   |
| Short-term investments                   |       | —                               |       | 113                    |       |
| Receivables from the  Nation             |       | 197                                  |       | 6,201                  |       |
| Other receivables, net                   |       | 2,352                                |       | 2,539                  |       |
| Inventories                              |       | 3,938                                |       | 4,046                  |       |
| Other current assets                     |       | 10,358                               |       | 10,369                 |       |
| Total current assets                     |       | 95,136                               |       | 106,498                |       |
|                                     |       |                                 |       |                   |       |
| Property and equipment,  net             |       | 668,497                              |       | 670,111                |       |
| Restricted cash                          |       | 33,013                               |       | —                 |       |
| Other long-term assets                   |       | 64,377                               |       | 65,319                 |       |
|                                     |       |                                 |       |                   |       |
| Total assets                             |       | $                                    | 861,023    |                   | $          | 841,928 |   |
|                                     |       |                                 |       |                   |       |
| **Liabilities and Capital**              | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current liabilities:                     |       |                                 |       |                   |       |
| Trade payables                           |       | $                                    | 12,255     |                   | $          | 2,328 |   |
| Construction payables                    |       | 5,352                                |       | 9,373                  |       |
| Distributions payable to  the Nation     |       | 3,745                                |       | 3,727                  |       |
| Exclusivity fees payable                 |       | 11,062                               |       | 8,220                  |       |
| Accrued interest payable                 |       | 15,104                               |       | 15,104                 |       |
| Accrued regulatory costs                 |       | 38,498                               |       | 33,683                 |       |
| Accrued gaming liabilities               |       | 15,262                               |       | 15,113                 |       |
| Accrued payroll and  related liabilities |       | 9,230                                |       | 9,652                  |       |
| Other current liabilities                |       | 6,066                                |       | 6,722                  |       |
| Total current liabilities                |       | 116,574                              |       | 103,922                |       |
|                                     |       |                                 |       |                   |       |
| Long-term debt                           |       | 497,870                              |       | 497,363                |       |
| Other long-term  liabilities             |       | 834                                  |       | 834                    |       |
|                                     |       |                                 |       |                   |       |
| Total liabilities                        |       | 615,278                              |       | 602,119                |       |
| Capital:                                 |       |                                 |       |                   |       |
| Retained earnings                        |       | 245,745                              |       | 239,809                |       |
|                                     |       |                                 |       |                   |       |
| Total liabilities and  capital           |       | $                                    | 861,023    |                   | $          | 841,928 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME ANDCHANGES IN CAPITAL**

**(Unaudited)**

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                         | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(Dollars in Thousands)**             | ** ** |
| **Revenues**                                |       |                                             |       |                                           |       |   |   |   |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Gaming                                      |       | $                                                | 128,904    |                                           | $          | 128,452 |   | $ | 253,017 |   | $ | 255,439 |   |
| Food and beverage                           |       | 13,574                                           |       | 14,231                                         |       | 26,829 |   | 28,435 |   |
| Lodging                                     |       | 4,640                                            |       | 5,577                                          |       | 9,844 |   | 11,872 |   |
| Retail, entertainment and other             |       | 5,066                                            |       | 5,825                                          |       | 10,958 |   | 12,266 |   |
| Gross Revenue                               |       | 152,184                                          |       | 154,085                                        |       | 300,648 |   | 308,012 |   |
| Less: Promotional allowances                |       | (12,964                                          | )          | (14,047                                        | )          | (26,265 | ) | (29,255 | ) |
| Net revenues                                |       | 139,220                                          |       | 140,038                                        |       | 274,383 |   | 278,757 |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| **Expenses**                                |       |                                             |       |                                           |       |   |   |   |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Gaming                                      |       | 42,487                                           |       | 36,424                                         |       | 78,209 |   | 73,650 |   |
| Food and beverage                           |       | 10,488                                           |       | 10,697                                         |       | 21,088 |   | 21,904 |   |
| Lodging                                     |       | 2,866                                            |       | 3,128                                          |       | 5,851 |   | 6,159 |   |
| Retail, entertainment and other             |       | 3,215                                            |       | 3,467                                          |       | 7,387 |   | 7,445 |   |
| Advertising, general and administrative     |       | 45,095                                           |       | 46,365                                         |       | 92,195 |   | 95,865 |   |
| Pre-opening costs                           |       | 20                                               |       | 78                                             |       | 92 |   | 136 |   |
| Depreciation                                |       | 11,045                                           |       | 12,583                                         |       | 21,775 |   | 25,170 |   |
| Impairment of property and equipment        |       | 166                                              |       | —                                         |       | 221 |   | — |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Total operating expenses                    |       | 115,382                                          |       | 112,742                                        |       | 226,818 |   | 230,329 |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Operating income                            |       | 23,838                                           |       | 27,296                                         |       | 47,565 |   | 48,428 |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Other non-operating expense                 |       | —                                           |       | (50                                            | )          | (113 | ) | (163 | ) |
| Interest income                             |       | 14                                               |       | 23                                             |       | 25 |   | 81 |   |
| Interest expense                            |       | (9,530                                           | )          | (9,674                                         | )          | (19,071 | ) | (19,277 | ) |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Net income                                  |       | $                                                | 14,322     |                                           | $          | 17,595 |   | $ | 28,406 |   | $ | 29,069 |   |
|                                        |       |                                             |       |                                           |       |   |   |   |   |
| Beginning capital balance                   |       | $                                                | 246,403    |                                           | $          | 285,814 |   | $ | 239,809 |   | $ | 290,846 |   |
| Net cash distributions (to) from the Nation |       | (14,980                                          | )          | 9,267                                          |       | (22,470 | ) | (7,239 | ) |
| Ending capital balance                      |       | $                                                | 245,745    |                                           | $          | 312,676 |   | $ | 245,745 |   | $ | 312,676 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended**       | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**                   | ** ** |
| ** **                                                                         | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash flows relating to  operating activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 28,406     |   | $ | 29,069 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation                                                                       |       | 21,775                               |       | 25,170 |   |
| Loss on disposal of assets                                                         |       | 91                                   |       | 7 |   |
| Amortization of deferred  financing costs, debt discount                           |       | 1,633                                |       | 1,621 |   |
| Other than temporary  decline in investments                                       |       | 113                                  |       | 150 |   |
| Provision for bad debts                                                            |       | 51                                   |       | 201 |   |
| Change in operating assets  and liabilities:                                       |       |                                 |       |   |   |
| Current assets                                                                     |       | 1,158                                |       | (1,113 | ) |
| Current liabilities                                                                |       | 6,318                                |       | 4,659 |   |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by  operating activities                                         |       | 59,545                               |       | 59,764 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  investing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchases of property and  equipment                                               |       | (13,936                              | )          | (33,786 | ) |
| Deposits to restricted  cash                                                       |       | (33,013                              | )          | — |   |
| Change in long-term  deposits                                                      |       | 10                                   |       | 50 |   |
| Land acquisition costs                                                             |       | (115                                 | )          | (482 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing  activities                                             |       | (47,054                              | )          | (34,218 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to  financing activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Contribution received from  the Nation                                             |       | 5,101                                |       | — |   |
| Cash paid for deferred  financing fees                                             |       | (79                                  | )          | — |   |
| Proceeds from senior  secured revolving loan agreement                             |       | —                               |       | 20,000 |   |
| Distributions paid to the  Nation                                                  |       | (22,452                              | )          | (33,239 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in financing  activities                                             |       | (17,430                              | )          | (13,239 | ) |
|                                                                               |       |                                 |       |   |   |
| Net increase(decrease) in  cash                                                    |       | (4,939                               | )          | 12,307 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and cash equivalents  balances:                                               |       |                                 |       |   |   |
| Beginning of period                                                                |       | 83,230                               |       | 53,305 |   |
|                                                                               |       |                                 |       |   |   |
| End of period                                                                      |       | $                                    | 78,291     |   | $ | 65,612 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1.**                                      Organization and Basis of Presentation

** **

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

 

Certainprior year amounts have been reclassified to conform to current yearpresentation.

 

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

 

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

 

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

 

·              SenecaNiagara Falls Gaming Corporation, or SNFGC;

 

·              SenecaTerritory Gaming Corporation, or STGC; and

 

·              SenecaErie Gaming Corporation, or SEGC.

 

SenecaNiagara Falls Gaming Corporation

 

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

 

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footmulti-purpose room and events center. The luxury hotel is adjacent and connected to the Seneca NiagaraCasino.  The entire complex, includingthe luxury hotel and the Seneca Niagara Casino, is referred to as the SenecaNiagara Casino and Hotel.

 

SenecaTerritory Gaming Corporation

 

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

 

Seneca Erie GamingCorporation

 

SEGC was formed on August 9,2003 to operate the Nation’s Class III gaming activities in Erie County,New York.  On October 3, 2005, theNation acquired approximately nine acres of land in the inner-harbor districtof downtown Buffalo, New York.  SEGCcommenced construction of its Seneca Buffalo Creek Casino on those nine acreson December 8, 2005, and on July 3, 2007 commenced Class IIIgaming on such property in a temporary facility, in fulfillment of therequirement set forth in the Nation’s Compact with the State of New York.  The facility features approximately 10,600square feet of gaming space and includes 457 slot machines and a snackbar.  Various plaintiffs have filed suitin federal and state court challenging the Nation’s right to conduct Class IIIgaming on the Nation’s nine acre Buffalo Creek Territory.  On July 8, 2008, in a federal suitcaptioned Citizens Against Casino Gambling in Erie County (CACGEC) v. Hogen,the Court issued a decision and order finding that, although the Nation’sBuffalo Creek Territory is “Indian country,” the determination by the NationalIndian Gaming Commission, or NIGC, that the Nation’s Buffalo Creek Territory isgaming-eligible land pursuant to the IGRA’s settlement of a land claimexception was “arbitrary, capricious, and not in accordance with the law.”  The Court’s decision did not provide forinjunctive relief, and SEGC has continued its operations at the Seneca BuffaloCreek Casino.  Plaintiffs subsequentlyfiled a motion on July 14, 2008 to force the court to enforce itsjudgment.

 

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

 

On March 31, 2009,plaintiffs in the litigation noted in the foregoing paragraph filed suit tochallenge the NIGC’s approval of the amended Class III GamingOrdinance.   On June 15, 2009, theNation moved to intervene as a defendant in the litigation known as CACGEC III,for certain limited claims.  On March 30,2010, the Court denied the Nation’s motion to intervene, while grantingpermission to participate as *amicus curiae*.  The Court also dismissedcertain secondary claims of the plaintiffs in the proceeding, while allowingother core claims regarding the eligibility of the land for casino gaming toproceed.

 

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

 

Other

 

LewistonGolf Course Corporation

 

TheNation’s Council has also chartered, at the request of the SGC Board ofDirectors, an additional subsidiary corporation, Lewiston Golf CourseCorporation, or LGCC, as a wholly-owned subsidiary of SNFGC.  LGCC was formed on July 18, 2007 by theNation’s Council to own, develop and operate Seneca Hickory Stick Golf Club,SNFGC’s tournament level golf course, in Lewiston, New York. It is locatedapproximately 10 miles from the

 

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SenecaNiagara Casino and Hotel in the Town of Lewiston. The golf course will serve asan amenity for our patrons enabling SGC to increase its demographic andgeographic reach. Designed by world-renowned golf architect Robert Trent JonesII, Seneca Hickory Stick Golf Club will feature a scenic, par-72, links-stylelayout and a 4,300 square foot clubhouse with a pro shop, bar and casual diningfor 40 patrons. The golf course is scheduled to open July 1, 2010.

 

**Recent Accounting Pronouncements**

** **

In February 2010,the Financial Accounting Standards Board, or the FASB, issued AccountingStandards Update  2010-09, “SubsequentEvents (Topic 855) — Amendments to Certain Recognition and DisclosureRequirements,” or Update 2010-09. Update 2010-09 removes the requirement forcompanies filing periodic reports with the SEC, or SEC filers, to disclose thedate through which an entity has evaluated subsequent events.  However, the disclosure exemption does notrelieve management of an SEC filer from its responsibility to evaluatesubsequent events through the date on which financial statements areissued.  Update 2010-09 became effectivefor the Company for the second quarter of Fiscal 2010.  The adoption of the provisions of the Updatedid not have a material impact on the Company’s consolidated financial statements.

 

In April 2010, theFASB issued an Accounting Standards Update, “Entertainment-Casinos (Topic 924),Accruals for Casino Base Jackpot Liabilities, a consensus of the FASB EmergingIssues Task Force,” or ASU 2010-16. The objective of ASU 2010-16 is to addressthe accounting for casino base jackpot liabilities. Specifically, it addressesdiversity in practice regarding whether an entity accrues liabilities for abase jackpot before it is won if the entity is not required to award the basejackpot. Some entities do not accrue liabilities for a base jackpot before itis won because they could avoid the payment. Other entities accrue liabilitiesfor a base jackpot ratably over the period of play expected to precede payout.ASU 2010-16 clarifies that an entity should not accrue jackpot liabilities (orportions thereof) before a jackpot is won if the entity can avoid paying thatjackpot. Jackpots should be accrued and charged to revenue when an entity hasthe obligation to pay the jackpot. This guidance applies to both base andprogressive jackpots and is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2010. Theamendments are to be applied prospectively with a cumulative-effect adjustmentreflected in retained earnings. The cumulative-effect adjustment is thedifference between the amounts recognized in the statement of financialposition before initial application of the amendments and the amountsrecognized in the statement of financial position at initial application ofthose amendments. The Company is currently evaluating the impact implementationof ASU 2010-16 will have on the consolidated financial statements.

 

A variety of proposed orotherwise potential accounting standards are currently under study bystandard-setting organizations and certain regulatory agencies. Because of thetentative and preliminary nature of such proposed standards, the Company hasnot yet determined the effect, if any, that the implementation of such proposedstandards would have on the consolidated financial statements.

 

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

 

Short-term investmentsare classified as available for sale as defined in the FASB AccountingStandards Codification, or ASC, Topic 320, *Investments —**Debt and Equity Securities*. Investments are stated at fair value. The Company evaluates investments for conditions that may indicate thatan other-than-temporary decline in market value has occurred. In conductingthis review, numerous factors are considered which, individually or incombination, may indicate that a decline is other-than-temporary. Based on thisevaluation, an other-than-temporary loss on one specific investment of $0 and$0.1 million was recorded in the three months ended March 31, 2010 and2009, respectively, and an other-than-temporary loss on one specific investmentof $0.1 million and $0.2 million was recorded in the six months ended March 31,2010 and 2009, respectively, as a component of other non-operating expense. Thecost basis of this investment has been reduced by the amount of theother-than-temporary loss recorded.

 

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

 

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

 

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determiningoperating income.

 

Duringthe three months and six months ended March 31, 2010, $166,000 and$221,000 was recorded as an impairment of property and equipment in addition tothe $107.6 million impairment recognized during Fiscal 2009.

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino and Hotel were suspended for variousreasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on our available cash, such as our paymentsto the Nation.  As of March 31,2010, due to the continuation of weak economic conditions, adverse creditmarket conditions and an uncertain economic outlook, construction remainssuspended indefinitely.  Furthermore,certain master planning efforts related to the future expansion of the NiagaraFalls property have been suspended for the foreseeable future for the samereasons.  As a result of thesecircumstances an impairment charge of $107.6 million was recognized during thethird and fourth quarters of Fiscal 2009 based upon an estimate of the netrealizable value based on an estimate of undiscounted cash flows that projectedno future benefit.  The reported fairvalue of zero is considered to be level three within the fair value hierarchyas established by ASC 820, Fair Value Measurements and Disclosures.  Level three inputs are defined as inputs forwhich significant valuation assumptions are unobservable in a market andtherefore value is based on the best available data, some of which isinternally developed and considers risk premiums that a market participantwould require. Referto Note 6, *Fair Value of Financial Instruments*, forfurther discussion of the fair value hierarchy.

 

**4.**                                      Restricted Cash

** **

Restrictedcash balances of $33.0 million at March 31, 2010 represent cash reservedfor future repayment of outstanding debt and other accrued liabilities,pursuant to a resolution adopted by the Board of Directors. As of March 31, 2010, such balancesinclude $15.9 million of cash reserves for future repayment ofoutstanding debt and $17.1 million for satisfaction of other accruedliabilities.

 

**5.**                                      Principal Debt Arrangements

** **

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

 
| ** **                                                                                          | ** ** | **As of**                                    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **March 31,  2010**                     | ** ** | **September 30,  2009** | ** ** |
| ** **                                                                                          | ** ** | **(In Thousands of Dollars)** | ** ** |
| 2004 71⁄4% senior notes due  2012                                                                |       | $                                            | 300,000    |   | $ | 300,000 |   |
| 2005 71⁄4% senior notes due  2012 net of unamortized discount of $2,130 and $2,637, respectively |       | 197,870                                      |       | 197,363 |   |
| Long-term debt                                                                                      |       | $                                            | 497,870    |   | $ | 497,363 |   |

 

**71⁄4% Senior Notes due 2012**

** **

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

 

The 2005 senior noteswere issued at a discount of $7.0 million. The discount is being amortized over the term of the 2005 senior notes,which amounted to $0.3 million for the three months ended March 31, 2010and 2009 and $0.5 million for the six months ended March 31, 2010 and2009.

 

The Senior Notes areguaranteed by SNFGC, STGC, SEGC and LGCC. The 2005 senior notes are treated asa single class with the 2004 senior notes and are identical to the 2004 seniornotes, except for certain tax attributes, and prior to November 1, 2005,the amount of interest accrued thereon.   Interest on the SeniorNotes is payable semi-annually on May 1 and November 1.  TheSenior Notes are unsecured and rank equally.  As of March 31, 2010and September 30, 2009, aggregate accrued and unpaid interest on theSenior Notes was $15.1 million.  TheSenior Notes, which mature on May 1, 2012, are redeemable at SGC’s optionin whole or in part at any time after May 1, 2008 at the redemption pricesset forth in the Senior Notes Indenture, are subject to redemption requirementsimposed by gaming laws and regulations and are required to be repurchased bySGC at the option of holders upon certain change of control events.

 

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TheSenior Notes Indenture contains certain negative and affirmative covenants. Thenegative covenants include limitations on restricted payments and the incurrenceof indebtedness, while the affirmative covenants include reporting obligationsand compliance with laws. As of March 31, 2010, SGC was in compliance withall covenants in the Indenture.

 

**SeniorSecured Revolving Loan Agreement**

 

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

 

SGC’sobligations under the Amended Senior Secured Revolving Loan Agreement continueto be secured by substantially all gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. SGC’s obligations are guaranteed by SNFGC, STGC, SEGC and LGCC,and the guarantors’ obligations continue to be secured by substantially all ofeach guarantor’s gaming and related assets (including substantially all gamingrevenues) not constituting real property or improvements. The Amended SeniorSecured Revolving Loan Agreement modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12 month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.  The Amended Senior Secured Revolving LoanAgreement also continues to contain additional customary covenants, includingcovenants restricting the incurrence of additional indebtedness, the creationof additional liens and the disposition of assets. As of March 31, 2010,SGC was in compliance with all covenants in the Amended Senior SecuredRevolving Loan Agreement.

 

As of March 31,2010, at SGC’s request, the lender under the Amended Senior Secured RevolvingLoan Agreement had issued letters of credit totaling $18.3 million, $13.2 million of which may be drawn upon to fund the purchase of certain parcelswithin the 50 acre “footprint” described in the Compact with New York State anddesignated for ownership by the Nation (as required by the ESDC), with theremaining $5.1 million issued in connection with worker’s compensation policiesand certain other contracts, as required. As of March 31, 2010, there wereno amounts outstanding on the Amended Senior Secured Revolving Loan Agreement.

 

**6.****                                     ****Fair Value of FinancialInstruments**

 

Codification Topic 820, Fair Value Measurements andDisclosures (“Codification Topic 820”) does not determine or affect thecircumstances under which fair value measurements are used, but defines fairvalue, expands disclosure requirements around fair value and specifies a hierarchyof valuation techniques based on whether the inputs to those valuationtechniques are observable or unobservable. Observable inputs reflect marketdata obtained from independent sources, while unobservable inputs reflect theCompany’s market assumptions. These inputs create the following fair valuehierarchy:

 

·                      Level 1: Quoted prices for identicalinstruments in active markets.

 

·                      Level 2: Quoted prices for similar instrumentsin active markets; quoted prices for identical or similar instruments inmarkets that are not active; and model-derived valuations in which allsignificant inputs and significant value drivers are observable in activemarkets.

 

·                      Level 3: Valuations derived from valuationtechniques in which one or more significant inputs or significant value driversare unobservable.

 

This hierarchy requires us to use observable marketdata, when available, and to minimize the use of unobservable 

 

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inputs when determining fair value. For someproducts or in certain market conditions, observable inputs may not beavailable.

 

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

 

The fair value of long term debt is estimated basedon current market quotes of SGC’s debt. As of March 31, 2010, the carrying amount and fair value of longterm debt is approximately $498 million and $495 million, respectively.

 

**7.****                                     ****Related-Party Transactions**

 

**Distributions**

 

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

 
| ** **                            | ** ** | **Six Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(In Millions of Dollars)**    | ** ** |
| Cash distributions                    |       | $                                              | 15.0       |   | $ | 26.2 |   |
| Distribution Agreement  distributions |       | 7.5                                            |       | 7.0 |   |
|                                  |       | $                                              | 22.5       |   | $ | 33.2 |   |

 

*CashDistributions*

 

·                  SGC paid cash distributions to the Nation in the amount of $2.5 millionper month during the six months ended March 31, 2010, totaling $15.0million.

 

·                  SGC paid cash distributions to the Nation in the amount of $4.0 millionper month from October 2008 through February 2009, totaling $20.0million. Also, during the six months ended March 31, 2009, SGC paid $5.0million pursuant to distribution declarations made in July 2008. Inaddition, in November 2008, SGC paid an additional $1.2 milliondistribution to the Nation.

 

*Distribution Agreement Obligations*

 

·                  During the six months ended March 31, 2010 and 2009, SGCdistributed $7.5 million and $7.0 million, respectively, to the Nation underthe Distribution Agreement, dated April 27, 2007, relating to the SenecaNation of Indians Capital Improvements Authority’s special obligation bonds.See “Note 8 — Commitments and Contingencies” for additional informationregarding SGC’s Distribution Agreement obligations.

 

**Contributions**

 

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

 

*Cash Contributions*

 

·                  In September 2009, the Nation declared a capital contribution, inthe amount of $5.1 million, for the value of land previously purchased for thedevelopment of the Seneca Niagara Falls Casino and Hotel. This amount wasrecorded as a receivable from the Nation at September 30, 2009 and paymentwas received in December 2009.

 

**Land and Related Acquisition Costs**

** **

**SGC has recorded approximately $59.2 million and$59.1 million in land and related acquisition costs as ‘Other long-term assets’in the accompanying consolidated balance sheets as of March 31, 2010 and September 30,2009, respectively, which are expected to be transferred to the Nation.**

 

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**Operating Lease Agreements**

 

*Head Leases:*

 

TheNation has entered into operating lease agreements (each, a Head Lease) witheach of SNFGC, STGC and SEGC.  Due to therelated party nature of these Head Leases, which can be effectively modified bythe Nation, SGC records monthly Head Lease expense equal to the requiredpayment amount for the respective month. Payment increases under the Head Leases are restricted under the termsof the Indenture governing the Senior Notes and the Distribution Agreementreferenced in “Note 8 — Commitments and Contingencies.”  The Head Leases contain no renewal options orescalation clauses.

 

Expensesresulting from the above Head Leases were as follows for the three months andsix months ended March 31, 2010 and 2009:

 
| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **2010**                                         | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** ** | ** ** | **(Dollars in Millions)**              | ** ** |
| SNFGC      |       | $                                                | 9.0        |                                           | $          | 8.8 |   | $ | 18.0 |   | $ | 18.0 |   |
| STGC       |       | 6.0                                              |       | 5.5                                            |       | 12.0 |   | 12.0 |   |
| SEGC       |       | 4.0                                              |       | 3.5                                            |       | 8.0 |   | 8.0 |   |
|       |       | $                                                | 19.0       |                                           | $          | 17.8 |   | $ | 38.0 |   | $ | 38.0 |   |

 

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

 

Seneca Niagara Falls Gaming Corporation

 

The SNFGC Head Lease(dated October 25, 2002) expires on December 31, 2023 and covers useof the land and certain improvements existing at the commencement of such HeadLease, principally including structures formerly known as the Niagara FallsConvention Center and Lackey Plaza.  On August 1,2008, at the request of the Nation, SGC approved an increase in the SNFGC HeadLease to $3.1 million per month, effective October 1, 2008, and to $3.7million per month, effective October 1, 2009.  On March 19, 2009, SNFGC entered into anamendment to the foregoing Head Lease agreement with the Nation, which reducedpayments to $3.0 million per month effective October 1, 2008 andeliminated the increase that would have taken effect as of October 1,2009.

 

Seneca Territory Gaming Corporation

 

TheSTGC Head Lease (effective as of May 1, 2004) expires on December 31,2023 and covers use of the land which is currently being used in operating theSeneca Allegany Casino and Hotel.  On August 1,2008, at the request of the Nation, SGC approved increases in the paymentsunder the STGC Head Lease to $2.1 million per month effective October 1,2008, and to $2.7 million per month effective October 1, 2009.  On March 19, 2009, STGC entered into anamendment to the foregoing Head Lease agreement with the Nation, which reducedpayments to $2.0 million per month effective October 1, 2008 andeliminated the increase that would have taken effect as of October 1,2009.

 

SenecaErie Gaming Corporation

 

TheSEGC Head Lease (effective as of April 1, 2006) expires on December 31,2023 and covers use of the land which is currently being used in operating theSeneca Buffalo Creek Casino.  On August 1,2008, at the request of the Nation, SGC approved an increase in the paymentsunder the SEGC Head Lease to $1.5 million per month effective October 1,2008 and thereafter.  On March 19,2009, SEGC entered into an amendment to the foregoing Head Lease agreement withthe Nation, which reduced payments to $1.3 million per month effective October 1,2008.

 

In connection with the March 19, 2009, HeadLease amendments described above, for purposes of compliance with its Indenturegoverning the Senior Notes and the Distribution Agreement, SGC obtained anddelivered to Wells Fargo, N.A. (as trustee under the Indenture governing theSenior Notes) written fair market value rent opinions from an independentfinancial advisor with regard to the SNFGC and STGC Head Lease amendments (asrequired by the

 

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Indenture). The SEGC Head Lease amendment reflects a 3% per annum (for two years)increase in rent as permitted by the Indenture. SGC also delivered to Wells Fargo, N.A. (as trustee under the indenturegoverning the Nation’s municipal bonds and a party to the DistributionAgreement) an additional certification required pursuant to the DistributionAgreement.  Further or additionalincreases in rent payable under the Head Lease agreements are restricted underthe terms of SGC’s Indenture governing its Senior Notes and the DistributionAgreement, and are subject to compliance with all applicable contractualcommitments of SGC and the Nation, such that no increase may contravene, or constitute a defaultunder any agreement, indenture, instrument or other commitment legally bindingupon the Nation, SNFGC, STGC or SEGC, respectively, or to which the premises(described in the Head Leases) are subject.

 

*Class IIPoker Leases:*

 

As of January 1,2005, the Company transferred all Class II operations to the Nation,including its poker operations.  TheCompany leases space within Seneca Niagara Casino and Hotel to Seneca Gamingand Entertainment, which operates the Nation’s Class II facilities, foroperation of the poker room. On November 9, 2009, Seneca Gaming andEntertainment relocated its poker operations in Seneca Allegany Casino to a newfacility located within one mile of the Allegany Casino property. For the threemonths ended March 31, 2010 and 2009, SGC recorded $0.1 million and $0.2million, respectively, of poker room rental income and fees, and for the sixmonths ended March 31, 2010 and 2009, SGC recorded $0.3 million and $0.4million, respectively, of rental income and fees. At March 31, 2010 and September 30,2009, SGC recorded $0.2 million and $0.5 million, respectively, as a receivablefrom the Nation relating to poker room rentals.

 

**OtherRelated Party Transactions**

 

*ConstructionServices:*

 

SNFGC,STGC and SEGC have each entered into construction management agreements withSeneca Construction Management Corporation (SCMC) and SCMC LLC, for certainrenovations and capital improvements at Seneca Niagara Casino and Hotel, SenecaAllegany Casino and Hotel, and Seneca Buffalo Creek Casino, respectively.  SCMC and SCMC LLC are wholly owned by theNation.  For the three months ended March 31,2010 and 2009, SNFGC, STGC and SEGC have collectively made payments to SCMC andSCMC LLC for construction management and related fees of $0.3 million and $0.6million, respectively, and for the six months ended March 31, 2010 and2009, SNFGC, STGC and SEGC have collectively made payments to SCMC and SCMC LLCfor construction management and related fees of $0.3 million and $1.6 million,respectively.  Such fees reflect theamounts earned by SCMC and SCMC LLC for the performance of constructionmanagement services related primarily to the recently completed expansion ofthe Buffalo Creek facility. Additional amounts paid to SCMC and SCMC LLC arepassed through and used to pay subcontractors, reimbursements for out-of-pocketexpenses and similar costs.

 

*Regulatory Services:*

 

SGC is charged by the Nation for its costs incurred related to theoperation of SGA gaming regulatory services. These include:  a) costs incurredsolely and directly in connection with regulatory services and oversight of SGC’sgaming operations and which are therefore 100% allocable to SGC; and b) anadministration fee, assessed by the Nation for costs indirectly incurred inconjunction with the operation and regulation of SGC, which is fixed as apercentage of direct costs, currently 20%, as determined by the Nation in itsperformance of administration of the SGA and its oversight of the Company. Suchcosts were approximately $2.3 million and $2.6 million for the three monthsended March 31, 2010 and 2009, respectively, and $4.5 million and $5.1million for the six months ended March 31, 2010 and 2009, respectively.

 

SGC is also charged by the Nation for its costs incurred related toservices provided by the New York State Racing and Wagering Board, New YorkState Police, Seneca Nation of Indians Marshals, Buffalo Police****and Cattaraugus County Sheriff Department solely anddirectly in connection with SGC’s operations, which costs were approximately$2.3 million and $3.1 million for the three months ended March 31, 2010and 2009, respectively, and $6.0 million and $5.7 million for the six monthsended March 31, 2010 and 2009, respectively.

 

At March 31, 2010 and September 30, 2009, approximately $38.5million and $33.7 million, respectively, were recorded as “accrued regulatorycosts” in the accompanying consolidated balance sheets, for the payment of suchNew York State related regulatory costs. The related expense was recorded as acomponent of advertising, general and administrative expense in theaccompanying consolidated statement of income.

 

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**8.**                                      Commitments and Contingencies

** **

**Distribution Agreement Obligations**

 

On April 27,2007, SGC entered into a Distribution Agreement among the Nation, the Seneca Nationof Indians Capital Improvements Authority, or the Authority, SGC and WellsFargo Bank, as Trustee, in connection with the Authority’s issuance in twoseries (one tax exempt and the other taxable) of an aggregate principal amountof $159,495,000 special obligation bonds, or the 2007 Nation Bonds.  TheDistribution Agreement obligates SGC, subject to any contractual restrictionsapplicable to SGC (including, but not limited to, those contained in the SeniorNotes Indenture), to make monthly distributions to the Nation at the times andin the amounts necessary to enable the Authority to pay the debt service on the2007 Nation Bonds as required under the Authority’s indenture.  At thedirection of the Nation and the Authority, SGC pays such distributions directlyto the Trustee.  The Authority’s debt service commenced on June 1,2007.  For the period from June 1, 2007 through November 1,2007, the Authority’s debt service averaged approximately $0.9 million permonth. For the period from December 1, 2007 through June 1, 2008, theAuthority’s debt service averaged approximately $1.7 million per month.  In June 2008, it was determined that theamortization (debt service) schedule upon which the foregoing $1.7 millionmonthly payments was made, was incorrect. A corrected amortization schedule was provided and, after giving effectto a resulting credit for amounts overpaid, for the period from January 1,2008 through December 1, 2023, the Authority’s debt service averagesapproximately $1.2 million per month. The foregoing debt service averages arebased 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 six months ended March 31,2010 and 2009, SGC distributed to the Nation $7.5 million and $7.0 million,respectively, for the Authority’s debt service on the special obligation bonds.

 

**The Seneca Nation Compact**

** **

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

 

The following tablesummarizes the exclusivity fees expense by property:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** | **March 31,**             | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 19,154     |                           | $          | 16,625 |   | $ | 35,091 |   | $ | 33,197 |   |
| Seneca Allegany Casino and Hotel      |       | 7,330                                |       | 6,593                          |       | 13,598 |   | 13,192 |   |
| Seneca Buffalo Creek Casino           |       | 3,084                                |       | 2,243                          |       | 5,449 |   | 4,153 |   |
| Total                                 |       | $                                    | 29,568     |                           | $          | 25,461 |   | $ | 54,138 |   | $ | 50,542 |   |

 

Exclusivityfees were recorded as a component of gaming expense in the accompanyingconsolidated statements of income.

 

**Expansion and Development**

** **

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

 

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April 2008 of a second hotel tower at the Seneca Allegany Casinoand Hotel.

 

In August 2008, construction activities at Seneca Allegany Casinoand Hotel and Seneca Buffalo Creek Casino were suspended indefinitely forreasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on available cash, such as payments tothe Nation.  As of March 31, 2010,construction remained suspended indefinitely. Furthermore, certain planning efforts related to the future expansion ofthe Seneca Niagara Falls property were suspended for the same reasons.  As a result of these circumstances animpairment charge of $107.6 million was recognized during the third and fourthquarters of Fiscal 2009. During the three and six months ended March 31,2010, an additional $166,000 and $221,000, respectively, was recorded as animpairment of property and equipment. Nonetheless, SGC will continue to explorealternative future expansion and development options.

 

The construction of a permanent casino at the Buffalo Creek site, aswell as any expansion by STGC at Seneca Allegany Casino and Hotel will requiresignificant capital outlays. The ability to recommence these projects willdepend on various factors including prevailing economic conditions, cash flowfrom operations, the availability of external financing with regard to one ormore of the projects, certain Nation and governmental approvals, and theeffects of legal and/or administrative proceedings.

 

*Seneca Niagara Falls Casino and Hotel. *In 2006, SNFGC began master planning activities forthe remaining approximately 24 acres of undeveloped land contained in theNiagara Falls footprint.  During August 2008,these master planning activities were suspended and an impairment charge wasrecognized related to these activities in the third quarter of Fiscal 2009, inthe amount of approximately $3.5 million. During the three and six months endedMarch 31, 2010, an additional $33,000, was recorded as an impairment ofproperty and equipment.

 

*Seneca Allegany Casino and Hotel. *Construction on the next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200-room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of approximately $130million, was suspended and an impairment charge was recognized for costsincurred related to these activities in the third and fourth quarters of Fiscal2009, in the amount of approximately $17.1 million. During the three and sixmonths ended March 31, 2010, an adjustment to estimated impairment in theamount of $1,000 and an additional impairment charge of $37,000, respectively,were recognized.

 

*Seneca Buffalo Creek Casino.*Construction on the permanent SenecaBuffalo Creek Casino and Hotel facility, which was planned to includeapproximately 90,000 square feet of gaming space; 2,000 slot machines; 45 tablegames; a 22-story all-suite hotel; four restaurants; a full-service spa andsalon; retail and other amenities; and a 2,200-space parking garage, for atotal estimated cost of approximately $333 million, was suspended and animpairment charge was recognized related to these activities in the third and fourthquarters of Fiscal 2009, in the amount of approximately $87.0 million. Duringthe three and six months ended March 31, 2010, an additional $134,000 and$151,000, respectively, were recorded as impairments of property and equipment.

 

On March 5, 2010 SEGC completed an expansion of the existingfacility, increasing the number of slot machines to 457 and the total squarefeet of gaming space to approximately 10,600.

 

*Seneca Hickory Stick Golf Club. *In July 2007, the Company commenced constructionof the Seneca Hickory Stick Golf Club, an 18-hole Robert Trent Jones IIdesigned golf course. The golf course is located in Lewiston, New York and isapproximately ten miles from the Seneca Niagara Casino and Hotel.  Seneca Hickory Stick Golf Club will feature ascenic par-72 links style layout and a 4,300 square foot clubhouse with a proshop, bar and casual dining for 40 patrons. The area around the clubhouse hasbeen designed to accommodate tents and support facilities for largetournaments. The golf course is scheduled to open July 1, 2010.  As of March 31, 2010, the Company hasincurred $23.0 million for the purchase of land and construction, with a totalcost to construct the golf course, clubhouse and related amenities estimated tobe approximately $25.5 million.

 

**Legal Proceedings**

 

***CitizensAgainst Casino Gambling in Erie County v. Hogen (1:2009-cv-00291 (WDNY)) —CACGEC III***

 

On March 31, 2009, Citizens Against CasinoGambling in Erie County (CACGEC) filed a third action in the United StatesDistrict Court, Western District of New York against the Chairman of the NIGC,the United States Department of the Interior, the NIGC, the Secretary of theInterior and the President of the United States.  The action

 

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seeks declaratory and injunctive relief under theAdministrative Procedure Act, the Declaratory Judgments Act, and the IGRA andis principally directed at the decision by the NIGC Chairman, on January 20,2009, to approve the Seneca Nation’s amendments to its Class III GamingOrdinance regarding the Nation’s Buffalo Creek Territory.  The NIGC Chairman concluded that IGRA’sgeneral prohibition against gaming on lands acquired after its enactment in1988 does not apply to lands, such as the Buffalo Creek Territory, that areheld in restricted fee.   The plaintiffsclaim that, in approving the Nation’s Class III Gaming ordinance on January 20,2009, the NIGC Chairman ignored the intention of Congress.  The plaintiffs also make several claims thatgo beyond their prior lawsuits.  Mostnotably, they challenge the constitutionality of the land purchase provisionscontained in the Seneca Nation Lands Claim Settlement Act of 1990 (“SNLCSA”),and attempt to challenge in a more extensive fashion than they had previouslythe validity of the Nation-State Gaming Compact.

 

On June 15, 2009, the Nation moved to interveneas a defendant in CACGEC III.  The Nation’sproposed intervention and participation as a defendant are expressly restrictedto the three claims for relief specified in the plaintiffs’ complaint,namely:  (1) whether, as restrictedfee lands over which the Nation exerts governmental authority, the BuffaloCreek Territory qualifies as “Indian lands” under IGRA; (2) whether theBuffalo Creek Territory is subject to the general prohibition found in section2719 of IGRA against gaming on trust lands acquired after IGRA’s effective dateeven though the Territory consists of restricted fee, rather than trust, lands;and (3) whether, if the Buffalo Creek Territory is subject to Section 2719’sgeneral prohibition, Class III gaming may nevertheless proceed on itbecause the Buffalo Creek Territory was acquired in settlement of a land claim.

 

On March 30, 2010, the Court denied the Nation’smotion to intervene, while granting permission for it to participate as *amicus curiae*.  TheCourt also dismissed certain secondary claims of the plaintiffs in theproceeding, while allowing other core claims regarding the eligibility of theland for casino gaming to proceed.    Ifthe plaintiffs ultimately succeed in this action, or in their pending appealsin the CACGEC I and CACGEC II proceedings (previous suits filed by theplaintiffs and relating to similar claims), the SGC may be unable to conductany Class III gaming at its existing properties.

 

***In the matter of the Petition ofNew York State Urban Development Corporation d/b/a Empire State DevelopmentCorporation (NYS Supreme Court, Niagara County)***

 

Pursuantto the Compact, the State of New York agreed to assist the Nation in whatevermanner appropriate, including through the exercise of its power of eminentdomain, to acquire acreage within the approximately 50-acre footprintsurrounding the former Niagara Falls Convention Center in the City of NiagaraFalls, New York, designated by New York State under the Compact for ownershipby the Nation.  The amounts paid tocondemnees from whom the ESDC has acquired property are deemed to be advance payments,in that property owners are entitled to reserve their rights to challenge theland and improvement values determined by the condemnor’s appraisers.

 

Withrespect to approximately 18 acres of land and related fixtures (a former waterpark) within the above footprint, the ESDC made advanced payments under NewYork eminent domain procedure law of $18.0 million to Fallsite LLC andFallsville Splash, LLC, the owners of the water park property.  The owners thereafter filed notices of claimseeking, in the aggregate, $40.0 million and $35.0 million for land and tradefixtures, respectively. On April 5, 2010, the New York State Supreme Courtdetermined that no additional compensation was owed to the former propertyowners for the water park real estate and fixtures.  SGC anticipates that the former propertyowners will appeal.

 

***Seneca Gaming Corporation v. Harvest Trends, Inc.et al. (NYS Supreme Court, Niagara County)***

 

OnApril 1, 2010, SGC filed suit in the State of New York Supreme Court,County of Niagara, against Harvest Trends, Inc., Harvest Trends LLP, RiverLee International, Inc., and several individuals who are former employeesof SGC.  The suit alleges that theseformer employees and a vendor, who had been hired and paid to assist SGC increating an enterprise data warehouse, used SGC time and SGC resources todevelop Harvest Trends, an entity created to market a similar product to SGC’scompetitors.  SGC is suing for damages inan amount to be determined and for injunctive relief for the misappropriationof trade secret customer data, unjust enrichment, unfair competition, breachesof fiduciary duties and duties of loyalty, and breaches of contracts.  In addition, on May 6, 2010, SGCinitiated a proceeding in Niagara Falls seeking binding arbitration againstRajat Shah, SGC’s former Senior Vice President of Corporate Development andGeneral Counsel, in connection with his alleged involvement with the employeesand entities involved in the lawsuit described above, seeking damages in anamount to be determined and injunctive relief for breach of his employmentagreement, breaches of fiduciary duty and duty of loyalty, and diversion ofcorporate opportunity.

 

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**Item 2.**                                                           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

** **

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

 

**Forward-Looking Statements**

 

When used in thisQuarterly Report on Form 10-Q, in other filings with the Securities andExchange Commission, or the SEC, in our press releases or in our other publiccommunications, the words “believe,” “estimate,” “anticipate,” “expect,” “contemplate,”“may,” “will,” “plan,” “project,” “will continue,” “will be,” “will continue,” “likelywill result” and similar expressions are intended to identify forward-lookingstatements.  Similarly, statements thatdescribe our plans, business, strategy or goals are all forward-lookingstatements.  Statements looking forwardin time are included in this Quarterly Report on Form 10-Q pursuant to the“safe harbor” provision of the Private Securities Litigation Reform Act of1995.  Such statements are subject tocertain risks and uncertainties, which could cause actual results to differmaterially from those expressed in or implied by these forward-looking statements,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 in Item 1A of our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2009, or the 2009 Form 10-K.  In addition to the risk factors described inItem 1A of our 2009 Form 10-K, the following important factors, amongothers, could affect our future financial condition or results of operations,causing actual results to differ materially from those expressed in theforward-looking statements: the local, regional, national, or global economicclimate, our substantial indebtedness and ability to meet our financialobligations and operate in accordance with the restrictions pursuant to such indebtedness,our incurrence of any additional indebtedness, the availability of financing,our failure to generate cash flows, increased competition, changes in federalIndian law, issues relating to the Nation-State Gaming Compact, or the Compact,between the Seneca Nation of Indians and New York State, the control of ourcompany by the Seneca Nation of Indians, or the Nation, changes in themembership of the Nation’s Council (the Nation’s legislative body) or Nationpolicies, changes in gaming laws or regulations, ongoing or future litigationchallenging our ability to conduct gaming operations, changes in federal orstate tax laws or the administration of such laws, our failure to retainexisting management, fill current vacancies, and attract new personnel, ourlimited experience operating casinos, hotels, and the golf course we intend toopen, seasonality and weather-related factors, investigative reviews byregulatory authorities relating to our gaming revenues, and acts of war orterrorism.

 

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

 

**Overview**

** **

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

 

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**ExecutiveSummary**

 

***Our Current Operations.*****    We currently operate three Class IIIgaming facilities:  Seneca Niagara Casinoand Hotel, in the City of Niagara Falls, New York (Niagara Territory),featuring over 147,000 square feet of gaming space, 4,037 slot machines, 102table games and 604 hotel rooms; Seneca Allegany Casino and Hotel, in the Cityof Salamanca, New York (Allegany Territory), featuring over 63,500 square feetof gaming space, 2,171 slot machines, 32 table games and 212 hotel rooms; andthe Seneca Buffalo Creek Casino (slots only facility), in the City of Buffalo,New York (Buffalo Creek Territory), featuring 457 slot machines.  Certain of these operations also includedining, entertainment, retail and spa and salon services.  For the three months ended March 31,2010 and 2009, approximately 93% and 92%, respectively, of our net revenue wasderived from our gaming activities.

 

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

 

In March 2006, SNFGC officially completed thephased opening of its luxury hotel expansion, which included a permanent147,000 square foot gaming facility (providing 35,000 square feet more gamingspace than the original 112,000 square feet), a 604-room luxury hotel with 118suites of various sizes, a full-service spa, salon, and fitness center, three finedining restaurants and a 24-hour casual restaurant, three retail stores, and a24,000 square foot multi-purpose room and events center.  The expansion of Seneca Niagara Casino andHotel, including the addition of our luxury hotel and other amenities, hasenabled us to attract higher-end patrons, increase length of stay, and extendour geographic market penetration and appeal to a more diverse demographicbase.

 

In 2006, we began master planning activities for the remainingapproximately 24 acres of undeveloped land contained in the approximately 50acre Niagara Falls footprint described in the Compact for ownership by theNation.  During August 2008, thesemaster planning activities were suspended due to the then prevailing economicconditions and adverse credit market conditions.  An impairment charge of $3.5 million wasrecognized during the third quarter of Fiscal 2009 related to these activities.During the three and six months ended March 31, 2010, an additional$33,000, was recorded as an impairment of property and equipment.

 

***Seneca Allegany Casino and Hotel****.*   Since opening on May 1, 2004, Seneca Allegany Casino and Hotel hasattracted patrons from the southern portion of Western New York, Erie andPittsburgh, Pennsylvania and Ohio.  As ofMarch 31, 2010, approximately 69% of the casino’s patron base is fromoutside of the State of New York.

 

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

 

Construction on our next phase of development at Seneca Allegany Casinoand Hotel, which was planned to include an additional 200 room hotel tower, andup to 30,000 square feet of additional gaming space and related amenities, fora total estimated cost of up to $130 million, was suspended for reasonsincluding:  the economic recession;inability to obtain construction financing at reasonable interest rates; andoperating and other demands on our available cash, such as our payments anddistributions to the Nation.  As of March 31,2010, construction remained suspended indefinitely. As a result of thesecircumstances, an impairment charge was recognized related to these activitiesin the third and fourth quarters of Fiscal 2009, in the amount of approximately$17.1 million. During the three and six months ended March 31, 2010, anadjustment to estimated impairment in the amount of $1,000 and an additionalimpairment charge of $37,000, respectively, were recognized.

 

***SenecaBuffalo Creek Casino****.    *On October 3, 2005, the Nationacquired approximately nine acres of land in the inner-harbor district ofBuffalo, New York.  On July 3, 2007,we began operating a temporary Class III gaming facility (approximately6,000 square feet) featuring 135 slot machines and a snack bar.  During the quarter ended

 

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March 31, 2008, thatfacility was expanded to include an additional 109 slot machines. During thequarter ended March 31, 2010, the existing facility was expanded toinclude an additional 4,600 square feet of gaming space and an additional 213slot machines. The current facility has approximately 10,600 square feet ofgaming space, and features 457 slot machines and a snack bar.

 

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

 

We suspended constructionon the permanent Seneca Buffalo Creek Casino and Hotel in August 2008 forreasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on our available cash, such as ourpayments to the Nation.  As of March 31,2010, construction remained suspended indefinitely. As a result of these circumstancesan impairment charge was recognized related to these activities in the thirdand fourth quarters of Fiscal 2009, in the amount of approximately $87.0million. During the three and six months ended March 31, 2010, anadditional $134,000 and $151,000, respectively, were recorded as impairments ofproperty and equipment.

 

Our ability to continue to operate the Seneca BuffaloCreek Casino facility will depend on various factors, including existing legalchallenges. See “Item 3.  LegalProceedings,” included in our 2009 Form 10-K for a description of thelegal proceedings relating to the Seneca Buffalo Creek Casino.

 

***Seneca Hickory Stick Golf Club —Lewiston, New York****.  *In March 2006, we acquired 257 acresof land with the intent to design and build a championship level golf course inLewiston, New York, approximately ten miles from Seneca Niagara Casino andHotel.  Seneca Hickory Stick Golf Club will feature a scenic par-72 linksstyle layout and a 4,300 square foot clubhouse with a pro shop, bar and casualdining for 40 patrons. The area around the clubhouse has been designed toaccommodate tents and support facilities for large tournaments. We selected theRobert Trent Jones II firm to design the golf course.  Construction of thegolf course commenced in July 2007 and the golf course is scheduled toopen July 1, 2010.  LGCC has engagedKemper Sports Management, Inc. to manage and operate the course. The totalcost to construct the golf course, clubhouse and related amenities is estimatedto be approximately $25.5 million.

 

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

 

***Marketing.****    *We use an integrated marketing strategy to attract andretain our patrons and to brand the Seneca name.  We coordinate our marketing events tomaximize the quality and length of stay of patron visits and to minimize competitionamong our gaming facilities.  The luxuryhotel and related amenities at the Seneca Niagara Casino and Hotel and theresort hotel and related amenities at Seneca Allegany Casino and Hotel furtherenhance our marketing initiatives in the region, including areas of New Yorkoutside of the Niagara Falls and Salamanca areas, in Pennsylvania, Ohio, andToronto, Canada and in areas outside the region including Michigan,Massachusetts, and Connecticut.

 

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

 

***Overall Outlook****.*     SGC’s financial performance during the three monthsended March 31, 2010 reflects continued demonstration of the company’s abilityto effectively manage its operations and financial performance in an uncertaineconomic environment.

 

For the three monthsended March 31, 2010, operating income was $23.8 million, a 12.7%, or $3.5million, decrease compared to operating income of $27.3 million for the threemonths ended March 31, 2009. This decrease is a result of a $3.5 millionincrease in exclusivity fees payable to New York State from 22% to 25%, whencomparing the three months ended March 31, 2010 to the three months endedMarch 31, 2009.

 

SGC has also increasedcash and cash equivalents from $91.2 million as of December 31, 2009 to$111.3 million as of March 31, 2010. As of March 31, 2010, $15.9 million of cash reserves for futurerepayment of outstanding debt is included in the restricted cash balancereported on the consolidated balance sheets, pursuant to a resolution approvedby the Board of Directors, in part, seeking to fund a $125.0 million reserve prior to May 2012to reduce its outstanding debt and thereby, its future borrowing costs.

 

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SGC continues to believethat it is the premier gaming operator in Western New York State and in theareas of Northern Pennsylvania and Ohio located within its primary andsecondary markets. Since the December 31, 2002 opening of the SenecaNiagara Casino, SGC has invested significantly in the development, expansionand maintenance of its gaming facilities, including the completion of the hoteland gaming expansion projects at Seneca Niagara Casino and Hotel and SenecaAllegany Casino and Hotel, and the opening and expansion of the casino on theSeneca Buffalo Creek Territory.  Theseinvestments have helped enable SGC to maintain its position as the premiergaming operator in the region described above. To help maintain its current market position, and to provide forexpanded opportunities in the convention and tourism markets, SGC intends to continueto explore opportunities for its Niagara Falls, Allegany and Buffalofacilities, subject to the availability of necessary funding. A principal goalis for the facilities to complement each other, offering diverse hotel,entertainment and gaming experiences for our guests.

 

SGC’s seniormanagement, Board of Directors and its owner, the Nation, monitor and reviewour financial condition and liquidity needs to help ensure appropriateoperating, financial and strategic plans meet ongoing economic challenges andaddress our ongoing liquidity requirements.

 

***RecentDevelopment****s*.  On October 19, 2009 we broke ground onan expansion of the Seneca Buffalo Creek Casino which added approximately 4,600square feet of gaming space to the existing facility and 213 slot machines. Theexpansion was opened on March 5, 2010.

 

Also, during the sixmonths ended March 31, 2010, 577 new slot machines were installed at theNiagara Falls and Allegany properties furthering our goal of providing the bestand newest entertainment experiences for our patrons.

 

Effective December 18,2009, SGC amended its $50.0 million Senior Secured Revolving Loan Agreement toextend the maturity date from December 19, 2009 to December 31, 2011.Amounts borrowed under the Amended Senior Secured Revolving Loan Agreementcontinue to bear interest at either one, three or six-month LIBOR plus one andone quarter percent (1.25%), or the prime rate (as reported in The Wall StreetJournal) plus one quarter percent (0.25%), with any outstanding principal balanceto be paid by, or on, the new maturity date. The $50.0 million commitment under the Amended Senior Secured RevolvingLoan Agreement reduces in tandem with any reduction in the letter of creditrequirement imposed by the Empire State Development Corporation, or ESDC(relating to the ESDC’s efforts on behalf of SGC in connection with ongoingcondemnation proceedings in Niagara Falls, New York), up to an aggregatereduction of $10.0 million.  The AmendedSenior Secured Revolving Loan Agreement modifies certain of the financialcovenants contained in the Senior Secured Revolving Loan Agreement, includingreducing the minimum consolidated EBITDA covenant from $160 million to $145million (on a rolling 12 month basis) as well as modifying the total leverageratio (of total funded debt to EBITDA) to a limit of 3.5 to 1.0.

 

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

 

In January 2010, Pennsylvania approvedlegislation allowing racinos and standalone slot facilities to operate up to250 tables per facility after paying a license fee of $16.5 million. Smallerresort casinos can obtain approval to operate up to 50 tables per facility fora $7.5 million license fee.  In additionto the upfront license fee, the facilities are required to pay a tax of 16% ofgross revenues from the games, which will drop to 14% after two years.

 

In late April 2010, Presque IsleDowns (in Erie, PA) obtained approval to operate 48 table games, while theMeadows Racetrack and Casino (outside of Pittsburgh, PA) obtained approval tooperate a total of 42 banking games (e.g., blackjack, craps, roulette) inaddition to 20 poker tables.

 

**Critical AccountingPolicies and Estimates**

** **

There have been nochanges in critical accounting policies and estimates since the filing of our2009 Form 10-K.

 

**Reclassifications**

 

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

 

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**Operating Results - ThreeMonths Ended March 31, 2010 Compared to the Three Months Ended March 31,2009**

** **

*Summary of Operating Results*

 

As of March 31, 2010, we own and operate theSeneca Niagara Casino and Hotel in Niagara Falls, New York; the Seneca AlleganyCasino and Hotel in Salamanca, New York; and the Seneca Buffalo Creek Casino inBuffalo, New York.  In addition, LewistonGolf Course Corporation was established to operate a golf course which iscurrently under construction in Lewiston, New York.  All of our revenues are derived from ouroperations at our completed facilities.

 

The following table summarizes our results fromoperations by corporation and/or facility:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Net revenues:                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 92,515     |   | $ | 93,954 |   |
| Seneca Allegany Casino and Hotel      |       | 34,098                               |       | 35,692 |   |
| Seneca Buffalo Creek Casino           |       | 12,607                               |       | 10,392 |   |
| Total                                 |       | $                                    | 139,220    |   | $ | 140,038 |   |
|                                  |       |                                 |       |   |   |
| Operating expenses:                   |       |                                 |       | ** ** |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 71,247     |   | $ | 69,300 |   |
| Seneca Allegany Casino and Hotel      |       | 34,431                               |       | 35,322 |   |
| Seneca Buffalo Creek Casino           |       | 9,073                                |       | 7,410 |   |
| Seneca Hickory Stick Golf  Club       |       | 9                                    |       | 53 |   |
| Seneca Gaming Corporation             |       | 622                                  |       | 657 |   |
| Total                                 |       | $                                    | 115,382    |   | $ | 112,742 |   |
|                                  |       |                                 |       |   |   |
| Operating income (loss):              |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 21,268     |   | $ | 24,654 |   |
| Seneca Allegany Casino and  Hotel     |       | (333                                 | )          | 370 |   |
| Seneca Buffalo Creek Casino           |       | 3,534                                |       | 2,982 |   |
| Seneca Hickory Stick Golf Club        |       | (9                                   | )          | (53 | ) |
| Seneca Gaming Corporation             |       | (622                                 | )          | (657 | ) |
| Total                                 |       | $                                    | 23,838     |   | $ | 27,296 |   |

 

The most importantfactors or trends contributing to our operating performance during the threemonths ended March 31, 2010 were:

 

·                  A 3% increase in the exclusivity fee payable to NewYork State, beginning January 1, 2010, from 22% to 25% which resulted in a$3.5 million increase to our operating expenses during the quarter ($2.3million of the increase is attributable to Seneca Niagara Falls Casino andHotel, $0.8 million is attributable to Seneca Allegany Casino and Hotel, and$0.4 million is attributable to Seneca Buffalo Creek Casino);

 

·                  The national recession and resultingimpact on discretionary consumer spending;

 

·                  Extension of hours of operation of theSeneca Buffalo Creek facility, effective February 2009, and subsequentexpansion of the Buffalo Creek facility, which opened in March 2010, toapproximately 10,600 square feet of gaming space and a total of 457 slotmachines;

 

·                  Relatively temperate weather during the three months ended March 31,2010 compared to the same period in 2009; and

 

·                  Capital investment in 577 slot machines, 401at Seneca Niagara Casino and Hoteland 176 at Seneca Allegany Casino and Hotel, introducing new gaming content toour gaming floors.

 

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*GrossRevenues*

 

Gross revenuesconsisted of the following:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 128,904    |   | $ | 128,452 |   |
| Food and beverage               |       | 13,574                               |       | 14,231 |   |
| Lodging                         |       | 4,640                                |       | 5,577 |   |
| Retail, entertainment and other |       | 5,066                                |       | 5,825 |   |
| Total                           |       | $                                    | 152,184    |   | $ | 154,085 |   |

 

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

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Gaming                          |       | 84.7                             | %          | 83.4 | % |
| Food and beverage               |       | 8.9                              | %          | 9.2 | % |
| Lodging                         |       | 3.1                              | %          | 3.6 | % |
| Retail, entertainment and other |       | 3.3                              | %          | 3.8 | % |
| Total                           |       | 100.0                            | %          | 100.0 | % |

 

*GamingRevenue*

 

Our gaming revenue forthe three months ended March 31, 2010 increased from $128.5 million to$128.9 million when compared to the same period in the prior year, primarilydue to the expansion of the Seneca Buffalo Creek Casino, partially offset bythe ongoing impact of adverse economic conditions on consumer demand for gamingand entertainment offerings.

 

During the three monthsended March 31, 2010, Seneca Niagara Casino and Hotel’s net gaming revenuedecreased $0.7 million, or 1%; Seneca Allegany Casino and Hotel’s net gamingrevenue decreased $1.0 million, or 3%; and Seneca Buffalo Creek Casino’s netgaming revenue increased $2.1 million, or 21% when comparing these sameperiods.

 

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

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** |
| ** **                                           | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Slot handle                                          |       | $                                | 1,506,117  |   | $ | 1,520,560 |   |
| Gross slot revenue                                   |       | $                                | 118,768    |   | $ | 116,715 |   |
| Net slot revenue                                     |       | $                                | 116,642    |   | $ | 113,885 |   |
| Free promotional slot plays (1)                      |       | $                                | 9,872      |   | $ | 12,867 |   |
| Weighted average number of slot machines (in  units) |       | 6,517                            |       | 6,664 |   |
| Gross slot hold percentage                           |       | 7.9                              | %          | 7.7 | % |
| Gross slot win per unit per day (in dollars)         |       | $                                | 202        |   | $ | 195 |   |

 

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(1)          Free promotional slotplays are included in slot handle, but not reflected inslot revenues.

 

Net slot revenueincreased $2.8 million, or 2%, when comparing the three months ended March 31,2010 to the three months ended March 31, 2009, due to the factorspreviously discussed.

 

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

 

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| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Table games drop                                         |       | $                                | 82,214     |   | $ | 90,649 |   |
| Net table games revenue                                  |       | $                                | 12,175     |   | $ | 14,455 |   |
| Weighted average number of table games (in units)        |       | 134                              |       | 143 |   |
| Table games hold percentage                              |       | 14.7                             | %          | 16.0 | % |
| Gross table games revenue per unit per day (in  dollars) |       | $                                | 1,006      |   | $ | 1,130 |   |

 

Net table games revenuedecreased $2.3 million, or 16%, when comparing the three months ended March 31,2010 to the three months ended March 31, 2009.  The decrease was principally due to theeconomic and related factors previously noted, coupled with decreases in theaverage number of table games and the table games hold percentage whencomparing these same periods.

 

*Food andBeverage Revenue*

 

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

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31,**               | ** ** |
| ** **                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Covers                     |       | 933                              |       | 956 |   |
| Average check (in dollars) |       | $                                | 14.54      |   | $ | 14.88 |   |
|                            |            |                                  |            |  |  |  |  |

 

During the three monthsended March 31, 2010, our consolidated food and beverage revenue decreased$0.7 million, or 5% when compared to the same period in 2009, due primarily tothe ongoing economic conditions causing a decrease in overall consumer spendingfor leisure and entertainment purposes. Seneca Niagara Casino and Hotel’s food and beverage revenue accountedfor $0.1 million of the decrease; Seneca Allegany Casino and Hotel’s and foodand beverage revenue accounted for $0.6 million of the decrease; and SenecaBuffalo Creek Casino’s food and beverage revenue approximated the revenue forthe same quarter in the prior year. During the three months ended March 31, 2010 and 2009, 53% and 52%,respectively, of our food and beverage revenue were the result of Seneca LinkPlayer’s Card point redemptions.

 

*LodgingRevenue*

 

The following tablepresents data related to lodging revenue:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Occupied rooms                      |       | 62,983                           |       | 68,946 |   |
| Average daily room rate (ADR)       |       | $                                | 73.67      |   | $ | 80.88 |   |
| Occupancy rate                      |       | 89.1                             | %          | 94.5 | % |
| Revenue per available room (REVPAR) |       | $                                | 65.61      |   | $ | 76.44 |   |

 

During the three monthsended March 31, 2010, our lodging revenue decreased by $0.9 million, or17%, when compared to the three months ended March 31, 2009, due to adecrease in the number of occupied rooms and average rate per occupied roomresulting from ongoing economic conditions. Seneca Niagara Casino and Hotel’slodging revenue accounted for $0.8 million of the decrease and Seneca AlleganyCasino and Hotel’s lodging revenue accounted for $0.1 million of thedecrease.  During the three months ended March 31,2010 and 2009, 81% and 79%, respectively, of our lodging revenue were theresult of Seneca Link Player’s Card point redemptions.

 

*Retail,Entertainment and Other Revenue*

 

During the three monthsended March 31, 2010, our retail revenue approximated that from the threemonths ended March 31, 2009. During the three months ended March 31,2010 and 2009, 71% and 77%, respectively, of our retail revenue wasattributable to Seneca Link Player’s Card point redemptions.

 

During the three monthsended March 31, 2010, our entertainment revenue decreased$0.5 million, or 41%, when compared to the same period in 2009. SenecaNiagara Casino and Hotel’s entertainment revenue accounted for $0.4

 

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million of the decreasedue to an entertainment product mix including more shows in the Bear’s Den (asmaller venue compared to the Seneca Niagara Events Center) during the threemonths ended March 31, 2010, coupled with lower average ticket prices,compared to the three months ended March 31, 2009.  Seneca Allegany Casino and Hotel’sentertainment revenue accounted for $0.1 million of the decrease. During thethree months ended March 31, 2010 and 2009, 58% and 41% of ourentertainment revenue, respectively, was attributable to Seneca Link Player’sCard point redemptions.

 

During the three monthsended March 31, 2010, other revenue decreased $0.3 million, or 13%,when compared to the same period in 2009,primarily due to the impact of non-recurringnegotiated supplier refunds received during the three months ended March 31,2009.

 

*PromotionalAllowances*

 

SGC operates acomplimentary program in which food and beverage, retail, entertainment, andother services are provided to patrons based on points earned through theSeneca Link Player’s Card.  The retailvalue of these complimentary items is included in gross revenues and thendeducted as promotional allowances to arrive at net revenues.

 

The retail value ofproviding such promotional allowances was included in revenues as follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | 7,175                                |       | 7,393 |   |
| Lodging                         |       | 3,755                                |       | 4,417 |   |
| Retail, entertainment and other |       | 2,034                                |       | 2,237 |   |
| Total                           |       | $                                    | 12,964     |   | $ | 14,047 |   |
|                                 |            |                                      |            |  |  |  |  |

 

Theestimated cost of providing such promotional allowances was as follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | $                                    | 5,386      |   | $ | 5,418 |   |
| Lodging                         |       | 2,293                                |       | 2,354 |   |
| Retail, entertainment and other |       | 1,625                                |       | 1,825 |   |
| Total                           |       | $                                    | 9,304      |   | $ | 9,597 |   |

 

Promotional allowances asa percentage of gaming revenue were 10.1% and 10.9% during the three monthsended March 31, 2010 and 2009, respectively.  Promotional allowances decreased $1.1million, or 8%, when comparing the three months ended March 31, 2010 tothe same period in 2009. As shown in the table above, food and beverage,lodging, retail, entertainment and other promotional allowances decreased $0.2million, $0.7 million and $0.2 million, respectively.

 

*Detailed Operating Expense Information*

 
| ** **                              | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **March 31,**                   | ** ** |
| ** **                              | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | $                                    | 42,487     |   | $ | 36,424 |   |
| Food and beverage                       |       | 10,488                               |       | 10,697 |   |
| Lodging                                 |       | 2,866                                |       | 3,128 |   |
| Retail, entertainment and other         |       | 3,215                                |       | 3,467 |   |
| Advertising, general and administrative |       | 45,095                               |       | 46,365 |   |
| Pre-opening costs                       |       | 20                                   |       | 78 |   |
| Depreciation                            |       | 11,045                               |       | 12,583 |   |
| Impairment of property and equipment    |       | 166                                  |       | 3⁄4 |   |
| Total operating expenses                |       | $                                    | 115,382    |   | $ | 112,742 |   |

 

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*GamingExpenses*

 

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

 

The following tablesummarizes the exclusivity fees expense by property:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 19,154     |   | $ | 16,625 |   |
| Seneca Allegany Casino and Hotel      |       | 7,330                                |       | 6,593 |   |
| Seneca Buffalo Creek Casino           |       | 3,084                                |       | 2,243 |   |
| Total                                 |       | $                                    | 29,568     |   | $ | 25,461 |   |

 

The slot exclusivity feeincreased $4.1 million, from $25.5 million for the three months ended March 31,2009 to $29.6 million for the three months ended March 31, 2010, dueprimarily to a 3% increase in the exclusivity fee percentage which becameeffective January 1, 2010, and resulted in a $3.5 million increase duringthe quarter, compared to the three months ended March 31, 2009.  Gaming expenses as a percentage of grossgaming revenues were 30.6% and 25.8% for the three months ended March 31,2010 and 2009, respectively.  Gamingexpenses prior to exclusivity fees expense, as a percentage of gross gamingrevenues were 10.0% and 8.5% for those same periods.

 

*Food andBeverage Expenses*

 

Food and beverageexpenses represent those costs incurred for the operation of our restaurants,snack bars and beverage outlets.  Theprimary components of these expenses are the cost of food and beverage productsand payroll and payroll related expenses for team members providing theservice.  During the three months ended March 31,2010, food and beverage costs decreased $0.2 million, or 2%, when compared tothe same period in 2009, primarily due to lower volumes, reflected as adecrease in covers (as discussed above under Food and Beverage Revenue). Foodand beverage expenses as a percentage of food and beverage revenues were 77.3%and 75.2% for the three months ended March 31, 2010 and 2009,respectively.

 

*LodgingExpenses*

 

Lodging expensesrepresent those costs incurred for the operation of our luxury hotel at SenecaNiagara Casino and Hotel and our resort hotel at Seneca Allegany Casino andHotel.  The components of these expensesinclude payroll and payroll related expenses, guest amenity supplies, laundryand other expenses.  During the threemonths ended March 31, 2010, lodging expenses decreased approximately $0.3million, or 8% when compared to the three months ended March 31,2009.  Lodging expenses as a percentageof lodging revenues were 61.8% and 56.1% for the three months ended March 31,2010 and 2009, respectively. The increase in this percentage is due to adecrease in average daily room rate. While we continue to monitor efficiencies in the lodging segment, weseek to maintain the quality of our product and services for the benefit of ourpatrons.

 

*Retail,Entertainment and Other Expenses*

 

Retail, entertainment andother expenses primarily represent those costs incurred for the operation ofour retail shops and spas and our entertainment offerings.  The components of these expenses includepayroll and payroll related costs, the purchase of products offered for sale inour retail outlets and spas and contract costs for entertainers.  For the three months ended March 31,2010, these costs decreased approximately $0.3 million, or 7%, over thecomparable 2009 period, primarily due to a $0.2 million decrease in headlineentertainment costs.  Retail,entertainment and other expenses as a percentage of retail, entertainment andother revenues were 63.5% and 59.5%, for the three months ended March 31,2010 and 2009, respectively. The prior year percentage includes the effect of$0.3 million of non-recurring negotiated supplier refunds, which resulted in alower percentage when compared to the three months ended March 31, 2010.

 

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*Advertising,General and Administrative Expenses*

 

Advertising, general andadministrative expenses consist primarily of payroll and payroll relatedexpenses, regulatory fees, advertising and marketing costs, Head Lease expense,insurance, legal and utility costs.  Forthe three months ended March 31, 2010, such costs decreased $1.3 million,or 3%, from the same period in 2009.  Thedecrease was primarily due to a decrease of $2.5 million in payroll and relatedexpenses due to ongoing efficiency measures employed by the Company, and adecrease of $1.2 million in regulatory expenses, partially offset by anincrease of $1.3 million in Head Lease expense and an increase of $1.1 millionin all other expenses. Advertising, general and administrative expenses as apercentage of gross revenues were 29.6% and 30.1%, for the three months ended March 31,2010 and 2009, respectively.

 

*Pre-openingExpenses*

 

Pre-opening expenses arenon-recurring costs incurred to support the expected opening of newfacilities.  During the three monthsended March 31, 2010 and 2009, pre-opening expenses incurred of $20,000and $78,000, respectively, were primarily related to the preparation of theSeneca Hickory Stick Golf Club, to be operated by the Lewiston Golf CourseCorporation.

 

*DepreciationExpense*

 

During the three monthsended March 31, 2010 and 2009, depreciation expense was $11.0 million and$12.6 million, respectively, a decrease of $1.6 million, or 12%.

 

*Impairmentof Property and Equipment*

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, as previously described, were suspendedfor reasons including:  prevailingeconomic conditions; inability to obtain construction financing at reasonableinterest rates; and operating and other demands on our available cash, such asour payments and distributions to the Nation. Furthermore, certain master planning efforts related to the futureexpansion of the Seneca Niagara Falls property were suspended for the samereasons.  As a result of the ongoingsuspension, an impairment charge of approximately $166,000 was recorded duringthe three months ended March 31, 2010, in addition to the impairmentcharge of $107.6 million recognized during the third and fourth quarters ofFiscal 2009.

 

*OtherNon-Operating Expenses*

 

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

 
| ** **             | ** ** | **Three Months Ended**     | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **March 31,**                   | ** ** |
| ** **             | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)** | ** ** |
|                   |       |                                 |       |   |   |
| Non-operating expenses |       | $                                    | 3⁄4     |   | $ | 50 |   |
|                        |            |                                      |            |  |  |  |  |

 

Duringthe three months ended March 31, 2009, we recorded an other-than-temporary loss on onespecific investment of $0.1 million as other non-operating expense. The costbasis of this investment was reduced by the amount of the other-than-temporaryloss recorded.

 

*Interest Income*

 

Interest income wasapproximately $14,000 and $23,000, respectively, for the three months ended March 31,2010 and 2009.

 

*Interest Expense*

 

Thefollowing table summarizes information related to interest on our long-termdebt and Senior Secured Revolving Loan Agreement:

 

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| ** **       | ** ** | **Three Months Ended**     | ** ** |
|------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **March 31,**                   | ** ** |
| ** **       | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)** | ** ** |
|             |       |                                 |       |   |   |
| Interest expense |       | $                                    | 9,530      |   | $ | 9,674 |   |
|                  |            |                                      |            |  |  |  |  |

 

During the three monthsended March 31, 2010 and 2009, interest expense consisted of interest onour $500.0 million aggregate principal amount of 71⁄4% senior notes, including$0.8 million of amortization related to financing costs and discount, which waspartially offset by $0.4 million of capitalized interest primarily related toconstruction activities for our Seneca Hickory Stick Golf Club.

 

*Net Income*

 

Netincome for the three months ended March 31, 2010 was $14.3 million, comparedto net income of $17.6 million for the three months ended March 31, 2009, a decrease of$3.3 million, for the reasons stated above.

 

**Operating Results - SixMonths Ended March 31, 2010 Compared to the Six Months Ended March 31,2009**

** **

*Summary of Operating Results*

 

The following table summarizes our results fromoperations by corporation and/or facility:

 
| ** **                            | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Net revenues:                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 182,561    |   | $ | 188,260 |   |
| Seneca Allegany Casino and Hotel      |       | 68,243                               |       | 71,272 |   |
| Seneca Buffalo Creek Casino           |       | 23,579                               |       | 19,225 |   |
| Total                                 |       | $                                    | 274,383    |   | $ | 278,757 |   |
|                                  |       |                                 |       |   |   |
| Operating expenses:                   | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 140,463    |   | $ | 141,437 |   |
| Seneca Allegany Casino and Hotel      |       | 68,203                               |       | 72,381 |   |
| Seneca Buffalo Creek Casino           |       | 17,104                               |       | 15,323 |   |
| Seneca Hickory Stick Golf  Club       |       | 81                                   |       | 102 |   |
| Seneca Gaming Corporation             |       | 967                                  |       | 1,086 |   |
| Total                                 |       | $                                    | 226,818    |   | $ | 230,329 |   |
|                                  |       |                                 |       |   |   |
| Operating income (loss):              |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 42,098     |   | $ | 46,823 |   |
| Seneca Allegany Casino and  Hotel     |       | 40                                   |       | (1,109 | ) |
| Seneca Buffalo Creek Casino           |       | 6,475                                |       | 3,902 |   |
| Seneca Hickory Stick Golf Club        |       | (81                                  | )          | (102 | ) |
| Seneca Gaming Corporation             |       | (967                                 | )          | (1,086 | ) |
| Total                                 |       | $                                    | 47,565     |   | $ | 48,428 |   |

 

The most importantfactors or trends contributing to our operating performance during the sixmonths ended March 31, 2010 were:

 

·                  A 3% increase in the exclusivity feepayable to New York State, beginning January 1, 2010, from 22% to 25%which resulted in a $3.5 million increase to our operating expenses during thefirst six months of Fiscal 2010 ($2.3 million of the increase is attributableto Seneca Niagara Falls Casino and Hotel, $0.8 million is attributable toSeneca Allegany Casino and Hotel, and $0.4 million is attributable to SenecaBuffalo Creek);

 

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·                  The national recession and resultingimpact on discretionary consumer spending;

 

·                  Extension of hours of operation of theSeneca Buffalo Creek facility, effective February 2009, and subsequentexpansion of the Buffalo Creek facility, which opened in March 2010, toapproximately 10,600 square feet of gaming space and a total of 457 slotmachines;

 

·                  Relatively temperate weather during the six months ended March 31,2010 compared to the same period in 2009; and

 

·                  Capital investment in approximately 577slot machines, 401 at Seneca Niagara Falls Casino and Hotel and 176 at SenecaAllegany Casino and Hotel, introducing new gaming content to our gaming floors.

 

*GrossRevenues*

 

Gross revenuesconsisted of the following:

 
| ** **                      | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 253,017    |   | $ | 255,439 |   |
| Food and beverage               |       | 26,829                               |       | 28,435 |   |
| Lodging                         |       | 9,844                                |       | 11,872 |   |
| Retail, entertainment and other |       | 10,958                               |       | 12,266 |   |
| Total                           |       | $                                    | 300,648    |   | $ | 308,012 |   |

 

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

 
| ** **                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **March 31,**             | ** ** |
| ** **                      | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Gaming                          |       | 84.2                           | %          | 82.9 | % |
| Food and beverage               |       | 8.9                            | %          | 9.2 | % |
| Lodging                         |       | 3.3                            | %          | 3.9 | % |
| Retail, entertainment and other |       | 3.6                            | %          | 4.0 | % |
| Total                           |       | 100.0                          | %          | 100.0 | % |

 

*GamingRevenue*

 

Our gaming revenue forthe six months ended March 31, 2010 decreased from $255.4 million to$253.0 million when compared to the same period in the prior year, primarilydue to the ongoing impact of adverse economic conditions on consumer demand forgaming and entertainment offerings.

 

During the six monthsended March 31, 2010, Seneca Niagara Casino and Hotel’s net gaming revenuedecreased $4.2 million, or 3%; Seneca Allegany Casino and Hotel’s net gamingrevenue decreased $2.4 million, or 4%; and Seneca Buffalo Creek Casino’s netgaming revenue increased $4.2 million, or 22% when comparing these sameperiods.

 

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

 
| ** **                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **March 31,**             | ** ** |
| ** **                                           | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Slot handle                                          |       | $                              | 2,960,451  |   | $ | 2,992,796 |   |
| Gross slot revenue                                   |       | $                              | 230,985    |   | $ | 231,541 |   |
| Net slot revenue                                     |       | $                              | 226,315    |   | $ | 225,461 |   |
| Free promotional slot plays (1)                      |       | $                              | 21,136     |   | $ | 22,904 |   |
| Weighted average number of slot machines (in  units) |       | 6,516                          |       | 6,672 |   |
| Gross slot hold percentage                           |       | 7.8                            | %          | 7.7 | % |
| Gross slot win per unit per day (in dollars)         |       | $                              | 195        |   | $ | 191 |   |

 

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(1)          Free promotional slotplays are included in slot handle, but not reflected inslot revenues.

 

Net slot revenueincreased $0.9 million, or 0.4%, when comparing the six months ended March 31,2010 to the six months ended March 31, 2009, due primarily to an increasein slot hold percentage.

 

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

 
| ** **                                               | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **March 31,**             | ** ** |
| ** **                                               | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Table games drop                                         |       | $                              | 166,879    |   | $ | 183,004 |   |
| Net table games revenue                                  |       | $                              | 26,523     |   | $ | 29,753 |   |
| Weighted average number of table games (in units)        |       | 138                            |       | 143 |   |
| Table games hold percentage                              |       | 15.9                           | %          | 16.3 | % |
| Gross table games revenue per unit per day (in  dollars) |       | $                              | 1,060      |   | $ | 1,152 |   |

 

Net table games revenuedecreased $3.2 million, or 11%, when comparing the six months ended March 31,2010 to the six months ended March 31, 2009.  The decrease was principally due to theeconomic and related factors previously noted, coupled with a slight decreasein the average number of table games and the table games hold percentage whencomparing these same periods.

 

*Food andBeverage Revenue*

 

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

 
| ** **                 | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **March 31,**             | ** ** |
| ** **                 | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Covers                     |       | 1,835                          |       | 1,891 |   |
| Average check (in dollars) |       | $                              | 14.62      |   | $ | 15.04 |   |
|                            |            |                                |            |  |  |  |  |

 

During the six monthsended March 31, 2010, our consolidated food and beverage revenue decreased$1.6 million, or 6% when compared to the same period in 2009, due primarily tothe ongoing economic conditions causing a decrease in overall consumer spendingfor leisure and entertainment purposes. Seneca Niagara Casino and Hotel’s food and beverage revenue accountedfor $0.9 million of the decrease; Seneca Allegany Casino and Hotel’s and foodand beverage revenue accounted for $0.7 million of the decrease; and SenecaBuffalo Creek Casino’s food and beverage revenue approximated the revenue forthe same quarter in the prior year. During the six months ended March 31, 2010 and 2009, 53% and 52%,respectively, of our food and beverage revenue were the result of Seneca LinkPlayer’s Card point redemptions.

 

*LodgingRevenue*

 

The following tablepresents data related to lodging revenue:

 
| ** **                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **March 31,**             | ** ** |
| ** **                          | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Occupied rooms                      |       | 125,758                        |       | 137,041 |   |
| Average daily room rate (ADR)       |       | $                              | 78.28      |   | $ | 86.63 |   |
| Occupancy rate                      |       | 89.5                           | %          | 93.6 | % |
| Revenue per available room (REVPAR) |       | $                              | 70.09      |   | $ | 81.11 |   |

 

During the six monthsended March 31, 2010, our lodging revenue decreased by $2.0 million, or17%, when compared to the six months ended March 31, 2009, due to adecrease in the number of occupied rooms and average rate per occupied roomresulting from ongoing economic conditions. Seneca Niagara Casino and Hotel’slodging revenue accounted for $1.8 million of the decrease and Seneca AlleganyCasino and Hotel’s lodging revenue accounted for $0.2 million of thedecrease.  During the six months ended March 31,2010 and 2009, 76% of our lodging revenue was the result of Seneca Link Player’sCard point redemptions.

 

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*Retail,Entertainment and Other Revenue*

 

During the six monthsended March 31, 2010, our retail revenue decreased $0.2 million, or11%, when compared to the same period in 2009. During the six months ended March 31,2010 and 2009, 75% and 80%, respectively, of our retail revenue wasattributable to Seneca Link Player’s Card point redemptions.

 

During the six monthsended March 31, 2010, our entertainment revenue decreased$0.3 million, or 31%, when compared to the same period in 2009,primarily due to the impact of theentertainment product mix at Seneca Niagara Casino and Hotel including moreshows in the Bear’s Den (a smaller venue compared to the Seneca Niagara EventsCenter) during the six months ended March 31, 2010, coupled with loweraverage ticket prices, compared to the six months ended March 31, 2009.During the six months ended March 31, 2010 and 2009, 53% and 50% of ourentertainment revenue, respectively, was attributable to Seneca Link Player’sCard point redemptions.

 

During the six monthsended March 31, 2010, other revenue decreased $0.8 million, or 13%,when compared to the same period in 2009,primarily due to the impact of non-recurringnegotiated supplier refunds received during the six months ended March 31,2009.

 

*PromotionalAllowances*

 

SGC operates acomplimentary program in which food and beverage, retail, entertainment, andother services are provided to patrons based on points earned through theSeneca Link Player’s Card.  The retailvalue of these complimentary items is included in gross revenues and thendeducted as promotional allowances to arrive at net revenues.

 

The retail value ofproviding such promotional allowances was included in revenues as follows:

 
| ** **                      | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | 14,095                               |       | 14,889 |   |
| Lodging                         |       | 7,418                                |       | 9,068 |   |
| Retail, entertainment and other |       | 4,752                                |       | 5,298 |   |
| Total                           |       | $                                    | 26,265     |   | $ | 29,255 |   |
|                                 |            |                                      |            |  |  |  |  |

 

Theestimated cost of providing such promotional allowances was as follows:

 
| ** **                      | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **March 31,**                   | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | $                                    | 10,760     |   | $ | 11,198 |   |
| Lodging                         |       | 4,392                                |       | 4,513 |   |
| Retail, entertainment and other |       | 3,816                                |       | 4,375 |   |
| Total                           |       | $                                    | 18,968     |   | $ | 20,086 |   |

 

Promotional allowances asa percentage of gaming revenue were 10.4% and 11.5% during the six months endedMarch 31, 2010 and 2009, respectively. Promotional allowances decreased $3.0 million, or 10%, when comparingthe six months ended March 31, 2010 to the same period in 2009. As shownin the table above, food and beverage, lodging, retail, entertainment and otherpromotional allowances decreased $0.8 million, $1.7 million and $0.5 million,respectively.

 

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*Detailed Operating Expense Information*

 
| ** **                              | ** ** | **Six Months Ended**       | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **March 31,**                   | ** ** |
| ** **                              | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | $                                    | 78,209     |   | $ | 73,650 |   |
| Food and beverage                       |       | 21,088                               |       | 21,904 |   |
| Lodging                                 |       | 5,851                                |       | 6,159 |   |
| Retail, entertainment and other         |       | 7,387                                |       | 7,445 |   |
| Advertising, general and administrative |       | 92,195                               |       | 95,865 |   |
| Pre-opening costs                       |       | 92                                   |       | 136 |   |
| Depreciation                            |       | 21,775                               |       | 25,170 |   |
| Impairment of property and equipment    |       | 221                                  |       | 3⁄4 |   |
| Total operating expenses                |       | $                                    | 226,818    |   | $ | 230,329 |   |

 

*GamingExpenses*

 

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

 

The following tablesummarizes the exclusivity fees expense by property:

 
| ** **                            | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **March 31,**                   | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 35,091     |   | $ | 33,197 |   |
| Seneca Allegany Casino and Hotel      |       | 13,598                               |       | 13,192 |   |
| Seneca Buffalo Creek Casino           |       | 5,449                                |       | 4,153 |   |
| Total                                 |       | $                                    | 54,138     |   | $ | 50,542 |   |

 

The slot exclusivity feeincreased $3.6 million, from $50.5 million for the six months ended March 31,2009 to $54.1 million for the six months ended March 31, 2010, due to a 3%increase in the exclusivity fee percentage which became effective January 1,2010, and resulted in a $3.5 million increase to expense during the six monthsended March 31, 2010, compared to the six months ended March 31, 2009.  Gaming expenses as a percentage of grossgaming revenues were 28.5% and 26.5% for the six months ended March 31,2010 and 2009, respectively.  Gamingexpenses, prior to exclusivity fees expense, as a percentage of gross gamingrevenues were 9.5% and 9.0% for those same periods.

 

*Food andBeverage Expenses*

 

Food and beverageexpenses represent those costs incurred for the operation of our restaurants,snack bars and beverage outlets.  Theprimary components of these expenses are the cost of food and beverage productsand payroll and payroll related expenses for team members providing theservice.  During the six months ended March 31,2010, food and beverage costs decreased $0.8 million, or 4%, when compared tothe same period in 2009, primarily due to lower volumes, reflected as adecrease in covers (as discussed above under Food and Beverage Revenue). Foodand beverage expenses as a percentage of food and beverage revenues were 78.6%and 77.0% for the six months ended March 31, 2010 and 2009, respectively.

 

*LodgingExpenses*

 

Lodging expensesrepresent those costs incurred for the operation of our luxury hotel at SenecaNiagara Casino and Hotel and our resort hotel at Seneca Allegany Casino and Hotel.  The components of these expenses includepayroll and payroll related expenses, guest amenity supplies, laundry and otherexpenses.  During the six months ended March 31,2010, lodging expenses decreased approximately $0.3 million, or 5%, whencompared to the six months ended March 31, 2009.  Lodging expenses as a percentage of lodgingrevenues were 59.4% and 51.9% for the six months ended March 31, 2010 and2009, respectively. The increase in this percentage is due to a decrease inaverage daily room rate.  While wecontinue to monitor efficiencies in the lodging segment, we seek to maintainthe quality of our product and services for the benefit of our patrons.

 

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*Retail,Entertainment and Other Expenses*

 

Retail, entertainment andother expenses primarily represent those costs incurred for the operation ofour retail shops and spas and our entertainment offerings.  The components of these expenses includepayroll and payroll related costs, the purchase of products offered for sale inour retail outlets and spas and contract costs for entertainers.  For the six months ended March 31, 2010,these costs approximated those of the comparable 2009 period. Retail,entertainment and other expenses as a percentage of retail, entertainment andother revenues were 67.4% and 60.7%, for the six months ended March 31,2010 and 2009, respectively. The increase over the prior year percentage is inpart due to the effect of $0.6 million of non-recurring negotiated supplierrefunds.

 

*Advertising,General and Administrative Expenses*

 

Advertising, general andadministrative expenses consist primarily of payroll and payroll related expenses,regulatory fees, advertising and marketing costs, Head Lease expense,insurance, legal and utility costs.  Forthe six months ended March 31, 2010, such costs decreased $3.7 million, or4%, from the same period in 2009.  Thedecrease was primarily due to a decrease of $4.9 million in payroll and relatedexpenses, due to ongoing efficiency measures employed by the Company, offset byan increase of $1.0 million in professional services expenses and a netincrease of $0.2 million in all other expenses. Advertising, general andadministrative expenses as a percentage of gross revenues were 30.7% and 31.1%,for the six months ended March 31, 2010 and 2009, respectively.

 

*Pre-openingExpenses*

 

Pre-opening expenses arenon-recurring costs incurred to support the expected opening of newfacilities.  During the six months ended March 31,2010 and 2009, $0.1 million of pre-opening expenses were incurred, primarilyrelated to the preparation of the Seneca Hickory Stick Golf Club, to beoperated by the Lewiston Golf Course Corporation.

 

*DepreciationExpense*

 

During the six monthsended March 31, 2010 and 2009, depreciation expense was $21.8 million and$25.2 million, respectively, a decrease of $3.4 million, or 14%.

 

*Impairmentof Property and Equipment*

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, as previously described, were suspendedfor reasons described above in the Executive Summary.  As a result of the ongoing suspension andreassessment of estimated impairment charges, approximately $221,000 wasrecorded during the six months ended March 31, 2010, in addition to theimpairment charge of $107.6 million recognized during the third and fourthquarters of Fiscal 2009.

 

*OtherNon-Operating Expenses*

 

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

 
| ** **             | ** ** | **Six Months Ended**       | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **March 31,**                   | ** ** |
| ** **             | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)** | ** ** |
|                   |       |                                 |       |   |   |
| Non-operating expenses |       | $                                    | 113        |   | $ | 163 |   |
|                        |            |                                      |            |  |  |  |  |

 

Duringthe six months ended March 31, 2010 and 2009, we recorded an other-than-temporary loss onone specific investment of $0.1 million and $0.2 million, respectively, asother non-operating expense. The cost basis of this investment has been reducedby the amount of the other-than-temporary loss recorded.

 

*Interest Income*

 

Interest income wasapproximately $25,000 and $81,000, respectively, for the six months ended March 31,2010 and 2009. The decrease in interest income can be attributed to thedecrease in the average cash balance on deposit with financial institutions ininterest bearing accounts when comparing these periods.

 

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*Interest Expense*

 

Thefollowing table summarizes information related to interest on our long-termdebt and Senior Secured Revolving Loan Agreement:

 
| ** **       | ** ** | **Six Months Ended**       | ** ** |
|------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **March 31,**                   | ** ** |
| ** **       | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)** | ** ** |
|             |       |                                 |       |   |   |
| Interest expense |       | $                                    | 19,071     |   | $ | 19,277 |   |
|                  |            |                                      |            |  |  |  |  |

 

During the six monthsended March 31, 2010 and 2009, interest expense consisted of interest onour $500.0 million aggregate principal amount of 71⁄4% senior notes, including$1.6 million of amortization related to financing costs and discount, which waspartially offset by $0.7 million of capitalized interest primarily related toconstruction activities for our Seneca Hickory Stick Golf Club.

 

*Net Income*

 

Net income for the six months ended March 31, 2010 was $28.4million, compared to net income of $29.1 million for the six months ended March 31, 2009, a decrease of$0.7 million, for the reasons stated above.

 

**Liquidity and Capital Resources**

 

SGC’s seniormanagement, Board of Directors and its owner, the Nation, monitor and reviewour financial condition and liquidity needs to help ensure appropriateoperating, financial and strategic plans meet ongoing economic challenges andaddress our ongoing liquidity requirements.

 

Inaddition, we intend to continue to work closely with the Nation to help ensurecash generated from our operations, available cash and cash equivalents,restricted cash, short-term investments and cash available under our AmendedSenior Secured Revolving Loan Agreement are sufficient to service our debt,satisfy our other financial obligations and commitments and to meet our workingcapital requirements for the remainder of the current fiscal year. In October 2009,the Nation reduced anticipated Fiscal 2010 monthly distributions, exclusive ofamounts required under the Distribution Agreement to $30.0 million, compared to$42.0 million for Fiscal 2009.  As aresult of these efforts, in conjunction with our efforts to create additionaloperating efficiencies, SGC’s depository cash balances increased toapproximately $82.7 million at March 31, 2010 (including $33.0 million ofrestricted cash) from $18.8 million, net of the $20.0 million proceeds drawnunder the Senior Secured Revolving Loan Agreement, as of March 31, 2009.

 

Ourability to fund our operations, make planned capital expenditures, service ourdebt and satisfy our other financial obligations and commitments depends on ourfuture operating performance and cash flow, which are in turn subject toprevailing economic conditions and to financial, business and other factors,some of which are beyond our control. Additionally, unlike traditional corporations, we are prohibited by lawfrom obtaining capital through an offering of equity securities and our abilityto incur additional indebtedness is limited under the terms of the Indenturegoverning the senior notes, the Distribution Agreement and the Amended SeniorSecured Revolving Loan Agreement.

 

We areleveraged, have significant interest payment requirements under the Indenturegoverning the Senior Notes, distribution obligations under the DistributionAgreement and other commitments from time to time to the Nation. We makedistributions to the Nation pursuant to declarations by our Board ofDirectors.  During the six months ended March 31,2010 and 2009, we distributed $15.0 million and $26.2 million, respectively, tothe Nation pursuant to such declarations. We distributed an additional $7.5 million and $7.0 million to the Nationduring the six months ended March 31, 2010 and 2009, respectively,pursuant to the Distribution Agreement. As such, limitations on our capital resources could force us to furtherdelay or abandon capital projects including the construction and development ofexpansion projects currently suspended.

 

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*Cash Flows*

 
| ** **                                             | ** ** | **Six Months Ended**       | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **March 31,**                   | ** ** |
| ** **                                             | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                                             | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net cash provided by operations                        |       | $                                    | 59,545     |   | $ | 59,764 |   |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to investing activities            |       |                                 |       |   |   |
| Purchases of property and equipment                    |       | (13,936                              | )          | (33,786 | ) |
| Deposits to restricted cash                            |       | (33,013                              | )          | 3⁄4 |   |
| Change in long-term deposits                           |       | 10                                   |       | 50 |   |
| Land acquisition costs                                 |       | (115                                 | )          | (482 | ) |
| Net cash used in investing activities                  |       | (47,054                              | )          | (34,218 | ) |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to financing activities            |       |                                 |       |   |   |
| Contribution received from the Nation                  |       | 5,101                                |       | 3⁄4 |   |
| Cash paid for deferred financing fees                  |       | (79                                  | )          | 3⁄4 |   |
| Proceeds from senior secured revolving loan  agreement |       | 3⁄4                               |       | 20,000 |   |
| Distributions paid to the Nation                       |       | (22,452                              | )          | (33,239 | ) |
| Net cash used in financing activities                  |       | (17,430                              | )          | (13,239 | ) |
|                                                   |       |                                 |       |   |   |
| Net increase(decrease) in cash and cash  equivalents   |       | $                                    | (4,939     | ) | $ | 12,307 |   |

 

*Cash Flows—Operating Activities*

 

The$0.2 million decrease in cash flows from operations during the six months endedMarch 31, 2010 as compared to the six months ended March 31, 2009 wasdue to lower depreciation expense of $3.4 million and lower net income of $0.7million, offset by an increase in cash inflows from the change in currentliabilities of $1.6 million and a decrease in cash outflows for current assetsof $2.3 million.

 

*Cash Flows—Investing Activities*

 

Duringthe six months ended March 31, 2010, cash flows used in investingactivities were approximately $47.1 million, compared to $34.2 million duringthe six months ended March 31, 2009. The increase of $12.8 million was due primarily to an increase inrestricted cash of $33.0 million, partly offset by a decrease in cash paid forproperty and equipment of $19.9 million.

 

Duringthe six months ended March 31, 2010, capital expenditures were $13.9million and consisted of: $2.4 million related to construction of the SenecaHickory Stick Golf Club; and $5.6 million for the expansion of the existinggaming facility at the Seneca Buffalo Creek Casino.  The remaining $5.9 million in capitalexpenditures were principally for the acquisition of equipment for existingcasino operations.  Our land acquisitionsof $0.1 million include legal expenses and other acquisition costs related to certainparcels within the 50 acre “footprint” described in the Compact with New YorkState and designated for ownership by the Nation.

 

*Cash Flows—Financing Activities*

 

During the six months ended March 31,2010, net cash used in financing activities was $17.4 million, compared to$13.2 million during the six months ended March 31, 2009, an increase of$4.2 million.  During the six monthsended March 31, 2010 these activities included cash distributions paid tothe Nation of $22.5 million offset by a cash contribution received from theNation of $5.1 million. During the six months ended March 31, 2009 theseactivities consisted of cash distributions to the Nation of $33.2 millionoffset by proceeds from borrowings under the senior secured revolving loan agreementof $20.0 million.

 

*Principal Debt Arrangements*

 

As of March 31,2010, our debt instruments and facilities consisted of the 2004 and 2005 seniornotes on which we pay a fixed interest rate of 71⁄4%, and the $50.0 millionAmended Senior Secured Revolving Loan Agreement, which matures on December 31,2011.  Following is a summary of certainmaterial terms of the senior notes and the Amended Senior Secured RevolvingLoan Agreement.

 

TheSenior Notes.   On May 5, 2004 and May 23, 2005,SGC issued $300.0 million and $200.0 million, respectively, in senior noteswith fixed interest payable at a rate of 71⁄4% per annum due 2012, which we referto collectively as the Senior Notes, under the Indenture.  The Senior Notes are currently guaranteed bySNFGC, STGC,

 

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SEGC,and LGCC.  Interest on the Senior Notesis payable semi-annually on May 1 and November 1.  The Senior Notes mature on May 1,2012.  The Senior Notes are unsecuredgeneral obligations.  As of March 31,2010, accrued interest on the Senior Notes was $15.1 million.  The indenture contains certain covenants,including limitations on restricted payments and the incurrence ofindebtedness, and reporting obligations. As of March 31, 2010, SGC was in compliance with all covenants inthe Indenture.

 

Amended Senior Secured Revolving Loan Agreement. On December 18, 2009, SGC amended its $50.0 million Senior SecuredRevolving Loan Agreement to extend the maturity date from December 19,2009 to December 31, 2011. Amounts borrowed under the Amended SeniorSecured Revolving Loan Agreement continue to bear interest at either one, threeor six-month LIBOR plus one and one quarter percent (1.25%), or the prime rate(as reported in The Wall Street Journal) plus one quarter percent (0.25%), withany outstanding principal balance to be paid by, or on, the new maturitydate.  The $50.0 million commitment underthe Amended Senior Secured Revolving Loan Agreement reduces in tandem with anyreduction in the letter of credit requirement imposed by the ESDC (relating tothe ESDC’s efforts on behalf of SGC in connection with ongoing condemnationproceedings in Niagara Falls, New York) up to an aggregate reduction of $10.0million.  The Amended Senior SecuredRevolving Loan Agreement requires that SGC maintain all of its deposit andinvestment accounts with the lender, subject to limited exceptions for certainexisting accounts.

 

SGC’s obligations under the Amended Senior SecuredRevolving Loan Agreement continue to be secured by substantially all gaming andrelated assets (including substantially all gaming revenues) not constitutingreal property or improvements. SGC’s obligations are guaranteed by SNFGC, STGC,SEGC and LGCC, and the guarantors’ obligations continue to be secured bysubstantially all of each guarantor’s gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. The Amended Senior Secured Revolving Loan Agreement modifiescertain of the financial covenants contained in the Senior Secured RevolvingLoan Agreement, including reducing the minimum consolidated EBITDA covenantfrom $160 million to $145 million (on a rolling 12-month basis) as well asmodifying the total leverage ratio (of total funded debt to EBITDA) to a limitof 3.5 to 1.0.  The Amended SeniorSecured Revolving Loan Agreement also continues to contain additional customarycovenants, including covenants restricting the incurrence of additionalindebtedness, the creation of additional liens and the disposition of assets.As of March 31, 2010, SGC was in compliance with all covenants in theAmended Senior Secured Revolving Loan Agreement.

 

As of March 31, 2010, at SGC’s request, thelender under the Amended Senior Secured Revolving Loan Agreement had issuedletters of credit totaling $18.3 million, $13.2 million (as required by theESDC) of which may be drawn upon to fund the purchase of certain parcels withinthe 50 acre “footprint” described in the Compact with New York State anddesignated for ownership by the Nation, with the remaining $5.1 million issuedin connection with worker’s compensation policies and certain other contracts,as required.

 

*DistributionAgreement Obligations*

 

On April 27,2007, SGC entered into a Distribution Agreement among the Nation, the SenecaNation of Indians Capital Improvements Authority, or the Authority, SGC andWells Fargo Bank, as Trustee, in connection with the Authority’s issuance intwo series (one tax exempt and the other taxable) of an aggregate principalamount of $159,495,000 special obligation bonds, or the 2007 Nation Bonds.  The Distribution Agreement obligates SGC,subject to any contractual restrictions applicable to SGC (including, but notlimited to, those contained in the Senior Notes Indenture) to make monthlydistributions to the Nation at the times and in the amounts necessary to enablethe Authority to pay the debt service on the 2007 Nation Bonds as requiredunder the Authority’s indenture.  At thedirection of the Nation and the Authority, SGC pays such distributions directlyto the Trustee.  The Authority’s debtservice commenced on June 1, 2007. For the period from June 1, 2007 through November 1, 2007, theAuthority’s debt service averaged approximately $0.9 million permonth.  For the period December 1,2007 through June 1, 2008, the Authority’s debt service averagedapproximately $1.7 million per month.  InJune 2008, it was determined that the amortization (debt service) scheduleprovided, upon which the foregoing $1.7 million monthly payments was made, wasincorrect.  A corrected amortizationschedule was provided and, after giving effect to a resulting credit foramounts overpaid, for the period from January 1, 2008 through December 1,2023, the Authority’s debt service averages approximately $1.2 million permonth.  The foregoing debt serviceaverages are based on scheduled payments of interest and principal under theAuthority’s indenture and bonds and do not address the effects of any earliercall for redemption, by acceleration or otherwise.  The Distribution Agreement provides thatneither the Trustee nor the Authority’s bondholders will have any recourseunder the Distribution Agreement to any revenues, assets or property of SGC orits subsidiaries should SGC fail to comply with our distributionobligations.  During the six months endedMarch 31, 2010 and 2009, SGC distributed to the Nation $7.5 million and$7.0 million, 

 

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respectively,for the Authority’s debt service on the special obligation bonds.

 

*OtherCommitments*

 

In2002 and pursuant to the Compact, the Nation acquired from the State of NewYork approximately 24 acres of land and related improvements in the City ofNiagara Falls, New York, including the then-Niagara Falls ConventionCenter.  The State of New York furtheragreed in the Compact to assist the Nation in whatever manner appropriate,including through the exercise of its power of eminent domain, to acquire theremaining acreage within the approximate 50-acre footprint in the City ofNiagara Falls, New York, designated by New York State under the Compact forownership by the Nation. The Compact specifically excluded approximately 1.5acres of land within the footprint owned by a Roman Catholic Church.  Additionally, in July 2006, the Nationagreed to waive its right to acquire approximately one half acre of additionalland within the footprint owned by End Time Handmaidens, Inc., a religiousorganization.  In return for the waiver,the Nation obtained a right of first negotiation and refusal with respect tothe future sale of the parcels.  As aresult of the carve-out relating to the parcels owned by the Roman CatholicChurch, and the Nation’s agreement with End Time Handmaidens, the total acreageof the Niagara Territory upon completion of the condemnation process isanticipated to be approximately 48 acres.

 

Wehave obtained possession of, either through eminent domain proceedings orprivate purchase, substantially all of the remaining acreage within thefootprint, other than certain streets and alleys owned by the City of NiagaraFalls providing access to the above church parcels, and a bicycle path owned bythe New York State Department of Transportation, or NYSDOT. We expect toacquire the above Niagara Falls city street and alley parcels during the thirdquarter of Fiscal 2010, with acquisition of the NYSDOT bike path requiringfurther dialogue with New York State.

 

Substantiallyall of the post-2002 real property acquisitions in Niagara Falls, New York havebeen pursuant to New York State Eminent Domain Procedure Law, or EDPL, usingthe State’s power of eminent domain (through the ESDC).  The amounts paid to condemnees from whom theESDC has acquired property are deemed to be advance payments, in that propertyowners are entitled to reserve their rights to challenge the land andimprovement values determined by the condemnor’s appraisers.  The ESDC has made advanced payments under theEDPL of approximately $31.5 million for the condemned parcels within thefootprint including, in particular, approximately 18 acres of land and relatedfixtures (a former water park) for an aggregate advanced payment of $18.0million, and another hotel property for an aggregate advanced payment of $8.2million (excluding fixtures).

 

Pursuant to the EDPL, NewYork state courts will determine the final purchase price to be paid tocondemnees who elect to challenge the initial appraised value of theirproperty.  To date, all record ownersfrom whom property was acquired pursuant to the EDPL have reserved rights toclaim additional compensation.  Mostrecord owners have filed notices of claim to initiate proceedings challengingthe fair market value appraisals utilized by ESDC. The most significantvaluation proceedings were those involving Fallsite LLC and Fallsville Splash,LLC, which have filed notices of claim in the amounts of $40.0 million and$35.0 million for land and trade fixtures, respectively, relating to a formerwater park within the footprint.  ESDC’sfair market appraisal value for the foregoing was approximately $17.0 million. On April 5,2010, the New York State Supreme Court determined that no additionalcompensation was owed to either Fallsite LLC or Fallsville Splash for the waterpark real estate and fixtures.  SGCanticipates that the former property owners will appeal.

 

IntertrustDevelopment had filed a notice of claim for $15.8 million for land and tradefixtures associated with a former Holiday Inn hotel within the footprint. ESDC’sfair market appraisal value for the foregoing was $8.2 million (excludingfixtures).  We agreed to a settlement ofthis matter with Intertrust, whereby Intertrust has received an additional $3.8million in addition to the appraisal value of $8.2 million, and whereby we haveagreed to purchase, for business promotional use, tickets to FallsviewWaterpark, an affiliate of Intertrust, for $2.5 million to be paid in threeinstallments over three years.

 

Anotherformer landowner, JFD Holdings has filed a notice of claim for $1.1 million fora parcel of land at 621 Niagara Street within the footprint.  ESDC’s fair market appraisal for theforegoing is approximately $550,000.  Notrial date has yet been set. Also, three individuals have filed notices ofclaim with respect to four parcels within the footprint seeking $955,000, inaggregate, for the four parcels.  ESDC’sfair-market appraisal for the four properties, in aggregate, is $185,000.  No trial dates have been set.

 

If acourt determines that the value for the land and improvements is higher thanthe appraised value paid to a condemnee, then SGC may be liable to the condemneefor the difference and potentially also responsible for certain

 

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additionalcosts and payments to the condemnee, such as attorneys’ fees.  As of March 31, 2010, $1.7 million ofthe previously recorded reserve of $6.4 million remained for such matters andis included in the other current and long-term liabilities sections on SGC’sconsolidated balance sheet.  Should theliability be greater than our reserve for such matters, it could have anegative impact on income and financial condition.

 

*Expansionand Development Plans*

 

On August 27, 2008, the construction activities at Seneca AlleganyCasino and Hotel and Seneca Buffalo Creek Casino, each described below, weresuspended for reasons including:  theeconomic recession; inability to obtain construction financing at reasonableinterest rates; and operating and other demands on available cash, such aspayments to the Nation.  As of March 31,2010, construction remained suspended indefinitely.  Furthermore, certain planning efforts relatedto the future expansion of the Seneca Niagara Falls property were suspended forthe same reasons.  As a result of thesecircumstances an impairment charge of $107.6 million was recognized during thethird and fourth quarters of Fiscal 2009. During the three and six months endedMarch 31, 2010, an additional $166,000 and $221,000, respectively, wasrecorded as an impairment of property and equipment. Nonetheless, SGC willcontinue to explore alternative future expansion and development options.

 

*Seneca Niagara Falls Casino and Hotel. *In 2006, we began master planning activities for theremaining approximately 24 acres of undeveloped land contained in the NiagaraFalls footprint.  During August 2008,these master planning activities were suspended and an impairment charge wasrecognized in the third quarter of Fiscal 2009 related to these activities, inthe amount of approximately $3.5 million. During the three and six months endedMarch 31, 2010, an additional $33,000, was recorded as an impairment ofproperty and equipment.

 

*Seneca Allegany Casino and Hotel. *Construction on the next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200-room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of approximately $130million, was suspended and an impairment charge was recognized in the third andfourth quarters of Fiscal 2009 related to these activities, in the amount ofapproximately $17.1 million. During the three and six months ended March 31,2010, an adjustment to estimated impairment in the amount of $1,000 and anadditional impairment charge of $37,000, respectively, were recognized.

 

*Seneca Buffalo Creek Casino.*Construction on the next phase ofdevelopment at Seneca Buffalo Creek Casino and Hotel, which was planned toinclude approximately 90,000 square feet of gaming space; 2,000 slot machines;45 table games; a 22-story all-suite hotel; four restaurants; a full-servicespa and salon; retail and other amenities; and a 2,200-space parking garage,for a total estimated cost of approximately $333 million, was suspended and animpairment charge was recognized in the third and fourth quarters of Fiscal2009 related to these activities, in the amount of approximately $87.0 million.During the three and six months ended March 31, 2010, an additional$134,000 and $151,000, respectively, were recorded as impairments of propertyand equipment.

 

On March 5, 2010 SEGC completed an expansion of the existingfacility, increasing the number of slot machines to 457 and the total squarefeet of gaming space to approximately 10,600.

 

The construction of a permanent casino at the Buffalo Creek site, aswell as any expansion by STGC at Seneca Allegany Casino and Hotel will requiresignificant capital outlays. The ability to recommence these projects willdepend on various factors including prevailing economic conditions, cash flowfrom operations, the availability of external financing with regard to one ormore of the projects, certain Nation and governmental approvals, and theeffects of legal and/or administrative proceedings.

 

*Seneca Hickory Stick Golf Club. *In July 2007,the Company commenced construction of the Seneca Hickory Stick Golf Club, an18-hole Robert Trent Jones II designed golf course. The golf course is locatedin Lewiston, New York and is approximately ten miles from the Seneca NiagaraCasino and Hotel.  Seneca Hickory StickGolf Club will feature a scenic Par-72 links style layout. There will be asimple 4,300 square foot clubhouse with a pro shop, bar and casual dining for40 patrons. The area around the clubhouse has been designed to accommodatetents and support facilities for large tournaments. The course is scheduled toopen July 1, 2010.  As of March 31,2010, the Company has incurred $23.0 million for the purchase of land andconstruction, with a total cost to construct the golf course, clubhouse andrelated amenities estimated to be approximately $25.5 million.

 

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**Regulation**

 

Ouroperations are regulated by Nation laws, the Compact and federal statutes, mostnotably the Indian Gaming Regulatory Act, or IGRA.  Several bills were proposed during pastsessions of Congress that would have affected Indian gaming but were notenacted into law.  While bills may beintroduced that are relevant to Indian gaming in the 111th Congress,leaders from the committees that have jurisdiction over the IGRA have not madeany indications that gaming regulation will be an agenda item for the 111th Congress.  It remains unclear whether the administrationwill pursue legislative initiatives related to the topic of Indian gaming.

 

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

 

**Recent Accounting Pronouncements**

** **

In February 2010,the Financial Accounting Standards Board, or the FASB, issued AccountingStandards Update  2010-09, “SubsequentEvents (Topic 855) — Amendments to Certain Recognition and DisclosureRequirements,” or Update 2010-09.  Update2010-09 removes the requirement for companies filing periodic reports with theSEC, or SEC filers, to disclose the date through which an entity has evaluatedsubsequent events.  However, thedisclosure exemption does not relieve management of an SEC filer from itsresponsibility to evaluate subsequent events through the date on whichfinancial statements are issued.  Update2010-09 became effective for the Company for the second quarter of Fiscal2010.  The adoption of the provisions ofthe Update did not have a material impact on the Company’s consolidatedfinancial statements.

 

**InApril 2010, the FASB issued an Accounting Standards Update, “Entertainment-Casinos(Topic 924), Accruals for Casino Base Jackpot Liabilities, a consensus of theFASB Emerging Issues Task Force,” or ASU 2010-16. The objective of ASU 2010-16is to address the accounting for casino base jackpot liabilities. Specifically,it addresses diversity in practice regarding whether an entity accruesliabilities for a base jackpot before it is won if the entity is not requiredto award the base jackpot. Some entities do not accrue liabilities for a basejackpot before it is won because they could avoid the payment. Other entitiesaccrue liabilities for a base jackpot ratably over the period of play expectedto precede payout. ASU 2010-16 clarifies that an entity should not accruejackpot liabilities (or portions thereof) before a jackpot is won if the entitycan avoid paying that jackpot. Jackpots should be accrued and charged torevenue when an entity has the obligation to pay the jackpot. This guidanceapplies to both base and progressive jackpots and is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2010. The amendments are to be applied prospectively with a cumulative-effectadjustment reflected in retained earnings. The cumulative-effect adjustment isthe difference between the amounts recognized in the statement of financialposition before initial application of the amendments and the amountsrecognized in the statement of financial position at initial application ofthose amendments. The Company is currently evaluating the impact implementationof ASU 2010-16 will have on the consolidated financial statements.**

** **

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

** **

**Item3.           Quantitative and QualitativeDisclosures About Market Risk**

** **

Therehave been no material changes in our market risk exposures since September 30,2009.  For more information, 

 

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referto “Item 7A.  Quantitative andQualitative Disclosures About Market Risk” included in our 2009 Form 10-K.

 

**Item4.          Controls andProcedures**

** **

(a)           Evaluation of Disclosure Controls andProcedures

 

TheCompany maintains a system of disclosure controls and procedures (as defined inRule 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934) designed to provide reasonable assurance as to the reliability of thefinancial statements and other disclosures contained in this report.  The Company’s Chairman of the Board and ChiefExecutive Officer, President and Chief Operating Officer, and Senior VicePresident and Chief Financial Officer evaluated the effectiveness of theCompany’s disclosure controls as of the end of the period covered in thisreport.  Based upon that evaluation, theCompany’s Chairman of the Board and Chief Executive Officer, President andChief Operating Officer, and Senior Vice President and Chief Financial Officerhave concluded that as of the end of such period, the Company’s disclosurecontrols and procedures were effective.

 

(b)           Changes in Internal Control overFinancial Reporting

 

Therehave been no changes in the Company’s internal control over financial reporting(as defined by Rule 13a-15(f)) that occurred during the period covered bythis Quarterly Report on Form 10-Q that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**Part II.     OTHER INFORMATION**

 

**Item 1.**                                                         Legal Proceedings

** **

Otherthan as described below, there have been no material changes in our legalproceedings since December 31, 2009. For more information, refer to “Item 3. Legal Proceedings” in our 2009 Form 10-K.

 

***CitizensAgainst Casino Gambling in Erie County v. Hogen (1:2009-cv-00291 (WDNY)) —CACGEC III***

 

On March 31, 2009, Citizens Against CasinoGambling in Erie County (CACGEC) filed a third action in the United StatesDistrict Court, Western District of New York against the Chairman of theNational Indian Gaming Commission, or NIGC, the United States Department of theInterior, the NIGC, the Secretary of the Interior and the President of theUnited States.  The action seeksdeclaratory and injunctive relief under the Administrative Procedure Act, theDeclaratory Judgments Act, and the IGRA and is principally directed at thedecision by the NIGC Chairman, on January 20, 2009, to approve the SenecaNation’s amendments to its Class III Gaming Ordinance regarding the Nation’sBuffalo Creek Territory.  The NIGCChairman concluded that IGRA’s general prohibition against gaming on landsacquired after its enactment in 1988 does not apply to lands, such as theBuffalo Creek Territory, that are held in restricted fee.   The plaintiffs claim that, in approving theNation’s Class III Gaming ordinance on January 20, 2009, the NIGCChairman ignored the intention of Congress. The plaintiffs also make several claims that go beyond their priorlawsuits.  Most notably, they challengethe constitutionality of the land purchase provisions contained in the SenecaNation Lands Claim Settlement Act of 1990, or SNLCSA, and attempt to challengein a more extensive fashion than they had previously the validity of theNation-State Gaming Compact.

 

On June 15, 2009, the Nation moved to interveneas a defendant in CACGEC III.  The Nation’sproposed intervention and participation as a defendant are expressly restrictedto the three claims for relief specified in the plaintiffs’ complaint,namely:  (1) whether, as restrictedfee lands over which the Nation exerts governmental authority, the BuffaloCreek Territory qualifies as “Indian lands” under IGRA; (2) whether theBuffalo Creek Territory is subject to the general prohibition found in section2719 of IGRA against gaming on trust lands acquired after IGRA’s effective dateeven though the Territory consists of restricted fee, rather than trust, lands;and (3) whether, if the Buffalo Creek Territory is subject to Section 2719’sgeneral prohibition, Class III gaming may nevertheless proceed on itbecause the Buffalo Creek Territory was acquired in settlement of a land claim.

 

On March 30, 2010, the Court denied the Nation’smotion to intervene, while granting permission for it to participate as *amicus curiae*.  TheCourt also dismissed certain secondary claims of the plaintiffs in theproceeding, while allowing other core claims regarding the eligibility of theland for casino gaming to proceed.   Ifthe plaintiffs ultimately succeed in this action, or in their pending appealsin the CACGEC I and CACGEC II proceedings (previous suits filed by theplaintiffs and relating to similar claims), the SGC may be unable to conductany Class III gaming at its existing properties.

 

***In the matter of the Petition ofNew York State Urban Development Corporation d/b/a Empire State DevelopmentCorporation (NYS Supreme Court, Niagara County)***

 

Pursuantto the Compact, the State of New York agreed to assist the Nation in whatevermanner appropriate, including through the exercise of its power of eminentdomain, to acquire acreage within the approximately 50-acre footprintsurrounding the former Niagara Falls Convention Center in the City of NiagaraFalls, New York, designated by New York State under the Compact for ownershipby the Nation.  The amounts paid tocondemnees from whom the ESDC has acquired property are deemed to be advancepayments, in that property owners are entitled to reserve their rights tochallenge the land and improvement values determined by the condemnor’sappraisers.

 

Withrespect to approximately 18 acres of land and related fixtures (a former waterpark) within the above footprint, the ESDC made advanced payments under NewYork eminent domain procedure law of $18.0 million to Fallsite LLC andFallsville Splash, LLC, the owners of the water park property.  The owners thereafter filed notices of claimseeking, in the aggregate, $40.0 million and $35.0 million for land and tradefixtures, respectively. On April 5, 2010, the New York State Supreme Courtdetermined that no additional compensation was owed to the former propertyowners for the water park real estate and fixtures.  SGC anticipates that the former propertyowners will appeal.

 

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***Seneca Gaming Corporation v. Harvest Trends, Inc.et al. (NYS Supreme Court, Niagara County)***

 

OnApril 1, 2010, SGC filed suit in the State of New York Supreme Court,County of Niagara, against Harvest Trends, Inc., Harvest Trends LLP, RiverLee International, Inc., and several individuals who are former employeesof SGC.  The suit alleges that theseformer employees and a vendor, who had been hired and paid to assist SGC increating an enterprise data warehouse, used SGC time and SGC resources todevelop Harvest Trends, an entity created to market a similar product to SGC’scompetitors.  SGC is suing for damages inan amount to be determined and for injunctive relief for the misappropriationof trade secret customer data, unjust enrichment, unfair competition, breachesof fiduciary duties and duties of loyalty, and breaches of contracts.  In addition, on May 6, 2010, SGCinitiated a proceeding in Niagara Falls seeking binding arbitration againstRajat Shah, SGC’s former Senior Vice President of Corporate Development andGeneral Counsel, in connection with his alleged involvement with the employeesand entities involved in the lawsuit described above, seeking damages in anamount to be determined and injunctive relief for breach of his employmentagreement, breaches of fiduciary duty and duty of loyalty, and diversion of corporateopportunity.

 

**Item1A.                Risk Factors**

** **

Ourresults of operations and financial condition are subject to numerous risks anduncertainties described in “Item 1A. Risk Factors” included in our 2009 Form 10-K.  The risk factors identified therein have not materiallychanged.

 

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**Item 6.   Exhibits**

 
| (a)              |       | Exhibits (listed according  to the number assigned in the table in Item 601 of Regulation S-K):                                                                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                   |
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                         |
| 31.1             |       | Certification of Catherine  Walker, principal executive officer, pursuant to Rule 13a-14 and 15d-14  of the Securities Exchange Act of 1934 (filed herewith).                                                                                           |
|             |       |                                                                                                                                                                                                                                                         |
| 31.2             |       | Certification of David  Sheridan, principal financial officer, pursuant to Rule 13a-14 and  15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                             |
|             |       |                                                                                                                                                                                                                                                         |
| 32.1             |       | Certification of Catherine  Walker, principal executive officer, and David Sheridan, principal financial  officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                   | **SENECA GAMING CORPORATION**                 |
|------------------------|-----------------------------------------------|
|                   |                                          |
|                   |                                          |
| Date: May 7, 2010 | /s/ Catherine Walker                          |
|                   | Catherine Walker                              |
|                   | Chief Operating Officer                       |
|                   | (Principal Executive  Officer)                |
|                   |                                          |
|                   |                                          |
| Date: May 7, 2010 | /s/ David Sheridan                            |
|                   | David Sheridan                                |
|                   | Chief Financial Officer                       |
|                   | (Principal Financial and  Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                          |
| 31.1             |       | Certification  of Catherine Walker, principal executive officer, pursuant to  Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (filed  herewith).                                                                                           |
|             |       |                                                                                                                                                                                                                                                          |
| 31.2             |       | Certification  of David Sheridan, principal financial officer, pursuant to Rule 13a-14  and 15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                              |
|             |       |                                                                                                                                                                                                                                                          |
| 32.1             |       | Certification  of Catherine Walker, principal executive officer, and David Sheridan, principal  financial officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith). |

 

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