Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **

| **x** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended December 31, 2008**

** **

**OR**

** **

| **o** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**For the transition period from                     to                     **

 

**Commission File Number: **333-117633

** **

**SENECA GAMING CORPORATION**

(Exact name 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 FourthStreet****Niagara Falls, NewYork (Seneca Nation Territory) 14303****(716) 299-1100**

(Address, includingzip code, and telephone number,includingarea code, of registrant’s principal 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 x   Noo

 

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

 

| 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   Nox

 

AtFebruary 17, 2009, the registrant had no outstanding shares of commonstock. The registrant is wholly owned by the Seneca Nation of Indians.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                         |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Financial Statements                                                                                                              | 1      |
|              | Consolidated  Balance Sheets as of December 31, 2008 (Unaudited) and  September 30, 2008                                | 1      |
|              | Consolidated  Statements of Income and Changes in Capital for the three months ended  December 31, 2008 and 2007 (Unaudited) | 2      |
|              | Consolidated  Statements of Cash Flows for the three months ended December 31, 2008  and 2007 (Unaudited)                    | 3      |
|              | Notes to Condensed Consolidated Financial Statements                                                                              | 4      |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 11     |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 25     |
| Item 4T.          | Controls and  Procedures                                                                                                          | 26     |
|              |                                                                                                                              |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                             | 26     |
| Item 1.           | Legal Proceedings                                                                                                                 | 26     |
| Item 1A.          | Risk Factors                                                                                                                      | 27     |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                      | 28     |
| Item 3.           | Defaults Upon  Senior Securities                                                                                                  | 28     |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                                              | 28     |
| Item 5.           | Other Information                                                                                                                 | 28     |
| Item 6.           | Exhibits                                                                                                                          | 28     |
|              | Signatures                                                                                                                        | 29     |

 

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**PART I.  FINANCIAL INFORMATION**

 

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

 

**SENECAGAMING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                              | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2008**                             | ** ** | **2008**               | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                              | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current assets:                         |       |                                 |       |                   |       |
| Cash and cash equivalents               |       | $                                    | 51,308     |                   | $          | 53,305 |   |
| Short-term investments                  |       | 200                                  |       | 300                    |       |
| Receivables, net                        |       | 2,708                                |       | 2,705                  |       |
| Inventories                             |       | 4,284                                |       | 4,196                  |       |
| Other current assets                    |       | 9,062                                |       | 9,127                  |       |
| Total current assets                    |       | 67,562                               |       | 69,633                 |       |
|                                    |       |                                 |       |                   |       |
| Property and equipment, net             |       | 794,800                              |       | 799,335                |       |
| Other  long-term assets                 |       | 66,689                               |       | 66,750                 |       |
|                                    |       |                                 |       |                   |       |
| Total assets                            |       | $                                    | 929,051    |                   | $          | 935,718 |   |
|                                    |       |                                 |       |                   |       |
| **Liabilities and Capital**             | ** ** | ** **                           | ** ** | ** **             | ** ** |
| Current liabilities:                    |       |                                 |       |                   |       |
| Trade payables                          |       | $                                    | 1,873      |                   | $          | 3,368 |   |
| Construction payables                   |       | 15,786                               |       | 29,619                 |       |
| Distributions payable to Nation         |       | 20,000                               |       | 24,000                 |       |
| Exclusivity fees payable                |       | 7,441                                |       | 9,234                  |       |
| Accrued interest payable                |       | 6,042                                |       | 15,104                 |       |
| Accrued  regulatory costs               |       | 30,426                               |       | 27,888                 |       |
| Accrued  gaming liabilities             |       | 16,625                               |       | 15,657                 |       |
| Accrued payroll and related liabilities |       | 10,690                               |       | 10,138                 |       |
| Other current liabilities               |       | 17,749                               |       | 13,511                 |       |
| Senior secured revolving loan payable   |       | 20,000                               |       | —                 |       |
| Total current liabilities               |       | 142,632                              |       | 148,519                |       |
|                                    |       |                                 |       |                   |       |
| Long-term debt                          |       | 496,605                              |       | 496,353                |       |
|                                    |       |                                 |       |                   |       |
| Total liabilities                       |       | 639,237                              |       | 644,872                |       |
|                                    |       |                                 |       |                   |       |
| Capital:                                |       |                                 |       |                   |       |
| Retained earnings                       |       | 285,814                              |       | 290,846                |       |
|                                    |       |                                 |       |                   |       |
| Total liabilities and capital           |       | $                                    | 929,051    |                   | $          | 935,718 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**SENECAGAMING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME AND CHANGES IN CAPITAL**

**(Unaudited)**

 
| ** **                                | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)**                | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Revenues:**                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Gaming                                    |       | $                                                   | 137,023    |   | $ | 150,080 |   |
| Food and beverage                         |       | 14,204                                              |       | 14,814 |   |
| Lodging                                   |       | 6,296                                               |       | 7,313 |   |
| Retail, entertainment and other           |       | 6,440                                               |       | 6,671 |   |
| Gross Revenue                             |       | 163,963                                             |       | 178,878 |   |
| Less: Promotional allowances              |       | (25,244                                             | )          | (28,678 | ) |
| Net revenues                              |       | 138,719                                             |       | 150,200 |   |
|                                      |       |                                                |       |   |   |
| **Expenses:**                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Gaming                                    |       | 37,225                                              |       | 41,438 |   |
| Food and beverage                         |       | 11,207                                              |       | 12,616 |   |
| Lodging                                   |       | 3,453                                               |       | 3,763 |   |
| Retail, entertainment and other           |       | 3,557                                               |       | 3,843 |   |
| Advertising, general and administrative   |       | 49,500                                              |       | 49,523 |   |
| Pre-opening costs                         |       | 58                                                  |       | 93 |   |
| Depreciation                              |       | 12,587                                              |       | 13,642 |   |
|                                      |       |                                                |       |   |   |
| Total operating expenses                  |       | 117,587                                             |       | 124,918 |   |
|                                      |       |                                                |       |   |   |
| Operating income                          |       | 21,132                                              |       | 25,282 |   |
|                                      |       |                                                |       |   |   |
| Other non-operating expenses              |       | (113                                                | )          | (3,750 | ) |
| Interest income                           |       | 58                                                  |       | 748 |   |
| Interest expense                          |       | (9,603                                              | )          | (9,871 | ) |
|                                      |       |                                                |       |   |   |
| Net income                                |       | $                                                   | 11,474     |   | $ | 12,409 |   |
|                                      |       |                                                |       |   |   |
| Beginning capital balance                 |       | 290,846                                             |       | 230,244 |   |
| Cash distributions declared to the Nation |       | (16,506                                             | )          | (4,628 | ) |
| Ending capital balance                    |       | $                                                   | 285,814    |   | $ | 238,025 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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** **

**SENECAGAMING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**                | ** ** |
| ** **                                                                         | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash flows relating to operating  activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 11,474     |   | $ | 12,409 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation                                                                       |       | 12,587                               |       | 13,642 |   |
| Loss on disposal of assets                                                         |       | 24                                   |       | 63 |   |
| Amortization of deferred financing costs,  debt discount                           |       | 810                                  |       | 809 |   |
| Other than temporary decline in investments                                        |       | 100                                  |       | 3,750 |   |
| Provision for bad debts                                                            |       | 75                                   |       | 90 |   |
|                                                                               |       |                                 |       |   |   |
| Change in operating assets and liabilities:                                        |       |                                 |       |   |   |
| Current assets                                                                     |       | (101                                 | )          | 1,228 |   |
| Long-term assets                                                                   |       | —                               |       | (3 | ) |
| Current liabilities                                                                |       | (4,054                               | )          | (5,305 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by operating activities                                          |       | 20,915                               |       | 26,683 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to investing  activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                |       | (21,909                              | )          | (24,353 | ) |
| Land acquisition costs                                                             |       | (497                                 | )          | (3,566 | ) |
| Deposits to restricted cash                                                        |       | —                               |       | (849 | ) |
| Sale of investments, net                                                           |       | —                               |       | 14,600 |   |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing activities                                              |       | (22,406                              | )          | (14,168 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to financing  activities:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Proceeds from senior secured revolving loan  agreement                             |       | 20,000                               |       | — |   |
| Distributions paid to the Nation                                                   |       | (20,506                              | )          | (16,628 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in financing activities                                              |       | (506                                 | )          | (16,628 | ) |
|                                                                               |       |                                 |       |   |   |
| Net decrease in cash                                                               |       | (1,997                               | )          | (4,113 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash balances:                                                                     |       |                                 |       |   |   |
| Beginning of period                                                                |       | 53,305                               |       | 78,662 |   |
|                                                                               |       |                                 |       |   |   |
| End of period                                                                      |       | $                                    | 51,308     |   | $ | 74,549 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**SENECAGAMING CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**                                      Organizationand Basis of Presentation

** **

The consolidated financial statements include theaccounts of Seneca Gaming Corporation, or SGC, and its wholly ownedsubsidiaries, or collectively, the Company. In consolidation, all intercompany balances and transactions have beeneliminated.  The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and notes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of SGC’s management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation have been included. Operating results for the three months ended December 31, 2008 arenot necessarily indicative of the results that may be expected for the yearending September 30, 2009.  Forfurther information, reference is made to the consolidated financial statementsand notes thereto included in SGC’s Annual Report on Form 10-K for thefiscal year ended September 30, 2008, or 2008 Form 10-K, as well asSGC’s other filings with the Securities and Exchange Commission, or SEC,pursuant to the Securities Exchange Act of 1934, as amended.

 

SGC, which was formed on August 1, 2002, is whollyowned by the Seneca Nation of Indians, or the Nation.  The Nation is a federally recognized Indiantribe with total territorial land comprising approximately 54,000 acres in theWestern New York region.  SGC wasorganized by the Nation to operate and manage its Class III gamingactivities on the Nation’s territories pursuant to the Indian Gaming RegulatoryAct of 1988, or IGRA.  Under IGRA,federally recognized Indian tribes are permitted to conduct full-scale casinogaming operations on tribal land, subject to, among other things, thenegotiation of a compact with the affected state.  Pursuant to IGRA, the Nation entered into theNation-State Gaming Compact with the State of New York dated April 12,2002, or the Compact, which has been approved by the Federal Bureau of IndianAffairs, Department of the Interior.  TheCompact expires in December 2016 and automatically renews for anadditional seven year period unless either the Nation or the State of New Yorkobjects in writing, in which case the parties are required to negotiate in goodfaith to address the objecting party’s concerns, with only the issue of a party’sgood faith subject to third party dispute resolution.  The Compact provides that its terms willremain in effect during the pendency of such negotiations.  The Compact provides the Nation the exclusiveright to conduct Class III gaming activities at three sites in the westernregion of the State of New York.

 

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

 

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

 

·              Seneca Niagara Falls GamingCorporation, or SNFGC;

 

·              Seneca Territory GamingCorporation, or STGC; and

 

·              Seneca Erie Gaming Corporation, orSEGC.

 

SNFGC was formed on August 1, 2002 to operatethe Nation’s Class III gaming activities 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 gamingfacility (providing 35,000 square feet more gaming space than the original112,000 square feet), a 604 room luxury hotel with 118 suites of various sizes,a full-service spa, salon, and fitness center, three fine dining restaurants(two additional) and a 24 hour casual restaurant, three new retail stores, anda 25,200 square-foot multi-purpose room and events center.  The luxury hotel is adjacent and connected tothe Seneca Niagara Casino.  The entirecomplex, including the luxury hotel and the Seneca Niagara Casino, is referredto as the Seneca Niagara Casino and Hotel.

 

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STGC was formed on September 20, 2003 tooperate the Nation’s Class III gaming activities in Salamanca, New York onthe Nation’s existing territorial land. Operations at STGC’s casino, or SenecaAllegany Casino, commenced May 1, 2004 utilizing an approximate 120,000square foot temporary structure.  On March 30,2007, the phased opening of the permanent gaming facility and resort hotel wascompleted, which included a permanent 63,500 square foot gaming facility(providing 12,000 square feet more gaming space than the original temporarygaming facility), a 212-room resort hotel, two fine dining restaurants, a 24hour casual restaurant, a spa and fitness center, and retail and otheramenities.  In March 2008, STGCcompleted a conversion of the former approximate 120,000 square foot temporarycasino structure into an events center with a seating capacity for 2,200people, 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.

 

SEGCwas formed on August 9, 2003 to operate the Nation’s Class III gamingactivities in Erie County, New York.  On October 3,2005, the Nation acquired approximately nine acres of land in the inner-harbordistrict of downtown Buffalo, New York. SEGC commenced construction of its Seneca Buffalo Creek Casino on thosenine acres on 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. Variousplaintiffs have filed suit in federal and state court challenging the Nation’sright to conduct Class III gaming on the Nation’s nine acre Buffalo CreekTerritory.  On July 8, 2008, in afederal suit captioned *Citizens Against CasinoGambling in Erie County v. Hogen*, the Court issued its decision and order finding that, although the Nation’sBuffalo Creek Territory is “Indian country”, the NIGC’s determination that theNation’s Buffalo Creek Territory is gaming-eligible land pursuant to the IGRA’ssettlement of a land claim exception was “arbitrary, capricious, and not inaccordance with the law”.  The Court’sdecision did not provide for injunctive relief, and SEGC has continued itsoperations at the Seneca Buffalo Creek Casino. Plaintiffs subsequently filed a motion on July 14, 2008 to forcethe court to enforce its judgment.

 

On January 20, 2009, the NIGC approved an amended Class IIIGaming Ordinance that had been submitted by the Nation and concluded that,based upon new Department of Interior regulations, IGRA’s general prohibitionagainst gaming on after-acquired lands did not apply to lands such as theBuffalo Creek Territory that are held in restricted fee, and that gaming on theNation’s Buffalo Creek Territory is not precluded by IGRA.  Subsequently, on January 30, 2009, theDistrict Court denied the plaintiffs’ motion to enforce, and further concludedthat the NIGC’s new analysis is presumed valid unless and until it becomes thesubject of a successful legal challenge.

 

Ifthe plaintiffs are successful in any of the Buffalo Creek-related legal proceedings,the Nation, and therefore SEGC, may be unable to continue operating theexisting Seneca Buffalo Creek Casino, may be delayed in the completion of theSeneca Buffalo Creek Casino and Hotel at this site or may be unable to conduct Class IIIgaming at this site.  The Nation, SGC and SEGC will vigorously defend anyactions to which they are parties.  SEGCdoes not believe the foregoing events constitute an impairment of its BuffaloCreek assets at this time.

 

The Nation’s Council has also chartered, at therequest of the SGC Board of Directors, two additional subsidiary corporations,Lewiston Golf Course Corporation, or LGCC, a wholly-owned subsidiary of SNFGCand Seneca Massachusetts Gaming Corporation, or SMGC, a wholly-owned subsidiaryof SGC.

 

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

 

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

 

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

 

Short-terminvestments are classified as available for sale as defined in SFAS No. 115,*Accounting for Certain Investments in Debtand Equity Securities*.  Investments are stated at fairvalue.  The Company evaluates investments for conditions that may indicatethat an other-than-temporary decline in market value has occurred. Inconducting this review, numerous factors are considered which, individually orin combination, may indicate that a decline is other-than-temporary. Based onthis evaluation, an other-than-temporary loss on one specific investment of$0.1 million and $3.8 million was recorded in the three months ended December 31,2008 and 2007, 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.

 

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**3.**                                      **Property and Equipment**

 

In accordance with the Financial Accounting Standard Board’s Statementof Financial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (SFAS 144), thecarrying value of the Company’s assets are reviewed when events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. If it is determined that an impairment loss has occurred based oncurrent and future levels of income and expected future cash flows as well asother factors, then an impairment loss is recognized as a deduction indetermining operating income. SGC management concludes that no such impairmentexists at December 31, 2008.

 

**4.**                                      PrincipalDebt Arrangements

** **

Long-term debt, as described below, consists of thefollowing:

 
| ** **                                                                                        | ** ** | **As of**                               | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                        | ** ** | **December 31,  2008**                  | ** ** | **September 30,  2008** | ** ** |
| ** **                                                                                        | ** ** | **(In Thousands of Dollars)** | ** ** |
| 2004 71⁄4% senior notes due 2012                                                               |       | $                                            | 300,000    |   | $ | 300,000 |   |
| 2005 71⁄4% senior notes due 2012 plus  unamortized discount of $3,395 and $3,647, respectively |       | 196,605                                      |       | 196,353 |   |
|                                                                                              |       | $                                            | 496,605    |   | $ | 496,353 |   |
| Less current maturities of long-term debt                                                         |       | —                                       |       | — |   |
| Long-term debt                                                                                    |       | $                                            | 496,605    |   | $ | 496,353 |   |

 

**71⁄4% Senior Notes due 2012**

** **

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

 

TheSenior Notes are guaranteed by SNFGC, STGC, SEGC and LGCC. The 2005 seniornotes are treated as a single class with the 2004 senior notes and areidentical to the 2004 senior notes, except for certain tax attributes and priorto November 1, 2005 the amount of interest accrued thereon.  Interest on the Senior Notes is payable semi-annually on May 1 and November 1. The Senior Notes are unsecured and rank equally.  As of December 31,2008, aggregate accrued interest on the Senior Notes was $6.0 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.

 

The Senior Notes Indenture contains certain financial and non-financialcovenants. The financial covenants include limitations on restricted paymentsand the incurrence of indebtedness, while the non-financial covenants includereporting obligations and compliance with laws and regulations. As of December 31,2008, SGC was in compliance with all covenants in the Indenture.

 

**Senior Secured Revolving Loan Agreement**

 

Effective June 19, 2008, SGC entered into a $50.0million Senior Secured Revolving Loan Agreement.  Amounts borrowed under the Senior SecuredRevolving Loan Agreement bear interest at either one, three or six-month LIBORplus one and one quarter percent (1.25%), or the prime rate (as reported in *The Wall Street Journal*) plus one quarterpercent (0.25%).  SGC’s obligations underthe Senior Secured Revolving Loan Agreement are secured by substantially allgaming and related assets (including substantially all gaming revenues) notconstituting real property or improvements.  SGC’s obligations areguaranteed by SNFGC, STGC, SEGC and LGCC.

 

The Senior Secured Revolving Loan Agreement contains certain financialcovenants requiring minimum consolidated EBITDA of $160 million (on a rolling12 month basis) and compliance with certain leverage and 

 

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coverage ratios. The Senior Secured Revolving Loan Agreement alsocontains additional customary covenants, including covenants restricting theincurrence of additional indebtedness, the creation of additional liens and thedisposition of assets. As of December 31, 2008, SGC was in compliance withall covenants in the Senior Secured Revolving Loan Agreement.

 

As of December 31, 2008, at SGC’s request, thelender under the Senior Secured Revolving Loan Agreement had issued letters ofcredit totaling $16.7 million, $11.2 million of which may be drawn upon to fundthe purchase of certain parcels within the 50 acre “footprint” described in theCompact with New York State and designated for ownership by the Nation, withthe remaining $5.5 million issued in connection with worker’s compensationpolicies and certain other contracts, as required.  On October 29, 2008, SGC borrowed $20.0million under the Senior Secured Revolving Loan Agreement.  As of December 31, 2008, $13.3 millionwas available to be drawn under the Senior Secured Revolving Loan Agreement.

 

**5.****                                     ****Related-Party Transactions**

 

**Distributions**

 

Distributions paid to the Nation, or on the Nation’sbehalf, as described below, consist of the following:

 
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(In Millions of Dollars)**         | ** ** |
| Cash distributions                    |       | $                                                   | 17.2       |   | $ | 12.2 |   |
| Distribution  agreement distributions |       | 3.3                                                 |       | 4.4 |   |
|                                  |       | $                                                   | 20.5       |   | $ | 16.6 |   |

 

·                  In September 2008, SGC declaredcash distributions to the Nation totaling $4 million, payable in October 2008.  In each of November 2008 and December 2008,SGC declared and paid $4 million in distributions to the Nation, for a total of$12 million during the three months ended December 31, 2008.  In November 2008, SGC paid an additional$1.2 million distribution to the Nation. In December 2008, SGC declared cash distributions to the Nationtotaling $4 million, payable in January 2009, which is reported as acomponent of ‘Distributions payable to the Nation’ on the accompanyingconsolidated balance sheets.

 

·                  In July 2008, SGC declared cashdistributions to the Nation totaling $20 million, of which $10 million ispayable in each of fiscal year 2009 and 2010. These amounts are payable in ten equal monthly payments of $1 million beginningOctober 1, 2008 and 2009, respectively. During the three months ended December 31, 2008, SGC paid cashdistributions of $4.0 million to the Nation pursuant to the foregoingdistribution declarations, which includes the prepayment of the January 2009distribution.  Amounts declared but notpaid totaling $16 million are reported as a component of ‘Distributions payableto Nation’ on the accompanying consolidated balance sheets.

 

·                  During the three months ended December 31,2008, SGC distributed $3.3 million to the Nation under the DistributionAgreement, dated April 27, 2007, relating to the Seneca Nation of IndiansCapital Improvements Authority’s special obligation bonds.

 

**SGC has recorded approximately $58.7 million in landand related acquisition costs as ‘Other long-term assets’ in the accompanyingconsolidated balance sheets as of December 31, 2008, which are expected tobe transferred to the Nation in the future at cost.**

** **

**Operating LeaseAgreements**

** **

*Head Leases:*

 

The Nation has entered into operating leaseagreements (each a Head Lease) with each of SNFGC, STGC and SEGC.  Due to the related party nature of these HeadLeases, which can be effectively modified by the Nation, SGC records monthlyHead Lease expense equal to the required payment amount for the respectivemonth.  Payment increases under the HeadLeases are restricted under the terms of the Indenture governing the SeniorNotes and the Distribution Agreement referenced in Note 6.  The foregoing Head Leases contain no renewaloptions or escalation clauses.

 

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The SNFGC Head Lease (dated October 25, 2002)has a term of 21 years and covers use of the land and certain improvementsexisting at the commencement of such Head Lease, principally includingstructures formerly known as the Niagara Falls Convention Center and LackeyPlaza.  As of October 1, 2005,monthly payments under the SNFGC Head Lease were $1,287,500.  Effective October 1, 2006, the paymentswere increased 3% to $1,326,125 per month, and effective October 1, 2007,the payments were increased by an additional 3% to $1,365,909 per month, ineach case as approved by the board of directors of SGC and SNFGC.  Pursuant to the terms of the Amended andRestated SNFGC Head Lease entered into on March 27, 2008, and effective October 1,2007, payments were further increased, at the request of the Nation, to$2,033,333 per month, with such increase effective as of October 1,2007.  On August 1, 2008, at therequest of the Nation, SGC approved an increase in the SNFGC Head Lease to$3,083,333 per month, effective October 1, 2008, and to $3,666,667 permonth, effective October 1, 2009. Such additional increases are conditioned upon compliance with theapplicable requirements of the Senior Notes Indenture related to affiliatetransactions, and are subject to compliance with all commitments legallybinding upon the Nation or SNFGC, or to which the premises (described in theHead Lease) are subject.  The foregoing October 1,2008 increase has been recognized as of December 31, 2008, but not paid,as the parties continue to take the steps required to comply with SGC’s SeniorNotes Indenture.  Head Lease payments maybe further increased upon agreement of the parties, provided that no increasemay contravene, or constitute a default under, any agreement, indenture,instrument or other commitment legally binding upon the Nation or SNFGC, or towhich the premises (described in the Head Lease) are subject.

 

The STGC (effective as of May 1, 2004) and SEGC(effective as of April 1, 2006) Head Leases were formerly oral agreements,which were memorialized in writing on March 2, 2007.  Both of these Head Leases cover use of theland which is currently being used or is expected to be used in operating theSeneca Allegany Casino and Hotel and Seneca Buffalo Creek Casino, respectively.  The STGC and SEGC Head Leases are effectiveuntil the date 21 years after the commencement of the Nation’s Class IIIgaming operations under the Compact. With respect to the STGC Head Lease, as of October 1, 2005 monthlypayments were $1,287,500.  Payments wereincreased by 3%, effective October 1, 2006, to $1,326,125 per month, andby an additional 3%, effective October 1, 2007, to $1,365,909 per month,in each case as approved by the board of directors of STGC.  Pursuant to an amendment to the STGC HeadLease entered into on March 27, 2008, and effective as of October 1,2007, the payments were increased, at the request of the Nation, to $1,691,667per month.  On August 1, 2008, atthe request of the Nation, SGC approved increases in the payments under theSTGC Head Lease to $2,166,666 per month effective October 1, 2008, and to$2,666,667 per month effective October 1, 2009.  With respect to the SEGC Head Lease, for thefirst six months of the term, SEGC made monthly payments of $520,000 to theNation.  Payments were increased,effective October 1, 2006, to $1,250,000, and by an additional 3%,effective October 1, 2007, to $1,287,500, in each case as approved by theboard of directors of SEGC.  Pursuant toan amendment to the SEGC Head Lease entered into on March 27, 2008, andeffective as of October 1, 2007, the payments were increased, at therequest of the Nation, to $1,441,667 per month. On August 1, 2008, at therequest of the Nation, SGC approved an increase in the payments under the SEGCHead Lease to $1,500,000 per month effective October 1, 2008 andthereafter.  The August 1, 2008 STGCand SEGC payment increases are conditioned upon compliance with the applicablerequirements of the Senior Notes Indenture related to affiliate transactions,and are subject to compliance with all commitments legally binding upon theNation, STGC or SEGC, as the case may be, or to which the premises (describedin the Head Leases) are subject.  Theforegoing October 1, 2008 increase has been recognized as of December 31,2008, but not paid, as the parties continue to take the steps required tocomply with SGC’s Senior Notes Indenture. Head Lease payments under the STGC and SEGC Head Leases may be furtherincreased upon agreement of the parties, provided that no increase maycontravene, or constitute a default under any agreement, indenture, instrumentor other commitment legally binding upon the Nation, STGC or SEGC,respectively, or to which the premises (described in the Head Leases) aresubject.

 

Expenses resulting from the above Head Leaseagreements were as follows for the three months ended December 31, 2008and 2007:

 
| ** ** | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** ** | ** ** | **(In Millions of Dollars)**         | ** ** |
| SNFGC      |       | $                                                   | 9.3        |   | $ | 6.5 |   |
| STGC       |       | 6.5                                                 |       | 5.1 |   |
| SEGC       |       | 4.5                                                 |       | 3.9 |   |
|       |       | $                                                   | 20.3       |   | $ | 15.5 |   |

 

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SNFGC, STGC, and SEGC record the Head Lease costs asa component of advertising, general and administrative costs in theaccompanying consolidated statements of income.

 

*Class II Leases:*

 

SNFGC and STGC lease space within the Seneca NiagaraCasino and Hotel and Seneca Allegany Casino and Hotel, respectively, foroperation of poker rooms by Seneca Gaming & Entertainment, a Class IIbusiness enterprise of the Nation.  Forthe three-month periods ended December 31, 2008 and 2007, SGC recorded$0.2 million and $0.2 million of poker room rental income and fees,respectively.  At December 31, 2008,SGC has recorded $0.1 million as a receivable from the Nation relating to pokerroom rentals and fees as a component of receivables, net in the accompanyingconsolidated balance sheets.

 

*Other Lease:*

 

STGC leases office space in a building owned by thebrother of a member of SGC’s Board of Directors.  For the three months ended December 31,2008 and 2007, such lease expense totaled $63,000 and $65,000, respectively.

 

**Other Related Party Transactions**

 

*Construction Services:*

 

SNFGC, STGC and SEGC have each entered intoconstruction management agreements with Seneca Construction ManagementCorporation, or SCMC, for certain renovations and capital improvements atSeneca Niagara Casino and Hotel, Seneca Allegany Casino and Hotel, and SenecaBuffalo Creek Casino, respectively.  SCMCis wholly owned by the Nation.  For thethree-month periods ended December 31, 2008 and 2007, SNFGC, STGC and SEGChave collectively made payments to SCMC for construction management and relatedfees of $1.0 million and $0.7 million, respectively.  Such fees reflect the amounts earned by SCMCfor the performance of construction management services. Additional amountspaid to SCMC are passed-through and used to pay subcontractors, reimbursementsfor out-of-pocket expenses and similar costs.

 

*Regulatory Services:*

 

SGC is charged by the Nation for its costs incurred related to theoperation of SGA gaming regulatory services, which were approximately $2.6million and $2.5 million for the three months ended December 31, 2008 and2007, respectively.

 

SGC is also charged, or expects to be charged, by the Nation for itscosts incurred related to services provided by New York State Racing andWagering Board, New York State Police, Seneca Nation of Indians Marshals,Buffalo Police****and Cattaraugus County SheriffDepartment in connection with SGC’s operations, which costs were approximately$2.6 million and $2.8 million for the three months ended December 31, 2008and 2007, respectively.

 

At December 31, 2008 and September 30, 2008, approximately$30.4 million and $27.9 million, respectively, were recorded as “accruedregulatory costs” in the accompanying consolidated balance sheets, for thepayment of such regulatory costs.

 

*Other:*

 

SNFGC, STGC, and SEGC, through the Corporation’scompetitive bidding process, have purchased goods and services from DRJEnterprises, which is owned by the brother-in-law of the SGC Chairman of theBoard of Directors.  Payments to DRJEnterprises for the three months ended December 31, 2008 and 2007 totaled$46,000 and $186,000, respectively.

 

SNFGC and STGC, through the Corporation’scompetitive bidding process, have purchased goods and services from MSEnterprises, which is owned by the grandson of the SGC Chairman of the Board ofDirectors.  Payments to MS Enterprisesfor the three months ended December 31, 2008 and 2007 totaled $105,000 and$0, respectively.

 

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**6.**                                      Commitmentsand Contingencies

** **

**Distribution Agreement Obligations**

 

On April 27, 2007, SGC entered into aDistribution Agreement among the Nation, the Seneca Nation of Indians CapitalImprovements Authority, or the Authority, SGC and Wells Fargo Bank, as Trustee,in connection with the Authority’s issuance in two series (one tax exempt andthe other taxable) of an aggregate principal amount of $159,495,000 specialobligation bonds, or the 2007 Nation Bonds.  The Distribution Agreementobligates SGC, subject to any contractual restrictions applicable to SGC (including,but not limited to, those contained in the Senior Notes Indenture), to makemonthly distributions to the Nation at the times and in the amounts necessaryto enable the Authority to pay the debt service on the 2007 Nation Bonds asrequired under the Authority’s indenture.  At the direction of the Nationand the Authority, SGC will pay such distributions directly to theTrustee.  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 three months ended December 31,2008, SGC distributed to the Nation $3.3 million for the Authority’s debtservice 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 for which exclusivity exists, based on the win of suchmachines (cash dropped into machines, after payouts but before expenses) andtotaled on a cumulative quarterly basis to be adjusted annually at the end ofthe relevant calendar year.  However,beginning in February 2005, the Company began advancing to the Nation on amonthly basis the exclusivity fee due for the prior month.  The exclusivity fee to the State of New Yorkfor years 1—4 (through December 31, 2006), is 18.0%, payable on an annualbasis. Thereafter, the exclusivity fee is 22% for years 5—7 (through December 31,2009), payable on a semi-annual basis and 25.0% for years 8—14 (through December 31,2016), payable on a quarterly basis.

 

For the three months ended December 31, 2008and 2007, total exclusivity fees were $25.1 million and $27.1 million,respectively.  The $25.1 millionexclusivity fee incurred during the three months ended December 31, 2008consisted of $16.6 million attributable to the operation of  SNFGC, $6.6 million attributable to theoperation of  STGC and $1.9 millionattributable to the operation of SEGC.

 

**Expansion and Development**

** **

As described in Note 1, the Compact provides the Nation the exclusiveright to conduct Class III gaming activities at three sites in the westernregion of the State of New York, subject to certain limited exceptions.  The Company opened its third Class IIIcasino on July 3, 2007 in a temporary facility in Buffalo, New York.  The construction of the Company’s permanentcasino at that site, as well as expansion by STGC at Seneca Allegany Casino andHotel, and the golf course development in Lewiston, New York, requiressignificant capital outlays.  In light ofgreater demands on our available cash, challenging economic and capital marketconditions, the Company temporarily suspended construction of the permanentSeneca Buffalo Creek Casino and Hotel and the expansion at Seneca AlleganyCasino and Hotel.  The Company continuesto evaluate various factors including cash flow from operations, theavailability of sufficient external financing, certain Nation and governmentalapprovals and the effects of legal and/or administrative proceedings indetermining when to recommence its construction and expansion plans on theAllegany and Buffalo Creek territories. The Company is also evaluating the scaling and scope of its clubhousedesign for the Seneca Hickory Stick Golf Club.

 

*Seneca Allegany Casino and Hotel. *On March 30, 2007,STGC officially opened its 212 room resort hotel, including two fine diningrestaurants, a 24-hour casual restaurant and certain other amenities, at theSeneca Allegany Casino and Hotel.  Thisexpansion followed the December 28, 2006 official opening of the permanentgaming floor. The approximate cost of constructing and equipping the hotel andexpansion project was $169.0 million.  InMarch 2008, STGC completed the conversion of the former temporary casinoat the Seneca Allegany Casino and Hotel into a 120,000 square foot eventscenter, and additional administration space, at a cost of approximately $29.3million.

 

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The next phase of construction, which provides for an additional 200room hotel, 31,000 square feet of additional gaming space and relatedamenities, landscaping and exterior façade enhancements to the property as awhole, commenced in April 2008. Construction was suspended in August 2008 due to various factors,including challenging economic and capital market conditions, demands on ouravailable cash and increased competition and construction costs.  Construction is anticipated to recommenceupon the stabilization of economic and capital market conditions, and assumingfinancing with acceptable terms becomes available.  As of December 31, 2008, the Company hasincurred $17.4 million related to this phase of construction.

 

*Seneca Buffalo Creek Casino and Hotel. *On July 3, 2007, theCompany opened a temporary Class III gaming facility at the Seneca BuffaloCreek Territory site (6,000 square feet including 125 slot machines and a snackbar) at a cost of approximately $6.8 million. In March 2008, the Company completed a 109 slot machine expansion(for a total of 244 slot machines) of the temporary Seneca Buffalo CreekCasino.  Construction of the permanent Seneca Buffalo Creek Casino andHotel, commenced in March 2008 and was anticipated to open in Summer2010.  The planned $333 million facility was expected to initially feature90,000 square feet of gaming space with approximately 2,000 slot machines, 45table games and a 22-story all suite hotel with approximately 206 rooms.  Planned amenities included a pool, spa andsalon, four restaurants, meeting rooms, a retail outlet and a 2,200-spaceparking garage.  Construction of thepermanent Seneca Buffalo Creek Casino and Hotel was suspended in August 2008due to various factors, including challenging economic and capital marketconditions, demands on our available cash and increased competition andconstruction costs.  Construction isanticipated to continue upon the stabilization of economic and capital marketconditions, and assuming financing with acceptable terms becomesavailable.  As of December 31, 2008,the Company has incurred $83.5 million on the construction of the permanentcasino and hotel.

 

*Seneca Hickory Stick Golf Club. *In July 2007, theCompany 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 eight miles from the Seneca NiagaraCasino and Hotel.  Completion of golfcourse construction is currently scheduled for Summer 2009. To allow for propergrow-in of the course, it is anticipated that the official opening of thecourse will occur in Spring 2010. The decision as to when to open the golfcourse for play will depend upon how well the course matures throughout the2009 growing season. As of December 31, 2008, the Company has incurred$17.9 million for the purchase of land and construction to date, with a totalcost to construct the golf course, clubhouse and related amenities estimated tobe approximately $25.5 million.

 

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

** **

Youshould read the following discussion and analysis in conjunction with thesections titled “Financial Statements” and “Notes to Consolidated FinancialStatements” included elsewhere in this Quarterly Report on Form 10-Q.  References below to years are to fiscal yearsof SGC unless otherwise noted. SGC’s fiscal year is from October 1 throughSeptember 30.

 

**Forward-Looking Statements**

 

When used in thisQuarterly Report on Form 10-Q, in other filings with the SEC, in our pressreleases or in our other public communications, the words “believe,” “estimate,”“anticipate,” “expect,” “contemplate,” “may,” “will” and similar expressionsare intended to identify forward-looking statements.  Statements looking forward in time areincluded in this Quarterly Report on Form 10-Q pursuant to the “safeharbor” provision of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risksand uncertainties, which could cause actual results to differ materially,including, but not limited to, the risk factors contained or referenced hereinand in our other reports filed with the SEC pursuant to the Securities ExchangeAct of 1934, as amended, including our 2008 Form 10-K.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of theirrespective dates.  We undertake noobligation to update these forward-looking statements to reflect events orcircumstances occurring after their respective dates.

 

**Overview**

** **

SGCis wholly owned by the Nation and chartered to develop, manage and direct allof the Nation’s Class III gaming operations on the Nation’s territories inWestern New York. SGC was chartered by the Nation in August 2002.  In August 2002, the Nation entered intothe Compact with New York State that provides the Nation with the right toestablish and operate three Class III gaming facilities in Western NewYork.  We currently operate 

 

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threeClass III gaming facilities in Western New York—Seneca  Niagara Casino and Hotel, which is located inthe City of Niagara Falls, New York (Niagara Territory) and operated by 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 STGC, approximately 75 miles northeast of Erie, Pennsylvania;and Seneca Buffalo Creek Casino, which is located in the inner harbor districtof Buffalo, New York (Buffalo Creek Territory) and operated by SEGC. SenecaNiagara Casino and Hotel opened on December 31, 2002 (initially, as theSeneca Niagara Casino).  Seneca AlleganyCasino and Hotel opened on May 1, 2004 (initially, as the Seneca AlleganyCasino).  Seneca Buffalo Creek Casinocommenced operations on July 3, 2007 in a temporary facility.  Our three casinos are located on land held inrestricted fee by the Nation, which, together with the rights under theCompact, allows us to conduct Class III gaming operations at theselocations in New York State and to operate the only casino gaming facilities inWestern New York State to offer both Class III slot machines and tablegames.

 

Asof December 31, 2008, Seneca Niagara Casino and Hotel featured over147,000 square feet of gaming space, 4,100 slot machines, 102 table games and604 hotel rooms; Seneca Allegany Casino and Hotel featured over 63,500 squarefeet of gaming space, 2,330 slot machines, 40 table games and 212 hotel rooms;and the Seneca Buffalo Creek Casino temporary facility featured 244 slotmachines and no table games.  See “ExecutiveSummary — Seneca Buffalo Creek Casino,” “Part II. Item 1. — LegalProceedings,” and “2008 Form 10-K Item 3. — Legal Proceedings” forinformation regarding the status of, and litigation related to, our SenecaBuffalo Creek Casino.

 

**Executive Summary**

 

***Our Current Operations.*****   We currently operate three Class III gaming facilities, SenecaNiagara Casino and Hotel, in the City of Niagara Falls, New York (NiagaraTerritory), Seneca Allegany Casino and Hotel, in the City of Salamanca, NewYork (Allegany Territory), and the Seneca Buffalo Creek Casino (slots onlytemporary facility), in the City of Buffalo, New York (Buffalo CreekTerritory).  Our casino operationsinclude gaming, lodging, dining, entertainment, retail and spa and salonservices.  For the three months ended December 31,2008, approximately 92% of our net revenue was derived from our gamingactivities.

 

***RecentDevelopments. ***Theongoing national economic recession has continued to negatively impact ouroperating performance and results, primarily due to reduced consumerdiscretionary spending, which has negatively impacted discretionary spending ongaming and entertainment.  Over the pasttwelve months, we have been attempting to mitigate the effects of the economicslowdown through implementation of expense reduction measures and efforts toincrease operational efficiencies.  Mostrecently, in December 2008, we implemented a multifaceted plan to furtherreduce expenses, the primary components of which were an approximate 5%workforce reduction, together with a wage freeze for all employees earning inexcess of $70,000 per year, voluntary salary reductions for senior management,and suspension of our bonus program which had historically been paid in December ofeach year.  While we have successfullyreduced certain expenses and increased certain operational efficiencies, weanticipate continuing to take measures to help preserve SGC’s financial condition,maintain adequate liquidity and position us for future growth and success, andendeavor to do so in a manner that will not compromise the quality or levels ofour offerings and services provided at each of our properties.  We have been having discussions with ourowner, the Nation, represented by the Seneca Nation Government, to reduce ourpayments to the Nation in order for us to retain more cash to restore ourliquidity and provide cash for priority maintenance capital expenditures andimplement a Senior Notes repurchase plan. There can be no assurance that discussions with the Nation’s governmentwill be successful in achieving any of the foregoing financial objectives.

 

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

 

***Seneca Niagara Casino and Hotel****. *  Prior to the opening of our luxury hotel, Seneca Niagara Casino primarilyrelied on drive-in and bus patrons from the Buffalo, Niagara Falls, andRochester areas in New York and secondarily from Erie, Pennsylvania, Ohio andother parts of New York.  Since theopening of the new luxury hotel and expanded gaming and related amenities in March 2006,Seneca Niagara Casino and Hotel has experienced steady growth in its patronbase.  The expansion of Seneca NiagaraCasino and Hotel, including the addition of our luxury hotel and other amenities,has enabled us to increase higher-end patron volume, gaming activity and lengthof stay, and extend our geographic market penetration and appeal to a morediverse demographic base.

 

***Seneca Allegany Casino and Hotel****.*   Since opening on May 1, 2004, Seneca Allegany Casino and Hotel hasattracted patrons from the southern portion of Western New York, Erie andPittsburgh, Pennsylvania and Ohio.  As ofDecember 31, 2008, approximately 42% of the casino’s patron base is fromoutside of the State of New York.

 

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InMarch 2007, we opened a 212-room resort hotel, including two fine diningrestaurants, a 24-hour casual restaurant and other certain amenities afterofficially opening the 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 new resort hotel, permanentcasino and events center provide a first-class gaming experience for ourpatrons, helping to increase patrons’ length of stay and to maintain thecompetitive position of the facility in light of competition in Pennsylvania,consisting principally of Presque Isle Downs, a new gaming facility that openedin late February 2007 in Erie, Pennsylvania approximately 80 miles fromthe Seneca Allegany Casino and Hotel and 120 miles from the Seneca NiagaraCasino and Hotel.  Presque Isle Downs hasapproximately 2,000 slot machines and offers dining and entertainment optionsthat include a steakhouse, a buffet and four lounges, but it does not offertable games or lodging.

 

Constructionon our next phase of development at Seneca Allegany Casino and Hotel, which wasplanned to include an additional 200 room hotel tower, and up to 30,000 squarefeet of additional gaming space and related amenities, for a total estimatedcost of up to $130 million, was suspended in August 2008 due to variousfactors, including challenging economic and capital market conditions,operating and other demands on our available cash, and increased competitionand construction costs.  We intend toresume construction upon the stabilization of economic and capital marketconditions, assuming we have access to sufficient external financing uponacceptable terms.

 

***Seneca Buffalo Creek Casino****.    *On October 3, 2005, the Nation acquired approximately nine acres ofland in the inner-harbor district of Buffalo, New York.  On July 3, 2007, we began operating atemporary Class III gaming facility (approximately 6,000 square feet)featuring 135 slot machines and a snack bar. During the quarter ended March 31, 2008, the temporary facility wasexpanded to include an additional 109 slot machines. The current temporaryfacility is approximately 8,600 square feet, and features 244 slot machines anda snack bar.

 

OnOctober 3, 2007, we formally announced our plans for a permanent casinoand hotel complex on the Buffalo Creek Territory having an estimated cost of$333 million, featuring approximately 90,000 square feet of gaming space; 2,000slot machines; 45 table games; a 22-story all suite hotel; four restaurants; afull-service spa and salon; retail and other amenities; and a 2,200-spaceparking garage.

 

Wesuspended construction on the permanent Seneca Buffalo Creek Casino and hotelin August 2008 due to various factors, including challenging economic andcapital market conditions, operating and other demands on our available cash(including distributions to the Nation and Head Lease payment increases), andincreased competition and construction costs. We intend to resume constructionupon the stabilization of economic and capital market conditions, assuming wehave access to sufficient external financing upon acceptable terms.

 

Our ability to continue to operate the Seneca BuffaloCreek Casino temporary facility, our ability to complete construction of thepermanent facility, as well as the timing of the construction and opening ofthe permanent Seneca Buffalo Creek Casino, will depend on various factors,including existing legal challenges and the availability of financing onacceptable terms.  Reference is made toour 2008 Form 10-K for a description of the legal proceedings relating tothe Seneca Buffalo Creek Casino.  Seealso “Part II. Item 1 - Legal Proceedings” for material developmentsregarding certain of these proceedings.

 

***Seneca Hickory Stick Golf Club —Lewiston, New York****.  *In March 2006, we acquired257 acres of land with the intent to design and build a championship level golfcourse in Lewiston, New York, approximately eight miles from Seneca NiagaraCasino and Hotel.  We selected the Robert Trent Jones II firm to designthe golf course.  Construction of the golf course commenced in July 2007,with completion of construction scheduled for Summer 2009.  To allow for proper grow-in of the course, itis anticipated that the official opening of the course will occur in Spring2010.  The decision as to when to openthe golf course for play will depend upon how well the course maturesthroughout the 2009 growing season.  Thetotal cost to construct the golf course, clubhouse and related amenities isestimated to be approximately $25.5 million.

 

In light of greater demands on our available cash, challenging economicand capital market conditions, the Company continues to evaluate the scope,phasing and timing of its clubhouse design for the Seneca Hickory Stick GolfClub.

 

***Marketing.****    *We use an integrated marketing strategy to attract and retain ourpatrons and to brand the Seneca name.  Wecoordinate our marketing events to maximize the quality and length of stay ofpatron visits and to minimize competition among our gaming facilities.  The luxury hotel and related amenities at theSeneca Niagara Casino and Hotel and the resort hotel and related amenities atSeneca Allegany Casino and Hotel further enhance 

 

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ourmarketing initiatives in the region, including areas of New York outside of theNiagara Falls and Salamanca areas, in Pennsylvania, Ohio, and Toronto, Canadaand in areas outside the region including Michigan, Massachusetts, andConnecticut.

 

***Seasonality.***     Wehave generally observed seasonal increases in gaming activity during the springand summer months and decreases in gaming activity during winter months associatedwith inclement weather.

 

***Overall Outlook****.*    SGC believes that it is the premier Class III gaming operator inWestern New York State and in the areas of Northern Pennsylvania and Ohiolocated within its primary and secondary markets. Since the December 31,2002 opening of the Seneca Niagara Casino, SGC has invested significantly inthe development, expansion and maintenance of its gaming facilities, includingthe completion of the hotel and gaming expansion projects at Seneca NiagaraCasino and Hotel and Seneca Allegany Casino and Hotel, and the opening of thetemporary casino on the Seneca Buffalo Creek Territory.  These investments have enabled SGC tomaintain its position as the premier gaming operator in the region describedabove.  To further that objective, and toprovide for expanded opportunities in the convention and tourism markets, amaster planning process continues with respect to the Niagara Falls, Alleganyand Buffalo gaming and related facilities. A principal goal is for the facilitiesto complement each other, offering diverse hotel, entertainment and gamingexperiences for our guests.

 

Although thecontinued economic recession, increased regional competition and inclementweather conditions present ongoing challenges that will require ongoingoperational efforts and Nation cooperation to mitigate the impact of theseadverse developments we believe our operating results positively reflect ourefforts to adapt to these turbulent economic and operational conditions.  We also continue to believe that,notwithstanding these challenges, the Western New York hotel, entertainment andgaming markets are underserved, and that the exclusivity provided by theCompact will continue to present us with a unique opportunity to serve thesemarkets.  As previously discussed, seniormanagement continues to monitor and review with the Corporation’s Board ofDirectors and its owner, the Seneca Nation of Indians, the Corporation’sfinancial condition and liquidity needs, to help ensure appropriate strategic plansare developed and implemented to meet ongoing economic challenges and addressthe liquidity requirements of the Corporation.

 

**CriticalAccounting Policies and Estimates**

** **

Therehave been no changes in critical accounting policies and estimates since thefiling of our 2008 Form 10-K.

 

**OperatingResults - Three Months Ended December 31, 2008 Compared to the ThreeMonths Ended December 31, 2007**

** **

*Summary of Operating Results*

 

As of December 31,2008, we own and operate the Seneca Niagara Casino and Hotel in Niagara Falls,New York; the Seneca Allegany Casino and Hotel in Salamanca, New York; and theSeneca Buffalo Creek Casino in Buffalo, New York.  In addition, Lewiston Golf Course Corporationwas established to operate a golf course which is currently under constructionin Lewiston, New York.  All of ourrevenues are derived from the operations of our completed facilities.

 

The following tablesummarizes our results from operations by property:

 
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)**                | ** ** |
| Net revenues:                         | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                                   | 94,307     |   | $ | 104,445 |   |
| Seneca Allegany Casino and Hotel      |       | 35,580                                              |       | 39,063 |   |
| Seneca Buffalo Creek Casino           |       | 8,832                                               |       | 6,692 |   |
| Total                                 |       | $                                                   | 138,719    |   | $ | 150,200 |   |
|                                  |       |                                                |       |   |   |
| Operating expenses:                   |       |                                                |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                                   | 72,136     |   | $ | 78,799 |   |
| Seneca  Allegany Casino and Hotel     |       | 37,059                                              |       | 39,057 |   |
| Seneca Buffalo Creek Casino           |       | 7,913                                               |       | 6,774 |   |
| Seneca Hickory Stick Golf Club        |       | 49                                                  |       | — |   |
| Seneca Gaming Corporation             |       | 430                                                 |       | 288 |   |
| Total                                 |       | $                                                   | 117,587    |   | $ | 124,918 |   |
|                                  |       |                                                |       |   |   |
| Operating income                      |       | $                                                   | 21,132     |   | $ | 25,282 |   |
|                                       |            |                                                     |            |  |  |  |  |  |  |

 

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Themost important factors or trends contributing to our operating performanceduring the three months ended December 31, 2008 and 2007 were:

 

Positivefactors and trends

 

·                  Reducedexpenses attributable to implementation of operating initiatives, whichincluded:  continued focus on hotel yieldmanagement; reduced food and beverage costs as a percentage of food andbeverage revenue; repricing of our food and beverage products; initiatives toincrease our cash paying patrons; and labor efficiencies achieved throughactive monitoring of scheduling activities and a reduction in workforce;

 

·                  Theincrease in the average daily number of slot machines at our temporary facilityon the Buffalo Creek Territory in March 2008;

 

·                  Theopening of the Seneca Events Center at Seneca Allegany Casino and Hotel in March 2008,resulting in increased entertainment offerings for our patrons;

 

·                  Ourability to enroll patrons in our cross-property Seneca Link Player’s Cardprogram, which continues to facilitate the use of effective direct mail andtargeted marketing programs to establish patron loyalty to the Seneca brand ata profitable level;

 

·                  Ourmix of slot machines, which we believe is superior to our competition andincludes the latest product offerings by leading slot manufacturers, andpromotes the ongoing development of a Seneca brand inter-property progressivelink; and

 

·                  Smokingbans in New York and Canada which came into effect in July 2003 and May 2006,respectively, which have helped to distinguish our properties from competitors.

 

Negative factors and trends

 

·                  Theeffects of increased Head Lease payments and distributions to the Nation, whichhave limited our cash reserves and funds available for construction, capitalreinvestment and liquidity reserves;

 

·                  Tumultuousand volatile economic conditions, reduced access to credit, increasingunemployment, and general consumer uncertainty leading to economic recession,reduced consumer spending and an apparent transition to gaming of logisticalconvenience;

 

·                  Adversecredit market conditions which have reduced the availability, and increased thecost, of capital for expansion projects;

 

·                  Limitedmaintenance capital investment in both our Niagara Falls and Alleganyproperties;

 

·                  Competitionfrom Presque Isle Downs in Erie, Pennsylvania, approximately 80 miles from theSeneca Allegany Casino and Hotel and 120 miles from the Seneca Niagara Casinoand Hotel, and additional marketing by New York racinos which may beattributable, in part, to recent New York State legislation providingadditional marketing dollars to racinos;

 

·                  Devaluation of the Canadian dollar resultingin reduced trip frequency from our Canadian patrons; and

 

·                  Inclement weather conditions during December 2008.

 

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*Gross Revenues*

 

Gross revenues consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)**                | ** ** |
| Gaming                          |       | $                                                   | 137,023    |   | $ | 150,080 |   |
| Food and beverage               |       | 14,204                                              |       | 14,814 |   |
| Lodging                         |       | 6,296                                               |       | 7,313 |   |
| Retail, entertainment and other |       | 6,440                                               |       | 6,671 |   |
| Total                           |       | $                                                   | 163,963    |   | $ | 178,878 |   |

 

Thetable below summarizes the percentage of gross revenues from each revenuesource:

 
| ** **                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Gaming                          |       | 83.6                                                | %          | 83.9 | % |
| Food and beverage               |       | 8.7                                                 | %          | 8.3 | % |
| Lodging                         |       | 3.8                                                 | %          | 4.1 | % |
| Retail, entertainment and other |       | 3.9                                                 | %          | 3.7 | % |
| Total                           |       | 100.0                                               | %          | 100.0 | % |

 

*Gaming Revenue*

 

Thefollowing table presents data related to gaming revenues (in thousands, exceptwhere noted):

 
| ** **                                           | ** ** | **Three Months Ended  December 31,** | ** **      |
|------------------------------------------------------|------------|-----------------------------------------------------|-----------------|
| ** **                                           | ** ** | **2008**                                            | ** **      | **2007** | ** ** |
| Slot handle                                     |       | $                                                   |  1,472,236 |   | $ |  1,596,789 | ** ** |
| Gross slot revenue                                   |       | $                                                   | 124,863         |   | $ | 135,759 |   |
| Net slot revenue                                     |       | $                                                   | 111,576         |   | $ | 119,530 |   |
| Weighted average number of slot machines  (in units) |       | 6,680                                               |            | 6,676 |   |
| Gross slot hold percentage                           |       | 8.48                                                | %               | 8.50 | % |
| Gross slot win per unit per day (in  dollars)        |       | $                                                   | 203             |   | $ | 221 |   |
|                                                 |       |                                                |            |   |   |
| Table games drop                                     |       | $                                                   | 92,355          |   | $ | 110,981 |   |
| Gross table games revenue                            |       | $                                                   | 15,342          |   | $ | 18,397 |   |
| Net table games revenue                              |       | $                                                   | 15,297          |   | $ | 18,325 |   |
| Weighted  average number of table games (in units)   |       | 142                                                 |            | 142 |   |
| Table games hold percentage                          |       | 16.61                                               | %               | 16.58 | % |
| Table games revenue per unit per day (in  dollars)   |       | $                                                   | 1,174           |   | $ | 1,408 |   |

 

Ourgaming revenue for the three months ended December 31, 2008 decreased whencompared to the same period in the prior year, primarily due to the currenteconomic recession and the resulting decrease in consumer discretionaryspending, including spending for gaming and entertainment purposes.

 

We offer electronic slot bonusing, which is included in slot revenuesand promotional allowances.  Slotbonusing allows us to reward our slot patrons, based on their propensity togame, by providing slot promotional credits for free play directly at the slotmachine through the use of their Seneca Link Player’s Card. The slotpromotional credits, which must be played at a slot machine and cannot beredeemed for cash, amounted to $7.8 million and $6.6 million at Seneca NiagaraCasino and Hotel during the three months ended December 31, 2008 and 2007,respectively, and $2.2 million and $5.5 million at Seneca Allegany Casino andHotel during the three months ended December 31, 2008 and 2007,respectively.  The decrease in slotpromotional credit play during the three months ended December 31, 2008was primarily due to decreased slot play.

 

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Ournet gaming revenue, net of promotional credits of $10.0 million and $12.1million in the three months ended December 31, 2008 and 2007,respectively, decreased $11.0 million, or 8%, when comparing the sameperiods.  During the three months ended December 31,2008, Seneca Niagara Casino and Hotel’s net gaming revenue decreased $9.8million, or 10%; Seneca Allegany Casino and Hotel’s net gaming revenuedecreased $3.3 million, or 9%; and Seneca Buffalo Creek Casino’s net gamingrevenue increased $2.1 million, or 31% when comparing these same periods.  We believe the foregoing decreases areattributable to the current economic environment and related conditions, theintroduction of competition in Pennsylvania at Presque Isle Downs, andincreased marketing funds available to New York racinos.

 

*Food and Beverage Revenue*

 

Thefollowing table presents data related to food and beverage revenue (inthousands, except where noted):

 
| ** **                 | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Covers                     |       | 934                                                 |       | 1,028 |   |
| Average check (in dollars) |       | $                                                   | 15.20      |   | $ | 14.41 |   |
|                            |            |                                                     |            |  |  |  |  |

 

Duringthe three months ended December 31, 2008, our consolidated food andbeverage revenue decreased $0.6 million, or 4% when compared to the same periodin 2007, to $14.2 million.  SenecaNiagara Casino and Hotel’s food and beverage revenue accounted for $0.5 millionof the decrease; Seneca Allegany Casino and Hotel’s food and beverage revenueaccounted for $0.1 million of the decrease; and Seneca Buffalo Creek Casino’sfood and beverage revenue remained flat over the same quarter in the prioryear.  During the three months ended December 31,2008 and 2007, 53% and 55%, respectively, of our food and beverage revenue werethe result of Seneca Link Player’s Card point redemptions.

 

*Lodging Revenue*

 

Thefollowing table presents data related to lodging revenue:

 
| ** **                          | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Occupied rooms                      |       | 68,095                                              |       | 67,387 |   |
| Average daily room rate (ADR)       |       | $                                                   | 92.45      |   | $ | 108.53 |   |
| Occupancy rate                      |       | 92.8                                                | %          | 90.6 | % |
| Revenue per available room (REVPAR) |       | $                                                   | 85.75      |   | $ | 98.35 |   |

 

Duringthe three months ended December 31, 2008, our lodging revenue decreased by$1.0 million, or 14%, when compared to the three months ended December 31,2007, due to a decrease in average rate per occupied room.  Seneca Niagara Casino and Hotel’s lodgingrevenue accounted for $0.8 million of the decrease and Seneca Allegany Casinoand Hotel’s lodging revenue accounted for $0.2 million of the decrease.  During the three months ended December 31,2008 and 2007, 26% and 25%, respectively, of our lodging revenue wasattributable to cash payments by patrons (as compared to revenue attributableto patron complimentaries).

 

*Retail, Entertainment and Other Revenue*

 

Duringthe three months ended December 31, 2008, our retail, entertainment andother revenue decreased $0.2 million, or 3%, when compared to the sameperiod in 2007.  During the three monthsended December 31, 2008 and 2007, 82% and 73%, respectively, of our retailrevenue was attributable to Seneca Link Player’s Card point redemptions.

 

*Promotional Allowances*

 

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.

 

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

 
| ** **                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)**                | ** ** |
| Gaming                          |       | $                                                   | 10,037     |   | $ | 12,115 |   |
| Food and beverage               |       | 7,253                                               |       | 8,024 |   |
| Lodging                         |       | 4,511                                               |       | 5,377 |   |
| Retail, entertainment and other |       | 3,443                                               |       | 3,162 |   |
| Total                           |       | $                                                   | 25,244     |   | $ | 28,678 |   |

 

The estimated cost of providing such promotional allowances was asfollows:

 
| ** **                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)**                | ** ** |
| Food and beverage               |       | $                                                   | 5,782      |   | $ | 6,903 |   |
| Lodging                         |       | 2,915                                               |       | 2,597 |   |
| Retail, entertainment and other |       | 2,620                                               |       | 2,678 |   |
| Total                           |       | $                                                   | 11,317     |   | $ | 12,178 |   |

 

Promotional allowances asa percentage of gaming revenue were 18.4% and 19.1% during the three monthsended December 31, 2008 and 2007, respectively.  Promotional allowances decreased $3.4million, or 12%, when comparing the three months ended December 31, 2008to the same period in 2007.

 

*Detailed Operating ExpenseInformation*

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)**                | ** ** |
|                                    |       |                                                |       |   |   |
| Operating expenses:                     |       |                                                |       |   |   |
| Gaming                                  |       | $                                                   | 37,225     |   | $ | 41,438 |   |
| Food and beverage                       |       | 11,207                                              |       | 12,616 |   |
| Lodging                                 |       | 3,453                                               |       | 3,763 |   |
| Retail, entertainment and other         |       | 3,557                                               |       | 3,843 |   |
| Advertising, general and administrative |       | 49,500                                              |       | 49,523 |   |
| Pre-opening costs                       |       | 58                                                  |       | 93 |   |
| Depreciation                            |       | 12,587                                              |       | 13,642 |   |
| Total Operating expenses                |       | $                                                   | 117,587    |   | $ | 124,918 |   |

 

*Gaming Expenses*

 

Gamingexpenses principally consist of costs incurred from operating our table gamesand slot machines, of which the primary components are payroll and payrollrelated costs and the slot exclusivity fee paid to New York State pursuant tothe Compact.

 

Thefollowing table summarizes the exclusivity fee incurred by property:

 
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)**                | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                                   | 16,573     |   | $ | 18,475 |   |
| Seneca Allegany Casino and Hotel      |       | 6,599                                               |       | 7,185 |   |
| Seneca Buffalo Creek Casino           |       | 1,909                                               |       | 1,452 |   |
| Total                                 |       | $                                                   | 25,081     |   | $ | 27,112 |   |
|                                       |            |                                                     |            |  |  |  |  |  |  |

 

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Theslot exclusivity fee decreased $2.0 million from $27.1 million for thethree months ended December 31, 2007 to $25.1 million for the three monthsended December 31, 2008, due to lower net slot revenues.  Gaming expenses as a percentage of grossgaming revenues were 27.1% and 27.6% for the three months ended December 31,2008 and 2007, respectively.

 

*Food and Beverage Expenses*

 

Foodand beverage expenses represent those costs incurred for the operation of ourrestaurants, snack bars and beverage outlets. The primary components of these expenses are the cost of food andbeverage products and payroll and payroll related expenses for team membersproviding the service.

 

Duringthe three months ended December 31, 2008, food and beverage costsdecreased $1.4 million, or 11%, when compared to the same period in 2007, dueprimarily to a concerted effort to reduce all components of such costs, whilemaintaining superior product offerings to our patrons.  Food and beverage expenses as a percentage offood and beverage revenues were 78.9% and 85.2% for the three months ended December 31,2008 and 2007, respectively.

 

*Lodging Expenses*

 

Lodgingexpenses represent those costs incurred for the operation of our luxury hoteland spa at Seneca Niagara Casino and Hotel and our resort hotel and spa atSeneca Allegany Casino and Hotel.  Thecomponents of these expenses include payroll and payroll related expenses,guest amenity supplies, laundry and other expenses.  During the three months ended December 31,2008, lodging expenses decreased $0.3 million, or 8%, as compared to the threemonth period ended December 31, 2007. The decrease is primarily due to a $0.3 million decrease in payroll andbenefit expenses.  Lodging expenses as apercentage of lodging revenues were 54.8% and 51.4% for the three months ended December 31,2008 and 2007, respectively.

 

*Retail, Entertainment and Other Expenses*

 

Retail,entertainment and other expenses primarily represent those costs incurred forthe operation our retail shops and entertainment offerings.  The components of these expenses includepayroll and payroll related costs, the purchase of products offered for sale inour retail outlets and contract costs for entertainers.  For the three months ended December 31,2008, these costs decreased approximately $0.3 million, or 7%, over thecomparable 2007 period, due principally to a $0.5 million decrease in retailcost of sales, offset by a $0.1 million increase in payroll and benefitexpenses and a $0.1 million increase in headline entertainment costs.  Retail, entertainment and other expenses as apercentage of retail, entertainment and other revenues were 55.2% and 57.6%,for the three months ended December 31, 2008 and 2007, respectively.

 

*Advertising, General and Administrative Expenses*

 

Advertising,general and administrative expenses consist primarily of payroll and payrollrelated expenses, regulatory fees, advertising and marketing costs, operatinglease expense, insurance, legal and utility costs.  For the three months ended December 31,2008, such costs decreased slightly from the same period in 2007.  For the three months ended December 31,2008, a $4.8 million increase in Head Lease expense over the comparative periodin 2007, was offset by a $1.2 million decrease special event costs, a $1.2million decrease in advertising costs, a $1.1 million decrease in promotionalexpenses, a $0.5 million decrease in payroll and benefits and a $0.2 milliondecrease in regulatory costs. Advertising, general and administrative expensesas a percentage of gross revenues were 30.1% and 27.6%, for the three monthsended December 31, 2008 and 2007, respectively.

 

*Pre-opening Expenses*

 

Pre-openingexpenses are non-recurring costs incurred to support the expected opening ofnew facilities.  During the three monthsended December 31, 2008, pre-opening expenses incurred were primarilyrelated to the preparation of the Seneca Hickory Stick Golf Club, to beoperated by the Lewiston Golf Course Corporation.  During the three months ended December 31,2008, pre-opening expenses decreased when compared to the same period in 2007due to the opening of the Seneca Events Center at Seneca Allegany Casino andHotel in March 2008.

 

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*Depreciation Expense*

 

Duringthe three months ended December 31, 2008 and 2007, depreciation expensewas $12.6 million and $13.6 million, respectively, a decrease of $1.0 million,or 7%.

 

*Other Non-Operating Expenses*

 

The following table summarizes information relatedto other non-operating expenses:

 
| ** **             | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **             | ** ** | **(Dollars in Thousands)**                | ** ** |
|                   |       |                                                |       |   |   |
| Non-operating expenses |       | $                                                   | (113       | ) | $ | (3,750 | ) |
|                        |            |                                                     |            |  |  |  |  |

 

During the three months ended December 31, 2008 and 2007, we recordedan other-than-temporary loss on one specific investment of $0.1 million and$3.8 million, respectively, as other non-operating expense. The cost basis ofthis investment has been reduced by the amount of the other-than-temporary lossrecorded.

 

*InterestIncome*

 

Interestincome was $0.1 million for the three months ended December 31, 2008,compared to $0.7 million for the three months ended December 31,2007.  The decrease in interest incomecan be attributed to the decrease in the average cash balance on deposit withfinancial institutions in interest bearing accounts when comparing theseperiods.

 

*Interest Expense*

 

The following table summarizes information relatedto interest on our long-term debt and Senior Secured Revolving Loan Agreement:

 
| ** **       | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------|------------|-------------------------------------------------|------------|
| ** **       | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)**            | ** ** |
|             |       |                                            |       |   |   |
| Interest expense |       | $                                               | 9,603      |   | $ | 9,871 |   |
|                  |            |                                                 |            |  |  |  |  |

 

Duringthe three months ended December 31, 2008, interest expense consistedsubstantially of interest on our $500 million aggregate principal amount of 71⁄4%senior notes, included $1.0 million of amortization related to financing costsand discount, and was partially offset by $0.4 million capitalized interest onour construction activities for our Seneca Hickory Stick Golf Course.  During the three months ended December 31,2007, there was no interest capitalized in conjunction with our constructionactivities.

 

*Net Income*

 

Net income for the three months ended December 31, 2008 was $11.5million, compared to $12.4 million for the three months ended December 31,2007, a decrease of $0.9 million, or 8%, for the reasons stated above.

 

**Liquidity and Capital Resources**

 

As previouslydiscussed, senior management continues to monitor, and review with theCorporation’s Board of Directors and its owner, the Seneca Nation of Indians,the Corporation’s financial condition and liquidity needs, to help ensureappropriate strategic plans are developed and implemented to meet ongoingeconomic challenges and address the liquidity requirements of the Corporation.

 

Taking into account the suspension of existingexpansion projects previously noted, we intend to work closely with theCorporation’s owner to ensure cash generated from our operations, availablecash and cash equivalents, short-term investments and cash available under ourSenior Secured Revolving Loan Agreement as of December 31, 2008 aresufficient to service our debt, satisfy our other financial obligations andcommitments and to meet our working capital requirements for the remainder ofthe current fiscal year.

 

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Our ability to fund our operations, make plannedcapital expenditures, service our debt and satisfy our other financialobligations and commitments depends on our future operating performance andcash flow, which are in turn subject to prevailing economic conditions and tofinancial, business and other factors, some of which are beyond ourcontrol.  Additionally, unlike traditionalcorporations, we are prohibited by law from obtaining capital through anoffering of equity securities and our ability to incur additional indebtednessis limited under the terms of the Indenture governing the senior notes, theDistribution Agreement and the Senior Secured Revolving Loan Agreement.  Reference is made to our Annual Report on Form 10-Kfor the year ended September 30, 2008 for a description of certain riskfactors discussing SGC’s ability to generate cash flow to complete itsexpansion projects.

 

We are leveraged, have significant interest paymentrequirements under the Senior Notes Indenture and have repayment obligationsunder the Senior Secured Revolving Loan Agreement which matures in June 2009(unless extended by us for six months), in addition to distribution obligationsunder the Distribution Agreement and other commitments from time to time to theNation. We make distributions to the Nation pursuant to declarations by ourBoard of Directors.  During the threemonths ended December 31, 2008 we distributed $17.2 million to the Nationpursuant to such declarations.  Wedistributed an additional $3.3 million to the Nation during the three monthsended December 31, 2008 pursuant to the Distribution Agreement.  As such, limitations on our capital resourcescould force us to delay or abandon capital projects as well as the constructionand development of proposed expansion projects.

 

*Cash Flows*

 
| ** **                                             | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(Dollars in Thousands)**                | ** ** |
| ** **                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net cash provided by operations                        |       | $                                                   | 20,915     |   | $ | 26,683 |   |
|                                                   |       |                                                |       |   |   |
| Cash flows relating to investing activities            |       |                                                |       |   |   |
| Capital expenditures                                   |       | (21,909                                             | )          | (24,353 | ) |
| Payments for land acquisitions and other  assets       |       | (497                                                | )          | (3,566 | ) |
| Deposits to restricted cash                            |       | —                                              |       | (849 | ) |
| Sale of investments, net                               |       | —                                              |       | 14,600 |   |
| Net cash used in investing activities                  |       | (22,406                                             | )          | (14,168 | ) |
|                                                   |       |                                                |       |   |   |
| Cash flows relating to financing activities            |       |                                                |       |   |   |
| Proceeds from senior secured revolving loan  agreement |       | 20,000                                              |       | — |   |
| Distributions paid to the Nation                       |       | (20,506                                             | )          | (16,628 | ) |
| Net cash used in financing activities                  |       | (506                                                | )          | (16,628 | ) |
|                                                   |       |                                                |       |   |   |
| Net decrease in cash and cash equivalents              |       | $                                                   | (1,997     | ) | $ | (4,113 | ) |

 

*Cash Flows—Operating Activities*

 

The $5.8 million decrease in cash flows fromoperations during the three months ended December 31, 2008 as compared tothe three months ended December 31, 2007 was primarily due to a $4.2million decrease in operating income, as previously described and a $1.0million decrease in depreciation expense.

 

*Cash Flows—Investing Activities*

 

During the three months ended December 31,2008, cash flows used in investing activities were approximately $22.4 million,compared to $14.2 million during the three months ended December 31,2007.  The increase of $8.2 million wasdue to:  a decrease in proceeds from thesale of investments of $14.6 million; offset by a $0.8 million reduction indeposits to restricted cash; a decrease in cash paid for property and equipmentof $2.4 million; and a decrease in cash paid for land acquisition of $3.1million.

 

During the three months ended December 31,2008, capital expenditures were $21.9 million and consisted of:  $9.1 million relating to the construction ofthe permanent Seneca Buffalo Creek Casino and Hotel on the Nation’s BuffaloCreek Territory;  $5.1 million associatedwith pre-construction costs relating to the additional hotel tower at theSeneca Allegany Casino and Hotel; $2.7 million relating to construction of theSeneca Hickory Stick Golf Club; 

 

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and $0.9 million for the conversion of the temporarygaming facility at Seneca Allegany Casino and Hotel into an events center, withrelated amenities.  The remaining $4.1million in capital expenditures were principally for the acquisition ofequipment for existing casino operations. Our land acquisitions of $0.5 million include legal expenses and otheracquisition costs related to certain parcels within the 50 acre “footprint”described in the Compact with New York State and designated for ownership bythe Nation.

 

*Cash Flows—Financing Activities*

 

During the three months ended December 31,2008, net cash used in financing activities was $0.5 million, compared to $16.6million during the three months ended December 31, 2007, a decrease of$16.1 million.  The decrease was due toan increase in distributions paid to the Nation of $3.9 million, offset byproceeds from our Senior Secured Revolving Loan Agreement of $20.0 million.

 

During the three months ended December 31, 2008, distributions tothe Nation amounted to $20.5 million. Cash distributions were $17.2 million and payments pursuant to theDistribution Agreement were $3.3 million.

 

*Principal Debt Arrangements*

 

As of December 31, 2008, our debt instrumentsand facilities consisted of the 2004 and 2005 senior notes on which we pay afixed interest rate of 71⁄4%, and a $50.0 million Senior Secured Revolving LoanAgreement, which matures on June 19, 2009 (with an option to extend forsix months).  Following is a summary ofcertain material terms of the senior notes and the Senior Secured RevolvingLoan Agreement.

 

The Senior Notes.   On May 5,2004 and May 23, 2005, SGC issued $300.0 million and $200.0 million,respectively, in senior notes with fixed interest payable at a rate of 71⁄4% perannum due 2012, which we refer to collectively as the Senior Notes, under theIndenture.  The Senior Notes arecurrently guaranteed by SNFGC, STGC, SEGC, and LGCC.  Interest on the Senior Notes is payablesemi-annually on May 1 and November 1.  The Senior Notes mature on May 1,2012.  The Senior Notes are unsecuredgeneral obligations.  As of December 31,2008, accrued interest on the Senior Notes was $6.0 million.  As of December 31, 2008, SGC was incompliance with all covenants in the Indenture.

 

Senior Secured Revolving Loan Agreement.  Effective June 19, 2008, SGC enteredinto a $50.0 million Senior Secured Revolving Loan Agreement, which matures on June 19,2009.  The maturity date may be extendedby SGC at its election (at any time after the six month anniversary of theclosing date and prior to June 19, 2009) for an additional period of sixmonths, provided that no default or event of default exists at the time ofelection.  Amounts borrowed under the Senior Secured Revolving LoanAgreement 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 Street Journal*) plus one quarterpercent (0.25%).  Any outstanding principalbalance is required to be paid on the maturity date.

 

SGC’sobligations under the Senior Secured Revolving Loan Agreement are secured by substantiallyall gaming and related assets (including substantially all gaming revenues) notconstituting real property or improvements.  SGC’s obligations areguaranteed by SNFGC, STGC, SEGC and LGCC.  The guarantors’ obligations aresecured by substantially all of each guarantor’s gaming and related assets(including substantially all gaming revenues) not constituting real property orimprovements.

 

The Senior Secured Revolving Loan Agreement contains certain financialcovenants requiring minimum consolidated EBITDA of $160 million (on a rolling12 month basis) and compliance with certain leverage and coverage ratios. TheSenior Secured Revolving Loan Agreement also contains additional customarycovenants, including covenants restricting the incurrence of additionalindebtedness, the creation of additional liens, and the disposition of assets.As of December 31, 2008, SGC was in compliance with all covenants in theSenior Secured Revolving Loan Agreement.

 

As of December 31, 2008, at SGC’s request, thelender under the Senior Secured Revolving Loan Agreement had issued letters ofcredit totaling $16.7 million, $11.2 million of which may be drawn upon to fundthe purchase of certain parcels within the 50 acre “footprint” described in theCompact with New York State and designated for ownership by the Nation, withthe remaining $5.5 million issued in connection with worker’s compensationpolicies and certain other contracts, as required.

 

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On October 29, 2008 SGC borrowed $20.0 millionunder the Senior Secured Revolving Loan Agreement.  As of December 31, 2008, $13.3 millionwas available to be drawn under the loan agreement.  We expect to draw down on this remainingamount by the end of the second quarter of Fiscal 2009.

 

Effective June 19, 2008, SGC’s securedreimbursement facilities were terminated and all outstanding letters of creditunder such facilities were assumed as outstanding letters of credit under theSenior Secured Revolving Loan Agreement.

 

*Distribution Agreement Obligations*

 

On April 27, 2007, SGC entered into aDistribution Agreement among the Nation, the Seneca Nation of Indians CapitalImprovements Authority, or the Authority, SGC and Wells Fargo Bank, as Trustee,in connection with the Authority’s issuance in two series (one tax exempt andthe other taxable) of an aggregate principal amount of $159,495,000 specialobligation bonds, or the 2007 Nation Bonds. The Distribution Agreement obligates SGC, subject to any contractualrestrictions applicable to SGC (including, but not limited to, those containedin the Senior Notes Indenture) to make monthly distributions to the Nation atthe times and in the amounts necessary to enable the Authority to pay the debtservice on the 2007 Nation Bonds as required under the Authority’sindenture.  At the direction of theNation and the Authority, SGC will pay such distributions directly to theTrustee.  The Authority’s debt servicecommenced on June 1, 2007.  For theperiod from June 1, 2007 through November 1, 2007, the Authority’sdebt service averaged approximately $0.9 million per month.  For the period December 1, 2007 through June 1,2008, the Authority’s debt service averaged approximately $1.7 million permonth.  In June 2008, it wasdetermined that the amortization (debt service) schedule provided, upon whichthe foregoing $1.7 million monthly payments was made, was incorrect.  A corrected amortization schedule wasprovided and, after giving effect to a resulting credit for amounts overpaid,for the period from January 1, 2008 through December 1, 2023, theAuthority’s debt service averages approximately $1.2 million permonth.  The foregoing debt serviceaverages are based on scheduled payments of interest and principal under theAuthority’s indenture and bonds and do not address the effects of any earliercall for redemption, by acceleration or otherwise.  The Distribution Agreement provides thatneither the Trustee nor the Authority’s bondholders will have any recourseunder the Distribution Agreement to any revenues, assets or property of SGC orits subsidiaries should SGC fail to comply with our distributionobligations.  During the three monthsended December 31, 2008, SGC distributed to the Nation $3.3 million forthe Authority’s debt service on the special obligation bonds.

 

Reference is made to the Senior Notes Indenture, theSenior Secured Revolving Loan Agreement and the Distribution Agreement for anunderstanding of all terms of such financing arrangements.

 

*Other Commitments*

 

We have acquired approximately 45 acres in the Cityof Niagara Falls, New York, designated by New York State under the Compact forownership by the Nation, and intend to acquire approximately three additionalacres. Under the Compact, the Nation is required to fund the acquisition of thisproperty, including all related costs and expenses. As initial security for theNation’s obligations to pay site acquisition costs and in furtherance of theongoing condemnation proceeding, the Nation was required to, and did, deliver,to the Empire State Development Corporation, or ESDC, a letter of credit in theamount of $33.5 million representing 150% of the then estimate of the totalremaining site acquisition costs not yet paid by the Nation.  In July 2006, we acquired, through thecondemnation process, approximately 18 acres of land and trade fixturesappurtenant thereto from Fallsite, LLC, or Fallsite and Fallsville, LLC, orFallsville, for an aggregate initial advance payment of $17.0 million, whichland is a portion of the land in the City of Niagara Falls, New York designatedunder the Compact for ownership by the Nation. Of this amount, $7.7 million wasdrawn on the letter of credit as part of the consideration for the purchase,leaving $25.8 million available under the letter of credit.  In March 2007, an additional $11.5million was drawn under the letter of credit to fund the acquisition of 18additional parcels of land and certain improvements.    In December 2007, an additional $3.0million was drawn under the letter of credit to fund the acquisition of sevenadditional parcels of land owned by the City of Niagara Falls.  In connection with the closing of the SeniorSecured Revolving Loan Agreement, at SGC’s request, the lender issued lettersof credit totaling $16.8 million, $11.2 million of which may now be drawn uponto fund the purchase of the remaining parcels within the “footprint” describedin the Compact.  If the estimate of suchsite acquisition costs increases or if certain other events occur, the Nationmay have to provide an additional letter of credit or replace the existing onewith one for a larger monetary amount or, if acceptable to the ESDC, provide asupplemental cash escrow amount. Unreimbursed amounts on the letter of credit may result in automaticdraw-downs under the Senior Secured Revolving Loan Agreement.

 

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Theamounts paid to condemnees from whom we have acquired property are deemed to beadvance payments. Pursuant to the New York State Eminent Domain Procedure Law,or EDPL, the New York state courts will determine the final purchase price tobe paid to condemnees who elect to challenge the initial appraised value oftheir property.  To date, all recordowners from whom property was condemned pursuant to the EDPL have reservedrights to claim additional compensation. Four record owners have filed notices of claim to challenge the fairmarket value appraisals utilized by ESDC. Fallsite LLC and Fallsville Splash, LLC have filed notices of claim inthe amounts of $40.0 and $35.0 million for land and trade fixtures,respectively, relating to a former water park within the footprint.  ESDC’s fair market appraisal value for theforegoing was approximately $17.0 million. Intertrust Development has filed a notice of claim for $15.8 million forland and trade fixtures associated with a former Holiday Inn hotel within thefootprint. ESDC’s fair market appraisal value for the foregoing was $8.2million (excluding fixtures). Additionally, JFD Holdings has filed a notice of claim for anunspecified amount for land and trade fixtures associated with a former PizzaHut restaurant within the footprint. ESDC’s fair market appraisal for the foregoing was approximately $0.4million.  Valuation proceedings withregard to the former water park are underway with expected completion in early2009.  We are finalizing a settlementwith regard to the former Holiday Inn property, which has been approved by boththe SGC Board of Directors and the Nation’s Council.

 

If a court determines that the value for the landand improvements, including trade fixtures, is higher than what ESDC hasdetermined to be their appraised values, then we may be liable for the differenceand potentially also responsible for certain additional costs and payments tothe applicable condemnee(s), such as their attorney fees.  As of December 31, 2008, we haveestablished a reserve in the amount of $6.4 million for such matters, which isincluded as a component of other current liabilities on SGC’s consolidatedbalance sheet.

 

*Expansion and Development Plans*

 

Duringthe next 18 months, due to liquidity concerns, ongoing demands on ourcash, and the state of the capital markets, it is unlikely that we will makesubstantial capital investments in our gaming facilities from cash onhand.  We will rely significantly onexternal financing to complete our expansion projects if and when resumed,which may not be available to us, or, if available, may not be on favorableterms, or terms as favorable as those under our existing indebtedness.

 

*Seneca Allegany Casino and Hotel*

 

In March 2008,we completed the conversion of the former temporary casino facility at SenecaAllegany Casino and Hotel, at a cost of approximately $29.3 million(approximately $4 million under budget), into an approximate 2,200 seat eventcenter with additional amenities and administrative space.  The exterior landscaping and façade enhancements,originally planned as part of the conversion of the temporary casino, have beendeferred to the next phase of construction.

 

Thenext phase of construction, originally planned for an additional 200 room hoteland 30,000 square feet of additional gaming and related amenities, was suspendedin August 2008 due to various factors, including challenging economic andcapital market conditions, operating and other demands on our available cashand increase competition and construction costs.  As of December 31, 2008, the Company hasincurred $17.4 million related to this phase of construction.

 

*Seneca Buffalo Creek Casino*

 

In March 2008, the Company completed a109 slot machine expansion (for a total of 244 slot machines) of the temporarySeneca Buffalo Creek Casino.  Construction of the permanent Seneca BuffaloCreek Casino and Hotel commenced in January 2008, with completionoriginally estimated for Summer 2010.  The permanent complex wasoriginally planned to feature 90,000 square feet of gaming space with 2,000slot machines, 45 table games and a 22-story all suite hotel with approximately206 rooms.  In August 2008, wesuspended construction due to various factors, including challenging economicand capital market conditions, operating and other demands on our availablecash and increase competition and construction costs.  We intend to resume construction upon thestabilization of economic and capital market conditions, and assumingsufficient external financing upon acceptable terms becomes available.  As of December 31, 2008, the Company hasincurred $83.5 million on the construction of the permanent casino andhotel.     See “Executive Summary — Seneca Buffalo Creek Casino,”“Part II. Item 1. — Legal Proceedings,” and “2008 Form 10-K Item 3. —Legal Proceedings” for information regarding the status of, and litigationrelated to, our Seneca Buffalo Creek Casino.

 

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*Seneca Hickory Stick Golf Club*

 

In July 2007, the Company commenced construction of the SenecaHickory Stick Golf Club, an 18-hole Robert Trent Jones II designed golf course,located in Lewiston, New York, approximately eight miles from the SenecaNiagara Casino and Hotel.  Constructionof the course is expected to be complete in Summer 2009, but to allow forproper grow-in of the course, it is anticipated that the official opening ofthe course will occur in Spring 2010.  Asof December 31, 2008, the Company has incurred $17.9 million on landacquisition and construction costs, with the total cost to construct the golfcourse, clubhouse and related amenities estimated to be approximately $25.5million.  In light of greater demands onour available cash, increased competition and challenging economic and capitalmarket conditions, the Company, in consultation with the Nation, continues toevaluate the scope, phasing and timing of its expansion plans, including theclubhouse design for the Seneca Hickory Stick Golf Club.

 

**Regulation**

 

Our operations are regulated by Nation laws, theCompact and federal statutes, most notably the Indian Gaming Regulatory Act, orIGRA.  Several bills were proposed duringpast sessions 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 thecommittees that have jurisdiction over the IGRA have not made any indicationsthat gaming regulation will be an agenda item for the 111th Congress. Moreover, the new administration has yet to appoint new members to theNIGC thus it remains unclear whether the administration will pursue legislativeinitiatives related to the topic of Indian gaming.

 

The Department of the Interior published finalregulations effective August 25, 2008 governing the conduct of gaming onlands taken into trust after October 17, 1988.  The regulations on their face do not purportto 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.

 

**New Accounting Pronouncements**

** **

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

 

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

** **

Reference is made to our 2008 Annual Report on Form 10-Kfor a complete discussion of our market risk.

 

On June 19, 2008, we entered into the SeniorSecured Revolving Loan Agreement that exposes SGC to interest rate risk in thatamounts borrowed under the SeniorSecured Revolving Loan Agreement will 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%).  As of December 31, 2008, we have drawndown $20.0 million on the Senior Secured Revolving Loan Agreement.  See “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Principal DebtArrangements” for further information relating to the Senior Secured Revolving LoanAgreement.

 

Since our senior notes are fixed-rateindebtedness, and our obligations under the Distribution Agreement are basedupon fixed-rate indebtedness of the Authority, we believe that our overallexposure to market risk in the form of interest rate fluctuations is low.

 

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**Item 4T.          Controls and Procedures**

** **

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures (asthat term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, or the Exchange Act) that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our President and Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, have inherent limitations due to cost issues, the possibility ofhuman error, judgments and assumptions regarding the likelihood of futureevents, and the circumvention and overriding of the controls and procedures.   Accordingly, even effective disclosure ofcontrols and procedures can provide only reasonable assurance of achieving thedesired control objectives.

 

SGC’s management, under the supervision of ourPresident and Chief Executive Officer, and with the participation of ourPresident and Chief Executive Officer and our Chief Financial Officer (as ourprincipal executive officer and principal financial officer, respectively), hasevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures.  Based on thatevaluation, our President and Chief Executive Officer and Chief FinancialOfficer have concluded that the design and operation of our disclosure controlsand procedures as of December 31, 2008 provided reasonable assurance thatthe disclosure controls and procedures are effective to accomplish theirobjectives.

 

**Changes in InternalControl over Financial Reporting**

** **

There have been no change in our internal controlover financial reporting identified in connection with the evaluation requiredby Exchange Act Rules 13a-15 or 15d-15 or otherwise that occurred duringthe quarter ended December 31, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Part II.     OTHERINFORMATION**

 

**Item 1.**            Legal Proceedings

** **

***Citizens Against Casino Gambling in ErieCounty v. Hogen (1:07-cv-00451-WMS (WDNY)) — CACGEC II***

 

Consistent with information previously reported by SGC, on July 12,2007, Citizens Against Casino Gambling in Erie County (CACGEC) filed a secondaction in the United States District Court, Western District of New Yorkagainst the United States Department of Interior, the National Indian GamingCommission, or NIGC, and two individuals in their official capacities asSecretary of the Interior and Chairman of the National Indian GamingCommission, respectively.  The actionsought declaratory and injunctive relief under the Administrative ProcedureAct, the Declaratory Judgments Act, and the Indian Regulatory Gaming Act and isprincipally directed at the decisions and actions of the defendants inapproving the Nation’s class III gaming ordinance, and the Indian land opinionissued by the Chairman relative to that approval.  The plaintiffs claim that the defendants havefailed to comply with federal law and have requested that the court takenumerous actions including declaring that the lands acquired by the Nationpursuant to SNLCSA are not Indian lands within the meaning of IGRA.

 

On July 8, 2008, the court issued its decision and order finding (a) thatthe NIGC’s determination that the Nation’s Buffalo Creek Territory is “Indiancountry” was in accord with Congress’ intent in enacting the SNLCSA, and (b) thatthe NIGC’s July 2, 2007 determination that the Nation’s Buffalo CreekTerritory is gaming-eligible land pursuant to the IGRA’s settlement of a landclaim exception is arbitrary, capricious, and not in accordance with the law.

 

The court’s decision did not provide for injunctive relief, and SGC hascontinued its operations at the Seneca Buffalo Creek Casino.  Plaintiffs subsequently filed a motion on July 14,2008 to force the court to enforce its judgment.

 

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In response to ongoing events in the litigation, on July 16, 2008,the Nation submitted a new gaming ordinance to the NIGC, so that the NIGC couldconsider the applicability of new Department of Interior regulations concludingthat lands like Buffalo Creek Territory are exempt from Section 20 of IGRA’sprohibition on gaming.

 

On July 22, 2008, the United States filed a motion responding tothe plaintiffs motion to enforce and requesting that the case be remanded tothe NIGC for further consideration. The remand motion is based upon significantchanges in the controlling law, as interpreted by the U.S. Department ofInterior.  The Seneca Nation of Indianssimultaneously filed an amicus brief supporting the United States’ motion forremand to the NIGC and opposing the plaintiffs’ motion to enforce.  On August 26, 2008, the court issued itsdecision on the foregoing motions and granted the plaintiffs’ request that thecourt enforce its July 8, 2008 decision and order to the extent that theNIGC and its Chairman are directed to carry out their enforcement duties underIGRA. The plaintiffs’ motion was denied to the extent that they requested anorder that would divest the NIGC of its discretion to determine the type ofenforcement action to take.

 

On September 3, 2008, the Chairman of the NIGC issued a “notice ofviolation” or “NOV” to the Nation as a result of the August 26, 2008decision. The NOV asserted that the Nation had violated IGRA by operating theSeneca Buffalo Creek Casino without an approved Class III gaming ordinancefor that facility because the gaming ordinance for those lands authorizedgaming on lands in Buffalo that the district court deemed ineligible forgaming.  The NOV further stated thatalthough the NIGC disagrees with the district court’s interpretation of IGRAregarding the Buffalo Creek parcel’s eligibility for gaming under IGRA, theNIGC, at that time, was bound by the district court’s ruling as to thisparticular land parcel absent reconsideration by the district court or reversalon any appeal.  Consequently, theChairman issued the NOV. The NOV was not accompanied by a closure order or anassessment of a civil fine. The NOV further stated that the Chairman of theNIGC may modify the measures required to correct the alleged violation if theNIGC approved the Nation’s amended July 16, 2008 gaming ordinance.

 

On October 21, 2008, the plaintiffs filed a motion seeking anorder from the court that would require the Chairman of the NIGC to issueorders immediately halting gaming at the Seneca Buffalo Creek facility andholding the NIGC Chairman in contempt for not doing so sooner.

 

On October 24, 2008, the U.S. Department of Justice filed a noticeof appeal relating to the court’s July 8, 2008 ruling on whether gaming ispermitted on Nation lands in Buffalo, in addition to the court’s August 26orders (directing the NIGC to issue the NOV and denying the U.S. government’smotion to remand the case to the NIGC for an administrative decision on thebasis of significant changes in controlling regulation).

 

As a material development, on January 20,2009, the NIGC Chairman approved the Nation’s Buffalo Creek Territory-specificamendments to its Class III Gaming Ordinance.  In approving theamendments, the NIGC Chairman consulted with the Department of the Interior andconsidered the Department of Interior’s new regulations in concluding that IGRA’sgeneral prohibition against gaming on after-acquired lands did not apply tolands like the Buffalo Creek Territory that are held in restricted fee.

 

Subsequently, the District Court on January 30, 2009 held that theNIGC’s action rendered moot the plaintiffs’ motion to enforce the Court’svacatur of the July 2, 2007 ordinance approval, and denied themotion.  The Court further concluded thatthe NIGC’s new analysis is presumed valid unless and until it becomes thesubject of a successful legal challenge.

 

Appeals remain pending in both the CACGEC I and CACGEC II proceedings,and the plaintiffs have expressed an intent to challenge the NIGC’s most recentaction.

 

If the plaintiffs are successful in their challenges, the Nation couldbe unable to conduct any Class III gaming upon lands acquired by theNation pursuant to the SNLCSA, including the Buffalo Creek Territory.

 

**Item 1A.**                                                  RiskFactors

** **

Thereare no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K for the fiscal year ended September 30,2008, except as disclosed in this Form 10-Q, including without limitation,the risk factors relating to our Seneca Buffalo Creek Casino set forth in “Item2 — Management’s Discussion and Analysis of Financial Condition and Results ofOperations” — “Executive Summary — Buffalo Creek Casino” and those relating toour expansion and development projects set forth in “Item 2 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations” —Liquidity and Capital Resources”.

 

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

** **

Not applicable.

 

**Item 3.**                                                           DefaultsUpon Senior Securities

** **

Not applicable.

 

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

** **

Not applicable.

 

**Item 5.**                                                           OtherInformation

** **

Not applicable.

 

**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 E. Brian Hansberry, principal  executive officer, pursuant to Rule 13a-14 and 15d-14 of the Securities  Exchange Act of 1934 (filed herewith).                                                                                      |
|         |       |                                                                                                                                                                                                                                                      |
| 31.2         |       | Certification of 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 E. Brian Hansberry, 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 (filed herewith). |

 

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**SIGNATURES**

**SENECAGAMING CORPORATION**

** **

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.

 

DatedFebruary 17, 2009

 

| /s/ E. Brian Hansberry                       |   |
|----------------------------------------------|--------|
| E. Brian Hansberry                           |   |
| President and Chief Executive Officer        |   |
| (Principal Executive Officer)                |   |
|                                         |   |
|                                         |   |
| /s/ David Sheridan                           |   |
| David Sheridan                               |   |
| Chief Financial Officer                      |   |
| (Principal Financial and Accounting Officer) |   |

 

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