Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

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

 

**For the transition period from                     to**

 

**Commission File Number:  333-117633**

 

**SENECAGAMING CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

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

 

(Note:As a voluntary filer, not subject to the filing requirements, the registrantfiled all reports under Section 13 or 15(d) of the Exchange Actduring the preceding 12 months.)

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

AtAugust 6, 2010, the registrant had no outstanding shares of common stock.The registrant is wholly owned by the Seneca Nation of Indians.

 

 

 

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**TABLE OFCONTENTS**

 
| **PART I.   FINANCIAL  INFORMATION** |                                                                                                                                              |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                                  | Financial Statements                                                                                                                              | 3 |
|                                                     | Consolidated Balance Sheets as of  June 30, 2010 (Unaudited) and September 30, 2009                                                     | 3 |
|                                                     | Consolidated Statements of  Operations and Changes in Capital for the three months and nine months ended  June 30, 2010 and 2009 (Unaudited) | 4 |
|                                                     | Consolidated Statements of  Cash Flows for the nine months ended June 30, 2010 and 2009 (Unaudited)                                          | 5 |
|                                                     | Notes to  Unaudited Consolidated Financial Statements                                                                                             | 6 |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       | 20 |
| Item 3.                                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                       | 46 |
| Item 4.                                                  | Controls and  Procedures                                                                                                                          | 46 |
|                                                     |                                                                                                                                              |   |
| **PART II.   OTHER  INFORMATION**    |                                                                                                                                              |
| Item 1.                                                  | Legal Proceedings                                                                                                                                 | 48 |
| Item 1A.                                                 | Risk Factors                                                                                                                                      | 49 |
| Item 6.                                                  | Exhibits                                                                                                                                          | 50 |
|                                                     | Signatures                                                                                                                                        | 51 |

 

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**PART I. FINANCIAL INFORMATION**

 

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

 

**SENECA GAMING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                              | ** ** | **June 30,**                    | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2010**                             | ** ** | **2009**               | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| **Assets**                              |       |                                 |       |                   |       |
| Current assets:                         |       |                                 |       |                   |       |
| Cash and cash equivalents               |       | $                                    | 68,963     |                   | $          | 83,230 |   |
| Short-term investments                  |       | —                               |       | 113                    |       |
| Receivables from the Nation             |       | 469                                  |       | 6,201                  |       |
| Other receivables, net                  |       | 2,607                                |       | 2,539                  |       |
| Inventories                             |       | 3,873                                |       | 4,046                  |       |
| Other current assets                    |       | 10,130                               |       | 10,369                 |       |
| Total current assets                    |       | 86,042                               |       | 106,498                |       |
|                                    |       |                                 |       |                   |       |
| Property and equipment, net             |       | 661,798                              |       | 670,111                |       |
| Restricted cash                         |       | 47,910                               |       | —                 |       |
| Other long-term assets                  |       | 64,308                               |       | 65,319                 |       |
|                                    |       |                                 |       |                   |       |
| Total assets                            |       | $                                    | 860,058    |                   | $          | 841,928 |   |
|                                    |       |                                 |       |                   |       |
| **Liabilities and Capital**             |       |                                 |       |                   |       |
| Current liabilities:                    |       |                                 |       |                   |       |
| Trade payables                          |       | $                                    | 9,173      |                   | $          | 2,328 |   |
| Construction payables                   |       | 4,624                                |       | 9,373                  |       |
| Distributions payable to the Nation     |       | 11,180                               |       | 3,727                  |       |
| Exclusivity fees payable                |       | 9,923                                |       | 8,220                  |       |
| Accrued interest payable                |       | 6,042                                |       | 15,104                 |       |
| Accrued regulatory costs                |       | 40,433                               |       | 33,683                 |       |
| Accrued gaming liabilities              |       | 15,465                               |       | 15,113                 |       |
| Accrued payroll and related liabilities |       | 7,487                                |       | 9,652                  |       |
| Other current liabilities               |       | 6,390                                |       | 6,722                  |       |
| Total current liabilities               |       | 110,717                              |       | 103,922                |       |
|                                    |       |                                 |       |                   |       |
| Long-term debt                          |       | 498,124                              |       | 497,363                |       |
| Other long-term liabilities             |       | —                               |       | 834                    |       |
|                                    |       |                                 |       |                   |       |
| Total liabilities                       |       | 608,841                              |       | 602,119                |       |
| Capital:                                |       |                                 |       |                   |       |
| Retained earnings                       |       | 251,217                              |       | 239,809                |       |
|                                    |       |                                 |       |                   |       |
| Total liabilities and capital           |       | $                                    | 860,058    |                   | $          | 841,928 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND CHANGES IN CAPITAL**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                        | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(Dollars in Thousands)**            | ** ** |
| **Revenues**                                  |       |                                            |       |                                           |       |   |   |   |   |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Gaming                                        |       | $                                               | 139,932    |                                           | $          | 137,175 |   | $ | 392,949 |   | $ | 392,615 |   |
| Food and beverage                             |       | 14,508                                          |       | 14,739                                         |       | 41,337 |   | 43,174 |   |
| Lodging                                       |       | 6,389                                           |       | 5,928                                          |       | 17,885 |   | 17,800 |   |
| Retail, entertainment and other               |       | 5,842                                           |       | 5,353                                          |       | 16,800 |   | 17,619 |   |
| Gross Revenue                                 |       | 166,671                                         |       | 163,195                                        |       | 468,971 |   | 471,208 |   |
| Less: Promotional allowances                  |       | (14,825                                         | )          | (14,163                                        | )          | (42,743 | ) | (43,419 | ) |
| Net revenues                                  |       | 151,846                                         |       | 149,032                                        |       | 426,228 |   | 427,789 |   |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| **Expenses**                                  |       |                                            |       |                                           |       |   |   |   |   |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Gaming                                        |       | 43,913                                          |       | 38,884                                         |       | 122,122 |   | 112,534 |   |
| Food and beverage                             |       | 10,736                                          |       | 11,126                                         |       | 31,824 |   | 33,030 |   |
| Lodging                                       |       | 2,896                                           |       | 3,084                                          |       | 8,747 |   | 9,243 |   |
| Retail, entertainment and other               |       | 3,325                                           |       | 3,307                                          |       | 10,711 |   | 10,752 |   |
| Advertising, general and administrative       |       | 45,875                                          |       | 45,084                                         |       | 138,071 |   | 140,949 |   |
| Pre-opening costs                             |       | 286                                             |       | 110                                            |       | 378 |   | 246 |   |
| Depreciation                                  |       | 11,110                                          |       | 11,668                                         |       | 32,885 |   | 36,838 |   |
| Impairment of property and equipment          |       | —                                          |       | 109,036                                        |       | 221 |   | 109,036 |   |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Total operating expenses                      |       | 118,141                                         |       | 222,299                                        |       | 344,959 |   | 452,628 |   |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Operating income (loss)                       |       | 33,705                                          |       | (73,267                                        | )          | 81,269 |   | (24,839 | ) |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Other non-operating expense                   |       | —                                          |       | (25                                            | )          | (113 | ) | (188 | ) |
| Interest income                               |       | 29                                              |       | 118                                            |       | 54 |   | 199 |   |
| Interest expense                              |       | (9,628                                          | )          | (9,500                                         | )          | (28,699 | ) | (28,777 | ) |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Net income (loss)                             |       | $                                               | 24,106     |                                           | $          | (82,674 | ) | $ | 52,511 |   | $ | (53,605 | ) |
|                                          |       |                                            |       |                                           |       |   |   |   |   |
| Beginning capital balance                     |       | $                                               | 245,745    |                                           | $          | 312,676 |   | $ | 239,809 |   | $ | 290,846 |   |
| Net cash distributions declared to the Nation |       | (18,634                                         | )          | (12,698                                        | )          | (41,103 | ) | (19,937 | ) |
| Ending capital balance                        |       | $                                               | 251,217    |                                           | $          | 217,304 |   | $ | 251,217 |   | $ | 217,304 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended**      | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**                    | ** ** |
| ** **                                                                         | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| **Cash flows relating to operating  activities:**                                  |       |                                 |       |   |   |
|                                                                               |       |                                 |       |   |   |
| Net income (loss)                                                                  |       | $                                    | 52,511     |   | $ | (53,605 | ) |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                 |       |   |   |
| Depreciation                                                                       |       | 32,885                               |       | 36,838 |   |
| Loss on disposal of assets                                                         |       | 83                                   |       | 155 |   |
| Amortization of deferred financing costs, debt  discount                           |       | 2,455                                |       | 2,432 |   |
| Other than temporary decline in investments                                        |       | 113                                  |       | 175 |   |
| Provision for bad debts                                                            |       | 32                                   |       | 296 |   |
| Impairment of property and equipment                                               |       | 221                                  |       | 109,036 |   |
| Change in operating assets and liabilities:                                        |       |                                 |       |   |   |
| Current assets                                                                     |       | 943                                  |       | (2,104 | ) |
| Current liabilities                                                                |       | (3,836                               | )          | (8,432 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by operating activities                                          |       | 85,407                               |       | 84,791 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to investing  activities:**                                  |       |                                 |       |   |   |
| Purchases of property and equipment                                                |       | (22,532                              | )          | (40,137 | ) |
| Deposits to restricted cash                                                        |       | (47,910                              | )          | — |   |
| Change in long-term deposits                                                       |       | 8                                    |       | 82 |   |
| Land acquisition costs                                                             |       | (612                                 | )          | (1,022 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing activities                                              |       | (71,046                              | )          | (41,077 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows relating to financing  activities:**                                  |       |                                 |       |   |   |
| Contribution received from the Nation                                              |       | 5,101                                |       | — |   |
| Cash paid for deferred financing fees                                              |       | (79                                  | )          | — |   |
| Proceeds from senior secured revolving loan  agreement                             |       | —                               |       | 20,000 |   |
| Payments on senior secured revolving loan  agreement                               |       | —                               |       | (20,000 | ) |
| Distributions paid to the Nation                                                   |       | (33,650                              | )          | (43,937 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in financing activities                                              |       | (28,628                              | )          | (43,937 | ) |
|                                                                               |       |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (14,267                              | )          | (223 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash and cash equivalents balances:                                                |       |                                 |       |   |   |
| Beginning of period                                                                |       | 83,230                               |       | 53,305 |   |
|                                                                               |       |                                 |       |   |   |
| End of period                                                                      |       | $                                    | 68,963     |   | $ | 53,082 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**SENECA GAMING CORPORATION**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                     ****Organization and Basis of Presentation**

 

Theconsolidated financial statements include the accounts of Seneca GamingCorporation, or SGC, and its wholly owned subsidiaries, or collectively, theCompany.  In consolidation, all intercompany balances and transactionshave been eliminated.  The accompanying unaudited consolidated financialstatements have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information.  Accordingly,they do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements.  In theopinion of SGC’s management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation have beenincluded.  Operating results for the three months and nine months endedJune 30, 2010 are not necessarily indicative of the results that may beexpected for SGC’s fiscal year ending September 30, 2010.  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, 2009, or 2009 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.

 

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

 

SGC,which was formed on August 1, 2002, is wholly owned by the Seneca Nationof Indians, or the Nation.  The Nation is a federally recognized Indiantribe with total territorial land comprising approximately 54,000 acres in theWestern New York region.  SGC was organized by the Nation to operate andmanage its Class III gaming activities on the Nation’s territoriespursuant to the Indian Gaming Regulatory Act of 1988, or IGRA.  UnderIGRA, federally recognized Indian tribes are permitted to conduct full-scalecasino gaming operations on tribal land, subject to, among other things, thenegotiation of a compact with the affected state.  Pursuant to IGRA, inAugust 2002, the Nation entered into the Nation-State Gaming Compact withthe State of New York, or the Compact, which has been approved by the FederalBureau of Indian Affairs, Department of the Interior.  The Compact becameeffective in December 2002, expires in December 2016 and automaticallyrenews for an additional seven year period unless either the Nation or theState of New York objects in writing, in which case the parties are required tonegotiate in good faith to address the objecting party’s concerns, with onlythe issue of a party’s good faith subject to third party disputeresolution.  The Compact provides that its terms will remain in effectduring the pendency of such negotiations.  The Compact provides the Nationwith the exclusive right to conduct Class III gaming activities at threesites in the western region of the State of New York, subject to certainlimited exceptions.

 

TheNation’s Constitution established the Nation’s Council, or the Council, to actas the Nation’s legislative authority.  The Council acts on the Nation’sbehalf with respect to SGC, and the Council established the Seneca GamingAuthority, or SGA, to regulate the gaming activities of SGC under the Compact.

 

TheCouncil, at the request of the SGC Board of Directors, chartered threesubsidiary corporations of SGC to operate the three sites authorized by theCompact.  In addition, the SGC Board of Directors hired the executivemanagement of SGC to oversee, develop and manage the three sites. Thesubsidiary corporations that operate the three sites authorized by the Compactare as follows:

 

·             Seneca Niagara Falls Gaming Corporation, or SNFGC;

 

·             Seneca Territory Gaming Corporation, or STGC; and

 

·             Seneca Erie Gaming Corporation, or SEGC.

 

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SenecaNiagara Falls Gaming Corporation

 

SNFGCwas formed on August 1, 2002 to operate the Nation’s Class III gamingactivities on the Nation’s territory in Niagara Falls, New York. Operations at SNFGC’s casino, or Seneca Niagara Casino, commencedDecember 31, 2002.  On March 31, 2006, SNFGC completed thephased opening of its luxury hotel expansion, which included a permanent147,000 square foot gaming facility (adding 35,000 square feet of gaming spaceto the original 112,000 square-foot facility), a 604-room luxury hotel with 118suites of various sizes, a full-service spa, salon and fitness center, threefine dining restaurants and a 24-hour casual restaurant, three retail stores,and a 24,000 square-foot multi-purpose room and events center.  The luxuryhotel is adjacent and connected to the Seneca Niagara Casino.  The entirecomplex, including the luxury hotel and the Seneca Niagara Casino, is referredto as the Seneca Niagara Casino and Hotel.

 

SenecaTerritory Gaming Corporation

 

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

 

Seneca Erie Gaming Corporation

 

SEGCwas formed on August 9, 2003 to operate the Nation’s Class III gamingactivities in Erie County, New York.  On October 3, 2005, the Nationacquired approximately nine acres of land in the inner-harbor district ofdowntown Buffalo, New York.  SEGC commenced construction of its SenecaBuffalo Creek Casino on those nine acres on December 8, 2005, and onJuly 3, 2007 commenced Class III gaming on such property in atemporary facility, in fulfillment of the requirement set forth in the Nation’sCompact with the State of New York.  The facility featured approximately6,000 square feet of gaming space, 135 slot machines and a snack bar. During the quarter ended March 31, 2008, that facility was expanded toinclude an additional 109 slot machines. During the quarter endedMarch 31, 2010, the existing facility was further expanded to include anadditional 4,600 square feet of gaming space and an additional 213 slotmachines. The current facility has approximately 10,600 square feet of gamingspace, and features 457 slot machines and a snack bar.  Various plaintiffshave filed suit in federal and state court challenging the Nation’s right toconduct Class III gaming on the Nation’s nine acre Buffalo CreekTerritory.  On July 8, 2008, in a federal suit captioned CitizensAgainst Casino Gambling in Erie County (CACGEC) v. Hogen, the Court issued adecision and order finding that, although the Nation’s Buffalo Creek Territoryis “Indian country,” the determination by the National Indian GamingCommission, or NIGC, that the Nation’s Buffalo Creek Territory isgaming-eligible land pursuant to the IGRA’s settlement of a land claimexception was “arbitrary, capricious, and not in accordance with the law.” The Court’s decision did not provide for injunctive relief, and SEGC hascontinued its operations at the Seneca Buffalo Creek Casino.  Plaintiffssubsequently filed a motion on July 14, 2008 to force the court to enforceits judgment.

 

OnJanuary 20, 2009, the NIGC approved an amended Class III GamingOrdinance that had been submitted by the Nation and concluded that, based uponnew Department of the 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, the District Court denied the plaintiffs’ motion to 

 

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enforce,and further concluded that the NIGC’s new analysis is presumed valid unless itbecomes the subject of a successful legal challenge.

 

OnMarch 31, 2009, plaintiffs in the litigation noted in the foregoingparagraph filed suit to challenge the NIGC’s approval of the amendedClass III Gaming Ordinance.   On June 15, 2009, the Nationmoved to intervene as a defendant in the litigation known as CACGEC III, forcertain limited claims.  On March 30, 2010, the Court denied theNation’s motion to intervene, while granting permission to participate as *amicus curiae*.  The Court alsodismissed certain secondary claims of the plaintiffs in the proceeding, whileallowing other core claims regarding the eligibility of the land for casinogaming to proceed. On May 18, 2010, the Nation filed a notice ofinterlocutory appeal with the Second Circuit Court of Appeals on the issue ofits right to intervene.

 

Ifthe plaintiffs are successful in any of the Buffalo Creek-related legalproceedings, SEGC may be unable to continue Class III gaming at theexisting Seneca Buffalo Creek Casino.

 

Other

 

LewistonGolf Course Corporation

 

TheNation’s Council has also chartered, at the request of the SGC Board ofDirectors, an additional subsidiary corporation, Lewiston Golf Course Corporation,or LGCC, as a wholly-owned subsidiary of SNFGC.  LGCC was formed onJuly 18, 2007 by the Nation’s Council to own, develop and operate SenecaHickory Stick Golf Club, SNFGC’s championship level golf course, in Lewiston,New York. It is located approximately 10 miles from the Seneca Niagara Casinoand Hotel. The golf course opened for public play on July 2, 2010. Thegolf course will serve as an amenity for SGC’s patrons and is intended toenable SGC to increase its demographic and geographic reach. Designed byworld-renowned golf architect Robert Trent Jones II, Seneca Hickory Stick GolfClub currently features a scenic, par-72, PGA-style layout and temporary proshop. The permanent clubhouse is currently under construction and will featureapproximately 4,300 square feet of space, including a pro shop, bar and casualdining for 40 patrons. The area around the clubhouse has been designed toaccommodate tents and support facilities for large tournaments.

 

**Recent Accounting Pronouncements**

 

In April 2010, theFinancial Accounting Standards Board, or FASB, issued an Accounting StandardsUpdate, “Entertainment-Casinos (Topic 924), Accruals for Casino Base JackpotLiabilities, a consensus of the FASB Emerging Issues Task Force,” or ASU2010-16. The objective of ASU 2010-16 is to address the accounting for casinobase jackpot liabilities. Specifically, it addresses diversity in practiceregarding whether an entity accrues liabilities for a base jackpot before it iswon if the entity is not required to award the base jackpot. Some entities donot accrue liabilities for a base jackpot before it is won because they couldavoid the payment. Other entities accrue liabilities for a base jackpot ratablyover the period of play expected to precede payout. ASU 2010-16 clarifies thatan entity should not accrue jackpot liabilities (or portions thereof) before ajackpot is won if the entity can avoid paying that jackpot. Jackpots should beaccrued and charged to revenue when an entity has the obligation to pay the jackpot.This guidance applies to both base and progressive jackpots and is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2010. The amendments are to be applied prospectivelywith a cumulative-effect adjustment reflected in retained earnings. Thecumulative-effect adjustment is the difference between the amounts recognizedin the statement of financial position before initial application of theamendments and the amounts recognized in the statement of financial position atinitial application of those amendments. The Company is currently evaluatingthe impact implementation of ASU 2010-16 will have on the consolidatedfinancial statements.

 

A variety of proposed orotherwise potential accounting standards are currently under study bystandard-setting organizations and certain regulatory agencies. Because of thetentative and preliminary nature of 

 

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such proposed standards, theCompany has not yet determined the effect, if any, that the implementation ofsuch proposed standards would have on the consolidated financial statements.

 

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

 

Short-term investments areclassified as available for sale as defined in the FASB Accounting StandardsCodification, or ASC, Topic 320, *Investments—**Debt and Equity Securities*. Investments are stated at fair value.  The Company evaluates investmentsfor conditions that may indicate that an other-than-temporary decline in marketvalue has occurred. In conducting this review, numerous factors are consideredwhich, individually or in combination, may indicate that a decline isother-than-temporary. Based on this evaluation, an other-than-temporary loss onone specific investment of $0 and $25,000 was recorded in the three monthsended June 30, 2010 and 2009, respectively, and an other-than-temporaryloss on one specific investment of $0.1 million and $0.2 million was recordedin the nine months ended June 30, 2010 and 2009, respectively, as acomponent of other non-operating expense. The cost basis of this investment hasbeen reduced by the amount of the other-than-temporary loss recorded.

 

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

 

In accordance with ASC Topic360, *Property, Plant and Equipment*,the carrying value of the Company’s assets are reviewed when events or changesin circumstances 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.

 

During the three months andnine months ended June 30, 2010, $0 and $221,000 was recorded as animpairment of property and equipment in addition to the $107.6 millionimpairment recognized as of September 30, 2009.

 

On August 27, 2008, theconstruction activities at Seneca Allegany Casino and Hotel and Seneca BuffaloCreek Casino and Hotel were suspended for various reasons including:  theeconomic recession; inability to obtain construction financing at reasonableinterest rates; and operating and other demands on the Company’s availablecash, such as the Company’s payments to the Nation.  As of June 30,2010, due to the continuation of weak economic conditions, adverse creditmarket conditions and an uncertain economic outlook, construction remainssuspended indefinitely.  Furthermore, certain master planning effortsrelated to the future expansion of the Niagara Falls property have beensuspended for the foreseeable future for the same reasons.  As a result ofthese circumstances an impairment charge of $107.6 million was recognized duringthe third and fourth quarters of Fiscal 2009 based upon an estimate of the netrealizable value based on an estimate of undiscounted cash flows that projectedno future benefit.  The reported fair value of zero is considered to beLevel 3 within the fair value hierarchy as established by ASC Topic 820, *Fair Value Measurements and Disclosures*.  Level 3inputs are defined as inputs for which significant valuation assumptions areunobservable in a market and therefore value is based on the best availabledata, some of which is internally developed and considers risk premiums that amarket participant would require. Refer to “Note 6 - Fair Value of Financial Instruments”, for further discussion ofthe fair value hierarchy.

 

**4.****                                     ****Restricted Cash**

 

Restrictedcash balances of $47.9 million at June 30, 2010 represent cash reservedfor future repayment of outstanding debt and other accrued liabilities,pursuant to a resolution adopted by the Board of Directors. As of June 30,2010, such balances include $25.5 million of cash reserves for future repaymentof outstanding debt and $22.4 million for satisfaction of other accruedliabilities.

 

**5.****                                     ****Principal Debt Arrangements**

 

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

 

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| ** **                                                                                          | ** ** | **As of**                                    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,   2010**                     | ** ** | **September 30,   2009** | ** ** |
| ** **                                                                                          | ** ** | **(In Thousands of Dollars)** | ** ** |
| 2004 71⁄4% senior notes due 2012                                                                 |       | $                                            | 300,000    |   | $ | 300,000 |   |
| 2005 71⁄4% senior notes due 2012 net of unamortized  discount of $1,876 and $2,637, respectively |       | 198,124                                      |       | 197,363 |   |
| Long-term debt                                                                                      |       | $                                            | 498,124    |   | $ | 497,363 |   |

 

**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.

 

The2005 senior notes were issued at a discount of $7.0 million.  The discountis being amortized over the term of the 2005 senior notes, which amounted to$0.3 million for the three months ended June 30, 2010 and 2009 and $0.8million for the nine months ended June 30, 2010 and 2009.

 

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, andprior to November 1, 2005, the amount of interest accrued thereon.  Interest on the Senior Notes is payable semi-annually on May 1 andNovember 1.  The Senior Notes are unsecured and rank equally. As of June 30, 2010 and September 30, 2009, aggregate accrued andunpaid interest on the Senior Notes was $6.0 million and $15.1 million,respectively.  The Senior Notes, which mature on May 1, 2012, areredeemable at SGC’s option in whole or in part at any time after May 1,2008 at the redemption prices set forth in the Senior Notes Indenture, aresubject to redemption requirements imposed by gaming laws and regulations andare required to be repurchased by SGC at the option of holders upon certainchange of control events.

 

TheSenior Notes Indenture contains certain negative and affirmative covenants. Thenegative covenants include limitations on restricted payments and theincurrence of indebtedness, while the affirmative covenants include reportingobligations and compliance with laws. As of June 30, 2010, SGC was incompliance with all covenants in the Indenture.

 

**Senior Secured Revolving Loan Agreement**

 

OnDecember 18, 2009, SGC amended its $50.0 million Senior Secured RevolvingLoan Agreement to extend the maturity date from December 19, 2009 toDecember 31, 2011. Amounts borrowed under the Amended Senior Secured RevolvingLoan Agreement continue to bear interest at either one, three or six-monthLIBOR plus one and one quarter percent (1.25%), or the prime rate (as reportedin The Wall Street Journal) plus one quarter percent (0.25%), with anyoutstanding principal balance to be paid by, or on, the new maturitydate.  The $50.0 million commitment under the Amended Senior SecuredRevolving Loan Agreement reduces in tandem with any reduction in the letter ofcredit requirement imposed by the Empire State Development Corporation, orESDC, (relating to the ESDC’s efforts on behalf of SGC in connection withongoing condemnation proceedings in Niagara Falls, New York), up to anaggregate reduction of $10.0 million.  As of June 30, 2010, the commitment was reduced to $49.2 million inaccordance with this provision. The Amended Senior Secured Revolving LoanAgreement requires that SGC maintain all of its deposit and investment accountswith the lender, subject to limited exceptions for certain existing accounts.Inaddition, beginning June 18, 2010 the Amended Senior Secured RevolvingLoan Agreement provides for the lender’s restriction of certain SGC depositsmaintained with the lender, for commitments in excess of 

 

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$40million.  As of June 30, 2010, theamount restricted under this provision amounts to $9.2 million, and is reportedas restricted cash on the consolidated balance sheet.

 

SGC’sobligations under the Amended Senior Secured Revolving Loan Agreement continueto be secured by substantially all gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. SGC’s obligations are guaranteed by SNFGC, STGC, SEGC and LGCC,and the guarantors’ obligations continue to be secured by substantially all ofeach guarantor’s gaming and related assets (including substantially all gamingrevenues) not constituting real property or improvements. The Amended SeniorSecured Revolving Loan Agreement modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12 month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.  The Amended SeniorSecured Revolving Loan Agreement also continues to contain additional customarycovenants, including covenants restricting the incurrence of additionalindebtedness, the creation of additional liens and the disposition of assets.As of June 30, 2010, SGC was in compliance with all covenants in theAmended Senior Secured Revolving Loan Agreement.

 

Asof June 30, 2010, at SGC’s request, the lender under the Amended SeniorSecured Revolving Loan Agreement had issued letters of credit totaling$17.4 million, $12.3 million  of which may be drawn upon to fund thepurchase of certain parcels within the 50 acre “footprint” described in theCompact with New York State and designated for ownership by the Nation (asrequired by the ESDC), with the remaining $5.1 million issued in connectionwith worker’s compensation policies and certain other contracts, as required.As of June 30, 2010, there were no amounts outstanding on the AmendedSenior Secured Revolving Loan Agreement.

 

**6.****                                     ****Fair Value of Financial Instruments**

 

CodificationTopic 820, *Fair Value Measurements and Disclosures*  does not determine or affect the circumstancesunder which fair value measurements are used, but defines fair value, expandsdisclosure requirements around fair value and specifies a hierarchy ofvaluation techniques based on whether the inputs to those valuation techniquesare observable or unobservable. Observable inputs reflect market data obtainedfrom independent sources, while unobservable inputs reflect the Company’smarket assumptions. These inputs create the following fair value hierarchy:

 

·                     Level 1: Quoted prices for identical instruments in active markets.

 

·                     Level 2: Quoted prices for similar instruments in active markets; quoted pricesfor identical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable in active markets.

 

·                     Level 3: Valuations derived from valuation techniques in which one or moresignificant inputs or significant value drivers are unobservable.

 

Thishierarchy requires us to use observable market data, when available, and tominimize the use of unobservable inputs when determining fair value. For someproducts or in certain market conditions, observable inputs may not beavailable.

 

Thefair values of certain of the Company’s financial instruments, including cashand cash equivalents, accounts receivable and other current liabilities,approximate their recorded carrying amounts because of their short-term nature.

 

Thefair value of long term debt is estimated based on current market quotes of SGC’sdebt.  As of June 30, 2010, the carrying amount and fair value oflong term debt is approximately $498 million and $489 million, respectively.

 

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

 

**Distributions**

 

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

 
| ** **                           | ** ** | **Nine Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(In Millions of Dollars)**    | ** ** |
| Cash distributions                   |       | $                                              | 22.5       |   | $ | 33.2 |   |
| Distribution Agreement distributions |       | 11.2                                           |       | 10.7 |   |
|                                 |       | $                                              | 33.7       |   | $ | 43.9 |   |

 

*Cash Distributions*

 

·                  SGC paid cash distributionsto the Nation in the amount of $2.5 million per month during the nine monthsended June 30, 2010, totaling $22.5 million. Additionally, $7.5 million ofdistributions, declared by the Board of Directors during the three months endedJune 30, 2010 and payable to the Nation, are recorded on the unauditedconsolidated balance sheet at June 30, 2010 as distributions payable.

 

·                  SGC paid cash distributionsto the Nation in the amount of $4.0 million per month from October 2008through February 2009, $1.0 million in April 2009 and $3.0 millionper month from May 2009 through June 2009, totaling $27.0 million.Also, during the nine months ended June 30, 2009, SGC paid $5.0 millionpursuant to distribution declarations made in July 2008. In addition, inNovember 2008, SGC paid an additional $1.2 million distribution to theNation.

 

*Distribution Agreement Obligations*

 

·                  During the nine months endedJune 30, 2010 and 2009, SGC distributed $11.2 million and $10.7 million,respectively, to the Nation under the Distribution Agreement, datedApril 27, 2007, relating to the Seneca Nation of Indians CapitalImprovements Authority’s special obligation bonds. Additionally, $3.7 millionof distributions, declared by the Board of Directors during the three monthsended June 30, 2010 and payable to the Nation, are recorded on theunaudited consolidated balance sheet at June 30, 2010 as distributionspayable. See “Note 8 — Commitments and Contingencies” for additionalinformation regarding SGC’s Distribution Agreement obligations.

 

**Contributions**

 

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

 

*Cash Contributions*

 

·                  In September 2009, theNation declared a capital contribution, in the amount of $5.1 million, for thevalue of land previously purchased for the development of the Seneca NiagaraFalls Casino and Hotel. This amount was recorded as a receivable from the Nationat September 30, 2009 and payment was received in December 2009.

 

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**Land and Related Acquisition Costs**

 

SGC has recorded approximately $59.7 million and$59.1 million in land and related acquisition costs as ‘Other long-term assets’in the accompanying consolidated balance sheets as of June 30, 2010 andSeptember 30, 2009, respectively, which are expected to be transferred tothe Nation.

 

**Operating Lease Agreements**

 

*Head Leases:*

 

TheNation has entered into operating lease agreements (each, a Head Lease) witheach of SNFGC, STGC and SEGC.  Due to the related party nature of theseHead Leases, which can be effectively modified by the Nation, SGC recordsmonthly Head Lease expense equal to the required payment amount for therespective month.  Payment increases under the Head Leases are restrictedunder the terms of the Indenture governing the Senior Notes and the DistributionAgreement referenced in “Note 8 — Commitments and Contingencies.”  TheHead Leases contain no renewal options or escalation clauses.

 

Expensesresulting from the above Head Leases were as follows for the three months andnine months ended June 30, 2010 and 2009:

 
| ** ** | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **2010**                                        | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** ** | ** ** | **(Dollars in Millions)**             | ** ** |
| SNFGC      |       | $                                               | 9.0        |                                           | $          | 9.0 |   | $ | 27.1 |   | $ | 27.1 |   |
| STGC       |       | 6.0                                             |       | 6.0                                            |       | 18.0 |   | 18.0 |   |
| SEGC       |       | 4.0                                             |       | 4.0                                            |       | 11.9 |   | 11.9 |   |
|       |       | $                                               | 19.0       |                                           | $          | 19.0 |   | $ | 57.0 |   | $ | 57.0 |   |

 

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

 

SenecaNiagara Falls Gaming Corporation

 

TheSNFGC Head Lease (dated October 25, 2002) expires on December 31,2023 and covers use of the land and certain improvements existing at thecommencement of such Head Lease, principally including structures formerlyknown as the Niagara Falls Convention Center and Lackey Plaza.  On August 1,2008, at the request of the Nation, SGC approved an increase in the SNFGC HeadLease to $3.1 million per month, effective October 1, 2008, and to $3.7million per month, effective October 1, 2009.  On March 19,2009, SNFGC entered into an amendment to the foregoing Head Lease agreementwith the Nation, which reduced payments to $3.0 million per month effectiveOctober 1, 2008 and eliminated the increase that would have taken effectas of October 1, 2009.

 

SenecaTerritory Gaming Corporation

 

TheSTGC Head Lease (effective as of May 1, 2004) expires on December 31,2023 and covers use of the land which is currently being used in operating theSeneca Allegany Casino and Hotel.  On August 1, 2008, at the requestof the Nation, SGC approved increases in the payments under the STGC Head Leaseto $2.1 million per month effective October 1, 2008, and to $2.7 millionper month effective October 1, 2009.  On March 19, 2009, STGCentered into an amendment to the foregoing Head Lease agreement with theNation, which reduced payments to $2.0 million per month effectiveOctober 1, 2008 and eliminated the increase that would have taken effectas of October 1, 2009.

 

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SenecaErie Gaming Corporation

 

TheSEGC Head Lease (effective as of April 1, 2006) expires onDecember 31, 2023 and covers use of the land which is currently being usedin operating the Seneca Buffalo Creek Casino.  On August 1, 2008, atthe request of the Nation, SGC approved an increase in the payments under theSEGC Head Lease to $1.5 million per month effective October 1, 2008 andthereafter.  On March 19, 2009, SEGC entered into an amendment to theforegoing Head Lease agreement with the Nation, which reduced payments to $1.3million per month effective October 1, 2008.

 

Inconnection with the March 19, 2009, Head Lease amendments described above,for purposes of compliance with its Indenture governing the Senior Notes andthe Distribution Agreement, SGC obtained and delivered to Wells Fargo, N.A. (astrustee under the Indenture governing the Senior Notes) written fair marketvalue rent opinions from an independent financial advisor with regard to theSNFGC and STGC Head Lease amendments (as required by the Indenture).  TheSEGC Head Lease amendment reflects a 3% per annum (for two years) increase inrent as permitted by the Indenture.  SGC also delivered to Wells Fargo,N.A. (as trustee under the indenture governing the Nation’s municipal bonds anda party to the Distribution Agreement) an additional certification requiredpursuant to the Distribution Agreement.  Further or additional increasesin rent payable under the Head Lease agreements are restricted under the termsof SGC’s Indenture governing its Senior Notes and the Distribution Agreement,and are subject to compliance with all applicable contractual commitments ofSGC and the Nation, such that no increase may contravene, or constitute adefault under any agreement, indenture, instrument or other commitment legallybinding upon the Nation, SNFGC, STGC or SEGC, respectively, or to which thepremises (described in the Head Leases) are subject.

 

*Class II Poker Leases:*

 

Asof January 1, 2005, the Company transferred all Class II operationsto the Nation, including its poker operations.  The Company leases spacewithin Seneca Niagara Casino and Hotel to Seneca Gaming and Entertainment,which operates the Nation’s Class II facilities, for operation of thepoker room. On November 9, 2009, Seneca Gaming and Entertainment relocatedits poker operations in Seneca Allegany Casino to a new facility located withinone mile of the Seneca Allegany Casino property. For the three months ended June 30,2010 and 2009, SGC recorded $0.1 million and $0.2 million, respectively, ofpoker room rental income and fees, and for the nine months ended June 30,2010 and 2009, SGC recorded $0.4 million and $0.6 million, respectively, ofrental income and fees. At June 30, 2010 and September 30, 2009, SGCrecorded $0.4 million and $0.5 million, respectively, as a receivable from theNation relating to poker room rentals.

 

**Other Related Party Transactions**

 

*Construction Services:*

 

SNFGC,STGC, SEGC and LGCC have each entered into construction management agreementswith Seneca Construction Management Corporation, or SCMC, and SCMC LLC, forcertain renovations and capital improvements at Seneca Niagara Casino andHotel, Seneca Allegany Casino and Hotel, Seneca Buffalo Creek Casino and SenecaHickory Stick Golf Club, respectively.  SCMC and SCMC LLC are wholly ownedby the Nation.  For the three months ended June 30, 2010 and 2009,SNFGC, STGC and SEGC have collectively made payments to SCMC and SCMC LLC forconstruction management and related fees of $0 and $0.2 million, respectively,and for the nine months ended June 30, 2010 and 2009, SNFGC, STGC and SEGChave collectively made payments to SCMC and SCMC LLC for constructionmanagement and related fees of $0.3 million and $1.8 million,respectively.  Such fees reflect the amounts earned by SCMC and SCMC LLCfor the performance of construction management services related primarily tothe recently completed expansion of the Buffalo Creek facility. Additionalamounts paid to SCMC and SCMC LLC are passed through and used to paysubcontractors, reimbursements for out-of-pocket expenses and similar costs.

 

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*Regulatory Services:*

 

SGC is charged by the Nation for its costs incurredrelated to the operation of SGA gaming regulatory services.  Theseinclude:  a) costs incurred solely and directly in connection withregulatory services and oversight of SGC’s gaming operations and which aretherefore 100% allocable to SGC; and b) an administration fee, assessed by theNation for costs indirectly incurred in conjunction with the operation andregulation of SGC, which is fixed as a percentage of direct costs, currently20%, as determined by the Nation in its performance of administration of theSGA and its oversight of the Company. Such costs were approximately $2.2million and $2.5 million for the three months ended June 30, 2010 and2009, respectively, and $6.7 million and $7.6 million for the nine months endedJune, 2010 and 2009, respectively.

 

SGC is also charged by the Nation for its costsincurred related to services provided by the New York State Racing and WageringBoard, New York State Police, Seneca Nation of Indians Marshals (through October 1,2009), Buffalo Police****andCattaraugus County Sheriff Department solely and directly in connection withSGC’s operations, which costs were approximately $2.9 million and $2.6 millionfor the three months ended June 30, 2010 and 2009, respectively, and $8.9million and $8.4 million for the nine months ended June 30, 2010 and 2009,respectively.

 

At June 30, 2010 and September 30, 2009,approximately $40.4 million and $33.7 million, respectively, were recorded as “accruedregulatory costs” in the accompanying consolidated balance sheets, for thepayment of such New York State related regulatory costs. The related expensewas recorded as a component of advertising, general and administrative expensein the accompanying consolidated statement of income.

 

**8.****                                     ****Commitments and Contingencies**

 

**Distribution Agreement Obligations**

 

OnApril 27, 2007, SGC entered into a Distribution Agreement among theNation, the Seneca Nation of Indians Capital Improvements Authority, or theAuthority, SGC and Wells Fargo Bank, as Trustee, in connection with theAuthority’s issuance in two series (one tax exempt and the other taxable) of anaggregate principal amount of $159,495,000 special obligation bonds, or the2007 Nation Bonds.  The Distribution Agreement obligates SGC, subject toany contractual restrictions applicable to SGC (including, but not limited to,those contained in the Senior Notes Indenture), to make monthly distributionsto the Nation at the times and in the amounts necessary to enable the Authorityto pay the debt service on the 2007 Nation Bonds as required under theAuthority’s indenture.  At the direction of the Nation and the Authority,SGC pays such distributions directly to the Trustee.  The Authority’s debtservice commenced on June 1, 2007.  For the period from June 1,2007 through November 1, 2007, the Authority’s debt service averagedapproximately $0.9 million per month. For the period from December 1, 2007through June 1, 2008, the Authority’s debt service averaged approximately$1.7 million per month.  In June 2008, it was determined that theamortization (debt service) schedule upon which the foregoing $1.7 millionmonthly payments was made, was incorrect.  A corrected amortizationschedule was provided and, after giving effect to a resulting credit foramounts overpaid, for the period from January 1, 2008 throughDecember 1, 2023, the Authority’s debt service averages approximately $1.2million per month. The foregoing debt service averages are based on scheduledpayments of interest and principal under the Authority’s indenture and bondsand do not address the effects of any earlier call for redemption, byacceleration 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 its distributionobligations.  For the nine months ended June 30, 2010 and 2009, SGCdistributed to the Nation $11.2 million and $10.7 million, respectively, forthe Authority’s debt service on the special obligation bonds.

 

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**The Seneca Nation Compact**

 

As part of its Compact, the Nation agrees tocontribute to the State of New York a portion of the proceeds from theoperation and conduct of each category of Gaming Device (as defined in theCompact) for which exclusivity exists, based on the win of such machines (cashdropped into machines, after payouts but before expenses) and totaled on acumulative quarterly basis to be adjusted annually at the end of the relevantcalendar year.  However, beginning in February 2005, the Companybegan advancing to the Nation on a monthly basis the exclusivity fee due forthe prior month.  The exclusivity fee to the State of New York for years1—4 (through December 31, 2006), was 18.0%, payable on an annual basis.Thereafter, the exclusivity fee was 22% for years 5—7 (throughDecember 31, 2009), payable on a semi-annual basis, and is 25.0% for years8—14 (through December 31, 2016), payable on a quarterly basis.

 

Thefollowing table summarizes the exclusivity fees expense by property:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** | **June 30,**               | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 20,175     |                            | $          | 17,617 |   | $ | 55,266 |   | $ | 50,815 |   |
| Seneca Allegany Casino and Hotel      |       | 8,176                                |       | 7,515                           |       | 21,774 |   | 20,707 |   |
| Seneca Buffalo Creek Casino           |       | 3,670                                |       | 2,397                           |       | 9,119 |   | 6,549 |   |
| Total                                 |       | $                                    | 32,021     |                            | $          | 27,529 |   | $ | 86,159 |   | $ | 78,071 |   |

 

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

 

**Expansion and Development**

 

As described in “Note 1 — Organization and Basis ofPresentation,” the Compact provides the Nation with the exclusive right toconduct Class III gaming activities at three sites in the western regionof the State of New York.

 

In August 2008, construction activities atSeneca Allegany Casino and Hotel and Seneca Buffalo Creek Casino were suspendedindefinitely for reasons including:  the economic recession; inability toobtain construction financing at reasonable interest rates; and operating andother demands on available cash, such as payments to the Nation.  As of June 30,2010, construction remained suspended indefinitely.  Furthermore, certainplanning efforts related to the future expansion of the Seneca Niagara Fallsproperty were suspended for the same reasons.  As a result of thesecircumstances an impairment charge of $107.6 million was recognized during thethird and fourth quarters of Fiscal 2009. During the three and nine monthsended June 30, 2010, an additional $0 and $221,000, respectively, wasrecorded as an impairment of property and equipment. Nonetheless, SGC willcontinue to explore alternative future expansion and development options.

 

The construction of a permanent casino at theBuffalo Creek site, as well as any expansion by STGC at Seneca Allegany Casinoand Hotel will require significant capital outlays. The ability to recommencethese projects will depend on various factors including prevailing economicconditions, cash flow from operations, the availability of external financingwith regard to one or more of the projects, certain Nation and governmentalapprovals, and the effects of legal and/or administrative proceedings.

 

*Seneca Niagara Falls Casino and Hotel. *In 2006, SNFGCbegan master planning activities for the remaining approximately 24 acres ofundeveloped land contained in the Niagara Falls footprint.  DuringAugust 2008, these master planning activities were suspended and animpairment charge was recognized 

 

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related to these activities in the third quarter ofFiscal 2009, in the amount of approximately $3.5 million. During the three andnine months ended June 30, 2010, an additional $0 and $33,000,respectively, was recorded as an impairment of property and equipment.

 

*Seneca Allegany Casino andHotel. *Construction on the next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200-room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of approximately $130million, was suspended and an impairment charge was recognized for costsincurred related to these activities in the third and fourth quarters of Fiscal2009, in the amount of approximately $17.1 million. During the three and ninemonths ended June 30, 2010, an additional $0 and $37,000, respectively,was recorded as an impairment of property and equipment.

 

*Seneca Buffalo Creek Casino.*Construction onthe permanent Seneca Buffalo Creek Casino and Hotel facility, which was plannedto include approximately 90,000 square feet of gaming space; 2,000 slotmachines; 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, for a total estimated cost of approximately $333 million, was suspendedand an impairment charge was recognized related to these activities in thethird and fourth quarters of Fiscal 2009, in the amount of approximately $87.0million. During the three and nine months ended June 30, 2010, anadditional $0 and $151,000, respectively, was recorded as an impairment ofproperty and equipment.

 

On March 5, 2010 SEGC completed an expansion ofthe existing facility, increasing the number of slot machines to 457 and thetotal square feet of gaming space to approximately 10,600.

 

*Seneca Hickory Stick Golf Club. *InJuly 2007, the Company commenced construction of the Seneca Hickory StickGolf Club, SNFGC’s championship level golf course, in Lewiston, New York. It islocated approximately 10 miles from the Seneca Niagara Casino and Hotel. Thegolf course will serve as an amenity for our patrons and is intended to enableSGC to increase its demographic and geographic reach. Designed byworld-renowned golf architect Robert Trent Jones II, Seneca Hickory Stick GolfClub currently features a scenic, par-72, PGA-style layout and temporary proshop. The permanent clubhouse is currently under construction and will featureapproximately 4,300 square feet of space, including a pro shop, bar and casualdining for 40 patrons. The area around the clubhouse has been designed toaccommodate tents and support facilities for large tournaments. The golf courseopened for public play on July 2, 2010.  As of June 30, 2010,the Company has incurred $24.2 million for the purchase of land andconstruction, with a total cost to construct the golf course, clubhouse andrelated amenities estimated to be approximately $25.5 million.

 

**Legal Proceedings**

 

***Citizens Against Casino Gambling inErie County v. Hogen (1:2009-cv-00291 (WDNY)) — CACGEC III***

 

OnMarch 31, 2009, Citizens Against Casino Gambling in Erie County (CACGEC)filed a third action in the United States District Court, Western District ofNew York against the Chairman of the NIGC, the United States Department of theInterior, the NIGC, the Secretary of the Interior and the President of theUnited States.  The action seeks declaratory and injunctive relief underthe Administrative Procedure Act, the Declaratory Judgments Act, and the IGRAand is principally directed at the decision by the NIGC Chairman, onJanuary 20, 2009, to approve the Seneca Nation’s amendments to itsClass III Gaming Ordinance regarding the Nation’s Buffalo CreekTerritory.  The NIGC Chairman concluded that IGRA’s general prohibitionagainst gaming on lands acquired after its enactment in 1988 does not apply tolands, such as the Buffalo Creek Territory, that are held in restrictedfee.   The plaintiffs claim that, in approving the Nation’sClass III Gaming ordinance on January 20, 2009, the NIGC Chairmanignored the intention of Congress.  The plaintiffs also make severalclaims that go beyond their prior lawsuits.  Most notably, they challengethe constitutionality of the land purchase provisions contained in the SenecaNation Lands Claim 

 

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SettlementAct of 1990 (“SNLCSA”), and attempt to challenge in a more extensive fashionthan they had previously the validity of the Nation-State Gaming Compact.

 

OnJune 15, 2009, the Nation moved to intervene as a defendant in CACGECIII.  The Nation’s proposed intervention and participation as a defendantare expressly restricted to the three claims for relief specified in theplaintiffs’ complaint, namely:  (1) whether, as restricted fee landsover which the Nation exerts governmental authority, the Buffalo CreekTerritory qualifies as “Indian lands” under IGRA; (2) whether the BuffaloCreek Territory is subject to the general prohibition found in section 2719 ofIGRA against gaming on trust lands acquired after IGRA’s effective date eventhough the Territory consists of restricted fee, rather than trust, lands; and(3) whether, if the Buffalo Creek Territory is subject toSection 2719’s general prohibition, Class III gaming may neverthelessproceed on it because the Buffalo Creek Territory was acquired in settlement ofa land claim.

 

OnMarch 30, 2010, the Court denied the Nation’s motion to intervene, whilegranting permission for it to participate as *amicuscuriae*.  The Court also dismissed certain secondary claims ofthe plaintiffs in the proceeding, while allowing other core claims regardingthe eligibility of the land for casino gaming to proceed.  On May 18,2010, the Nation filed a notice of interlocutory appeal with the Second CircuitCourt of Appeals on the issue of its right to intervene.  If theplaintiffs ultimately succeed in this action, or in their pending appeals inthe CACGEC I and CACGEC II proceedings (previous suits filed by the plaintiffsand relating to similar claims), the SGC may be unable to conduct anyClass III gaming at its existing properties.

 

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

 

Pursuantto the Compact, the State of New York agreed to assist the Nation in whatevermanner appropriate, including through the exercise of its power of eminentdomain, to acquire acreage within the approximately 50-acre footprint surroundingthe former Niagara Falls Convention Center in the City of Niagara Falls, NewYork, designated by New York State under the Compact for ownership by theNation.  The amounts paid to condemnees from whom the ESDC has acquiredproperty are deemed to be advance payments, in that property owners areentitled to reserve their rights to challenge the land and improvement valuesdetermined by the condemnor’s appraisers.

 

Withrespect to approximately 18 acres of land and related fixtures (a former waterpark) within the above footprint, the ESDC made advanced payments under NewYork eminent domain procedure law of $18.0 million to Fallsite LLC andFallsville Splash, LLC, the owners of the water park property.  The ownersthereafter filed notices of claim seeking, in the aggregate, $40.0 million and$35.0 million for land and trade fixtures, respectively. On April 5, 2010,the New York State Supreme Court determined that no additional compensation wasowed to the former property owners for the water park real estate andfixtures.  SGC anticipates that the former property owners will appeal thevaluation decision.  In a related action,on June 21, 2010 the condemnees separately moved to vacate the original2006 order that vested title to the Splashpark properties in ESDC.  The ESDC is vigorously contesting thecondemnees’ claims as procedurally improper and substantively without merit. Ifthe claimants are successful, the former Splashpark properties could bereturned to the property owners at which point SGC would seek return of the amountspaid for the properties.

 

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

 

OnApril 1, 2010, SGC filed suit in the State of New York Supreme Court,County of Niagara, against Harvest Trends, Inc., Harvest Trends LLP, RiverLee International, Inc., and several individuals who are former employeesof SGC.  The suit alleges that these former employees and a vendor, whohad been hired and paid to assist SGC in creating an enterprise data warehouse,used SGC time and SGC resources to develop Harvest Trends, an entity created tomarket a similar product to SGC’s competitors.  SGC is suing for damagesin an amount to be determined and for injunctive relief for themisappropriation of trade secret 

 

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customerdata, unjust enrichment, unfair competition, breaches of fiduciary duties andduties of loyalty, and breaches of contracts.  On July 13, 2010, fourof the defendants in the above referenced case filed separatecounter-suits against SGC and 20 other parties, including executives andmembers of SGC’s Board of Directors and personnel employed by the SGA. These suits, brought in the State of New York Supreme Court, County of Niagara,allege defamation, intentional infliction of emotional distress, productdisparagement, unfair competition, tortious interference with prospectivebusiness advantage, abuse of process and aiding and abetting theseactivities.  Each of these complaints seeks in excess of $100 million indamages.  SGC believes that these actions are without merit, and intendsto defend itself against these actions vigorously.

 

***Seneca Niagara Falls Gaming Corporation and SenecaGaming Corporation v. Toohey, et. al. (NYS Supreme Court, Niagara County)***

 

OnApril 30, 2010, SNFGC and SGC filed suit in the New York Supreme Court,County of Niagara, against a number of individual defendants (Timothy Toohey,Michael J. Dowd, Bergal Mitchell, Rachel Mitchell, Barry Halftown and MarkGabriele).  SNFGC and SGC subsequentlyamended their complaint on June 17, 2010. The suit alleges that the defendants, individually andcollectively, engaged in fraud with respect to a real estate transaction inwhich SNFGC purchased land in the Town of Lewiston, New York, for thedevelopment of its Seneca Hickory Stick golf course.  The suit also alleges that Bergal Mitchell,who had at the pertinent times been a member of the Board of Directors of SNFGCand SGC, breached his fiduciary duties by failing to disclose and concealingcertain material information with respect to the transaction.  The suit also asserts aiding and abetting claimsagainst various defendants, both with respect to fraud and breach of fiduciaryduty claims.  SGC and SNFGC are suing forcompensatory and punitive damages. Several of the defendants have answered the complaint, while othershave moved or stated their intention to move to dismiss.

 

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**Item 2.****                                                          ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

Youshould read the following discussion and analysis in conjunction with thesection titled “Financial Statements” and the accompanying “Notes toConsolidated Financial Statements” included elsewhere in this Quarterly Reporton Form 10-Q.  References below to years are to fiscal years ofSeneca Gaming Corporation, or SGC, unless otherwise noted.  SGC’s fiscalyear is from October 1 through September 30.

 

**Forward-Looking Statements**

 

Whenused in this Quarterly Report on Form 10-Q, in other filings with theSecurities and Exchange Commission, or the SEC, in our press releases or in ourother public communications, the words “believe,” “estimate,” “anticipate,” “expect,”“contemplate,” “may,” “will,” “plan,” “project,” “will continue,” “will be,” “willcontinue,” “likely will result” and similar expressions are intended toidentify forward-looking statements.  Similarly, statements that describeour plans, business, strategy or goals are all forward-lookingstatements.  Statements looking forward in time are included in thisQuarterly Report on Form 10-Q pursuant to the “safe harbor” provision ofthe Private Securities Litigation Reform Act of 1995.  Such statements aresubject to certain risks and uncertainties, which could cause actual results todiffer materially from those expressed in or implied by these forward-lookingstatements, including, but not limited to, the risk factors contained orreferenced herein and in our other reports filed with the SEC pursuant to theSecurities Exchange Act of 1934, as amended, including in Item 1A of our AnnualReport on Form 10-K for the fiscal year ended September 30, 2009, orthe 2009 Form 10-K.  In addition to the risk factors described inItem 1A of our 2009 Form 10-K, the following important factors, amongothers, could affect our future financial condition or results of operations,causing actual results to differ materially from those expressed in theforward-looking statements: the local, regional, national, or global economicclimate, our substantial indebtedness and ability to meet our financialobligations and operate in accordance with the restrictions pursuant to suchindebtedness, our incurrence of any additional indebtedness, the availabilityof financing, our failure to generate cash flows, increased competition,changes in federal Indian law, issues relating to the Nation-State GamingCompact, or the Compact, between the Seneca Nation of Indians and New YorkState, the control of our company by the Seneca Nation of Indians, or theNation, changes in the membership of the Nation’s Council (the Nation’slegislative body) or Nation policies, changes in gaming laws or regulations,ongoing or future litigation challenging our ability to conduct gamingoperations, changes in federal or state tax laws or the administration of suchlaws, our failure to retain existing management, fill current vacancies, andattract new personnel, our limited experience operating casinos, hotels, andthe recently opened golf course, seasonality and weather-related factors,investigative reviews by regulatory authorities relating to our gamingrevenues, and acts of war or terrorism.

 

Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of their respective dates.  We undertake no obligationto update these forward-looking statements to reflect events or circumstancesoccurring 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.  InAugust 2002, the Nation entered into the Compact with New York State thatprovides the Nation with the right to establish and operate threeClass III gaming facilities in Western New York.  Class IIIgaming, the most heavily regulated of the gaming classes includes, among otherthings, slot machines and table games.   We currently operate threeClass III gaming facilities in Western New York—Seneca  NiagaraCasino and Hotel, which is located in the City of Niagara Falls, New York(Niagara Territory) and operated by Seneca Niagara Falls Gaming Corporation, orSNFGC, approximately 20 miles north of Buffalo, New York; Seneca AlleganyCasino and Hotel, which is located in the City of Salamanca, New York (AlleganyTerritory) and operated by Seneca Territory Gaming Corporation, or STGC,approximately 75 miles northeast of Erie, Pennsylvania; and Seneca BuffaloCreek Casino, which is 

 

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locatedin the inner harbor district of Buffalo, New York (Buffalo Creek Territory) andoperated by Seneca Erie Gaming Corporation, or SEGC. Seneca Niagara Casino andHotel opened on December 31, 2002 (initially, as the Seneca NiagaraCasino).  Seneca Allegany Casino and Hotel opened on May 1, 2004(initially, as the Seneca Allegany Casino).  Seneca Buffalo Creek Casinocommenced operations on July 3, 2007.  Our three casinos are locatedon land held in restricted fee by the Nation, which, together with the rightsunder the Compact, allows us to conduct Class III gaming operations atthese locations in New York State and are the only casino resort gaming facilitiesin Western New York State to offer both Class III slot machines and tablegames.

 

**Executive Summary**

 

***Our Current Operations.*****    We currently operate three Class III gamingfacilities:  Seneca Niagara Casino and Hotel, in the City of NiagaraFalls, New York (Niagara Territory), featuring over 147,000 square feet ofgaming space, 3,973 slot machines, 102 table games and 604 hotel rooms; SenecaAllegany Casino and Hotel, in the City of Salamanca, New York (AlleganyTerritory), featuring over 63,500 square feet of gaming space, 2,144 slotmachines, 33 table games and 212 hotel rooms; and the Seneca Buffalo CreekCasino (slots only facility), in the City of Buffalo, New York (Buffalo CreekTerritory), featuring approximately 10,600 square feet of gaming space and 457slot machines.  Certain of these operations also include dining,entertainment, retail and spa and salon services.  For the three monthsended June 30, 2010 and 2009, approximately 92% of our net revenue wasderived from our gaming activities.

 

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

 

InMarch 2006, SNFGC completed the phased opening of its luxury hotelexpansion, which included a permanent 147,000 square foot gaming facility(providing 35,000 square feet more gaming space than the original 112,000square feet), a 604-room luxury hotel with 118 suites of various sizes, afull-service spa, salon and fitness center, three fine dining restaurants and a24-hour casual restaurant, three retail stores, and a 24,000 square footmulti-purpose room and events center.  The expansion of Seneca NiagaraCasino and Hotel, including the addition of our luxury hotel and otheramenities, has enabled us to attract higher-end patrons, increase length ofstay, and extend our geographic market penetration and appeal to a more diversedemographic base.

 

In 2006, we began master planning activities for theremaining approximately 24 acres of undeveloped land contained in theapproximately 50 acre Niagara Falls footprint described in the Compact forownership by the Nation.  During August 2008, these master planningactivities were suspended due to the then prevailing economic conditions andadverse credit market conditions.  An impairment charge of $3.5 millionwas recognized during the third quarter of Fiscal 2009 related to these activities.During the three and nine months ended June 30, 2010, an additional $0 and$33,000, respectively, was recorded as an impairment of property and equipment.

 

***Seneca Allegany Casino and Hotel****.*   Since opening on May 1, 2004, Seneca Allegany Casino and Hotel hasattracted patrons from the southern portion of Western New York, Erie andPittsburgh, Pennsylvania and Ohio.  As of June 30, 2010,approximately 69% of the casino’s patron base is from outside of the State ofNew York.

 

InMarch 2007, we opened a 212-room resort hotel, including two fine diningrestaurants, a 24-hour casual restaurant and certain other amenities afterofficially opening the new permanent gaming floor in December 2006. In March 2008, we completed the conversion of the former approximate 120,000square foot temporary casino structure into an events center with a seatingcapacity for 2,200 people, along with additional administrative office spaceand amenities.  We believe the resort hotel, casino and events centerprovide a first-class gaming experience for our patrons, encouraging longerpatron length of stay and helping to maintain the competitive position of thefacility in light of our closest and most immediate 

 

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competition,Presque Isle Downs, in Erie, Pennsylvania (approximately 80 miles from theSeneca Allegany Casino and Hotel).  Presque Isle Downs has approximately2,000 slot machines and 48 table games and offers dining and entertainmentoptions that include a steakhouse, a buffet and four lounges, but it does notoffer lodging.

 

Construction on our next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200 room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of up to $130 million, wassuspended for reasons including:  the economic recession; inability toobtain construction financing at reasonable interest rates; and operating andother demands on our available cash, such as our payments and distributions tothe Nation.  As of June 30, 2010, construction remained suspendedindefinitely. As a result of these circumstances, an impairment charge wasrecognized related to these activities in the third and fourth quarters ofFiscal 2009, in the amount of approximately $17.1 million. During the three andnine months ended June 30, 2010, an additional $0 and $37,000, was recordedas an impairment of property and equipment.

 

***Seneca Buffalo Creek Casino****.    *On October 3, 2005, the Nation acquired approximately nine acresof land in the inner-harbor district of Buffalo, New York.  OnJuly 3, 2007, we began operating a temporary Class III gamingfacility (approximately 6,000 square feet) featuring 135 slot machines and asnack bar.  During the quarter ended March 31, 2008, that facilitywas expanded to include an additional 109 slot machines. During the quarterended March 31, 2010, the existing facility was further expanded toinclude an additional 4,600 square feet of gaming space and an additional 213slot machines. The current facility has approximately 10,600 square feet ofgaming space, and features 457 slot machines and a snack bar.

 

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 for reasons including:  the economic recession;inability to obtain construction financing at reasonable interest rates; andoperating and other demands on our available cash, such as our payments to theNation.  As of June 30, 2010, construction remained suspendedindefinitely. As a result of these circumstances an impairment charge wasrecognized related to these activities in the third and fourth quarters ofFiscal 2009, in the amount of approximately $87.0 million. During the three andnine months ended June 30, 2010, an additional $0 and $151,000,respectively, was recorded as an impairment of property and equipment.

 

Ourability to continue to operate the Seneca Buffalo Creek Casino facility willdepend on various factors, including existing legal challenges. See “Item3.  Legal Proceedings,” included in our 2009 Form 10-K for adescription of the legal proceedings relating to the Seneca Buffalo CreekCasino.

 

***Seneca Hickory Stick Golf Club —Lewiston, New York****.  *InMarch 2006, we acquired 257 acres of land with the intent to design andbuild the Seneca Hickory Stick Golf Club, SNFGC’s championship level golfcourse, in Lewiston, New York. It is located approximately 10 miles from theSeneca Niagara Casino and Hotel in the Town of Lewiston. The golf course willserve as an amenity for our patrons intended to enable SGC to increase itsdemographic and geographic reach. Designed by world-renowned golf architectRobert Trent Jones II, Seneca Hickory Stick Golf Club currently features ascenic, par-72, PGA-style layout and temporary pro shop. The permanentclubhouse is currently under construction and will feature approximately 4,300square feet of space, including a pro shop, bar and casual dining for 40patrons. The area around the clubhouse has been designed to accommodate tentsand support facilities for large tournaments. The golf course opened for publicplay on July 2, 2010.  LGCC has engaged Kemper SportsManagement, Inc. to manage and operate the course. The total cost toconstruct the golf course, clubhouse and related amenities is estimated to beapproximately $25.5 million.

 

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***Key Performance Indicators.*****    Our operating results are dependent on the volume ofpatrons at our casinos, our ability to attract patrons for repeat visits andour ability to increase patron revenue per trip.

 

***Marketing.****    *We use an integrated marketing strategy to attract and retain our patronsand to brand the Seneca name.  We coordinate our marketing events tomaximize the quality and length of stay of patron visits and to minimizecompetition among our gaming facilities.  The luxury hotel and relatedamenities at the Seneca Niagara Casino and Hotel and the resort hotel andrelated amenities at Seneca Allegany Casino and Hotel further enhance 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.***    We have generally observed seasonal increases in gaming activity during thespring and summer months and decreases in gaming activity during winter monthsassociated with inclement weather.

 

***Overall Outlook****.*    SGC’s financial performance during the three months ended June 30, 2010continues to reflect positively on the company’s efforts to effectively manageits operations and financial performance in an uncertain economic environment.

 

Forthe three months ended June 30, 2010, operating income was $33.7 million,a $107.0 million increase when compared to an operating loss of $73.3 millionfor the three months ended June 30, 2009. This increase resultsprincipally from the effects of the $109.0 million impairment charge recognizedduring the three months ended June 30, 2009. A $3.8 million increase inexclusivity fees payable to New York State from 22% to 25%, when comparing thethree months ended June 30, 2010 to the three months ended June 30,2009, slightly offset this increase. Additionally, for the three months endedJune 30, 2010, net revenues increased 1.9% when compared to the threemonths ended June 30, 2009.

 

SGChas also increased cash, cash equivalents and restricted cash from $83.2million as of September 30, 2009 to $116.9 million as of June 30,2010.  As of June 30, 2010, $25.5 million of cash reserves for futurerepayment of outstanding debt, and/or fees associated with the refinancingthereof, is included in the restricted cash balance reported on theconsolidated balance sheets, pursuant to a resolution approved by the Board ofDirectors, in part, seeking to fund a $125.0 million reserve prior toMay 2012 to reduce its outstanding debt and thereby, its future borrowingcosts.

 

SGCcontinues to believe that it is the premier gaming operator in Western New YorkState and in the areas of Northern Pennsylvania and Ohio located within itsprimary and secondary markets. Since the December 31, 2002 opening of theSeneca Niagara Casino, SGC has invested significantly in the development,expansion and maintenance of its gaming facilities, including the completion ofthe hotel and gaming expansion projects at Seneca Niagara Casino and Hotel andSeneca Allegany Casino and Hotel, and the opening and expansion of the casinoon the Seneca Buffalo Creek Territory.  These investments have helpedenable SGC to maintain its position as the premier gaming operator in theregion described above.  To help maintain its current market position, andto provide for expanded opportunities in the convention and tourism markets,SGC intends to continue to explore opportunities for its Niagara Falls,Allegany and Buffalo facilities, subject to the availability of necessaryfunding. A principal goal is for the facilities to complement each other,offering diverse hotel, entertainment and gaming experiences for our guests.

 

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

 

***Recent Development****s*.  OnOctober 19, 2009, we broke ground on an expansion of the Seneca BuffaloCreek Casino which added approximately 4,600 square feet of gaming space to theexisting facility and 213 slot machines. The expansion was opened onMarch 5, 2010.

 

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Also,during the nine months ended June 30, 2010, 685 new slot machines wereinstalled at the Niagara Falls and Allegany properties furthering our goal ofproviding the best and newest entertainment experiences for our patrons.

 

EffectiveDecember 18, 2009, SGC amended its $50.0 million Senior Secured RevolvingLoan Agreement to extend the maturity date from December 19, 2009 toDecember 31, 2011. Amounts borrowed under the Amended Senior SecuredRevolving Loan Agreement continue to bear interest at either one, three orsix-month LIBOR plus one and one quarter percent (1.25%), or the prime rate (asreported in The Wall Street Journal) plus one quarter percent (0.25%), with anyoutstanding principal balance to be paid by, or on, the new maturitydate.  The $50.0 million commitment under the Amended Senior SecuredRevolving Loan Agreement reduces in tandem with any reduction in the letter ofcredit requirement imposed by the Empire State Development Corporation, or ESDC(relating to the ESDC’s efforts on behalf of SGC in connection with ongoingcondemnation proceedings in Niagara Falls, New York), up to an aggregatereduction of $10.0 million.  As of June 30, 2010, the commitment wasreduced to $49.2 million in accordance with this provision. The Amended SeniorSecured Revolving Loan Agreement modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12 month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.

 

OnJune 16, 2010, the Seneca Gaming Corporation’s Board of Directors held itsannual meeting and acted to reappoint Kevin Seneca as the Chairman of theBoard, and to formally appoint Richard K. Nephew as Audit Committee Chairman(who had been serving as the Acting Chairman). Other officer appointments included Karen Karsten, Vice Chair, RichardK. Nephew, Treasurer and Ina Locke, Secretary. Each will serve in theirrespective capacities until the Board’s next annual meeting, until theirsuccessors are elected, or appointed and qualified, or until their earlierresignation or removal. The officer appointments did not affect the compositionof the Board, and the Directors each continue to serve on the Board for theirrespective terms as designated by the Nation’s Council.

 

InJuly 2010, nine Pennsylvania casinos offered table games for the firsttime in that state. In western Pennsylvania, The Rivers Casino, MeadowsRacetrack and Casino and Presque Isle Downs unveiled 85, 68 and 48 table games,respectively. In central Pennsylvania, Mohegan Sun at Pocono Downs, Mount AiryResort Casino in the Poconos and Hollywood Casino opened 62, 72 and 52 tablegames, respectively. In eastern Pennsylvania, Parx Casino, Harrah’s ChesterCasino and Racetrack and Sands Bethlehem opened 57, 74 and 89 table games,respectively.

 

OnJuly 12, 2010, SGC entered into an amended and restated EmploymentAgreement with Catherine A. Walker, pursuant to which Ms. Walker agreed toserve as President and Chief Executive Officer of SGC and its subsidiaries fora period of five years.  Ms. Walkerhad served as Chief Operating Officer since March 16, 2008, and was theprincipal executive officer of SGC until her most recent appointment asPresident and CEO.

 

**Critical Accounting Policies andEstimates**

 

Therehave been no changes in critical accounting policies and estimates since thefiling of our 2009 Form 10-K.

 

**Reclassifications**

 

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

 

**Operating Results - Three MonthsEnded June 30, 2010 Compared to the Three Months Ended June 30, 2009**

 

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*Summary of Operating Results*

 

Asof June 30, 2010, we own and operate the Seneca Niagara Casino and Hotelin Niagara Falls, New York; the Seneca Allegany Casino and Hotel in Salamanca,New York; and the Seneca Buffalo Creek Casino in Buffalo, New York.  Inaddition, Lewiston Golf Course Corporation was established to operate a golfcourse which opened July 2, 2010, in Lewiston, New York.  All of ourrevenues are derived from our operations at our completed facilities.

 

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

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Net revenues:                         |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 97,899     |   | $ | 98,591 |   |
| Seneca Allegany Casino and Hotel      |       | 38,956                               |       | 39,338 |   |
| Seneca Buffalo Creek Casino           |       | 14,991                               |       | 11,103 |   |
| Total                                 |       | $                                    | 151,846    |   | $ | 149,032 |   |
|                                  |       |                                 |       |   |   |
| Operating expenses:                   |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 71,358     |   | $ | 71,942 |   |
| Seneca Allegany Casino and Hotel      |       | 35,799                               |       | 54,104 |   |
| Seneca Buffalo Creek Casino           |       | 9,666                                |       | 95,391 |   |
| Seneca Hickory Stick Golf Club        |       | 284                                  |       | 96 |   |
| Seneca Gaming Corporation             |       | 1,034                                |       | 766 |   |
| Total                                 |       | $                                    | 118,141    |   | $ | 222,299 |   |
|                                  |       |                                 |       |   |   |
| Operating income (loss):              |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 26,541     |   | $ | 26,649 |   |
| Seneca Allegany Casino and Hotel      |       | 3,157                                |       | (14,766 | ) |
| Seneca Buffalo Creek Casino           |       | 5,325                                |       | (84,288 | ) |
| Seneca Hickory Stick Golf Club        |       | (284                                 | )          | (96 | ) |
| Seneca Gaming Corporation             |       | (1,034                               | )          | (766 | ) |
| Total                                 |       | $                                    | 33,705     |   | $ | (73,267 | ) |

 

Themost important factors or trends contributing to our operating performanceduring the three months ended June 30, 2010 were:

 

·                 Expansion of the Buffalo Creek facility,which opened in March 2010, to approximately 10,600 square feet of gamingspace and a total of 457 slot machines;

 

·                 Capital investment in approximately 108 slotmachines, 20 at Seneca Niagara Falls Casino and Hotel and 88 at Seneca AlleganyCasino and Hotel, introducing new gaming content to our gaming floors;

 

·                 A 3% increase in the exclusivity fee payableto New York State, beginning January 1, 2010, from 22% to 25% whichresulted in a $3.8 million increase to our operating expenses during thequarter ($2.4 million of the increase is attributable to Seneca Niagara FallsCasino and Hotel, $1.0 million

 

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isattributable to Seneca Allegany Casino and Hotel, and $0.4 million isattributable to Seneca Buffalo Creek Casino); and

 

·      Theongoing economic recession and resulting impact on discretionary consumerspending.

 

*Gross Revenues*

 

Grossrevenues consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 139,932    |   | $ | 137,175 |   |
| Food and beverage               |       | 14,508                               |       | 14,739 |   |
| Lodging                         |       | 6,389                                |       | 5,928 |   |
| Retail, entertainment and other |       | 5,842                                |       | 5,353 |   |
| Total                           |       | $                                    | 166,671    |   | $ | 163,195 |   |

 

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

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **June 30,**                | ** ** |
| ** **                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Gaming                          |       | 84.0                             | %          | 84.1 | % |
| Food and beverage               |       | 8.7                              | %          | 9.0 | % |
| Lodging                         |       | 3.8                              | %          | 3.6 | % |
| Retail, entertainment and other |       | 3.5                              | %          | 3.3 | % |
| Total                           |       | 100.0                            | %          | 100.0 | % |

 

*Gaming Revenue*

 

Ourgaming revenue for the three months ended June 30, 2010 increased from$137.2 million to $139.9 million when compared to the same period in the prioryear, primarily due to the expansion of the Seneca Buffalo Creek Casino,partially offset by the ongoing impact of adverse economic conditions onconsumer demand for gaming and entertainment offerings.

 

Duringthe three months ended June 30, 2010, Seneca Niagara Casino and Hotel’snet gaming revenue decreased $0.5 million, or 1%; Seneca Allegany Casino andHotel’s net gaming revenue decreased $0.5 million, or 1%; and Seneca BuffaloCreek Casino’s net gaming revenue increased $3.7 million, or 35% when comparingthese same periods.

 

Revenuesfrom slot machines are the largest component of our gaming revenues. Thefollowing table presents data related to slot revenues (in thousands, exceptwhere noted):

 

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| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **June 30,**                | ** ** |
| ** **                                           | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Slot handle                                          |       | $                                | 1,637,391  |   | $ | 1,616,272 |   |
| Gross slot revenue                                   |       | $                                | 128,626    |   | $ | 126,019 |   |
| Net slot revenue                                     |       | $                                | 126,598    |   | $ | 122,711 |   |
| Free promotional slot plays (1)                      |       | $                                | 12,356     |   | $ | 15,986 |   |
| Weighted average number of slot machines (in  units) |       | 6,624                            |       | 6,653 |   |
| Gross slot hold percentage                           |       | 7.9                              | %          | 7.8 | % |
| Gross slot win per unit per day (in dollars)         |       | $                                | 213        |   | $ | 208 |   |

 

----

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

 

Netslot revenue increased $3.9 million, or 3%, when comparing the three monthsended June 30, 2010 to the three months ended June 30, 2009,primarily due to the factors discussed above.

 

Thefollowing table presents data related to table game revenues (in thousands,except where noted):

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** ** |
| ** **                                               | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Table games drop                                         |       | $                                | 90,799     |   | $ | 91,845 |   |
| Net table games revenue                                  |       | $                                | 13,264     |   | $ | 14,345 |   |
| Weighted average number of table games (in units)        |       | 134                              |       | 145 |   |
| Table games hold percentage                              |       | 14.7                             | %          | 15.2 | % |
| Gross table games revenue per unit per day (in  dollars) |       | $                                | 1,094      |   | $ | 1,056 |   |

 

Nettable games revenue decreased $1.0 million, or 8%, when comparing the threemonths ended June 30, 2010 to the three months ended June 30,2009.  The decrease was principally due to decreases in the average numberof table games and the table games hold percentage, coupled with the economicand related factors previously noted, when comparing these same periods.

 

*Food and Beverage Revenue*

 

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

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **June 30,**                | ** ** |
| ** **                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Covers                     |       | 977                              |       | 1,013 |   |
| Average check (in dollars) |       | $                                | 14.85      |   | $ | 14.55 |   |
|                            |            |                                  |            |  |  |  |  |

 

Duringthe three months ended June 30, 2010, our consolidated food and beveragerevenue decreased $0.2 million, or 2% when compared to the same period in 2009,due primarily to the ongoing economic conditions causing a decrease in overallconsumer spending for leisure and entertainment purposes. Seneca AlleganyCasino and Hotel’s and food and beverage revenue accounted for substantiallyall of the decrease.  During the three months ended June 30, 2010 and2009, 50% and 52%, respectively, of our food and beverage revenue were theresult of Seneca Link Player’s Card point redemptions.

 

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*Lodging Revenue*

 

Thefollowing table presents data related to lodging revenue:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Occupied rooms                      |       | 71,689                           |       | 71,603 |   |
| Average daily room rate (ADR)       |       | $                                | 89.13      |   | $ | 82.78 |   |
| Occupancy rate                      |       | 97.1                             | %          | 96.7 | % |
| Revenue per available room (REVPAR) |       | $                                | 86.56      |   | $ | 80.07 |   |

 

Duringthe three months ended June 30, 2010, our lodging revenue increased by$0.5 million, or 8%, when compared to the three months ended June 30,2009, due primarily to increases in the average rate per occupied room and thenumber of occupied rooms. Seneca Niagara Casino and Hotel’s lodging revenueaccounted for $0.4 million of the increase and Seneca Allegany Casino and Hotel’slodging revenue accounted for $0.1 million of the increase.  During thethree months ended June 30, 2010 and 2009, 82% and 75%, respectively, ofour lodging revenue were the result of Seneca Link Player’s Card pointredemptions.

 

*Retail, Entertainment and Other Revenue*

 

Duringthe three months ended June 30, 2010, our retail revenue increased by $0.3million, or 10%, when compared to the three months ended June 30, 2009.Seneca Niagara Casino and Hotel’s retail revenue accounted for substantiallyall of this increase, due primarily to the February 2010 opening of itsnewest retail outlet, “Ten”, which features various pieces of merchandise, eachfor the retail price of ten dollars. During the three months ended June 30,2010 and 2009, 70% and 72%, respectively, of our retail revenue wasattributable to Seneca Link Player’s Card point redemptions.

 

Duringthe three months ended June 30, 2010, our entertainment revenue increased$0.1 million, or 17%, when compared to the same period in 2009. A decreasein Seneca Niagara Casino and Hotel’s entertainment revenue of $0.1 million wasoffset by an increase in Seneca Allegany Casino and Hotel’s entertainmentrevenue of $0.2 million. The increase in average ticket price at the SenecaAllegany Casino and Hotel (as shown in the table, below) is primarily due tothe limited number of shows offered in the three months ended June 30, 2009, featuringlesser known headline entertainers. During the three months ended June 30,2010 and 2009, 59% and 52% of our entertainment revenue, respectively, wasattributable to Seneca Link Player’s Card point redemptions.

 

Thefollowing table presents data related to entertainment revenue:

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **June 30,**                | ** ** |
| ** **             | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **             | ** ** | **SNFGC**                        | ** ** | **STGC** | ** ** | **SNFGC** | ** ** | **STGC** | ** ** |
| Number of shows        |       | 16                               |       | 5 |   | 10 |   | 2 |   |
| Number of tickets sold |       | 11,565                           |       | 7,901 |   | 12,809 |   | 3,534 |   |
| Occupancy percentage   |       | 76                               | %          | 66 | % | 85 | % | 74 | % |
| Average ticket price   |       | $                                | 47.36      |   | $ | 42.65 |   | $ | 53.50 |   | $ | 19.85 |   |
|                        |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Duringthe three months ended June 30, 2010, other revenue increased$0.1 million, or 5%, when compared to the three months ended June 30,2009.

 

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*Promotional Allowances*

 

SGCoperates a complimentary program in which food and beverage, retail,entertainment, and other services are provided to patrons based on pointsearned through the Seneca Link Player’s Card.  The retail value of thesecomplimentary items is included in gross revenues and then deducted aspromotional allowances to arrive at net revenues.

 

Theretail value of providing such promotional allowances was included in revenuesas follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | 7,212                                |       | 7,640 |   |
| Lodging                         |       | 5,246                                |       | 4,432 |   |
| Retail, entertainment and other |       | 2,367                                |       | 2,091 |   |
| Total                           |       | $                                    | 14,825     |   | $ | 14,163 |   |
|                                 |            |                                      |            |  |  |  |  |

 

Theestimated cost of providing such promotional allowances was as follows:

 
| ** **                      | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | $                                    | 5,201      |   | $ | 5,586 |   |
| Lodging                         |       | 2,331                                |       | 2,245 |   |
| Retail, entertainment and other |       | 1,790                                |       | 1,851 |   |
| Total                           |       | $                                    | 9,322      |   | $ | 9,682 |   |

 

Promotionalallowances as a percentage of gaming revenue were 10.6% and 10.3% during thethree months ended June 30, 2010 and 2009, respectively.  Promotionalallowances increased $0.7 million, or 5%, when comparing the three months endedJune 30, 2010 to the same period in 2009. As shown in the table above,lodging and retail, entertainment and other promotional allowances increased$0.8 million and $0.3 million, respectively, while food and beveragepromotional allowances decreased $0.4 million.

 

*Detailed Operating Expense Information*

 
| ** **                              | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                    | ** ** |
| ** **                              | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | $                                    | 43,913     |   | $ | 38,884 |   |
| Food and beverage                       |       | 10,736                               |       | 11,126 |   |
| Lodging                                 |       | 2,896                                |       | 3,084 |   |
| Retail, entertainment and other         |       | 3,325                                |       | 3,307 |   |
| Advertising, general and administrative |       | 45,875                               |       | 45,084 |   |
| Pre-opening costs                       |       | 286                                  |       | 110 |   |
| Depreciation                            |       | 11,110                               |       | 11,668 |   |
| Impairment of property and equipment    |       | —                               |       | 109,036 |   |
| Total operating expenses                |       | $                                    | 118,141    |   | $ | 222,299 |   |

 

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*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 fees expense by property:

 
| ** **                            | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 20,175     |   | $ | 17,617 |   |
| Seneca Allegany Casino and Hotel      |       | 8,176                                |       | 7,515 |   |
| Seneca Buffalo Creek Casino           |       | 3,670                                |       | 2,397 |   |
| Total                                 |       | $                                    | 32,021     |   | $ | 27,529 |   |

 

Theslot exclusivity fee increased $4.5 million, from $27.5 million for thethree months ended June 30, 2009 to $32.0 million for the three monthsended June 30, 2010, due primarily to a 3% increase in the exclusivity feepercentage which became effective January 1, 2010, and resulted in a $3.8million increase during the quarter, compared to the three months endedJune 30, 2009.  Gaming expenses as a percentage of gross gamingrevenues were 31.4% and 28.3% for the three months ended June 30, 2010 and2009, respectively.  Gaming expenses prior to exclusivity fees expense, asa percentage of gross gaming revenues were 8.5% and 8.3% for those same periods.

 

*Food and Beverage Expenses*

 

Foodand beverage expenses represent those costs incurred for the operation of ourrestaurants, snack bars and beverage outlets.  The primary components ofthese expenses are the cost of food and beverage products and payroll andpayroll related expenses for team members providing the service.  Duringthe three months ended June 30, 2010, food and beverage costs decreased$0.4 million, or 4%, when compared to the same period in 2009, primarily due tolower volumes, reflected as a decrease in covers (as indicated above under “Foodand Beverage Revenue”). Food and beverage expenses as a percentage of food andbeverage revenues were 74.0% and 75.5% for the three months ended June 30,2010 and 2009, respectively.

 

*Lodging Expenses*

 

Lodgingexpenses represent those costs incurred for the operation of our luxury hotelat Seneca Niagara Casino and Hotel and our resort hotel at Seneca AlleganyCasino and Hotel.  The components of these expenses include payroll andpayroll related expenses, guest amenity supplies, laundry and otherexpenses.  During the three months ended June 30, 2010, lodgingexpenses decreased approximately $0.2 million, or 6% when compared to the threemonths ended June 30, 2009.  Lodging expenses as a percentage oflodging revenues were 45.3% and 52.0% for the three months ended June 30,2010 and 2009, respectively. The decrease in this percentage is due to thedecrease in expense coupled with the increase in lodging revenues, discussedabove.  While we continue to monitor efficiencies in the lodging segment,we seek to maintain the quality of our product and services for the benefit ofour patrons.

 

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*Retail, Entertainment and Other Expenses*

 

Retail,entertainment and other expenses primarily represent those costs incurred forthe operation of our retail shops and spas and our entertainmentofferings.  The components of these expenses include payroll and payrollrelated costs, the purchase of products offered for sale in our retail outletsand spas and contract costs for entertainers.  For the three months endedJune 30, 2010, these costs approximated those of the comparable 2009period.  Retail, entertainment and other expenses as a percentage ofretail, entertainment and other revenues were 56.9% and 61.8%, for the threemonths ended June 30, 2010 and 2009, respectively.

 

*Advertising, General and Administrative Expenses*

 

Advertising,general and administrative expenses consist primarily of payroll and payrollrelated expenses, regulatory fees, advertising and marketing costs, Head Leaseexpense, insurance, legal and utility costs.  For the three months endedJune 30, 2010, such costs increased $0.8 million, or 2%, from the sameperiod in 2009.  The increase was due to increases in professionalservices expense, promotional expense and utilities expense of $0.7 million,$0.4 million and $0.3 million, respectively, offset by a decrease of $0.6million in payroll and related expenses due to ongoing efficiency measuresemployed by the Company. Advertising, general and administrative expenses as apercentage of gross revenues were 27.5% and 27.6%, for the three months endedJune 30, 2010 and 2009, respectively.

 

*Pre-opening Expenses*

 

Pre-openingexpenses are non-recurring costs incurred to support the expected opening ofnew facilities.  During the three months ended June 30, 2010 and2009, pre-opening expenses incurred of $0.3 million and $0.1 million,respectively, were primarily related to the preparation of the Seneca HickoryStick Golf Club, operated by the Lewiston Golf Course Corporation.

 

*Depreciation Expense*

 

Duringthe three months ended June 30, 2010 and 2009, depreciation expense was$11.1 million and $11.7 million, respectively, a decrease of $0.6 million, or5%.

 

*Impairment of Property and Equipment*

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, as previously described, were suspendedfor reasons including:  prevailing economic conditions; inability toobtain construction financing at reasonable interest rates; and operating andother demands on our available cash, such as our payments and distributions tothe Nation.  Furthermore, certain master planning efforts related to thefuture expansion of the Seneca Niagara Falls property were suspended for thesame reasons.  As a result of these circumstances, an impairment charge ofapproximately $109.0 million was recorded during the three months ended June 30,2009.

 

*InterestIncome*

 

Interest income wasapproximately $29,000 and $118,000, respectively, for the three months endedJune 30, 2010 and 2009. The decrease in interest income is due primarilyto a $100,000 non-recurring adjustment during the three months ended June 30,2009.

 

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*Interest Expense*

 

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

 
| ** **       | ** ** | **Three Months Ended**     | ** ** |
|------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **June 30,**                    | ** ** |
| ** **       | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)** | ** ** |
|             |       |                                 |       |   |   |
| Interest expense |       | $                                    | 9,628      |   | $ | 9,500 |   |
|                  |            |                                      |            |  |  |  |  |

 

Duringthe three months ended June 30, 2010 and 2009, interest expense consistedprimarily of interest on our $500.0 million aggregate principal amount of the71⁄4% Senior Notes, including $0.8 million of amortization related to financingcosts and discount, which was partially offset for the three months ended June 30,2010 and 2009 by $0.3 million and $0.4 million, respectively, of capitalizedinterest primarily related to construction activities for our Seneca HickoryStick Golf Club.

 

*Net Income*

 

Netincome for the three months ended June 30, 2010 was $24.1 million,compared to a net loss of $82.7 million for the three months endedJune 30, 2009, an increase of $106.8 million, for the reasons statedabove.

 

**Operating Results - Nine MonthsEnded June 30, 2010 Compared to the Nine Months Ended June 30, 2009**

 

*Summary of Operating Results*

 

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

 
| ** **                            | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Net revenues:                         |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 280,460    |   | $ | 286,851 |   |
| Seneca Allegany Casino and Hotel      |       | 107,199                              |       | 110,610 |   |
| Seneca Buffalo Creek Casino           |       | 38,569                               |       | 30,328 |   |
| Total                                 |       | $                                    | 426,228    |   | $ | 427,789 |   |
|                                  |       |                                 |       |   |   |
| Operating expenses:                   |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 211,821    |   | $ | 213,379 |   |
| Seneca Allegany Casino and Hotel      |       | 104,003                              |       | 126,485 |   |
| Seneca Buffalo Creek Casino           |       | 26,770                               |       | 110,713 |   |
| Seneca Hickory Stick Golf Club        |       | 364                                  |       | 198 |   |
| Seneca Gaming Corporation             |       | 2,001                                |       | 1,853 |   |
| Total                                 |       | $                                    | 344,959    |   | $ | 452,628 |   |
|                                  |       |                                 |       |   |   |
| Operating income (loss):              |       |                                 |       |   |   |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 68,639     |   | $ | 73,472 |   |
| Seneca Allegany Casino and Hotel      |       | 3,196                                |       | (15,875 | ) |
| Seneca Buffalo Creek Casino           |       | 11,799                               |       | (80,385 | ) |
| Seneca Hickory Stick Golf Club        |       | (364                                 | )          | (198 | ) |
| Seneca Gaming Corporation             |       | (2,001                               | )          | (1,853 | ) |
| Total                                 |       | $                                    | 81,269     |   | $ | (24,839 | ) |

 

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Themost important factors or trends contributing to our operating performanceduring the nine months ended June 30, 2010 were:

 

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

 

·                 Capital investment in approximately 685 slotmachines, 421 at Seneca Niagara Falls Casino and Hotel and 264 at SenecaAllegany Casino and Hotel, introducing new gaming content to our gaming floors;

 

·                 Relatively temperate weather during the ninemonths ended June 30, 2010 compared to the same period in 2009;

 

·                 A 3% increase in the exclusivity fee payableto New York State, beginning January 1, 2010, from 22% to 25% whichresulted in a $7.4 million increase to our operating expenses during the firstnine months of Fiscal 2010 ($4.7 million of the increase is attributable toSeneca Niagara Falls Casino and Hotel, $1.9 million is attributable to SenecaAllegany Casino and Hotel, and $0.8 million is attributable to Seneca BuffaloCreek);

 

·                 The ongoing economic recession and resultingimpact on discretionary consumer spending;

 

*Gross Revenues*

 

Grossrevenues consisted of the following:

 
| ** **                      | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Gaming                          |       | $                                    | 392,949    |   | $ | 392,615 |   |
| Food and beverage               |       | 41,337                               |       | 43,174 |   |
| Lodging                         |       | 17,885                               |       | 17,800 |   |
| Retail, entertainment and other |       | 16,800                               |       | 17,619 |   |
| Total                           |       | $                                    | 468,971    |   | $ | 471,208 |   |

 

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

 

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| ** **                      | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **June 30,**               | ** ** |
| ** **                      | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Gaming                          |       | 83.8                            | %          | 83.3 | % |
| Food and beverage               |       | 8.8                             | %          | 9.2 | % |
| Lodging                         |       | 3.8                             | %          | 3.8 | % |
| Retail, entertainment and other |       | 3.6                             | %          | 3.7 | % |
| Total                           |       | 100.0                           | %          | 100.0 | % |

 

*Gaming Revenue*

 

Ourgaming revenue for the nine months ended June 30, 2010 increased from$392.6 million to $392.9 million when compared to the same period in the prioryear, primarily due to the expansion of the Seneca Buffalo Creek Casino, whichhas offset the ongoing impact of adverse economic conditions on consumer demandfor gaming and entertainment offerings.

 

Duringthe nine months ended June 30, 2010, Seneca Niagara Casino and Hotel’s netgaming revenue decreased $4.8 million, or 2%; Seneca Allegany Casino and Hotel’snet gaming revenue decreased $2.9 million, or 3%; and Seneca Buffalo CreekCasino’s net gaming revenue increased $8.0 million, or 27%, when comparingthese same periods.

 

Revenuesfrom slot machines are the largest component of our gaming revenues. Thefollowing table presents data related to slot revenues (in thousands, exceptwhere noted):

 
| ** **                                           | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **June 30,**               | ** ** |
| ** **                                           | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Slot handle                                          |       | $                               | 4,597,842  |   | $ | 4,609,068 |   |
| Gross slot revenue                                   |       | $                               | 359,611    |   | $ | 357,560 |   |
| Net slot revenue                                     |       | $                               | 352,913    |   | $ | 348,173 |   |
| Free promotional slot plays (1)                      |       | $                               | 33,492     |   | $ | 38,890 |   |
| Weighted average number of slot machines (in  units) |       | 6,552                           |       | 6,666 |   |
| Gross slot hold percentage                           |       | 7.8                             | %          | 7.8 | % |
| Gross slot win per unit per day (in dollars)         |       | $                               | 201        |   | $ | 196 |   |

 

----

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

 

Netslot revenue increased $4.7 million, or 1%, when comparing the nine monthsended June 30, 2010 to the nine months ended June 30, 2009, dueprimarily to the expansion of the Seneca Buffalo Creek Casino.

 

Thefollowing table presents data related to table game revenues (in thousands,except where noted):

 
| ** **                                               | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **June 30,**               | ** ** |
| ** **                                               | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Table games drop                                         |       | $                               | 257,678    |   | $ | 274,848 |   |
| Net table games revenue                                  |       | $                               | 39,787     |   | $ | 44,098 |   |
| Weighted average number of table games (in units)        |       | 136                             |       | 143 |   |
| Table games hold percentage                              |       | 15.5                            | %          | 15.9 | % |
| Gross table games revenue per unit per day (in  dollars) |       | $                               | 1,071      |   | $ | 1,119 |   |

 

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Nettable games revenue decreased $4.3 million, or 10%, when comparing the ninemonths ended June 30, 2010 to the nine months ended June 30,2009.  The decrease was principally due to a decrease in the averagenumber of table games and the table games hold percentage, coupled with theeconomic and related factors previously noted, when comparing these sameperiods.

 

*Food and Beverage Revenue*

 

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

 
| ** **                 | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **June 30,**               | ** ** |
| ** **                 | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Covers                     |       | 2,812                           |       | 2,904 |   |
| Average check (in dollars) |       | $                               | 14.70      |   | $ | 14.87 |   |
|                            |            |                                 |            |  |  |  |  |

 

Duringthe nine months ended June 30, 2010, our consolidated food and beveragerevenue decreased $1.8 million, or 4% when compared to the same period in 2009,due primarily to the ongoing economic conditions causing a decrease in overallconsumer spending for leisure and entertainment purposes.  Seneca NiagaraCasino and Hotel’s food and beverage revenue accounted for $0.9 million of thedecrease; Seneca Allegany Casino and Hotel’s and food and beverage revenueaccounted for $1.0 million of the decrease; and Seneca Buffalo Creek Casino’sfood and beverage revenue increased $0.1 million when compared with the sameperiod in the prior year.  During the nine months ended June 30, 2010and 2009, 52% of our food and beverage revenue were the result of Seneca Link Player’sCard point redemptions.

 

*Lodging Revenue*

 

Thefollowing table presents data related to lodging revenue:

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **June 30,**               | ** ** |
| ** **                          | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Occupied rooms                      |       | 197,447                         |       | 208,644 |   |
| Average daily room rate (ADR)       |       | $                               | 90.58      |   | $ | 85.31 |   |
| Occupancy rate                      |       | 92.2                            | %          | 94.7 | % |
| Revenue per available room (REVPAR) |       | $                               | 83.48      |   | $ | 80.76 |   |

 

Duringthe nine months ended June 30, 2010, our lodging revenue increased $0.1million, or 1%, when compared to the nine months ended June 30, 2009, dueprimarily to an increase in the average rate per occupied room, which more thanoffset a decrease in the number of occupied rooms resulting from ongoingeconomic conditions. Seneca Niagara Casino and Hotel’s lodging revenueincreased $0.2 million while Seneca Allegany Casino and Hotel’s lodging revenuedecreased by $0.1 million.  During the nine months ended June 30,2010 and 2009, 80% and 76% of our lodging revenue, respectively, was the resultof Seneca Link Player’s Card point redemptions.

 

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*Retail, Entertainment and Other Revenue*

 

Duringthe nine months ended June 30, 2010, our retail revenue approximated thatof the same period in 2009. During the nine months ended June 30, 2010 and2009, 73% and 77%, respectively, of our retail revenue was attributable toSeneca Link Player’s Card point redemptions.

 

Duringthe nine months ended June 30, 2010, our entertainment revenue decreased$0.2 million, or 8%, when compared to the same period in 2009, primarilydue to the impact of the entertainment product mix at Seneca Niagara Casino andHotel including more shows in the Bear’s Den (a smaller venue compared to theSeneca Niagara Events Center) during the nine months ended June 30, 2010,coupled with lower average ticket prices, compared to the nine months ended June 30,2009. During the nine months ended June 30, 2010 and 2009, 55% and 50% ofour entertainment revenue, respectively, was attributable to Seneca Link Player’sCard point redemptions.

 

Thefollowing table presents data related to entertainment revenue:

 
| ** **             | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **June 30,**               | ** ** |
| ** **             | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **             | ** ** | **SNFGC**                       | ** ** | **STGC** | ** ** | **SNFGC** | ** ** | **STGC** | ** ** |
| Number of shows        |       | 63                              |       | 14 |   | 37 |   | 6 |   |
| Number of tickets sold |       | 35,433                          |       | 21,784 |   | 40,836 |   | 12,084 |   |
| Occupancy percentage   |       | 70                              | %          | 67 | % | 84 | % | 83 | % |
| Average ticket price   |       | $                               | 44.58      |   | $ | 41.94 |   | $ | 52.86 |   | $ | 44.63 |   |
|                        |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Duringthe nine months ended June 30, 2010, other revenue decreased$0.6 million, or 8%, when compared to the same period in 2009, primarilydue to the impact of non-recurring negotiated supplier refunds received duringthe nine months ended June 30, 2009.

 

*Promotional Allowances*

 

SGCoperates a complimentary program in which food and beverage, retail,entertainment, and other services are provided to patrons based on pointsearned through the Seneca Link Player’s Card.  The retail value of thesecomplimentary items is included in gross revenues and then deducted aspromotional allowances to arrive at net revenues.

 

Theretail value of providing such promotional allowances was included in revenuesas follows:

 
| ** **                      | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | 21,307                               |       | 22,529 |   |
| Lodging                         |       | 14,317                               |       | 13,500 |   |
| Retail, entertainment and other |       | 7,119                                |       | 7,390 |   |
| Total                           |       | $                                    | 42,743     |   | $ | 43,419 |   |
|                                 |            |                                      |            |  |  |  |  |

 

Theestimated cost of providing such promotional allowances was as follows:

 

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| ** **                      | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **June 30,**                    | ** ** |
| ** **                      | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Food and beverage               |       | $                                    | 15,949     |   | $ | 16,782 |   |
| Lodging                         |       | 6,856                                |       | 6,777 |   |
| Retail, entertainment and other |       | 5,607                                |       | 6,229 |   |
| Total                           |       | $                                    | 28,412     |   | $ | 29,788 |   |

 

Promotionalallowances as a percentage of gaming revenue were 10.9% and 11.1% during thenine months ended June 30, 2010 and 2009, respectively.  Promotionalallowances decreased $0.7 million, or 2%, when comparing the nine months ended June 30,2010 to the same period in 2009. As shown in the table above, food and beverageand retail, entertainment and other promotional allowances decreased $1.2million and $0.3 million, respectively, while lodging promotional allowancesincreased $0.8 million.

 

*Detailed Operating Expense Information*

 
| ** **                              | ** ** | **Nine Months Ended**      | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                    | ** ** |
| ** **                              | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | $                                    | 122,122    |   | $ | 112,534 |   |
| Food and beverage                       |       | 31,824                               |       | 33,030 |   |
| Lodging                                 |       | 8,747                                |       | 9,243 |   |
| Retail, entertainment and other         |       | 10,711                               |       | 10,752 |   |
| Advertising, general and administrative |       | 138,071                              |       | 140,949 |   |
| Pre-opening costs                       |       | 378                                  |       | 246 |   |
| Depreciation                            |       | 32,885                               |       | 36,838 |   |
| Impairment of property and equipment    |       | 221                                  |       | 109,036 |   |
| Total operating expenses                |       | $                                    | 344,959    |   | $ | 452,628 |   |

 

*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 fees expense by property:

 
| ** **                            | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **June 30,**                    | ** ** |
| ** **                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
| Seneca Niagara Falls Casino and Hotel |       | $                                    | 55,266     |   | $ | 50,815 |   |
| Seneca Allegany Casino and Hotel      |       | 21,774                               |       | 20,707 |   |
| Seneca Buffalo Creek Casino           |       | 9,119                                |       | 6,549 |   |
| Total                                 |       | $                                    | 86,159     |   | $ | 78,071 |   |

 

Theslot exclusivity fee increased $8.1 million, from $78.1 million for thenine months ended June 30, 2009 to $86.2 million for the nine months endedJune 30, 2010, due to a 3% increase in the exclusivity fee 

 

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percentagewhich became effective January 1, 2010, and resulted in a $7.4 millionincrease to expense during the nine months ended June 30, 2010, comparedto the nine months ended June 30, 2009.  Gaming expenses as apercentage of gross gaming revenues were 31.1% and 28.7% for the nine monthsended June 30, 2010 and 2009, respectively.  Gaming expenses, priorto exclusivity fees expense, as a percentage of gross gaming revenues were 9.2%and 8.8% for those same periods.

 

*Food and Beverage Expenses*

 

Foodand beverage expenses represent those costs incurred for the operation of ourrestaurants, snack bars and beverage outlets.  The primary components ofthese expenses are the cost of food and beverage products and payroll andpayroll related expenses for team members providing the service.  Duringthe nine months ended June 30, 2010, food and beverage costs decreased$1.2 million, or 4%, when compared to the same period in 2009, primarily due tolower volumes, reflected as a decrease in covers (as indicated above under “Foodand Beverage Revenue”). Food and beverage expenses as a percentage of food andbeverage revenues were 77.0% and 76.5% for the nine months ended June 30,2010 and 2009, respectively.

 

*Lodging Expenses*

 

Lodgingexpenses represent those costs incurred for the operation of our luxury hotelat Seneca Niagara Casino and Hotel and our resort hotel at Seneca AlleganyCasino and Hotel.  The components of these expenses include payroll andpayroll related expenses, guest amenity supplies, laundry and otherexpenses.  During the nine months ended June 30, 2010, lodgingexpenses decreased approximately $0.5 million, or 5%, when compared to the ninemonths ended June 30, 2009.  Lodging expenses as a percentage oflodging revenues were 48.9% and 51.9% for the nine months ended June 30,2010 and 2009, respectively. While we continue to monitor efficiencies in thelodging segment, we seek to maintain the quality of our product and servicesfor the benefit of our patrons.

 

*Retail, Entertainment and Other Expenses*

 

Retail,entertainment and other expenses primarily represent those costs incurred forthe operation of our retail shops and spas and our entertainmentofferings.  The components of these expenses include payroll and payrollrelated costs, the purchase of products offered for sale in our retail outletsand spas and contract costs for entertainers.  For the nine months ended June 30,2010, these costs approximated those of the comparable 2009 period. Retail,entertainment and other expenses as a percentage of retail, entertainment andother revenues were 63.8% and 61.0%, for the nine months ended June 30,2010 and 2009, respectively. The increase over the prior year percentage is inpart due to the effect of $0.6 million of non-recurring negotiated supplierrefunds.

 

*Advertising, General and Administrative Expenses*

 

Advertising,general and administrative expenses consist primarily of payroll and payrollrelated expenses, regulatory fees, advertising and marketing costs, Head Leaseexpense, insurance, legal and utility costs.  For the nine months ended June 30,2010, such costs decreased $2.9 million, or 2%, from the same period in2009.  The decrease was primarily due to a decrease of $5.5 million inpayroll and related expenses due to ongoing efficiency measures employed by theCompany and a decrease of $0.4 million in regulatory expense, offset by increasesof $1.7 million in professional services expenses; $0.5 million in specialevents expense; $0.5 million in advertising expense; and $0.3 million inpromotional expense. Advertising, general and administrative expenses as apercentage of gross revenues were 29.4% and 29.9%, for the nine months endedJune 30, 2010 and 2009, respectively.

 

*Pre-opening Expenses*

 

Pre-openingexpenses are non-recurring costs incurred to support the expected opening ofnew facilities.  During the nine months ended June 30, 2010 and 2009,$0.4 million and $0.2 million, respectively, of pre-

 

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openingexpenses were incurred, primarily related to the preparation of the SenecaHickory Stick Golf Club, operated by the Lewiston Golf Course Corporation.

 

*Depreciation Expense*

 

Duringthe nine months ended June 30, 2010 and 2009, depreciation expense was$32.9 million and $36.8 million, respectively, a decrease of $3.9 million, or11%.

 

*Impairment of Property and Equipment*

 

OnAugust 27, 2008, the construction activities at Seneca Allegany Casino andHotel and Seneca Buffalo Creek Casino, as previously described, were suspendedfor reasons described above in the Executive Summary.  As a result of theongoing suspension and reassessment of estimated impairment charges,approximately $221,000 was recorded during the nine months ended June 30,2010, in addition to the impairment charge of $107.6 million recognized duringthe third and fourth quarters of Fiscal 2009.

 

*Other Non-Operating Expense*

 

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

 
| ** **                  | ** ** | **Nine Months Ended**      | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                    | ** ** |
| ** **                  | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                                 |       |   |   |
| Other non-operating expense |       | $                                    | 113        |   | $ | 188 |   |
|                             |            |                                      |            |  |  |  |  |

 

During the nine months endedJune 30, 2010 and 2009, we recorded an other-than-temporary loss on onespecific investment of $0.1 million and $0.2 million, respectively, as othernon-operating expense. The cost basis of this investment has been reduced bythe amount of the other-than-temporary loss recorded.

 

*InterestIncome*

 

Interest income wasapproximately $0.1 million and $0.2 million, respectively, for the nine monthsended June 30, 2010 and 2009. The decrease in interest income is dueprimarily to a $0.1 million non-recurring adjustment during the three monthsended June 30, 2009.

 

*Interest Expense*

 

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

 
| ** **       | ** ** | **Nine Months Ended**      | ** ** |
|------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **June 30,**                    | ** ** |
| ** **       | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **       | ** ** | **(Dollars in Thousands)** | ** ** |
|             |       |                                 |       |   |   |
| Interest expense |       | $                                    | 28,699     |   | $ | 28,777 |   |
|                  |            |                                      |            |  |  |  |  |

 

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Duringthe nine months ended June 30, 2010 and 2009, interest expense consistedof interest on our  Senior Notes,including $2.5 million and $2.4 million, respectively, of amortization relatedto financing costs and discount, which was partially offset by $0.9 million and$1.1 million, respectively, of capitalized interest primarily related toconstruction activities for our Seneca Hickory Stick Golf Club.

 

*Net Income*

 

Netincome for the nine months ended June 30, 2010 was $52.5 million, comparedto a net loss of $53.6 million for the nine months ended June 30, 2009, anincrease of $106.1 million, for the reasons stated above.

 

**Liquidity and Capital Resources**

 

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

 

Inaddition, we intend to continue to work closely with the Nation to help ensurecash generated from our operations, available cash and cash equivalents,restricted cash, short-term investments and cash available under our AmendedSenior Secured Revolving Loan Agreement are sufficient to service our debt,satisfy our other financial obligations and commitments and to meet our workingcapital requirements for the remainder of the current fiscal year. InOctober 2009, the Nation reduced anticipated Fiscal 2010 monthly distributions,exclusive of amounts required under the Distribution Agreement to $30.0million, compared to $42.0 million for Fiscal 2009.  As a result of theseefforts, in conjunction with our efforts to create additional operatingefficiencies, SGC’s depository cash balances increased to approximately $91.8million at June 30, 2010 (including $47.9 million of restricted cash) from$61.7 million, as of September 30, 2009.

 

Ourability to fund our operations, make planned capital expenditures, service ourdebt and satisfy our other financial obligations and commitments depends on ourfuture operating performance and cash flow, which are in turn subject toprevailing economic conditions and to financial, business and other factors,some of which are beyond our control.  Additionally, unlike 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 Amended Senior Secured Revolving Loan Agreement.

 

Weare leveraged, have significant interest payment requirements under theIndenture governing the Senior Notes, distribution obligations under theDistribution Agreement and other commitments from time to time to the Nation.We make distributions to the Nation pursuant to declarations by our Board ofDirectors.  During the nine months ended June 30, 2010 and 2009, wedistributed $22.5 million and $33.2 million, respectively, to the Nationpursuant to such declarations.  We distributed an additional $11.2 millionand $10.7 million to the Nation during the nine months ended June 30, 2010and 2009, respectively, pursuant to the Distribution Agreement.  As such,limitations on our capital resources could force us to further delay or abandoncapital projects including the construction and development of expansionprojects currently suspended.

 

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*Cash Flows*

 
| ** **                                             | ** ** | **Nine Months Ended**      | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                    | ** ** |
| ** **                                             | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                   |       |                                 |       |   |   |
| Net cash provided by operations                        |       | $                                    | 85,407     |   | $ | 84,791 |   |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to investing activities            |       |                                 |       |   |   |
| Purchases of property and equipment                    |       | (22,532                              | )          | (40,137 | ) |
| Deposits to restricted cash                            |       | (47,910                              | )          | — |   |
| Change in long-term deposits                           |       | 8                                    |       | 82 |   |
| Land acquisition costs                                 |       | (612                                 | )          | (1,022 | ) |
| Net cash used in investing activities                  |       | (71,046                              | )          | (41,077 | ) |
|                                                   |       |                                 |       |   |   |
| Cash flows relating to financing activities            |       |                                 |       |   |   |
| Contribution received from the Nation                  |       | 5,101                                |       | — |   |
| Cash paid for deferred financing fees                  |       | (79                                  | )          | — |   |
| Proceeds from senior secured revolving loan  agreement |       | —                               |       | 20,000 |   |
| Payments on senior secured revolving loan  agreement   |       | —                               |       | (20,000 | ) |
| Distributions paid to the Nation                       |       | (33,650                              | )          | (43,937 | ) |
| Net cash used in financing activities                  |       | (28,628                              | )          | (43,937 | ) |
|                                                   |       |                                 |       |   |   |
| Net decrease in cash and cash equivalents              |       | $                                    | (14,267    | ) | $ | (223 | ) |

 

*Cash Flows—Operating Activities*

 

The$0.6 million increase in cash flows from operations during the nine monthsended June 30, 2010 as compared to the nine months ended June 30,2009 was due to higher net income of $106.1 million; a decrease in cashpayments of current liabilities of $4.6 million and a decrease in cash paid forcurrent assets of $3.0 million, offset by a decrease in impairment of propertyand equipment of $108.8 million; a decrease in depreciation expense of $4.0million and a decrease in bad debt expense of $0.3 million.

 

*Cash Flows—Investing Activities*

 

Duringthe nine months ended June 30, 2010, cash flows used in investingactivities were approximately $71.0 million, compared to $41.1 million duringthe nine months ended June 30, 2009.  The increase of $29.9 millionwas due primarily to an increase in restricted cash of $47.9 million, partlyoffset by a decrease in cash paid for property and equipment and landacquisition costs of $17.6 million and 0.4 million, respectively.

 

Duringthe nine months ended June 30, 2010, purchases of property and equipmentwere $22.5 million and consisted of: $3.7 million related to construction ofthe Seneca Hickory Stick Golf Club; $6.9 million for the expansion of theexisting gaming facility at the Seneca Buffalo Creek Casino; and $11.9 million forthe acquisition of equipment for existing casino operations, principally, thepurchase of slot machines.  Land acquisitions of $0.6 million includelegal expenses and other acquisition costs related to certain parcels withinthe 50 acre “footprint” described in the Compact with New York State anddesignated for ownership by the Nation.

 

*Cash Flows—Financing Activities*

 

During the nine months ended June 30, 2010, netcash used in financing activities was $28.6 million, compared to $43.9 millionduring the nine months ended June 30, 2009, a decrease of $15.3million.  During the nine months ended June 30, 2010 these activitiesincluded cash distributions paid to the Nation of $33.7 million, partiallyoffset by a cash contribution received from the Nation of $5.1 million. Duringthe nine months ended June 30, 2009 these activities consisted of cashdistributions to the Nation of $43.9 million.

 

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*Principal Debt Arrangements*

 

Asof June 30, 2010, our debt instruments and facilities consisted of theSenior Notes on which we pay a fixed interest rate of 71⁄4%, and the AmendedSenior Secured Revolving Loan Agreement, which matures on December 31,2011.  Following is a summary of certain material terms of the SeniorNotes and the Amended Senior Secured Revolving Loan Agreement.

 

TheSenior Notes.   On May 5, 2004 and May 23,2005, SGC issued $300.0 million and $200.0 million, respectively, in seniornotes with fixed interest payable at a rate of 71⁄4% per annum due 2012, which werefer to collectively as the Senior Notes, under the Indenture.  TheSenior Notes are currently guaranteed by SNFGC, STGC, SEGC, and LGCC. Interest on the Senior Notes is payable semi-annually on May 1 andNovember 1.  The Senior Notes mature on May 1, 2012.  TheSenior Notes are unsecured general obligations.  As of June 30, 2010,accrued interest on the Senior Notes was $6.0 million.  The Indenturecontains certain covenants, including limitations on restricted payments andthe incurrence of indebtedness, and reporting obligations.  As of June 30,2010, SGC was in compliance with all covenants in the Indenture.

 

AmendedSenior Secured Revolving Loan Agreement.  On December 18,2009, SGC amended its $50.0 million Senior Secured Revolving Loan Agreement toextend the maturity date from December 19, 2009 to December 31, 2011.Amounts borrowed under the Amended Senior Secured Revolving Loan Agreementcontinue to bear interest at either one, three or six-month LIBOR plus one andone quarter percent (1.25%), or the prime rate (as reported in The Wall StreetJournal) plus one quarter percent (0.25%), with any outstanding principalbalance to be paid by, or on, the new maturity date.  The $50.0 millioncommitment under the Amended Senior Secured Revolving Loan Agreement reduces intandem with any reduction in the letter of credit requirement imposed by theESDC (relating to the ESDC’s efforts on behalf of SGC in connection withongoing condemnation proceedings in Niagara Falls, New York) up to an aggregatereduction of $10.0 million. As of June 30, 2010, the commitment wasreduced to $49.2 million in accordance with this provision.  The Amended Senior Secured Revolving LoanAgreement requires that SGC maintain all of its deposit and investment accountswith the lender, subject to limited exceptions for certain existing accounts.In addition, beginning June 18, 2010 the Amended Senior Secured RevolvingLoan Agreement provides for the lender’s restriction of certain SGC depositsmaintained with the lender, for commitments in excess of $40 million.  As of June 30, 2010, the amountrestricted under this provision amounts to $9.2 million, and is reported asrestricted cash on the consolidated balance sheet.

 

SGC’sobligations under the Amended Senior Secured Revolving Loan Agreement continueto be secured by substantially all gaming and related assets (includingsubstantially all gaming revenues) not constituting real property orimprovements. SGC’s obligations are guaranteed by SNFGC, STGC, SEGC and LGCC,and the guarantors’ obligations continue to be secured by substantially all ofeach guarantor’s gaming and related assets (including substantially all gamingrevenues) not constituting real property or improvements. The Amended SeniorSecured Revolving Loan Agreement modifies certain of the financial covenantscontained in the Senior Secured Revolving Loan Agreement, including reducingthe minimum consolidated EBITDA covenant from $160 million to $145 million (ona rolling 12-month basis) as well as modifying the total leverage ratio (oftotal funded debt to EBITDA) to a limit of 3.5 to 1.0.  The Amended SeniorSecured Revolving Loan Agreement also continues to contain additional customarycovenants, including covenants restricting the incurrence of additionalindebtedness, the creation of additional liens and the disposition of assets.As of June 30, 2010, SGC was in compliance with all covenants in theAmended Senior Secured Revolving Loan Agreement.

 

Asof June 30, 2010, at SGC’s request, the lender under the Amended SeniorSecured Revolving Loan Agreement had issued letters of credit totaling $17.4million, $12.3 million (as required by the ESDC) of which may be drawn upon tofund the purchase of certain parcels within the 50 acre “footprint” describedin the Compact with New York State and designated for ownership by the Nation,with the remaining $5.1 million issued in connection with worker’s compensationpolicies and certain other contracts, as required.

 

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* *

*Distribution Agreement Obligations*

 

OnApril 27, 2007, SGC entered into a Distribution Agreement among theNation, the Seneca Nation of Indians Capital Improvements Authority, or theAuthority, SGC and Wells Fargo Bank, as Trustee, in connection with the Authority’sissuance in two series (one tax exempt and the other taxable) of an aggregateprincipal amount of $159,495,000 special obligation bonds, or the 2007 NationBonds.  The Distribution Agreement obligates SGC, subject to anycontractual restrictions applicable to SGC (including, but not limited to,those contained in the Senior Notes Indenture) to make monthly distributions tothe Nation at the times and in the amounts necessary to enable the Authority topay the debt service on the 2007 Nation Bonds as required under the Authority’sindenture.  At the direction of the Nation and the Authority, SGC payssuch distributions directly to the Trustee.  The Authority’s debt servicecommenced on June 1, 2007.  For the period from June 1, 2007through November 1, 2007, the Authority’s debt service averagedapproximately $0.9 million per month.  For the periodDecember 1, 2007 through June 1, 2008, the Authority’s debt serviceaveraged approximately $1.7 million per month.  In June 2008, it wasdetermined that the amortization (debt service) schedule provided, upon whichthe foregoing $1.7 million monthly payments was made, was incorrect.  Acorrected amortization schedule was provided and, after giving effect to aresulting credit for amounts overpaid, for the period from January 1, 2008through December 1, 2023, the Authority’s debt service averagesapproximately $1.2 million per month.  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 DistributionAgreement provides that neither the Trustee nor the Authority’s bondholderswill have any recourse under the Distribution Agreement to any revenues, assetsor property of SGC or its subsidiaries should SGC fail to comply with ourdistribution obligations.  During the nine months ended June 30, 2010and 2009, SGC distributed to the Nation $11.2 million and $10.7 million, respectively,for the Authority’s debt service on the special obligation bonds.

 

*Other Commitments*

 

In2002 and pursuant to the Compact, the Nation acquired from the State of NewYork approximately 24 acres of land and related improvements in the City ofNiagara Falls, New York, including the then-Niagara Falls ConventionCenter.  The State of New York further agreed in the Compact to assist theNation in whatever manner appropriate, including through the exercise of itspower of eminent domain, to acquire the remaining acreage within theapproximate 50-acre footprint in the City of Niagara Falls, New York,designated by New York State under the Compact for ownership by the Nation. TheCompact specifically excluded approximately 1.5 acres of land within thefootprint owned by a Roman Catholic Church.  Additionally, inJuly 2006, the Nation agreed to waive its right to acquire approximatelyone half acre of additional land within the footprint owned by End TimeHandmaidens, Inc., a religious organization.  In return for the waiver,the Nation obtained a right of first negotiation and refusal with respect tothe future sale of the parcels.  As a result of the carve-out relating tothe parcels owned by the Roman Catholic Church, and the Nation’s agreement withEnd Time Handmaidens, the total acreage of the Niagara Territory uponcompletion of the condemnation process is anticipated to be approximately 48acres.

 

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

 

Substantiallyall of the post-2002 real property acquisitions in Niagara Falls, New York havebeen pursuant to New York State Eminent Domain Procedure Law, or EDPL, usingthe State’s power of eminent domain (through the ESDC).  The amounts paidto condemnees from whom the ESDC has acquired property are deemed to be advancepayments, in that property owners are entitled to reserve their rights tochallenge the land and improvement values determined by the condemnor’sappraisers.  The ESDC has made advanced payments under the EDPL ofapproximately $31.5 million for the condemned parcels within the footprintincluding, in particular, approximately 18 acres of land and related fixtures(a former water park) for an 

 

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aggregateadvanced payment of $18.0 million, and another hotel property for an aggregateadvanced payment of $8.2 million (excluding fixtures).

 

Pursuantto the EDPL, 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 record owners from whom property wasacquired pursuant to the EDPL have reserved rights to claim additionalcompensation.  Most record owners have filed notices of claim to initiateproceedings challenging the fair market value appraisals utilized by ESDC. Themost significant valuation proceedings were those involving Fallsite LLC andFallsville Splash, LLC, which have filed notices of claim in the amounts of$40.0 million and $35.0 million for land and trade fixtures, respectively,relating to a former water park within the footprint.  ESDC’s fair marketappraisal value for the foregoing was approximately $17.0 million. OnApril 5, 2010, the New York State Supreme Court determined that noadditional compensation was owed to either Fallsite LLC or Fallsville Splashfor the water park real estate and fixtures.  SGC anticipates that theformer property owners will appeal. In a related action, on June 21, 2010the condemnees separately moved to vacate the original 2006 order that vestedtitle to the Splashpark properties in ESDC. The ESDC is vigorously contesting the condemnees’ claims as procedurallyimproper and substantively without merit. If the claimants are successful, theformer Splashpark properties could be returned to the property owners at whichpoint SGC would seek return of the amounts paid for the properties.

 

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

 

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

 

Ifa court determines that the value for the land and improvements is higher thanthe appraised value paid to a condemnee, then SGC may be liable to thecondemnee for the difference and potentially also responsible for certainadditional costs and payments to the condemnee, such as attorneys’ fees. As of June 30, 2010, $0.8 million of the previously recorded reserve of$6.4 million remained for such matters and is included in the other currentliabilities section on SGC’s consolidated balance sheet.  Should theliability be greater than our reserve for such matters, it could have anegative impact on income and financial condition.

 

*Expansion and Development Plans*

 

On August 27, 2008, the construction activitiesat Seneca Allegany Casino and Hotel and Seneca Buffalo Creek Casino, eachdescribed below, were suspended for reasons including:  the economicrecession; inability to obtain construction financing at reasonable interestrates; and operating and other demands on available cash, such as payments tothe Nation.  As of June 30, 2010, construction remained suspendedindefinitely.  Furthermore, certain planning efforts related to the futureexpansion of the Seneca Niagara Falls property were suspended for the samereasons.  As a result of these circumstances an impairment charge of$107.6 million was recognized during the third and fourth quarters of Fiscal2009. During the three and nine months ended June 30, 2010, an additional$0 and $221,000, respectively, was recorded as an impairment of property andequipment. Nonetheless, SGC will continue to explore alternative futureexpansion and development options.

 

*Seneca Niagara Falls Casino andHotel. *In 2006, we began master planning activities for theremaining approximately 24 acres of undeveloped land contained in the NiagaraFalls footprint.  During August 2008, 

 

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these master planning activities were suspended andan impairment charge was recognized in the third quarter of Fiscal 2009 relatedto these activities, in the amount of approximately $3.5 million. During thethree and nine months ended June 30, 2010, an additional $0 and $33,000,respectively, was recorded as an impairment of property and equipment.

 

*Seneca Allegany Casino andHotel. *Construction on the next phase of development atSeneca Allegany Casino and Hotel, which was planned to include an additional200-room hotel tower, and up to 30,000 square feet of additional gaming spaceand related amenities, for a total estimated cost of approximately $130million, was suspended and an impairment charge was recognized for costsincurred related to these activities in the third and fourth quarters of Fiscal2009, in the amount of approximately $17.1 million. During the three and ninemonths ended June 30, 2010, an additional $0 and $37,000, respectively,was recorded as an impairment of property and equipment.

 

*Seneca Buffalo Creek Casino.*Construction onthe next phase of development at Seneca Buffalo Creek Casino and Hotel, whichwas planned to include 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, for a total estimated cost of approximately $333 million, wassuspended and an impairment charge was recognized in the third and fourthquarters of Fiscal 2009 related to these activities, in the amount ofapproximately $87.0 million. During the three and nine months ended June 30,2010, an additional $0 and $151,000, respectively, was recorded as animpairment of property and equipment.

 

On March 5, 2010 SEGC completed an expansion ofthe existing facility, increasing the number of slot machines to 457 and thetotal square feet of gaming space to approximately 10,600.

 

The construction of a permanent casino at theBuffalo Creek site, as well as any expansion by STGC at Seneca Allegany Casinoand Hotel will require significant capital outlays. The ability to recommencethese projects will depend on various factors including prevailing economicconditions, cash flow from operations, the availability of external financingwith regard to one or more of the projects, certain Nation and governmentalapprovals, and the effects of legal and/or administrative proceedings.

 

*Seneca Hickory Stick Golf Club. *InJuly 2007, the Company commenced construction of the Seneca Hickory StickGolf Club, SNFGC’s championship level golf course, in Lewiston, New York. It islocated approximately 10 miles from the Seneca Niagara Casino and Hotel. Thegolf course will serve as an amenity for our patrons intended to enable SGC toincrease its demographic and geographic reach. Designed by world-renowned golfarchitect Robert Trent Jones II, Seneca Hickory Stick Golf Club currentlyfeatures a scenic, par-72, PGA-style layout and temporary pro shop. Thepermanent clubhouse is currently under construction and will featureapproximately 4,300 square feet of space, including a pro shop, bar and casualdining for 40 patrons. The area around the clubhouse has been designed toaccommodate tents and support facilities for large tournaments. The golf courseopened for public play on July 2, 2010.  As of June 30, 2010,the Company has incurred $24.2 million for the purchase of land andconstruction, with a total cost to construct the golf course, clubhouse andrelated amenities estimated to be approximately $25.5 million.

 

**Regulation**

 

Ouroperations are regulated by Nation laws, the Compact and federal statutes, mostnotably the Indian Gaming Regulatory Act, or IGRA.  Several bills wereproposed during past sessions of Congress that would have affected Indiangaming but were not enacted into law.  While bills may be introduced thatare relevant to Indian gaming in the 111th Congress, leaders from the committees thathave jurisdiction over the IGRA have not made any indications that gamingregulation will be an agenda item for the 111th Congress.  It remains unclear whether theadministration will pursue legislative initiatives related to the topic ofIndian gaming.

 

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TheDepartment of the Interior published final regulations effectiveAugust 25, 2008 governing the conduct of gaming on lands taken into trustafter 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 or court decisions construing thenew regulations could adversely impact expansion of SGC gaming operations andthe future growth of the Nation’s revenue base. In addition, from time to time,various government officials have proposed taxing Indian casino gaming orotherwise limiting or restricting the conduct of gaming operations by Indiantribes. No assurance can be given that such legislation, if and when enacted byCongress, would not have a material adverse effect on the operations of SGC. IfCongress were to enact comprehensive amendments to the IGRA, such legislationcould have a material adverse effect on the operations of SGC. In addition,under federal law, gaming on the Nation’s lands may be dependent upon thepermissibility under New York law of certain forms of gaming or similaractivities. If New York State were to make various forms of gaming illegal oragainst public policy (or the courts were to similarly rule), or otherwise totake a legal position adverse to SGC, such actions could have a materialadverse effect on our ability to conduct our gaming operations as currentlyconducted. Moreover, a 1996 U.S. Supreme Court decision may permit a state toavoid or refuse to negotiate amendments to existing compacts such as theCompact.

 

**Recent Accounting Pronouncements**

 

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

 

Otherproposed or otherwise potential accounting standards are currently under studyby standard-setting organizations and certain regulatory agencies. Because ofthe tentative and preliminary nature of such proposed standards, the Companyhas not yet determined the effect, if any, that the implementation of suchproposed standards would have on the consolidated financial statements.

 

**Item 3.          Quantitative and Qualitative Disclosures About Market Risk**

 

Therehave been no material changes in our market risk exposures sinceSeptember 30, 2009.  For more information, refer to “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in our2009 Form 10-K.

 

**Item4.          Controls andProcedures**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

TheCompany maintains a system of disclosure controls and procedures (as defined inRule 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934) designed to provide reasonable assurance as to the 

 

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reliabilityof the financial statements and other disclosures contained in thisreport.  The Company’s Chairman of the Board, President and ChiefExecutive Officer and Senior Vice President and Chief Financial Officerevaluated the effectiveness of the Company’s disclosure controls as of the endof the period covered in this report.  Based upon that evaluation, theCompany’s Chairman of the Board President and Chief Executive Officer, andSenior Vice President and Chief Financial Officer have concluded that as of theend of such period, the Company’s disclosure controls and procedures wereeffective.

 

(b)          Changes in Internal Control over Financial Reporting

 

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

 

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** **

**Part II.     OTHERINFORMATION**

 

**Item 1.****                                                          ****Legal Proceedings**

 

Otherthan as described below, there have been no material changes in our legal proceedingssince March 31, 2010.  For more information, refer to “Item 3. Legal Proceedings” in our 2009 Form 10-K.

 

***Citizens Against Casino Gambling inErie County v. Hogen (1:2009-cv-00291 (WDNY)) — CACGEC III***

 

OnMarch 31, 2009, Citizens Against Casino Gambling in Erie County (CACGEC)filed a third action in the United States District Court, Western District ofNew York against the Chairman of the NIGC, the United States Department of theInterior, the NIGC, the Secretary of the Interior and the President of theUnited States.  The action seeks declaratory and injunctive relief underthe Administrative Procedure Act, the Declaratory Judgments Act, and the IGRAand is principally directed at the decision by the NIGC Chairman, onJanuary 20, 2009, to approve the Seneca Nation’s amendments to itsClass III Gaming Ordinance regarding the Nation’s Buffalo CreekTerritory.  The NIGC Chairman concluded that IGRA’s general prohibitionagainst gaming on lands acquired after its enactment in 1988 does not apply to lands,such as the Buffalo Creek Territory, that are held in restrictedfee.   The plaintiffs claim that, in approving the Nation’sClass III Gaming ordinance on January 20, 2009, the NIGC Chairmanignored the intention of Congress.  The plaintiffs also make severalclaims that go beyond their prior lawsuits.  Most notably, they challengethe constitutionality of the land purchase provisions contained in the SenecaNation Lands Claim Settlement Act of 1990 (“SNLCSA”), and attempt to challengein a more extensive fashion than they had previously the validity of theNation-State Gaming Compact.

 

OnJune 15, 2009, the Nation moved to intervene as a defendant in CACGECIII.  The Nation’s proposed intervention and participation as a defendantare expressly restricted to the three claims for relief specified in theplaintiffs’ complaint, namely:  (1) whether, as restricted fee landsover which the Nation exerts governmental authority, the Buffalo CreekTerritory qualifies as “Indian lands” under IGRA; (2) whether the BuffaloCreek Territory is subject to the general prohibition found in section 2719 ofIGRA against gaming on trust lands acquired after IGRA’s effective date eventhough the Territory consists of restricted fee, rather than trust, lands; and(3) whether, if the Buffalo Creek Territory is subject toSection 2719’s general prohibition, Class III gaming may neverthelessproceed on it because the Buffalo Creek Territory was acquired in settlement ofa land claim.

 

OnMarch 30, 2010, the Court denied the Nation’s motion to intervene, whilegranting permission for it to participate as *amicuscuriae*.  The Court also dismissed certain secondary claims ofthe plaintiffs in the proceeding, while allowing other core claims regardingthe eligibility of the land for casino gaming to proceed.   On May 18,2010, the Nation filed a notice of interlocutory appeal with the Second CircuitCourt of Appeals on the issue of its right to intervene.  If the plaintiffs ultimately succeed in thisaction, or in their pending appeals in the CACGEC I and CACGEC II proceedings(previous suits filed by the plaintiffs and relating to similar claims), theSGC may be unable to conduct any Class III gaming at its existingproperties.

 

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

 

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

 

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Withrespect to approximately 18 acres of land and related fixtures (a former waterpark) within the above footprint, the ESDC made advanced payments under NewYork eminent domain procedure law of $18.0 million to Fallsite LLC andFallsville Splash, LLC, the owners of the water park property.  The ownersthereafter filed notices of claim seeking, in the aggregate, $40.0 million and$35.0 million for land and trade fixtures, respectively. On April 5, 2010,the New York State Supreme Court determined that no additional compensation wasowed to the former property owners for the water park real estate and fixtures. SGC anticipates that the former property owners will appeal the valuationdecision.  In a related action, on June 21,2010 the condemnees separately moved to vacate the original 2006 order thatvested title to the Splashpark properties in ESDC.  The ESDC is vigorously contesting thecondemnees’ claims as procedurally improper and substantively without merit. Ifthe claimants are successful, the former Splashpark properties could bereturned to the property owners at which point SGC would seek return of theamounts paid for the properties.

 

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

 

OnApril 1, 2010, SGC filed suit in the State of New York Supreme Court,County of Niagara, against Harvest Trends, Inc., Harvest Trends LLP, RiverLee International, Inc., and several individuals who are former employeesof SGC.  The suit alleges that these former employees and a vendor, whohad been hired and paid to assist SGC in creating an enterprise data warehouse,used SGC time and SGC resources to develop Harvest Trends, an entity created tomarket a similar product to SGC’s competitors.  SGC is suing for damagesin an amount to be determined and for injunctive relief for themisappropriation of trade secret customer data, unjust enrichment, unfaircompetition, breaches of fiduciary duties and duties of loyalty, and breachesof contracts.   On July 13,2010, four of the defendants in the above referenced case filed separatecounter-suits against SGC and 20 other parties, including executives andmembers of SGC’s Board of Directors and personnel employed by the SGA. These suits, brought in the State of New York Supreme Court, County of Niagara,allege defamation, intentional infliction of emotional distress, productdisparagement, unfair competition, tortious interference with prospectivebusiness advantage, abuse of process and aiding and abetting theseactivities.  Each of these complaints seeks in excess of $100 million indamages.  SGC believes that these actions are without merit, and intendsto defend itself against these actions vigorously.

 

***Seneca Niagara Falls Gaming Corporation and SenecaGaming Corporation v. Toohey, et. al. (NYS Supreme Court, Niagara County)***

 

OnApril 30, 2010, SNFGC and SGC filed suit in the New York Supreme Court,County of Niagara, against a number of individual defendants (TimothyToohey, Michael J. Dowd, Bergal Mitchell, Rachel Mitchell, Barry Halftown andMark Gabriele).  SNFGC and SGCsubsequently amended their complaint on June 17, 2010.  The suit alleges that the defendants,individually and collectively, engaged in fraud with respect to a real estatetransaction in which SNFGC purchased land in the Town of Lewiston, New York,for the development of its Seneca Hickory Stick golf course.  The suit also alleges that Bergal Mitchell,who had at the pertinent times been a member of the Board of Directors of SNFGCand SGC, breached his fiduciary duties by failing to disclose and concealingcertain material information with respect to the transaction.  The suit also asserts aiding and abettingclaims against various defendants, both with respect to fraud and breach offiduciary duty claims.  SGC and SNFGC aresuing for compensatory and punitive damages. Several of the defendants have answered the complaint, while othershave moved or stated their intention to move to dismiss.

 

**Item 1A.****                                                 ****Risk Factors**

 

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

 

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**Item 6.   Exhibits**

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

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                          |
| 10.1             |       | Employment  Agreement, dated as of June 23, 2010, by and between Seneca Gaming  Corporation and Lee K. Shannon (filed herewith).                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                          |
| 31.1             |       | Certification  of Catherine Walker, principal executive officer, pursuant to  Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (filed  herewith).                                                                                           |
|             |       |                                                                                                                                                                                                                                                          |
| 31.2             |       | Certification  of David Sheridan, principal financial officer, pursuant to Rule 13a-14 and  15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                              |
|             |       |                                                                                                                                                                                                                                                          |
| 32.1             |       | Certification  of Catherine Walker, principal executive officer, and David Sheridan,  principal financial officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |

 

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**SIGNATURES**

 

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

 

 
|                       | **SENECA GAMING CORPORATION**                 |
|----------------------------|-----------------------------------------------|
|                       |                                          |
|                       |                                          |
| Date:  August 6, 2010 | /s/  Catherine Walker                         |
|                       | Catherine  Walker                             |
|                       | President  and Chief Executive Officer        |
|                       | (Principal  Executive Officer)                |
|                       |                                          |
|                       |                                          |
| Date:  August 6, 2010 | /s/  David Sheridan                           |
|                       | David  Sheridan                               |
|                       | Chief  Financial Officer                      |
|                       | (Principal  Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                          |
| 10.1             |       | Employment  Agreement, dated as of June 23, 2010, by and between Seneca Gaming  Corporation and Lee K. Shannon (filed herewith).                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                          |
| 31.1             |       | Certification  of Catherine Walker, principal executive officer, pursuant to  Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (filed  herewith).                                                                                           |
|             |       |                                                                                                                                                                                                                                                          |
| 31.2             |       | Certification  of David Sheridan, principal financial officer, pursuant to Rule 13a-14  and 15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                              |
|             |       |                                                                                                                                                                                                                                                          |
| 32.1             |       | Certification  of Catherine Walker, principal executive officer, and David Sheridan,  principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith). |

 

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