**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31,2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to          **

 

**Commission File Number:  333-117633**

 

**SENECAGAMING CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **Not Applicable**                                             | ** ** | **7990**                                                 | ** ** | **54-2122988**                      |
|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------|
| (State or other  jurisdiction ofincorporation or organization) |       | (Primary Standard  IndustrialClassification Code Number) |       | (I.R.S. EmployerIdentification No.) |

 

**310 Fourth Street**

**Niagara Falls, New York (SenecaNation Territory) 14303**

**(716) 299-1100**

(Address, including zip code, and telephonenumber,including area code, of registrant’sprincipal executive offices)

 

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

 

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

 
| Large  accelerated filero |   | Accelerated  filero |   | Non-accelerated  filerý |
|---------------------------|--------|---------------------|--------|------------------------------|

 

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

 

AtFebruary 13, 2006, 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                                                                                           |   |
|              | Consolidated Balance Sheets as of December 31,  2005 (Unaudited) and September 30, 2005              |   |
|              | Consolidated  Statements of Income for the three months ended December 31, 2005 and  2004 (Unaudited)     |   |
|              | Consolidated Statements of  Cash Flows for the three months ended December 31, 2005 and 2004  (Unaudited) |   |
|              | Notes to Consolidated  Financial Statements                                                                    |   |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                    |   |
| Item 3.           | Quantitative and Qualitative  Disclosures About Market Risk                                                    |   |
| Item 4.           | Controls and Procedures                                                                                        |   |
|              |                                                                                                           |   |
| **PART II.** | **OTHER INFORMATION**                                                                                          |   |
| Item 1.           | Legal Proceedings                                                                                              |   |
| Item 1A.          | Risk Factors                                                                                                   |   |
| Item 2.           | Unregistered Sales of Equity  Securities and Use of Proceeds                                                   |   |
| Item 3.           | Defaults Upon Senior  Securities                                                                               |   |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                                           |   |
| Item 5.           | Other Information                                                                                              |   |
| Item 6.           | Exhibits                                                                                                       |   |
|              | Signatures                                                                                                     |   |

 

i

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**PART I.  FINANCIAL INFORMATION**

 

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

 

**SENECA GAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                     | ** ** | **December 31,  2005**     | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| **Assets**                                     |       |                       |       |                    |       |
| Current assets:                                |       |                       |       |                    |       |
| Cash and cash equivalents                      |       | $                          | 50,465     |                    | $          | 142,467 |   |
| Short-term investments                         |       | 98,000                     |       | 96,091                  |       |
| Receivables from Nation                        |       | 467                        |       | 875                     |       |
| Other receivables, net                         |       | 2,027                      |       | 1,979                   |       |
| Inventories                                    |       | 2,411                      |       | 2,095                   |       |
| Other current assets                           |       | 6,185                      |       | 6,437                   |       |
| Total current assets                           |       | 159,555                    |       | 249,944                 |       |
|                                           |       |                       |       |                    |       |
| Property and  equipment, net                   |       | 480,237                    |       | 430,418                 |       |
| Other long-term  assets                        |       | 60,325                     |       | 18,486                  |       |
| Total assets                                   |       | $                          | 700,117    |                    | $          | 698,848 |   |
|                                           |       |                       |       |                    |       |
| **Liabilities  and Shareholders’ Equity** | ** ** | ** **                 | ** ** | ** **              | ** ** |
| Current  liabilities:                          |       |                       |       |                    |       |
| Trade payables                                 |       | 5,330                      |       | 3,898                   |       |
| Construction payables - SCMC                   |       | 32,433                     |       | 10,894                  |       |
| Construction payables - other                  |       | —                     |       | 23,341                  |       |
| Exclusivity fees payable                       |       | 5,373                      |       | 5,717                   |       |
| Accrued interest                               |       | 6,042                      |       | 14,218                  |       |
| Other current liabilities                      |       | 35,897                     |       | 38,003                  |       |
| Total current liabilities                      |       | 85,075                     |       | 96,071                  |       |
|                                           |       |                       |       |                    |       |
| Long-term debt                                 |       | 493,601                    |       | 493,352                 |       |
|                                           |       |                       |       |                    |       |
| Total  liabilities                             |       | 578,676                    |       | 589,423                 |       |
|                                           |       |                       |       |                    |       |
| Capital:                                       | ** ** | ** **                 | ** ** | ** **              | ** ** |
| Retained earnings                              |       | 121,441                    |       | 109,425                 |       |
|                                           |       |                       |       |                    |       |
| Total  liabilities and capital                 |       | $                          | 700,117    |                    | $          | 698,848 |   |

 

*See accompanying notes.*

 

1

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**SENECA GAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**                | ** ** |
| **Revenues**                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Gaming                                  |       | $                                         | 110,039    |   | $ | 104,291 |   |
| Food and beverage                       |       | 9,786                                     |       | 9,676 |   |
| Retail, entertainment and other         |       | 4,722                                     |       | 4,234 |   |
| Less: promotional allowances            |       | (15,631                                   | )          | (10,325 | ) |
| Net revenues                            |       | 108,916                                   |       | 107,876 |   |
|                                    |       |                                      |       |   |   |
| **Expenses**                            |       |                                      |       |   |   |
| Gaming                                  |       | 28,040                                    |       | 28,627 |   |
| Food and beverage                       |       | 8,810                                     |       | 8,691 |   |
| Retail, entertainment and other         |       | 3,012                                     |       | 2,881 |   |
| Advertising, general and administrative |       | 31,420                                    |       | 29,231 |   |
| Pre-opening costs                       |       | 3,056                                     |       | 63 |   |
| Depreciation and amortization           |       | 7,071                                     |       | 6,367 |   |
|                                    |       |                                      |       |   |   |
| Total operating expenses                |       | 81,409                                    |       | 75,860 |   |
|                                    |       |                                      |       |   |   |
| Operating income                        |       | 27,507                                    |       | 32,016 |   |
| Interest income                         |       | 1,528                                     |       | 1,003 |   |
| Interest expense                        |       | (7,749                                    | )          | (11,956 | ) |
|                                    |       |                                      |       |   |   |
| Net income                              |       | $                                         | 21,286     |   | $ | 21,063 |   |

 

*See accompanying notes.*

 

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**SENECAGAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended   December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(dollars in thousands)**                 | ** ** |
| **Cash flows relating to operating activities:**                                   |       |                                       |       |   |   |
| Net income                                                                         |       | $                                          | 21,286     |   | $ | 21,063 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                       |       |   |   |
| Depreciation and amortization                                                      |       | 7,071                                      |       | 6,367 |   |
| Amortization of deferred financing costs and debt  discount                        |       | 787                                        |       | 620 |   |
| Other                                                                              |       | 115                                        |       | 137 |   |
| Change in operating assets and liabilities:                                        |       |                                       |       |   |   |
| Current assets                                                                     |       | 189                                        |       | (465 | ) |
| Long-term assets                                                                   |       | —                                     |       | 10 |   |
| Current liabilities                                                                |       | (9,193                                     | )          | 7,790 |   |
| Net cash provided by operating activities                                          |       | $                                          | 20,255     |   | $ | 35,522 |   |
|                                                                               |       |                                       |       |   |   |
| **Cash flows relating to investing activities:**                                   |       |                                       |       |   |   |
| Purchases of property and equipment                                                |       | (58,700                                    | )          | (47,812 | ) |
| Payments for land acquisitions                                                     |       | (12,663                                    | )          | (198 | ) |
| Purchase of investments, net                                                       |       | (1,909                                     | )          | (33,906 | ) |
| Payment to collateralize letter of credit                                          |       | (34,055                                    | )          | — |   |
| Net cash used in investing activities                                              |       | (107,327                                   | )          | (81,916 | ) |
|                                                                               |       |                                       |       |   |   |
| **Cash flows relating to financing activities:**                                   |       |                                       |       |   |   |
| Payments to sinking fund, net                                                      |       | —                                     |       | (11,973 | ) |
| Repayments of long-term debt                                                       |       | —                                     |       | (138 | ) |
| Payment of deferred financing costs                                                |       | (345                                       | )          | (95 | ) |
| Dividends paid to the Nation                                                       |       | (4,585                                     | )          | (655 | ) |
| Net cash used in financing activities                                              |       | (4,930                                     | )          | (12,861 | ) |
|                                                                               |       |                                       |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (92,002                                    | )          | (59,255 | ) |
|                                                                               |       |                                       |       |   |   |
| Cash and cash equivalents balances:                                                |       |                                       |       |   |   |
| Beginning of period                                                                |       | 142,467                                    |       | 211,595 |   |
| End of period                                                                      |       | $                                          | 50,465     |   | $ | 152,340 |   |
|                                                                               |       |                                       |       |   |   |
| Supplemental disclosures of cash flow information                                  |       |                                       |       |   |   |
| Noncash investing activities                                                       |       |                                       |       |   |   |
| Distribution of property to the Nation                                             |       | $                                          | 4,685      |   | $ | — |   |

 

*See accompanying notes.*

 

3

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**SENECAGAMING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**                                      Organization and Basis of Presentation

 

The consolidated financial statements include the accounts of SenecaGaming Corporation, or SGC, and its wholly owned subsidiaries, or collectively,the Company. In consolidation, all intercompany balances and transactions havebeen eliminated. The accompanying unaudited consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion of theCompany’s management, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation have been included. Operatingresults for the three months ended December 31, 2005 are not necessarilyindicative of the results that may be expected for the year ended September 30,2006. For further information, reference is made to the consolidated financialstatements and footnotes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2005.

 

SGC, which was formed on August 1, 2002, is wholly owned by theSeneca Nation of Indians, or the Nation. The Nation is a federally recognizedIndian tribe with total territorial land comprising approximately 54,000 acresin the Western New York region. SGC was organized by the Nation to operate andmanage its Class III Gaming activities pursuant to the Indian GamingRegulatory Act of 1988, or IGRA. Under IGRA, federally recognized Indian tribesare permitted to conduct full-scale casino gaming operations on tribal land,subject to, among other things, the negotiation of a compact with the affectedstate. Pursuant to IGRA, the Nation entered into the Nation-State GamingCompact with the State of New York in August, 2002, or the Compact, which hasbeen approved by the Federal Bureau of Indian Affairs, Department of theInterior. The Compact provides the Nation the exclusive right to conduct Class IIIgaming activities at three sites in the western region of the State of NewYork.

 

TheNation’s Constitution established the Tribal Council, or the Council, to act asthe Nation’s legislative authority. The Council acts on the Nation’s behalfwith respect to SGC, and the Council established the Seneca Gaming Authority,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 executive managementof SGC, including the President and Chief Executive Officer, to oversee,develop, and manage the three sites. The subsidiary corporations are asfollows:

 

•                                          Seneca Niagara Falls Gaming Corporation, or SNFGC

 

•                                          Seneca Territory Gaming Corporation, or STGC

 

•                                          Seneca Erie Gaming Corporation, or SEGC

 

4

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SNFGCwas formed on August 1, 2002 to operate the Nation’s gaming activities inNiagara Falls, New York. Operations at SNFGC’s casino, or Seneca NiagaraCasino, commenced December 31, 2002. On December 30, 2005, SNFGC officially opened the first 10 of 26floors of rooms of its luxury hotel, which includes 35,000 square feet ofadditional gaming space, 3 new restaurants, 3 new retail stores and a 25,200 square-foot multi-purpose room andan additional 8,000 square feet of conference and banquet space.  The luxury hotel is adjacent andconnected to the Seneca Niagara Casino.  Theentire complex, including the luxury hotel and the Seneca Niagara Casino, isreferred to as the Seneca Niagara Casino and Hotel.

 

STGCwas formed on September 20, 2003 to operate the Nation’s gaming activitiesin Salamanca, New York on its territorial land. Operations at STGC’s casino, orSeneca Allegany Casino, commenced May 1, 2004.

 

SEGCwas formed on August 9, 2003 to operate the Nation’s gaming activities inErie County, New York. On October 3, 2005, the Nation acquiredapproximately nine acres of land in the historic waterfront district ofdowntown Buffalo.  SEGC commencedconstruction of SEGC’s Erie County gaming facility on those nine acres on December 8,2005.  The exclusive right, under theCompact, to establish and operate a third Class III gaming facility inErie County may terminate if the Nation or SEGC fails to commence Class IIIgaming operations by December 9, 2007.

 

**2.**                                      Long-Term Debt

 

Long-term debt, as described below, consists of the 2004 and 2005 71⁄4% seniornotes.

 

**71⁄4%Senior Notes**

 

On May 5, 2004, SGC issued $300.0 million in 71⁄4% senior notesdue 2012, or the 2004 senior notes. The 2004 senior notes are guaranteed by SNFGC,STGC and SEGC or collectively, the Guarantors. The net proceeds from the 2004 senior notes were, or will be, used principallyto fund in whole or in part (a) the repayment in May 2004 of vendorequipment financing, (b) SNFGC’s construction and equipping of the luxuryhotel, (c) the acquisition of the remaining 24 acres in Niagara Falls, asprovided for in the Compact, (d) the payment of $22.0 million in August 2004to satisfy the obligation to the Empire State Development Corporation inconnection with the transfer of certain property to the Nation for use as theSeneca Niagara Casino, and (e) a $25.0 million distribution to the Nation,paid in 2004.

 

On May 23, 2005, SGC issued an additional $200.0 million in 71⁄4%senior notes due 2012, Series B, or the 2005 senior notes. The 2005 seniornotes are treated as a single class with the 2004 senior notes and areidentical to the 2004 senior notes, except for certain tax attributes and priorto November 1, 2005 the amount of interest accrued thereon.  Gross proceeds on the 2005 senior notes were approximately$193.0 million.  Such proceeds were, orwill be, used to (a) pay in full and terminate on May 23, 2005, the seniorsecured term loan, or the Term Loan, made by Freemantle Limited, or Freemantle,to SNFGC in November 2002, for a negotiated amount of approximately $126.7million, representing $80.0 million in outstanding principal and approximately$46.7 million for interest on such principal, at a prescribed interest rate,that would have otherwise been payable if the Term Loan had not been paid on May 23,2005, but was instead paid 81⁄2 months prior to its November 22, 2007 statedmaturity, (b) to fund certain costs associated with the expansion of ouroperations, (c) to pay the fees and expenses associated with the offeringof the 2005 senior notes and (d) for general corporate purposes.

 

5

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Interest on the 2004 and 2005 senior notes is payable semi-annually on May 1and November 1. The 2004 and 2005 senior notes are unsecured and rankequally. As of December 31, 2005, aggregate accrued interest on the 2004and 2005 senior notes was $6.0 million.

 

The Indenture governing the 2004 and 2005 senior notes contains certainfinancial and non-financial covenants. The financial covenants includelimitations on restricted payments and the incurrence of indebtedness, whilethe non-financial covenants include reporting obligations and compliance withlaws and regulations. As of December 31, 2005, SGC was in compliance withall covenants in the Indenture.

 

**TermLoan**

 

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

 

Asdiscussed above, on May 23, 2005, the Term Loan was paid in full. Thenegotiated payment in full of the Term Loan resulted in a charge to earnings inMay 2005 on the early extinguishment of the Term Loan of approximately $49.2million, including the write-off of $2.5 million of deferred financing costs.

 

**DerivativeInstruments**

 

SGC isconsidered an “end user” of derivative instruments and has engaged inderivative transactions for risk management purposes only. Effective on May 25,2004, SGC entered into two interest rate cap agreements for an aggregatenotional amount of $80.0 million, equal to the then outstanding balance ofthe Term Loan. The instruments were purchased for approximately$1.1 million each, $2.2 million in total. Periodic changes in thefair market value of the instruments were recorded as adjustments to interestexpense. Both instruments were sold in the third quarter of 2005 subsequent tothe payment in full and termination of the Term Loan.  Gross proceeds from the sale of theseinstruments were $0.7 million.

 

**3.****                                     ****Related-Party Transactions**

 

**LandLeases from the Nation**

 

The Nation entered into anoperating lease agreement (Head Lease) with SNFGC on October 25, 2002, foruse of the land and the building which is currently a portion of the SenecaNiagara Casino and Hotel. The Seneca Niagara Casino and Hotel lease term is for21 years and currently requires monthly rent payments of $1.25 million.  Rent payments of $1.0 million per month commencedJuly 1, 2003. Rent payments were increased from $1.0 million to $1.25million per month, effective June 1, 2005. Effective October 1, 2005, the lease payments may increase by 3%annually and each October 1 thereafter over the remaining lease life.

 

6

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Annualincreases must be authorized by the board of directors of SGC and, subject tocompliance with the terms of the Indenture governing the senior notes, mayexceed 3%.  Rent is payable only to theextent that sufficient funds are available, measured on an annual basis, fromthe net proceeds derived from the operation of the casino facility and othercommercial activities related to the operation of the casino.  If on an annual basis sufficient funds arenot available, any shortfall in the rent amount does not accumulate.  Due to the related party nature of thislease, which can be effectively modified by the Nation, the Company records monthlylease expense equal to the payment amount for the respective month.  During the fiscal quarter ended December 31,2005 and 2004, SNFGC made lease payments to the Nation of $3.8 million and $3.0million, respectively.  The leasecontains no renewal options or escalation clauses.

 

STGC leases the land upon which the Seneca Allegany Casino operatesfrom the Nation pursuant to an oral agreement. The monthly lease payment was$1.0 million effective October 1, 2004 and $1.25 million effective March 1,2005.  Effective October 1, 2005,the lease payments may increase by 3% annually and each October 1 thereafterover the remaining lease life.  Annualincreases must be authorized by the board of directors of SGC and, subject tocompliance with the terms of the Indenture governing the senior notes, mayexceed 3%.  During the fiscal quartersended December 31, 2005 and 2004, STGC made lease payments to the Nation of$3.8 million and $3.0 million, respectively. There is no present oral agreement as to renewal options or escalation.

 

**Other Related Party Transactions**

 

Both SNFGC andSTGC have entered into construction management agreements with SenecaConstruction Management Corporation (SCMC) for the construction of the luxuryhotel project at Seneca Niagara Casino and the resort hotel project at SenecaAllegany Casino.  SCMC is wholly owned bythe Nation.  For the quarter ended December 31,2005, SNFGC and STGC have made total payments to SCMC of $37.8 million.

 

As of January 1, 2005, the Company transferred all Class IIoperations to the Nation, including its poker operations.  The Company leases space within both SenecaNiagara Casino and Hotel and Seneca Allegany Casino for operation of thepoker rooms by the Nation.  For thequarter ended December 31, 2005, the Company recorded $0.2 million ofrental income and fees and at December 31, 2005, the Company has recorded$0.5 million as a receivable from the Nation relating to poker room rentals andfees.

 

During the fiscal quartersended December 31, 2005 and 2004, the Company declared and paid dividendsto the Nation of $4.6 million and $0.7 million, respectively.

 

During the quarter ended December 31,2005, the Company distributed real property of $4.7 million for use in itscasino operations to the Nation.  Thedistribution amount of $4.7 million for 2005 is based on the acquisition costs.

 

The Company is charged bythe Nation for SGA costs, which are incurred by the Nation. SGA costs chargedto the Company were approximately $2.4 million in the quarter ended December 31,2005, as compared to $1.9 million in the quarter ended December 31, 2004.  The Company also incurs costs which are passedthrough the Nation for New York State gaming regulatory services and New YorkState Police and Cattaraugus County Sheriff Department services. The Companyhas recorded expenses of approximately $1.8 million in the quarter endedDecember 31, 2005, and $2.1 million in the quarter ended December 31, 2004. AtDecember 31, 2005 and 2004, approximately $10.0 million and $6.4 million,respectively, of the SGA, other regulatory, and police costs were recorded asother current liabilities.

 

7

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SGC incurred legal fees of $22,000primarily for regulatory and compact matters during the quarter ended December 31,2004 from a law firm that specializes in gaming regulatory issues in which theformer President/CEO of SGC was a partner. The former President/CEO did notreceive any remuneration from the law firm during 2004.  The Company ceased using the services of thislaw firm effective November 8, 2004.

 

During the quarters ended December 31,2005 and 2004, the Company purchased $38,000 and $106,000, respectively, oftobacco products from an entity in which the owner is a member of the Council.

 

During the quarter ended December 31,2004, the Company purchased $56,000 of bottled water from an entity which isowned by a member of the Council. As of November 2, 2004, this individual wasno longer a member of the Council.

 

STGC leases office space in a building owned by the brother of a memberof the Company’s board of directors. During the fiscal quarters ended December 31, 2005 and 2004, suchlease payments totaled $0 and $98,000, respectively.  At December 31, 2005, $99,000 in leaseexpense was payable to this individual. Such amount was paid in January 2006.

 

**4.**                                      Commitments and Contingencies

 

**TheSeneca Nation Compact**

 

Under the Compact, the Nation has agreed to contribute to the State ofNew York a portion of the proceeds from the operation and conduct of eachcategory of gaming device for which exclusivity exists, based on the win ofsuch machines (cash dropped into machines, after payouts but before expenses)and totaled on a cumulative quarterly basis to be adjusted annually at the endof the relevant calendar year. The exclusivity fee to the State of New York foryears 1-4 is 18.0% paid on an annual basis. Thereafter, the exclusivity fee is22.0% for years 5-7 on a semi-annual basis and 25.0% for years 8-14 on aquarterly basis.

 

Pursuant to the Compact, amounts due to New York State are payable bythe Nation. In February, 2005, Seneca Niagara Casino and Seneca Allegany casinocommenced monthly payments to the Nation of each entity’s prior month’sexclusivity fees. For the three months ended December 31, 2005 and 2004,total exclusivity fees were $16.6 million and $15.6 million, respectively. Ofthe $16.6 million exclusivity fee for the three months ended December 31,2005, $11.0 million was attributable to SNFGC and $5.6 million was attributableto STGC.

 

**AdditionalCasino Location and Planned Expansion**

 

As described in Note 1, theCompact provides the Nation the exclusive right to conduct Class III gamingactivities at three sites in the western region of the State of New York.  The construction of our third casino site inErie County as well as expansion by SNFGC and STGC will require significantcapital outlays. The amount and timing of these capital expenditures aredependent on various factors including financing availability, certain Nationand governmental approvals, construction timelines, and the performance of itstwo operating casinos.

 

8

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**5.**                                      **Class II Gaming Operations Transfer**

 

Effective January 1, 2005 and at the direction of the Council, theClass II gaming operations at Seneca Niagara Casino and Seneca AlleganyCasino were transferred to the Nation.  Forthe three months ended December 31, 2004, the Company had total revenuesfrom these Class II gaming operations of approximately $3.4 million. Also,equipment with a net book value of $2.5 million was transferred to the Nationon January 1, 2005.  This wasrecorded as a distribution to the Nation in January 2005.

 

**6.****                                     ****Subsequent Events**

 

In January 2006,an action was filed in the United States District Court, Western District ofNew York by various plaintiffs against the United States Department of theInterior, the National Indian Gaming Commission and three individuals in theirofficial capacities as Secretary of the Interior, Acting Assistant Secretary ofthe Interior for Indian Affairs and Chairman of the National Indian GamingCommission.  The action seeks declaratoryand injunctive relief under the Administrative Procedure Act, the DeclaratoryJudgements Act, the National Historic Preservation Act (NHPA), the NationalEnvironmental Policy Act (NEPA) and the Indian Regulatory Gaming Act (IGRA) andis principally directed at the decisions and actions of the defendants thatpermit the construction and operation of our Seneca Buffalo Creek Casino.  The plaintiffs claim that the defendants havefailed to comply with NEPA, NHPA and IGRA and have requested that the Courttake numerous actions including declaring that the lands acquired by the Nationpursuant to the Seneca Nation Land Claims Settlement Act (SNLCSA) are notgaming eligible Indian lands within the meaning of IGRA and declaring that theCompact violates IGRA.  If the plaintiffsare successful, the Nation would be unable to conduct any gaming upon landsacquired pursuant to SNLCSA.

 

On or about February 1, 2006, an action was filed in theNew York Supreme Court, County of Erie by various plaintiffs againstGeorge E. Pataki, in his official capacity as Governor of the State of NewYork; State Gaming Officials of the New York State Wagering Board; City ofBuffalo; Common Council of the City of Buffalo; Anthony Masiello in hisprevious capacity as Mayor of Buffalo; Byron Brown in his capacity as Mayor ofBuffalo; City of Buffalo Department of Public Works; Buffalo Sewer Authority;and Niagara Frontier Transportation Authority. The action seeks directive andinjunctive relief under the State Environmental Quality Review Act (SEQRA); theFirst Parks, Recreation, Historic Preservation Law (PRHPL); First CityEnvironmental Review Ordinance (CERO); and Freedom of Information Law (FOIL)and is principally directed at the decisions and actions of the defendants inconnection with our Seneca Buffalo Creek Casino. The plaintiffs claim that thedefendants have failed to comply with SEQRA, PRHPL, CERO, and FOIL and haverequested that the Court take numerous actions including directing compliancewith SEQRA, PRHPL, CERO and FOIL and restraining further action relating to thedevelopment of our Seneca Buffalo Creek Casino. If the plaintiffs aresuccessful, the Nation may be delayed in the completion of the Seneca BuffaloCreek Casino at this site or may be unable to complete the Seneca Buffalo CreekCasino at this site. Certain of these plaintiffs are also plaintiffs in thefederal lawsuit filed in January 2006 and referenced above.

 

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

** **

You should readthe following discussion and analysis in conjunction with the sections titled “FinancialStatements” and “Notes to Consolidated Financial Statements” included elsewherein this Form 10-Q. References below to years are to fiscal years of SGCunless otherwise noted. SGC’s fiscal year is from October 1 through September 30.

 

**Forward-LookingStatements**

 

When used in this Quarterly Report on Form 10-Q, inother filings with the SEC, in our press releases or in our other public or shareholdercommunications, the words “believe,” “estimate,” “anticipate,” “expect,”“contemplate,” “may,” “will” and similar expressions are intended to identifyforward-looking statements. Statements looking forward in time are included inthis Quarterly 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, including, but not limited to, the risk factors contained orreference herein and in our other reports filed with the SEC pursuant to theSecurities Exchange Act of 1934, as amended, including our 2005 Form 10-K.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. We undertake no obligationto update these forward-looking statements to reflect events or circumstancesoccurring after the date hereof.

 

**Overview**

 

Seneca GamingCorporation is wholly owned by the Seneca Nation of Indians of New York andchartered to manage and direct all of the Nation’s Class III gamingoperations. The Nation entered into a Compact with New York State on August 18,2002 that provides the Nation with the right to establish and operate three Class IIIgaming facilities in Western New York. We opened our first Class IIIgaming facility on Nation Territory in the City of Niagara Falls, New York on December 31,2002, featuring Class III slot machines, table games and keno. This facilityis operated by our wholly owned subsidiary SNFGC. On May 1 2004, we openedour second Class III gaming facility, Seneca Allegany Casino, on theNation’s Territory in the City of Salamanca, New York. This facility features Class IIIslot machines and table games. This facility is operated by our wholly ownedsubsidiary STGC.

 

Underthe Compact, the Nation also has an exclusive right to establish and operate athird Class III gaming facility in Erie County, New York. On October 3,2005, the Nation acquired approximately nine acres of land in the historicwaterfront district of downtown Buffalo. The Company commenced construction of its Erie County gaming facility onthose nine acres on December 8, 2005. The exclusive right, under the Compact, to establish and operate a thirdClass III gaming facility in Erie County may terminate if the Nation orSEGC fails to commence Class III gaming operations in Erie County by December9, 2007.  See “Part II. Item 1. - LegalProceedings” for information regarding litigation related to our Seneca BuffaloCreek Casino.

 

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**Executive Summary**

 

*OurCurrent Operations.*  We currently operate two Class IIIgaming facilities, Seneca Niagara Casino, in the City of Niagara Falls, NewYork, and Seneca Allegany Casino, in the City of Salamanca, New York. Ourcasino operations include gaming, dining, entertainment and retail. For thethree months ended December 31, 2005, approximately 95% of our net revenuewas derived from our gaming activities.

 

*KeyPerformance Indicators.*  Our operating results aredependent on the volume of profitable patrons visiting our casinos, our abilityto attract them for repeat visits, our provision of superior service to ourpatrons and the expansion of and reinvestment in our facilities.

 

*Seneca Niagara Casino.*  SenecaNiagara Casino currently relies primarily on drive-in and bus patrons from theBuffalo, Niagara Falls, and Rochester areas in New York and secondarily fromthe Erie, Pennsylvania area, Ohio and other parts of New York. Since opening onDecember 31, 2002, Seneca Niagara Casino has experienced steady growth inits patron base. With the partial opening of our 604-room hotel and relatedamenities in December 2005 and the expected completion of the hotel andamenities by March 31, 2006, we believe that we will be able to increaseprofitable patron volume and gaming activity, extend our geographic penetrationand appeal to a more diverse demographic base. The luxury hotel expansion includes:

 

•                  604 rooms,including 118 suites of various sizes, with 10 floors officially opened on December 30,2005, and the remaining floors scheduled to open by March 31, 2006;

 

•                  35,000 squarefeet of additional gaming space featuring approximately 950 slot machines and33 table games (12 of which were relocated from the existing gaming areas),which additional gaming space opened on December 15, 2005;

 

**•**                  a full-serviceluxury spa and salon, scheduled to open on March 31, 2006;

 

•                  a 25,200square-foot multi-purpose room and an additional 8,000 square feet ofconference and banquet space, all of which opened on December 31, 2005;

 

•                  two specialtyrestaurants, a 24-hour casual dining restaurant and a deli, with the specialtyrestaurants having opened on December 27, 2005 and January 19, 2006,the casual dining restaurant having opened on December 23, 2005,  and the deli having opened on December 15,2005; and

 

**•**                  approximately2,300 square feet of retail space for three stores, with two stores havingopened on December 15, 2005 and one having opened on December 30, 2005.

 

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*SenecaAllegany Casino.*  Sinceopening on May 1, 2004, Seneca Allegany Casino has experienced steadygrowth in its patron base, net revenue, and profitability. Seneca AlleganyCasino has attracted patrons from the southern portion of Western New York,Erie and Pittsburgh, Pennsylvania, and Ohio. From opening through December 31,2005, approximately 66%, of the casino’s patrons have come from outside of theState of New York.

 

In July 2005,we opened our 1,850-space parking garage and we are constructing a 220-roomhotel and casino at Seneca Allegany Casino. We believe this expansion isnecessary to provide a first-class gaming experience for our patrons and tomaintain the competitive position of the facility in light of expected future casinogaming competition in Pennsylvania. We expect that the total cost of thisexpansion project, including the cost of our recently opened parking garage,will cost between $187.0 and $198.0 million, and we plan to continue to fundthis expansion with cash flows from operations at Seneca Allegany Casino andborrowings from SGC. We are targeting opening the entire public area space and thefirst few floors of this hotel by October 22, 2006.  This target date may be extended based onvarious factors, including cost, which we are currently evaluating.  We continue to plan to open the remaininghotel floors by December 31, 2006.

 

**Seneca Buffalo Creek Casino**

 

In addition toSeneca Niagara Casino and Seneca Allegany Casino, the Nation has the exclusiveright to construct our third Class III gaming facility in Erie County, NewYork. This new Class III gaming facility, which we refer to as SenecaBuffalo Creek Casino, is expected to cater primarily to the local market inBuffalo and its suburbs. On October 3, 2005 the Nation acquiredapproximately nine acres of land in the historic waterfront district ofdowntown Buffalo.  We commencedconstruction of our Erie County gaming facility on those nine acres,constituting the Nation’s Buffalo Creek Territory, on December 8,2005.  Buffalo Creek Casino is expectedto initially feature:

 

•           1,900 to 2,200 slotmachines;

 

•           30 to 50 table games;

 

•           a specialty restaurant;

 

•           a 24-hour casual diningrestaurant;

 

•           a nightclub;

 

•           retail stores; and

 

•           a 2,500-space parkinggarage.

 

The Nation’sexclusive right under the Compact with New York State to establish and operatea Class III gaming facility in Erie County, New York, could have terminatedif the Nation had failed to commence construction of a Class III gamingfacility in Erie County by December 9, 2005 (and we note that we commencedconstruction on December 8, 2005) and

 

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may terminate if the Nation fails to commenceClass III gaming operations in Erie County by December 9, 2007. Weexpect to open the Buffalo Creek Casino by the December 9, 2007deadline.  The timing of the opening ofSeneca Buffalo Creek Casino will depend on various factors, including existing legalchallenges by various plaintiffs.  See”Part II.Item 1. Legal Proceedings.”  In the eventthat we are able to open a casino in Erie County, this casino will be owned andoperated by SEGC. We intend to operate Seneca Buffalo Creek Casino in a mannerthat will complement both Seneca Niagara Casino and Seneca Allegany Casino.

 

*Current,Continued and Future Reliance on Cash Flow*. * *We intend to fund themaintenance of our facilities and our planned future expansion projects from ourcash flow and cash on hand. We currently rely and will continue to rely on ourability to generate cash flow from operations to repay our debt financing.

 

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

 

*OverallOutlook.*  As discussed in more detail above, sinceinception, we have invested heavily in our operations and plan to continue todo so during the remainder of fiscal 2006.  We believe that investments in additionalgaming space and non-gaming amenities at our facilities and our exclusiveability to offer Class III gaming in Western New York, will enable us tocapitalize on what we believe is an underserved market in Western New York,Pennsylvania and parts of Ohio.

 

**Critical Accounting Policies and Estimates**

** **

There have been nochanges in critical accounting policies and estimates since the filing of our 2005 Form 10-K for the year ended September 30,2005.

 

**Operating Results - Three Months Ended December 31,2005 Compared to the Three Months Ended December 31, 2004**

** **

*Operating Results*

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(unaudited, dollars in  thousands)**    | ** ** |
| Net Revenue                             |       | $                                         | 108,916    |   | $ | 107,876 |   |
| Operating expenses:                     |       |                                      |       |   |   |
| Gaming                                  |       | 28,040                                    |       | 28,627 |   |
| Food and beverage                       |       | 8,810                                     |       | 8,691 |   |
| Retail, entertainment and other         |       | 3,012                                     |       | 2,881 |   |
| Advertising, general and administrative |       | 31,420                                    |       | 29,231 |   |
| Pre-opening costs                       |       | 3,056                                     |       | 63 |   |
| Depreciation and amortization           |       | 7,071                                     |       | 6,367 |   |
| Operating income                        |       | $                                         | 27,507     |   | $ | 32,016 |   |

 

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The most importantfactors and trends contributing to our operating performance during the threemonths ended December 31, 2005 and 2004 were:

 

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

 

•                  Ourability to enroll approximately 1.0 million patrons in our cross-propertySeneca Link Player’s Card program, which has increased our ability to useeffective direct mail and targeted marketing programs to establish patronloyalty to the Seneca brand at a profitable level.

 

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

 

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

 

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

 

•                  Ourcontinued expansion at and reinvestment in both of our properties, most notablyour progress with the luxury hotel expansion project at Seneca Niagara Casinoand the resort hotel expansion project at Seneca Allegany Casino.

 

*DetailedRevenue Information*

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(unaudited, dollars in  thousands)**    | ** ** |
| Gaming revenue:                         |       |                                      |       |   |   |
| Slots                                   |       | $                                         | 94,687     |   | $ | 84,213 |   |
| Table games                             |       | 15,244                                    |       | 16,514 |   |
| Other                                   |       | 108                                       |       | 3,564 |   |
| Gaming revenue                          |       | 110,039                                   |       | 104,291 |   |
| Non-gaming revenue:                     |       |                                      |       |   |   |
| Food and beverage                       |       | 9,786                                     |       | 9,676 |   |
| Retail, entertainment and other         |       | 4,722                                     |       | 4,234 |   |
| Non-gaming revenue                      |       | 14,508                                    |       | 13,910 |   |
| Less promotional allowances and credits |       | (15,631                                   | )          | (10,325 | ) |
| Net revenue                             |       | $                                         | 108,916    |   | $ | 107,876 |   |

 

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Our gaming revenue for the three months ended December 31, 2005increased relative to the comparable period last year due to the opening of theadditional gaming space at Seneca Niagara Casino on December 15, 2005,which added approximately 950 slot machines and 21 table games to ouroperations, the addition of 69 slot machines at Seneca Allegany Casino andcontinued growth in our patron base. As of December 31, 2005, our casinoshad an aggregate of 124 table games and 6,227 slot machines available toour patrons, representing a net increase of 2 table games and a net increase of1,100 slot machines from December 31, 2004. During these periods, thenumber of patrons enrolled in our Seneca Link Player’s Card program hassteadily increased. As of December 31, 2005, we had over 1.0 millionpatrons enrolled, an increase of over 300,000 patrons over the number of enrolled members at December 31, 2004.

 

Our net gamingrevenue, net of promotional credits of $6.5 million and $2.4 million in thequarters ended December 31, 2005 and 2004, respectively, increased $1.6 million,or 2%, for the three months ended December 31, 2005 relative to thecomparable period ended December 31, 2004. Net gaming revenue for thequarter ended December 31, 2004 included $3.4 million in Class IIgaming revenue. These Class II gaming operations were transferred to the Nationon January 1, 2005.  During the threemonths ended December 31, 2005, Seneca Niagara Casino net gaming revenue decreased$1.6 million, or 2%. This decrease reflects $1.4 million of Class IIpoker revenue in the prior year, that did not occur in the current year.  Seneca Allegany Casino’s net gaming revenuefor the quarter ended December 31, 2005 was $34.0 million, an increase of$3.3 million or 11% from the quarter ended December 31, 2004.  This increase was mainly due to a $4.9million increase in net slot revenue, partially offset by a reduction of $1.9million in Class II gaming revenue in 2004 which did not occur in 2005,and a $0.3 million increase in table games revenue.

 

Our food andbeverage revenue and retail revenue have increased in direct relation to ourincrease in gaming revenue. There is a direct relation between our food andbeverage revenue and retail revenue to our gaming revenue because a significantportion of this revenue is from players’ point redemptions. For the three monthsended December 31, 2005 and 2004, 61% and 53%, respectively, of our foodand beverage revenue and 88% and 87% of our retail revenue, respectively,represented players’ point redemptions. For the three months ended December 31,2005, food and beverage revenue increased $0.1 million, or 1% to $9.8 million.For the three months ended December 31, 2005 Seneca Allegany Casinogenerated an additional $0.4 million in food and beverage revenue compared tothe prior period, primarily due to increased utilization of players’ points during2005. Seneca Niagara Casino’s food and beverage revenue for the quarter ended December 31,2005 decreased $0.3 million in relation to the comparable prior year period, mainlydue to the October 2005 closure of one of its restaurants, which wasreplaced by an upscale nightclub in mid-December 2005.

 

For the threemonths ended December 31, 2005, our retail, entertainment and otherrevenue increased by $0.5 million in relation to the comparable 2004period. This increase was primarily attributable to higher revenue at ourSeneca Allegany Casino of $0.5 million, due to increased utilization of players’points during 2005.

 

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*Detailed Operating Expenses Information*

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(unaudited, dollars in  thousands)**    | ** ** |
| Operating expenses:                     |       |                                      |       |   |   |
| Gaming                                  |       | $                                         | 28,040     |   | $ | 28,627 |   |
| Food and beverage                       |       | 8,810                                     |       | 8,691 |   |
| Retail, entertainment and other         |       | 3,012                                     |       | 2,882 |   |
| Advertising, general and administrative |       | 31,420                                    |       | 29,230 |   |
| Pre-opening costs                       |       | 3,056                                     |       | 63 |   |
| Depreciation and amortization           |       | 7,071                                     |       | 6,367 |   |
| Operating expenses                      |       | $                                         | 81,409     |   | $ | 75,860 |   |

 

Gaming expensesprincipally consist of costs incurred from operating our table games and slotmachines, of which the primary components are related payroll and employeebenefit costs, and the slot exclusivity fee due to New York State pursuant tothe Compact. The slot exclusivity fee increased by $1.0 million from $15.6 millionfor the three months ended December 31, 2004 to $16.6 million for thethree months ended December 31, 2005. This increase was offset by a $1.2 million decrease in promotionalexpenses, along with a $0.4 million decrease in payroll and benefits costs.

 

Currently, theexclusivity fee is 18% of the slot machine net drop (money dropped into themachines after payout but before our expenses). This fee will increase to 22%on January 1, 2007 and to 25% on January 1, 2010.

 

Food and beverage expensesare costs we incur for the operation of our restaurants, snack bars andbeverage outlets. The primary components of these expenses are the cost of foodand beverages and related payroll and employee benefit expenses.

 

Retail,entertainment and other expenses represent our costs to operate our retailshops and entertainment offerings. The components of these expenses includerelated payroll and employee benefit costs, the purchase of products offeredfor sale in our retail outlets, and contract costs for entertainers. For thethree months ended December 31, 2005 in relation to the same period in2004, these costs increased approximately $0.1 million, or 5%, due mainly tohigher retail revenues in the current year.

 

Advertising,general and administrative expenses are incurred to support our operations.These expenses consist primarily of related payroll and employee benefitscosts, regulatory, advertising, rent, marketing, insurance, legal and energycosts. For the three months ended December 31, 2005 and 2004, such costswere $31.4 million and $29.2 million, a $2.2 million increase, or 8%.  This was mainly attributable to a $1.7million increase in the head lease expense with the Nation for both casinos inrelation to the same period in 2004, along with a $0.3 million increase in insurancecosts in the three months ended December 31, 2005 over the same period in2004.

 

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*Non-Operating Expenses*

 

The followingtable summarizes information related to interest on our long-term debt:

 
| ** **       | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **       | ** ** | **(unaudited, dollars in  thousands)**    | ** ** |
| Interest expense |       | $                                         | 7,749      |   | $ | 11,956 |   |
|                  |            |                                           |            |  |  |  |  |

 

Our interest costfor the three months ended December 31, 2005 decreased $4.2 million overthe three months ended December 31, 2004. This decrease was primarily attributableto the payment infull and termination of SNFGC’s Term Loanin May 2005, partially offset by additional interest relating to the $200million in 2005 senior notes issued in May 2005.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 
| ** **                                      | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(unaudited, dollars in  thousands)**    | ** ** |
| Net cash provided by operations                 |       | $                                         | 20,255     |   | $ | 35,522 |   |
|                                            |       |                                      |       |   |   |
| Cash flows relating to investing activities:    |       |                                      |       |   |   |
| Capital expenditures                            |       | (58,700                                   | )          | (47,812 | ) |
| Payments for land acquisitions and other assets |       | (12,663                                   | )          | (198 | ) |
| Payment to collateralize letter of credit       |       | (34,055                                   | )          | — |   |
| Purchase of investments                         |       | (1,909                                    | )          | (33,906 | ) |
| Net cash used in investing activities           |       | (107,327                                  | )          | (81,916 | ) |
|                                            |       |                                      |       |   |   |
| Cash flows relating to financing activities:    |       |                                      |       |   |   |
| Payments to sinking fund, net                   |       | —                                    |       | (11,973 | ) |
| Repayment of long-term debt                     |       | —                                    |       | (138 | ) |
| Payment of deferred financing costs             |       | (345                                      | )          | (95 | ) |
| Dividends paid to the Nation                    |       | (4,585                                    | )          | (655 | ) |
| Net cash used in financing activities           |       | (4,930                                    | )          | (12,861 | ) |
|                                            |       |                                      |       |   |   |
| Net decrease in cash and cash equivalents       |       | $                                         | (92,002    | ) | $ | (59,255 | ) |

 

*CashFlows—Operating Activities.*  The decrease in cashflows from operations during the three months ended December 31, 2005compared to the same period in 2004 resulted principally from the change inpayment frequency regarding state exclusivity fees. In January 2005, theCompany paid exclusivity fees related to the entire 2004 calendar year.  Subsequent to that payment, the Company beganpaying exclusivity fees on a monthly basis for the prior month’s fees due.  Exclusivity fees for the quarter ended December 31,2004 (paid in 2005) were $15.6 million.

 

*CashFlows—Investing Activities.*  Our capitalexpenditures of $58.7 million during the three months ended December 31,2005 were mainly comprised of $50.8 million of costs associated with theconstruction and equipping of the Seneca Niagara Casino luxury hotel and

 

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$1.7 million relatedto the construction of the Seneca Allegany Casino garage and hotel.  The remaining capital expenditures wereprincipally for the acquisition of equipment for the existing casinooperations, the cogeneration plant and the nightclub at Seneca Niagara Casino.Purchases of investments represent short-term investments of excess cash ininstruments having a maturity of more than 90 days.

 

We intend toacquire the remaining approximately 24 acres of the approximately 50 acres inthe City of Niagara Falls, New York, designated by New York State under theCompact for ownership by the Nation. Under the Compact, the Nation is requiredto fund the acquisition of this property, including all related costs andexpenses. As initial security for the Nation’s obligations to pay siteacquisition costs and in furtherance of the ongoing condemnation proceeding,the Nation was required to deliver, and has delivered, to the Empire StateDevelopment Corporation, or ESDC, a letter of credit in the amount of $33.5million representing 150% of the then estimate of the total remaining siteacquisition costs not yet paid by the Nation. If the estimate of such site acquisition costs increases or if certainother events occur, the Nation may have to provide an additional letter ofcredit or replace the existing one with one for a larger monetary amount or, ifacceptable to the ESDC, provide a supplemental cash escrow amount.  This outstanding letter of credit is 100%collateralized by a cash deposit in an interest-bearing restricted account witha bank.

 

*Cash Flows—Financing Activities. *     Duringthe quarter ended December 31, 2004, the Company paid $12.0 million into asinking fund related to the the Term Loan. In May 2005, the Term Loan was terminated and the sinking fundbalance (including accumulated earnings) was transferred to cash and short-terminvestments.

 

*PrincipalDebt Arrangements.*  As of December 31, 2005,our long-term debt consists of $300.0 million in 2004 senior notes and $200.0million in 2005 senior notes. We pay a fixed interest rate of 71⁄4% annually onboth the 2004 and 2005 senior notes.

 

During the next24 months, we plan to make substantial capital improvements to our gamingfacilities. In December 2005, at Seneca Niagara Casino we had a partialopening of a new 604-room luxury hotel, including 35,000 square feet ofadditional gaming space with approximately 950 slot machines and several new restaurantsand retail stores. We expect the total cost to construct and equip the luxuryhotel to be approximately $235.0 to $240.0 million.  We also expect the luxury hotel to becompleted by March 31, 2006.

 

We haveconstructed a 1,850 space-parking garage and are constructing a 220-room hotel andcasino at our Seneca Allegany Casino. We estimate the total cost to completethis project to be between $187.0 million and $198.0 million. Thegarage opened on July 1, 2005.  We aretargeting opening all public areas and the first few floors of this hotel by October 22,2006.  This target date may be extended basedon various factors, including cost, which we are currently evaluating.   Wecontinue to plan to complete the project by December 31, 2006.

 

On May 23, 2005, SGC issued an additional $200.0 million in 71⁄4%senior notes due 2012, Series B, or the 2005 senior notes. The 2005 seniornotes are treated as a single class with the 2004 senior notes and areidentical to the 2004 senior notes, except for certain tax attributes and priorto November 1, 2005 the amount of interest accrued thereon.  Gross proceeds on the

 

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2005senior notes were approximately $193.0 million. Such proceeds were, or will be,used to (a) pay in full and terminate on May 23, 2005, the seniorsecured term loan, or the Term Loan, made by Freemantle Limited, or Freemantle,to SNFGC in November 2002, for a negotiated amount of approximately $126.7million, representing $80.0 million in outstanding principal and approximately$46.7 million for interest on such principal, at a prescribed interest rate,that would have otherwise been payable if the Term Loan had not been paid on May 23,2005, but was instead paid 81⁄2 months prior to its November 22, 2007 statedmaturity (resulting in a reduction of future interest payments that would haveotherwise been payable under the Term Loan if it had not been paid in full, byapproximately $18.0 million), (b) to fund certain costs associated withthe expansion of our operations, (c) to pay the fees and expensesassociated with the offering of the 2005 senior notes and (d) for generalcorporate purposes.  Interest on the 2004and 2005 senior notes is payable semi-annually on November 1 and May 1.The 2004 and 2005 senior notes are unsecured and rank equally. As of December 31,2005, aggregate accrued interest on the 2004 and 2005 senior notes was $6.0 million.

 

We expect cashgenerated from our operations, available cash and cash equivalents andshort-term investments as of December 31, 2005 to be sufficient to fundour expansion plans described above, service our debt, and meet our workingcapital requirements for the near future. However, our ability to fund our operations, make planned capitalexpenditures and service our debt depends on our future operating performanceand cash flow, which are in turn subject to prevailing economic conditions andto financial, business and other factors, some of which are beyond our control.Additionally, unlike traditional corporations, we are prohibited by law fromgenerating cash through an offering of equity securities. Also, our ability toincur additional indebtedness is limited under the terms of the indenturegoverning the 2004 and 2005 senior notes.

 

We are highlyleveraged and have significant interest payment requirements on our 2004 and2005 senior notes. As such, limitations on our capital resources could force usto delay or abandon capital projects as well as the construction anddevelopment of new properties.

 

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

** **

Reference is madeto our 2005 Form 10-K for a complete discussion of the Company’s marketrisk. This market risk information has not materially changed in the interimperiod.

 

**Regulation**

 

Our operations areregulated by Nation laws, the Compact and federal statutes, most notably theIndian Gaming Regulatory Act, or IGRA. Several bills have been proposed duringthe current and recent sessions of U.S. Congress that could affect Indiangaming. Notably, though its proposed legislation has yet to be presented toCongress, the Policies and Procedures Subproject of the Bureau of IndianAffairs has proposed sweeping changes to the federal laws concerning Indians.Certain of such bills, if enacted, could impair the ability of the Nation andSGC to expand its gaming operations and adversely impact the future growth ofthe Nation’s revenue base. In addition, from time to time, various governmentofficials have proposed taxing Indian casino gaming or otherwise limiting orrestricting the conduct of gaming operations by

 

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Indian tribes. Noassurance can be given that such legislation, if and when enacted by Congress,would not have a material adverse effect on the operations of SGC.  Senator John McCain, Chairman of the SenateIndian Committee, has held a couple of hearings regarding possible amendmentsto IGRA. As it relates particularly to off-reservation gaming, there have beenseveral Congressional hearings held by both the Seneca Indian Affairs Committeeand the House Resources Committee.  HouseResources Committee Chairman Richard Pombo has circulated a draft bill, whichhas not been introduced, to amend the IGRA to restrict off-reservation gamingactivities by tribes. On November 18, 2005, Senator McCain introduced S.2078, the Indian Gaming Regulatory Act Amendments of 2005.  S. 2078 makes a number of amendments to IGRA,including: (1) expanding the authority of the National Indian GamingCommission (“NIGC”) over “gaming-related contracts”, (2) authorizing theNIGC to regulate Class III gaming, (3) limiting the lands eligiblefor gaming, and (4) making a number of technical amendments to IGRA.  The Senate Committee on Indian Affairs hasheld one hearing on S. 2078, and it is expected that it will hold a series ofhearings in connection with S. 2078.  IfCongress were to enact comprehensive amendments to IGRA, such legislation couldhave a material adverse effect on the operations of SGC. In addition, underfederal 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 rule similarly), or otherwiseto take a legal position adverse to the Compact or any of its provisions, suchactions could have a material adverse effect on the ability of our casinos toconduct their gaming operations as currently conducted. Moreover, a 1996 U.S.Supreme Court decision may permit a state to avoid or refuse to negotiate amendmentsto existing compacts such as the Compact.

 

**New Accounting Pronouncements**

** **

There are noaccounting standards that have not yet been adopted which are expected to havea material impact on our financial reporting.

 

**Item4. Controls and Procedures**

** **

**Evaluation of Disclosure Controlsand Procedures**

 

We maintaindisclosure controls and procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act)that are designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including our Presidentand Chief Executive Officer and Senior Vice President of Finance andAdministration, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, have inherent limitations due to cost issues, thepossibility of human error, judgments and assumptions regarding the likelihoodof future events, and the circumvention and overriding of the controls andprocedures. Accordingly, even effective disclosure of controls and procedurescan provide only reasonable assurance of achieving the desired controlobjectives.

 

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The Company’smanagement, under the supervision and with participation of our President and ChiefExecutive Officer and Senior Vice President of Finance and Administration (asour principal executive officer and principal financial officer, respectively),has evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on that evaluation, our President and ChiefExecutive Officer and Senior Vice President of Finance and Administration have concludedthat the design and operation of our disclosure controls and procedures as of December 31,2005 provided reasonable assurance that the disclosure controls and proceduresare effective to accomplish their objectives.

 

**Changes in Internal Control over Financial Reporting**

 

There has not beenany change in our internal control over financial reporting identified inconnection with the evaluation required by Exchange Act Rules 13a-15 or15d-15 or otherwise that occurred during the quarter ended December 31,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Part II.  OTHER INFORMATION**

 

**Item 1.**                                                           LegalProceedings

** **

Material developments in the quarter ended December 31, 2005regarding legal proceedings previously reported and two new legal proceedingsarising in the current quarter have been previously reported in our annualreport on Form 10-K for the fiscal year ended September 30, 2005 andAmendment No. 4 to our registration statement on Form S-4 filed withthe Securities and Exchange Commission on February 3, 2006.

 

**Item1A.**  Risk Factors

 

There are nomaterial changes from the risk factors previously disclosed in our AnnualReport on Form 10-K for the fiscal year ended September 30, 2005except as disclosed in our Amendment No. 4 to Form S-4 RegistrationStatement filed with the Securities and Exchange Commission on February 3,2006.

 

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

** **

Not applicable.

 

**Item 3.**                                                           DefaultsUpon Senior Securities

** **

Not applicable.

 

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

** **

Not applicable.

 

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**Item 5.**                                                           OtherInformation

** **

Not applicable.

 

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

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

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1+            |       | Amendment No. 1  to Employment Agreement, dated as of October 1, 2005, between Seneca  Gaming Corporation and Barry W. Brandon (incorporated by reference to Exhibit 10.20  to SGC’s Amendment No. 1 to Registration Statement on Form S-4  filed with the SEC on November 30, 2005).                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2+            |       | Amendment No. 1  to Second Amended and Restated Employment Agreement, dated as of January 30,  2006, between Seneca Gaming Corporation and John Pasqualoni (incorporated by  reference to Exhibit 10.23 to SGC’s Amendment No. 3 to Registration  Statement on Form S-4 filed with the SEC on February 2, 2006).                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3             |       | Construction  Management Agreement, entered into January 12, 2006 and effective as of September 1,  2005, between Seneca Niagara Falls Gaming Corporation, as Owner, and Seneca  Construction Management Corporation, as Construction Manager (incorporated by  reference to Exhibit 10.21 to SGC Amendment No. 2 to Registration  Statement on Form S-4 filed with the SEC on January 17, 2006). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4             |       | First Amendment  to Construction Management Agreement, dated as of January 12, 2006, by  and between Seneca Construction Management Corporation, as Construction  Manager, and Seneca Territory Gaming Corporation, as Owner (incorporated by  reference to Exhibit 10.22 to SGC Amendment No. 2 to Registration  Statement on Form S-4 filed with the SEC on January 17, 2006).                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1             |       | Certification of John Pasqualoni, Principal Executive  Officer, pursuant to Rule 13a-14 and  15d-14 of the Securities Exchange Act of 1934 (filed herewith).                                                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2             |       | Certification of Joseph A. D’Amato, Principal Financial Officer,  pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of  1934 (filed herewith).                                                                                                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1             |       | Certification of John Pasqualoni, Principal Executive Officer and  Joseph A. D’Amato, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350,  as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith).                                                                                                                                                                           |

 

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**SIGNATURES**

** **

**SENECA GAMING CORPORATION**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

DatedFebruary 14, 2006

 

 
| /s/ John  Pasqualoni                               |   |
|----------------------------------------------------|--------|
| John Pasqualoni                                    |
| President and  Chief Executive Officer             |
| (Principal  Executive Officer)                     |
|                                               |
| /s/ Joseph A. D’Amato                         |   |
| Joseph A. D’Amato                             |
| Senior Vice  President, Finance and Administration |
| (Principal  Financial and Accounting Officer)      |

 

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