**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****          ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

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

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**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 Street**

**Niagara Falls, New York (Seneca NationTerritory) 14303**

**(716) 299-1100**

(Address, including zip code, andtelephone number,

including area code, ofregistrant’s principal executive offices)

 

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

 

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

 

AtMay 1, 2005, the registrant had no outstanding shares of common stock. Theregistrant is wholly-owned by the Seneca Nation of Indians, or Nation.

 

 

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**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                        | 1  |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------|----|
| Item 1.           | Financial Statements                                                                                                             | 1  |
|              | Condensed Consolidated Balance Sheets as of  March 31, 2005 (Unaudited) and September 30, 2004                         | 1  |
|              | Condensed Consolidated Statements of Income  for the three months and six months ended March 31, 2005 and 2004  (Unaudited) | 2  |
|              | Condensed Consolidated Statements of Cash  Flows for the six months ended March 31, 2005 and 2004 (Unaudited)               | 3  |
|              | Notes to Condensed Consolidated Financial  Statements                                                                            | 4  |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                      | 16 |
| Item 3.           | Quantitative and Qualitative Disclosures  About Market Risk                                                                      | 28 |
| Item 4.           | Controls and Procedures                                                                                                          | 28 |
|              |                                                                                                                             |
| **PART II.** | **OTHER INFORMATION**                                                                                                            | 30 |
| Item 1.           | Legal Proceedings                                                                                                                | 30 |
| Item 2.           | Changes in Securities and Use of Proceeds                                                                                        | 30 |
| Item 3.           | Defaults upon Senior Securities                                                                                                  | 30 |
| Item 4.           | Submission of Matter to a Vote of Security  Holders                                                                              | 30 |
| Item 5.           | Other Information                                                                                                                | 30 |
| Item 6.           | Exhibits and Reports of Form 8-K                                                                                            | 32 |
|              | Signatures                                                                                                                       | 33 |

** **

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**PART I.****FINANCIALINFORMATION**

 

**Item I.****             FinancialStatements**

 

**SENECA GAMING CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                        | ** ** | **March 31,  2005**   | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
| **Assets**                        |       |                       |       |                         |       |
| Cash and cash equivalents         |       | $                          | 69,801     |                         | $          | 211,595 |   |
| Short-term investments            |       | 111,822                    |       | 57,963                       |       |
| Receivables                       |       | 1,515                      |       | 1,348                        |       |
| Inventories                       |       | 2,363                      |       | 2,123                        |       |
| Other current assets              |       | 4,810                      |       | 3,171                        |       |
| Total current assets              |       | 190,311                    |       | 276,200                      |       |
|                              |       |                       |       |                         |       |
| Property and equipment, net       |       | 343,431                    |       | 282,797                      |       |
| Other long-term assets            |       | 42,740                     |       | 25,059                       |       |
| Total assets                      |       | $                          | 576,482    |                         | $          | 584,056 |   |
|                              |       |                       |       |                         |       |
| **Liabilities and capital**       | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Liabilities:                      |       |                       |       |                         |       |
| Current portion of long-term debt |       | $                          | 47         |                         | $          | 325 |   |
| Trade payables                    |       | 1,434                      |       | 3,415                        |       |
| Construction payables             |       | 18,786                     |       | 28,807                       |       |
| Dividends payable – Nation   |       | —                     |       | 655                          |       |
| Exclusivity fees                  |       | 5,949                      |       | 41,549                       |       |
| Accrued interest                  |       | 11,246                     |       | 10,866                       |       |
| Other current liabilities         |       | 32,530                     |       | 31,752                       |       |
| Total current liabilities         |       | 69,992                     |       | 117,369                      |       |
|                              |       |                       |       |                         |       |
| Long-term debt                    |       | 380,000                    |       | 380,000                      |       |
| Total liabilities                 |       | 449,992                    |       | 497,369                      |       |
|                              |       |                       |       |                         |       |
| Capital:                          | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| Retained earnings                 |       | 126,490                    |       | 86,687                       |       |
| Total liabilities and capital     |       | $                          | 576,482    |                         | $          | 584,056 |   |

* *

*See accompanying notes.*

 

1

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**SENECA GAMING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**             | ** ** |
| **Revenues**                            |       |                                   |       |                                 |       |   |   |   |   |
| Gaming                                  |       | $                                      | 103,495    |                                 | $          | 74,096 |   | $ | 207,786 |   | $ | 141,954 |   |
| Food and beverage                       |       | 9,873                                  |       | 6,394                                |       | 19,550 |   | 12,466 |   |
| Retail, entertainment and other         |       | 4,049                                  |       | 2,493                                |       | 8,283 |   | 5,120 |   |
| Less promotional allowances             |       | (11,136                                | )          | (4,632                               | )          | (21,462 | ) | (9,455 | ) |
| Net revenues                            |       | 106,281                                |       | 78,351                               |       | 214,157 |   | 150,085 |   |
|                                    |       |                                   |       |                                 |       |   |   |   |   |
| **Expenses**                            |       |                                   |       |                                 |       |   |   |   |   |
| Gaming                                  |       | 27,925                                 |       | 20,168                               |       | 56,552 |   | 38,950 |   |
| Food and beverage                       |       | 8,346                                  |       | 5,356                                |       | 17,037 |   | 10,445 |   |
| Retail, entertainment and other         |       | 2,311                                  |       | 1,454                                |       | 5,192 |   | 3,078 |   |
| Advertising, general and administrative |       | 29,637                                 |       | 18,547                               |       | 58,867 |   | 37,268 |   |
| Pre-opening costs                       |       | 119                                    |       | 925                                  |       | 183 |   | 1,027 |   |
| Depreciation and amortization           |       | 6,469                                  |       | 3,343                                |       | 12,836 |   | 6,501 |   |
| Total operating expenses                |       | 74,807                                 |       | 49,793                               |       | 150,667 |   | 97,269 |   |
|                                    |       |                                   |       |                                 |       |   |   |   |   |
| Operating income                        |       | 31,474                                 |       | 28,558                               |       | 63,490 |   | 52,816 |   |
| Interest income                         |       | 1,009                                  |       | 230                                  |       | 2,012 |   | 268 |   |
| Interest expense                        |       | (10,849                                | )          | (5,104                               | )          | (22,805 | ) | (10,289 | ) |
|                                    |       |                                   |       |                                 |       |   |   |   |   |
| Net Income                              |       | $                                      | 21,634     |                                 | $          | 23,684 |   | $ | 42,697 |   | $ | 42,795 |   |

* *

*See accompanying notes.*

 

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**SENECA GAMING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(dollars in thousands)**           | ** ** |
| **Cash flows from operating activities**                                           |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 42,697     |   | $ | 42,795 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 12,836                               |       | 6,501 |   |
| Amortization of deferred financing costs                                           |       | 1,264                                |       | 615 |   |
| Provision for bad debts                                                            |       | 54                                   |       | 55 |   |
| Loss on disposal of assets                                                         |       | 11                                   |       | — |   |
| Fair market value adjustment of interest  rate cap                                 |       | (256                                 | )          | — |   |
| Changes in operating assets and  liabilities:                                      |       |                                 |       |   |   |
| Other current assets                                                               |       | (2,074                               | )          | 741 |   |
| Long-term assets                                                                   |       | 40                                   |       | — |   |
| Current liabilities                                                                |       | (36,429                              | )          | (14,006 | ) |
| Due to Nation                                                                      |       | 6                                    |       | — |   |
| Net cash provided by operating activities                                          |       | $                                    | 18,149     |   | $ | 36,701 |   |
| **Cash flows from investing activities**                                           |       |                                 |       |   |   |
| Purchases of property and equipment                                                |       | (85,984                              | )          | (51,983 | ) |
| Payments for land acquisitions                                                     |       | (580                                 | )          | (5,093 | ) |
| Purchase of investments                                                            |       | (53,859                              | )          | — |   |
| Net cash used in investing activities                                              |       | (140,423                             | )          | (57,076 | ) |
| **Cash flows from financing activities**                                           |       |                                 |       |   |   |
| Payments to sinking fund                                                           |       | (17,631                              | )          | (6,008 | ) |
| Proceeds from notes payable                                                        |       | —                               |       | 1,128 |   |
| Repayments of notes payable                                                        |       | (278                                 | )          | (6,626 | ) |
| Payment of deferred financing costs                                                |       | (519                                 | )          | (487 | ) |
| Dividends paid to the Nation                                                       |       | (1,092                               | )          | (434 | ) |
| Net cash used in financing activities                                              |       | (19,520                              | )          | (12,427 | ) |
| Decrease in cash and cash equivalents                                              |       | (141,794                             | )          | (32,802 | ) |
| Cash and cash equivalents at beginning of  the period                              |       | 211,595                              |       | 59,628 |   |
| Cash and cash equivalents at end of the  period                                    |       | $                                    | 69,801     |   | $ | 26,826 |   |

* *

*See accompanying notes.*

 

3

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**SENECA GAMING CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.**             Organizationand 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 and six months ended March 31, 2005 are notnecessarily indicative of the results that may be expected for the year ended September 30,2005. For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-Kfor the fiscal year ended September 30, 2004 or 2004 Form 10-K.

 

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 dated April 12, 2002, or the Compact,which has been approved by the Federal Bureau of Indian Affairs, Department ofthe Interior. 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.

 

The Nation’s Constitution established the Tribal Council or, theCouncil, to act as the Nation’s legislative authority. The Council acts on theNation’s behalf with respect to SGC, and the Council established the SenecaGaming Authority, or SGA, to regulate the gaming activities of SGC under theCompact.

 

The Council, at the request of the SGC Board of Directors, charteredthree subsidiary corporations of SGC to operate the three sites authorized bythe Compact. In addition, the SGC Board of Directors hired the executivemanagement of SGC, including the President/Chief Executive Officer, to oversee,develop, and manage the three sites. The subsidiary corporations are asfollows:

 

•      SenecaNiagara Falls Gaming Corporation, or SNFGC

•      SenecaTerritory Gaming Corporation, or STGC

•      SenecaErie Gaming Corporation, or SEGC

 

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SNFGC wasformed 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.

 

STGC wasformed on September 20, 2003 to operate the Nation’s gaming activities inSalamanca, New York on its territorial land. From its formation until the May 1,2004 opening of the STGC’s casino in Salamanca, or the Seneca Allegany Casino,STGC dedicated its efforts to the construction and equipping of the Seneca AlleganyCasino, hiring and training staff, and obtaining regulatory approvals.

 

SEGC was formed on August 9, 2003 to operate the Nation’s gamingactivities in Erie County, New York and has selected a site for this facilitynear the Buffalo-Niagara International Airport in Cheektowaga, New York. Thepurchase of this site is currently subject to litigation and SEGC isconsidering alternative sites. The exclusive right, under the Compact, for thethird site may terminate if the Nation or SEGC fails to commence constructionof a Class III gaming facility in Erie County, New York by December 9,2005, or if the Nation or SEGC fails to commence Class III gamingoperations by December 9, 2007.

 

**2.**             Long-TermDebt

** **

Long-term debt, as described below, consists of the following:

 
| ** **                                | ** ** | **March 31,  2004** | ** ** | **September 30,  2004** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **(In thousands)**       | ** ** |
| ** **                                | ** ** | ** **               | ** ** |
| 71/4% senior notes                        |       | $                        | 300,000    |                         | $          | 300,000 |   |
| Term Loan                                 |       | 80,000                   |       | 80,000                       |       |
| Other                                     |       | 47                       |       | 325                          |       |
|                                      |       | 380,047                  |       | 380,325                      |       |
| Less current maturities of long-term debt |       | 47                       |       | 325                          |       |
| Long-term debt                            |       | $                        | 380,000    |                         | $          | 380,000 |   |

 

**2004 7 1/4%Senior Notes**

 

On May 5, 2004, SGC issued $300.0 million in senior noteswith fixed interest payable at a rate of 71⁄4% per annum due 2012, or the 2004senior notes. These securities are guaranteed by STGC and SEGC, orcollectively, the Guarantors. SNFGC, or theNon-Guarantor, will guarantee the debt securities after repayment of itsexisting Term Loan (defined below).

 

The proceeds from the 2004 senior notes were used to repurchase all ofthe outstanding equipment financing (discussed below) and is being usedprincipally to fund SNFGC’s construction and equipping of a 604-room hotel andthe acquisition of land in Niagara Falls, as provided for in the Compact. Inaddition, $22.0 million of the proceeds was used to satisfy the obligation tothe Empire State Development Corporation in connection with the transfer ofcertain property to the Nation for use as the Seneca Niagara Casino. Intereston the 2004 senior notes is payable semi-annually on November 1 and May 1.The 2004 senior notes are uncollateralized general obligations and aresubordinated to the Term Loan. As of March 31, 2005, accrued interest onthe 2004 senior notes was $9.1 million.

 

The 2004 senior notes indenture contains certain financial andnon-financial covenants. The financial covenants include limitations onrestricted payments and the incurrence of indebtedness, while the non-financialcovenants include reporting obligations and compliance with laws andregulations. As of March 31, 2005, SGC complied with all of its respectivecovenant requirements, other than its financial reporting requirement, which itsatisfied upon the filing of its 2004 Form 10-K with the Securities andExchange Commission, or

 

5

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SEC, on May 9,2005 and the filing of its Quarterly Report on Form 10-Q for the periodended December 31, 2004 with the SEC on May 9, 2005. The reports weredelayed due to the independent investigation called for by the Council, whichSGC disclosed in its Current Reports on Form 8-K filed with the SEC on December 3,2004 and January 13, 2005. The independent investigation has beenconcluded with regard to matters involving the Company’s financial reporting.The covenants contained in the indenture permit the Company to borrow anadditional $15.0 million for equipment and obtain an unsecured subordinatecredit facility up to $150.0 million less the amount outstanding under the TermLoan.

 

**Term Loan**

** **

SNFGC entered into a five year Term Loan with Freemantle Limited, orthe Lender, dated November 22, 2002, or the Term Loan. The Term Loanprovided $80.0 million in financing for the initial construction of theSeneca Niagara Casino and other related costs. As of March 31, 2005,$80.0 million was outstanding. The entire outstanding balance is due on November 22,2007.

 

SNFGC pays interest on a monthly basis in arrears at one-month LIBORplus twenty-nine percent (29%). In addition, SNFGC incurred an availability feeof 0.5% on any unborrowed balance. On April 15, 2004, SNFGC borrowed theremaining $22.7 million available under the Agreement.

 

SNFGC has pledged substantially all of its assets as collateral for theoutstanding amounts due under the Term Loan. SNFGC is also obligated to makepayments into a sinking fund account to be held for the benefit of and asadditional collateral for the Lender. Sinking fund payments totaling $23.5million through March 31, 2005 have been made by SNFGC. Commencing January 1,2005 and through December 31, 2006, equal quarterly payments for$5.5 million each are due on or before the last day of each calendarquarter, resulting in annual payments of $22.0 million. Commencing January 1,2007 through the maturity date of the Term Loan, November 22, 2007, threeequal quarterly payments are due on or before the last day of the first threecalendar quarters and one final payment is due on the maturity date, of$4.5 million, or $18.0 million in total. At the maturity date of theTerm Loan, $80.0 million of payments will have been made to the sinking fundthat will be used to fully satisfy the outstanding balance. SNFGC may satisfythese amounts by entering into an unconditional bank loan commitment orirrevocable standby letter of credit for the benefit of the Lender.

 

The Term Loan contains various covenants; these include, but are notlimited to, restrictions on SNFGC’s ability to pay dividends, guarantee debt,limitations on additional borrowings, uses of cash, minimum debt coverage, anddebt coverage threshold ratios. In addition, the Term Loan requires SNFGC tomaintain, at all times through the maturity of the Term Loan, a minimum cashbalance of $10.0 million. In addition, the Term Loan requires SNFGC toestablish a segregated bank account where its operating and investment cash ismaintained. In the event of default, as defined in the Term Loan, the Lenderhas recourse to these funds as additional collateral. SNFGC may obtain arelease of the collateral pledged as support for the borrowings by depositingfunds sufficient to cover the $80.0 million principal balance of the TermLoan and all cumulative successive interest payments until the maturity date ofthe Term Loan. As of March 31, 2005, SGC has been in compliance with allof its respective

 

6

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covenantrequirements, other than its financial reporting requirement, which itsatisfied upon the filing of its 2004 Form 10-K with the SEC on May 9,2005 and the filing of its Quarterly Report on Form 10-Q for the periodended December 31, 2004 with the SEC on May 9, 2005. The reports weredelayed due to the independent investigation called for by the Council whichSGC disclosed in its Current Reports on Form 8-K filed with the SEC on December 3,2004 and January 13, 2005. The independent investigation has beenconcluded with regard to matters involving the Company’s financial reporting.

 

**EquipmentFinancing**

 

SNFGC entered into five financing arrangements with certain slotmachine vendors providing approximately $37.0 million of loans to financeSNFGC’s gaming equipment, including its slot machines. Interest rates on theseloans ranged from 6.0% to 6.42%. These notes were retired in May 2004using the proceeds from the Company’s 2004senior notes.

 

**DerivativeInstruments**

 

SGC is considered an “end user” of derivative instruments and engagesin derivative 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 outstanding balance of theTerm Loan. The instruments were purchased for approximately $1.1 millioneach, $2.2 million in total. Both instruments terminate on November 22,2007 simultaneously with the Term Loan. These interest rate caps limit theCompany’s exposure on the Term Loan to 29% plus 4% on the thirty-day LIBOR,effectively capping the interest rate on the Term Loan at 33%.

 

The aggregate fair market value change of SGC’s interest rate capsduring the three month and six month periods ended March 31, 2005 was anincrease of $374,000 and $256,000, respectively, and is recorded as a reductionof interest expense since the Company is not using hedge accounting. The valueof the interest rate caps at March 31, 2005 is $1,117,000 and isclassified as other long-term assets in the accompanying balance sheet.

 

**3.**             Related-PartyTransactions

** **

**Land Lease fromthe Nation**

** **

The Nation entered into an operating lease agreement, or Head Lease,with SNFGC on October 25, 2002, for use of the land and the building,which is currently the Seneca Niagara Casino. The Seneca Niagara Casino leaseterm is for 21 years and requires monthly rent payments of$1.0 million. Rent payments commenced July 1, 2003. Rent is payableonly to the extent that sufficient funds are available from the net proceedsderived from the operation of the Seneca Niagara Casino and other commercialactivities related to the operation of the Casino. Rent payments aresubordinate to the payment required under the Term Loan. During each of thethree and six month periods ended March 31, 2005 and 2004, SNFGC madelease payments to the Nation of $3.0 million and $6.0 million,respectively.

 

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STGC leases the land upon which the Seneca Allegany Casino operatesfrom the Nation pursuant to a verbal agreement. STGC and the Nation arefinalizing a written lease for the land. During the three month and six monthperiods ended March 31, 2005, STGC made lease payments to the Nation of$3.3 million and $6.3, respectively. On February 16, 2005, the leasepayments were increased to $1.25 million per month effective March 1,2005.

 

**OtherRelated-Party Transactions**

** **

SGC declared and paid a dividend to the Nation of approximately$437,000 during the six month period ended March 31, 2005. SGC also paid$655,000 to the Nation during the six month period ended March 31, 2005for dividends declared in the prior year.

 

The Company is charged by the Nation for SGA regulatory costs, whichare incurred by the Nation. SGA regulatory costs charged to the Company wereapproximately $2.2 million and $1.3 million for the three months endedMarch, 2005 and 2004, respectively, and $4.1 million and $2.5 million for thesix months ended March 31, 2005 and 2004, respectively. The Company alsoincurs costs, which are passed through the Nation for the State of New Yorkgaming regulatory services, and the State of New York Police and CattaraugusCounty Sheriff Department services. The Company has recorded approximately$2.1 million and $1.0 million for the three months ended March 31,2005 and 2004, respectively, and $4.2 million and $1.7 million for the sixmonths ended March 31, 2005 and 2004, respectively in connection withthese services.

 

SGC incurred legal fees of $0 and $51,000 primarily for regulatory andCompact matters during the three months ended March 31, 2005 and 2004,respectively, and $22,000 and $104,000 during the six months ended March 31,2005 and 2004, respectively from a law firm that specializes in gamingregulatory issues in which the Company’s former President/CEO of SGC, whoresigned on April 6, 2005, is a partner. The President/CEO did not receiveany remuneration from the law firm during 2004, and is not actively involved inits management. The Company ceased using the services of this law firmeffective November 8, 2004.

 

The Company purchased tobacco products from an entity where the owneris a member of the Council and a former SGA Commissioner.  During the three month periods ended March 31,2005 and 2004, such purchases totaled $42,000 and $195,000, respectively, andduring the six month periods ended March 31, 2005 and 2004, such purchasestotaled $148,000 and $304,000, respectively.

 

The Company purchased bottled water from an entity which is owned by amember of the Council.  During the threemonth periods ended March 31, 2005 and 2004, such purchases totaled$48,000 and $36,000, respectively, and during the six month periods ended March 31,2005 and 2004, such purchases totaled $104,000 and $62,000, respectively.  As of November 2, 2004 this individualis no longer a member of Council.

 

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**4**.             Commitmentsand Contingencies

** **

**The Seneca NationCompact**

** **

As part of its Compact, the Nation agrees to contribute to the State ofNew York a portion of the proceeds from the operation and conduct of eachcategory of gaming device for which exclusivity exists, based on the win 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 the State of New York arepayable by the Nation. Effective January 1, 2005 Seneca Niagara Casino andSeneca Allegany Casino commenced monthly payments to the Nation of each entity’sprior month’s exclusivity fees. In the three months ended March 31, 2005such payments totaled $10.0 million. At March 31, 2005, the exclusivityfee payable to the Nation for the month of March is $5.9 million, and waspaid to the Nation in April 2005. The SNFGC and STGC portions of the March 31, 2005 liability are$4.0 million and $1.9 million, respectively. SGC transferred $57.1 million in January 2005to the Nation for the exclusivity fee owed to the State of New York. On April 29,2005, the Nation transferred the exclusivity fee to the State of New York. Forthe three month periods ended March 31, 2005 and 2004, total exclusivityfees were $15.9 million and $11.2 million, respectively.  For the six month periods ended March 31,2005 and 2004, total exclusivity fees were $31.5 million and $21.3 million,respectively.

 

**Additional CasinoLocation and Expansions**

** **

As described in Note 1, the Compact provides the Nation theexclusive right to conduct Class III gaming activities at three sites inthe western region of the State of New York. On April 9, 2004, we enteredinto a non-binding letter of intent with Uniland to purchase approximately 57.1acres of property for the Cheektowaga Site. In May 2004, various parties,including the Mayor of the City of Buffalo, filed a complaint against GovernorPataki, the State of New York, the Town of Cheektowaga and Uniland to prohibitthe sale of the Cheektowaga Site to SEGC. On June 16, 2004, JusticeMakowski of the Supreme Court of the State of New York agreed with the plaintiffsand held that the Compact provision allowing the Nation to locate a Class IIIgaming facility anywhere in Erie County in the event a site in the City ofBuffalo is rejected by the Nation for any reason is unconstitutional.  On April 27, 2005, the Town ofCheektowaga filed a brief to appeal the Supreme Court decision.  Because of litigation, the Nation and SGC mayconsider alternative sites.  Thisfacility, as well as planned expansions of Seneca Niagara Casino and SenecaAllegany Casino will require significant capital outlays.  The amount and timing of these capitalexpenditures are dependent on various factors including financing availability,certain Nation and governmental approvals, construction timelines and theperformance of its two operating facilities.

 

9

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**5**.             **Class IIGaming Operations Transfer**

 

Effective January 1, 2005, at the direction of the Council, the Class IIgaming operations at Seneca Niagara Casino and Seneca Allegany Casino, were transferredto the Nation’s Class II gaming division. The Company had total revenues from these Class II gamingoperations of approximately $3.4 million in the six months ended March 31,2005, none in the three months ended March 31, 2005. Also, equipment witha net book value of $2.5 million was transferred to the Nation on January 1,2005.  This was recorded as adistribution to the Nation in January 2005.

 

**6.**             CondensedConsolidating Financial Statement Information

** **

SGC, or the Parent, issued $300 million of senior notes in May 2004.These securities are guaranteed by STGC and SEGC or collectively, theGuarantors. SNFGC, or the Non-Guarantor, will guarantee the debt securitiesafter repayment of its existing Term Loan.

 

Condensed consolidating financial information for the Parent andGuarantors and Non-Guarantor is as follows:

 
| ** **                             | ** ** | **Condensed Consolidating Balance Sheet  March 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                             | ** ** | **Parent and  Guarantors**                                     | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                   |       |                                                           |       |   |   |   |   |   |   |
| **Assets**                             |       |                                                           |       |   |   |   |   |   |   |
| Cash and cash equivalents              |       | $                                                              | 45,301     |   | $ | 24,500 |   | $ | — |   | $ | 69,801 |   |
| Short-term investments                 |       | 111,822                                                        |       | — |   | — |   | 111,822 |   |
| Other current assets                   |       | 2,893                                                          |       | 5,795 |   | — |   | 8,688 |   |
|                                   |       |                                                           |       |   |   |   |   |   |   |
| Total current assets                   |       | 160,016                                                        |       | 30,295 |   | — |   | 190,311 |   |
| Property and equipment, net            |       | 115,857                                                        |       | 227,574 |   | — |   | 343,431 |   |
| Other long-term assets                 |       | 12,768                                                         |       | 29,972 |   | — |   | 42,740 |   |
| Investment in non-guarantor subsidiary |       | 167,945                                                        |       | — |   | (167,945 | ) | — |   |
| Total assets                           |       | $                                                              | 456,586    |   | $ | 287,841 |   | $ | (167,945 | ) | $ | 576,482 |   |
|                                   |       |                                                           |       |   |   |   |   |   |   |
| **Liabilities and Capital**            |       |                                                           |       |   |   |   |   |   |   |
|                                   |       |                                                           |       |   |   |   |   |   |   |
| Current liabilities                    |       | $                                                              | 30,096     |   | $ | 39,896 |   | $ | — |   | $ | 69,992 |   |
| Long-term debt                         |       | 300,000                                                        |       | 80,000 |   | — |   | 380,000 |   |
| Total capital                          |       | 126,490                                                        |       | 167,945 |   | (167,945 | ) | 126,490 |   |
| Total liabilities and capital          |       | $                                                              | 456,586    |   | $ | 287,841 |   | $ | (167,945 | ) | $ | 576,482 |   |

 

10

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| ** **                             | ** ** | **Condensed Consolidating Balance Sheet  September 30, 2004** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Parent and  Guarantors**                                         | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                   |       |                                                               |       |   |   |   |   |   |   |
| **Assets**                             |       |                                                               |       |   |   |   |   |   |   |
| Cash and cash equivalents              |       | $                                                                  | 157,288    |   | $ | 54,307 |   | $ | — |   | $ | 211,595 |   |
| Short-term investments                 |       | 57,963                                                             |       | — |   | — |   | 57,963 |   |
| Other current assets                   |       | 1,204                                                              |       | 5,438 |   | — |   | 6,642 |   |
|                                   |       |                                                               |       |   |   |   |   |   |   |
| Total current assets                   |       | 216,455                                                            |       | 59,745 |   | — |   | 276,200 |   |
| Property and equipment, net            |       | 95,629                                                             |       | 187,168 |   | — |   | 282,797 |   |
| Other long-term assets                 |       | 13,244                                                             |       | 11,815 |   | — |   | 25,059 |   |
| Investment in non-guarantor subsidiary |       | 111,166                                                            |       | — |   | (111,166 | ) | — |   |
| Total assets                           |       | $                                                                  | 436,494    |   | $ | 258,728 |   | $ | (111,166 | ) | $ | 584,056 |   |
|                                   |       |                                                               |       |   |   |   |   |   |   |
| **Liabilities and Capital**            |       |                                                               |       |   |   |   |   |   |   |
|                                   |       |                                                               |       |   |   |   |   |   |   |
| Current liabilities                    |       | $                                                                  | 49,807     |   | $ | 67,562 |   | $ | — |   | $ | 117,369 |   |
| Long-term debt                         |       | 300,000                                                            |       | 80,000 |   | — |   | 380,000 |   |
| Total capital                          |       | 86,687                                                             |       | 111,166 |   | (111,166 | ) | 86,687 |   |
| Total liabilities and capital          |       | $                                                                  | 436,494    |   | $ | 258,728 |   | $ | (111,166 | ) | $ | 584,056 |   |
|                                        |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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**Condensed Consolidating Statement of Income**

**For the Three Months Ended March 31,  2005**

** **
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                            |       |                       |       |              |       |             |       |      |       |
| Net revenue                                     |       | $                          | 31,940     |              | $          | 74,341           |       | $         | —     |   | $ | 106,281 |   |
| Expenses                                        |       |                       |       |              |       |             |       |      |       |
| Gaming and other operations                     |       | 11,388                     |       | 27,194            |       | —           |       | 38,582    |       |
| Advertising, general and administrative         |       | 11,432                     |       | 18,205            |       | —           |       | 29,637    |       |
| Pre-opening costs                               |       | 3                          |       | 116               |       | —           |       | 119       |       |
| Depreciation and amortization                   |       | 2,045                      |       | 4,424             |       | —           |       | 6,469     |       |
| Total operating expenses                        |       | 24,868                     |       | 49,939            |       | —           |       | 74,807    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Operating income                                |       | 7,072                      |       | 24,402            |       | —           |       | 31,474    |       |
| Interest income                                 |       | 878                        |       | 131               |       | —           |       | 1,009     |       |
| Interest expense                                |       | (5,309                     | )          | (5,540            | )          | —           |       | (10,849   | )          |
| Equity in earnings of non-guarantor  subsidiary |       | 18,993                     |       | —            |       | (18,993          | )          | —    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Net income (loss)                               |       | $                          | 21,634     |              | $          | 18,993           |       | $         | (18,993    | ) | $ | 21,634 |   |

 

**Condensed Consolidating Statement of Income**

**For the Three Months Ended March 31, 2004**

** **
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                            |       |                       |       |              |       |             |       |      |       |
| Net revenue                                     |       | $                          | —     |              | $          | 78,351           |       | $         | —     |   | $ | 78,351 |   |
| Expenses                                        |       |                       |       |              |       |             |       |      |       |
| Gaming and other operations                     |       | —                     |       | 26,978            |       | —           |       | 26,978    |       |
| Advertising, general and administrative         |       | 50                         |       | 18,497            |       | —           |       | 18,547    |       |
| Pre-opening costs                               |       | 925                        |       | —            |       | —           |       | 925       |       |
| Depreciation and amortization                   |       | 4                          |       | 3,339             |       | —           |       | 3,343     |       |
| Total operating expenses                        |       | 979                        |       | 48,814            |       | —           |       | 49,793    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Operating income                                |       | (979                       | )          | 29,537            |       | —           |       | 28,558    |       |
| Interest income                                 |       | 210                        |       | 20                |       | —           |       | 230       |       |
| Interest expense                                |       | (6                         | )          | (5,098            | )          | —           |       | (5,104    | )          |
| Equity in earnings of non-guarantor  subsidiary |       | 24,459                     |       | —            |       | (24,459          | )          | —    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Net income (loss)                               |       | $                          | 23,684     |              | $          | 24,459           |       | $         | (24,459    | ) | $ | 23,684 |   |

 

12

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**Condensed Consolidating Statement of Income**

**For the Six Months Ended March 31, 2005**

** **
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                            |       |                       |       |              |       |             |       |      |       |
| Net revenue                                     |       | $                          | 64,266     |              | $          | 149,891          |       | $         | —     |   | $ | 214,157 |   |
| Expenses                                        |       |                       |       |              |       |             |       |      |       |
| Gaming and other operations                     |       | 23,228                     |       | 55,553            |       | —           |       | 78,781    |       |
| Advertising, general and administrative         |       | 21,881                     |       | 36,986            |       | —           |       | 58,867    |       |
| Pre-opening costs                               |       | 55                         |       | 128               |       | —           |       | 183       |       |
| Depreciation and amortization                   |       | 4,060                      |       | 8,776             |       | —           |       | 12,836    |       |
| Total operating expenses                        |       | 49,224                     |       | 101,443           |       | —           |       | 150,667   |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Operating income                                |       | 15,042                     |       | 48,448            |       | —           |       | 63,490    |       |
| Interest income                                 |       | 1,762                      |       | 250               |       | —           |       | 2,012     |       |
| Interest expense                                |       | (10,888                    | )          | (11,917           | )          | —           |       | (22,805   | )          |
| Equity in earnings of non-guarantor  subsidiary |       | 36,781                     |       | —            |       | (36,781          | )          | —    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Net income (loss)                               |       | $                          | 42,697     |              | $          | 36,781           |       | $         | (36,781    | ) | $ | 42,697 |   |

 

**Condensed Consolidating Statement of Income**

**For the Six Months Ended March 31, 2004**

 
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                            |       |                       |       |              |       |             |       |      |       |
| Net revenue                                     |       | $                          | —     |              | $          | 150,085          |       | $         | —     |   | $ | 150,085 |   |
| Expenses                                        |       |                       |       |              |       |             |       |      |       |
| Gaming and other operations                     |       | —                     |       | 52,473            |       | —           |       | 52,473    |       |
| Advertising, general and administrative         |       | 114                        |       | 37,154            |       | —           |       | 37,268    |       |
| Pre-opening costs                               |       | 1,027                      |       | —            |       | —           |       | 1,027     |       |
| Depreciation and amortization                   |       | 4                          |       | 6,497             |       | —           |       | 6,501     |       |
| Total operating expenses                        |       | 1,145                      |       | 96,124            |       | —           |       | 97,269    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Operating income                                |       | (1,145                     | )          | 53,961            |       | —           |       | 52,816    |       |
| Interest income                                 |       | 210                        |       | 58                |       | —           |       | 268       |       |
| Interest expense                                |       | (6                         | )          | (10,283           | )          | —           |       | (10,289   | )          |
| Equity in earnings of non-guarantor  subsidiary |       | 43,736                     |       | —            |       | (43,736          | )          | —    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Net income (loss)                               |       | $                          | 42,795     |              | $          | 43,736           |       | $         | (43,736    | ) | $ | 42,795 |   |

 

13

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**CondensedConsolidating Statement of Cash Flows For the Six Months Ended March 31, 2005**

 
| ** **                                            | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------|------------|-----------|------------|
| Net cash flows  provided by operations                |       | $                          | 371        |               | $          | 17,778           |       | $         | —     |   | $ | 18,149 |   |
| Net cash used in  investing activities                |       | (91,337                    | )          | (49,086            | )          | —           |       | (140,423  | )          |
| Repayment of  notes payable                           |       | (278                       | )          | —             |       | —           |       | (278      | )          |
| Payment to  sinking fund                              |       | —                     |       | (17,631            | )          | —           |       | (17,631   | )          |
| Payment of  deferred financing costs                  |       | (64                        | )          | (455               | )          | —           |       | (519      | )          |
| Distribution to SNFGC                                 |       | (20,000                    | )          | 20,000             |       | —           |       | —    |       |
| Intercompany  transactions                            |       | 414                        |       | (414               | )          | —           |       | —    |       |
| Dividends paid  to the Nation                         |       | (1,092                     | )          | —             |       | —           |       | (1,092    | )          |
| Net cash (used  in) provided by financing activities  |       | (21,020                    | )          | 1,500              |       | —           |       | (19,520   | )          |
| Net increase  (decrease) in cash and cash equivalents |       | (111,986                   | )          | (29,808            | )          |             |       | (141,794  | )          |
| Cash and cash  equivalents at beginning of period     |       | 157,288                    |       | 54,307             |       | —           |       | 211,595   |       |
| Cash and cash  equivalents at end of period           |       | $                          | 45,302     |               | $          | 24,499           |       | $         | —     |   | $ | 69,801 |   |

 

14

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**CondensedConsolidating Statement of Cash Flows For the Six Months Ended March 31, 2004**

 
| ** **                                            | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------|------------|-----------|------------|
| Net cash flows  (used in) provided by operations      |       | $                          | (519       | )                  | $          | 37,220           |       | $         | —     |   | $ | 36,701 |   |
| Net cash used in  investing activities                |       | (21,265                    | )          | (35,811            | )          | —           |       | (57,076   | )          |
| Repayment of  notes payable                           |       | (530                       | )          | (6,096             | )          | —           |       | (6,626    | )          |
| Proceeds from  notes payable                          |       | 1,128                      |       | —             |       |             |       | 1,128     |       |
| Payment to  sinking fund                              |       | —                     |       | (6,008             | )          | —           |       | (6,008    | )          |
| Payment of  deferred financing costs                  |       | (71                        | )          | (416               | )          | —           |       | (487      | )          |
| Distribution to SGC                                   |       | 25,000                     |       | (25,000            | )          |             |       |      |       |
| Intercompany  transactions                            |       | (186                       | )          | 186                |       | —           |       | —    |       |
| Dividends paid  to the Nation                         |       | (434                       | )          | —             |       | —           |       | (434      | )          |
| Net cash  provided by (used in) financing activities  |       | 24,907                     |       | (37,334            | )          | —           |       | (12,427   | )          |
| Net increase  (decrease) in cash and cash equivalents |       | 3,124                      |       | (35,925            | )          |             |       | (32,802   | )          |
| Cash and cash  equivalents at beginning of period     |       | —                     |       | 59,628             |       | —           |       | 59,628    |       |
| Cash and cash  equivalents at end of period           |       | $                          | 3,124      |               | $          | 23,703           |       | $         | —     |   | $ | 26,826 |   |

 

**7.Subsequent Events**

 

As previously disclosed in its Current Reports on Form 8-Kfiled with the SEC on April 6, 2005, effective April 6, 2005, G.Michael Brown resigned as SGC’s President and Chief Executive Officer. SGC’sboard of directors elected John Pasqualoni as interim President and ChiefExecutive Officer, effective April 6, 2005. Mr. Brown will continueto assist the Company as an outside consultant until the end of the year.

 

15

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On May 10, 2005, SGC announced that it iscommencing an offering of an aggregate principal amount of $200 million ofadditional 71⁄4% senior notes due 2012 pursuant to an exemption from registrationunder the Securities Act of 1933.  The issuance would be an add-on to the existingaggregate principal amount of $300 million of 71⁄4% senior notes due 2012 thatwere issued in May 2004.  The add-on senior notes would havesubstantially identically terms to, and form a single series with, thepreviously issued senior notes.

 

On May 9, 2005 SNFGC, the Nation and FreemantleLimited entered into an agreement to terminate the Term Loan with Freemantle. Theagreement allows SNFGC to pay off the Term Loan with Freemantle at a negotiatedamount of approximately $126 million on or prior to May 23, 2005. Paymentof this amount will result in a charge to earnings of approximately $50million, including the write-off of $4 million of deferred financingcosts.  The Company expects to use theproceeds from the senior note offering described above or other financing inorder to pay the negotiated amount to Freemantle.

 

**Item2.**    Management’sDiscussion of Financial Condition and Results of Operation

** **

You should read the following discussion and analysisin conjunction with the section titled “Financial Statements and Notes toConsolidated Financial Statements included elsewhere in this Form 10-Q.References below to years are to fiscal years of Seneca Gaming Corporationunless otherwise noted. Seneca Gaming Corporation’s fiscal year is from October 1through September 30.

 

**Overview**

** **

Seneca Gaming Corporation is wholly owned by theSeneca Nation of Indians of New York and chartered to manage and direct all ofthe Nation’s Class III gaming operations. The Nation entered into aCompact with the State of New York on August 18, 2002 that provides theNation with the right to establish and operate three Class III gamingfacilities in Western New York. We opened our first Class III gamingfacility on Nation Territory in the City of Niagara Falls, New York on December 31,2002, featuring both Class III slot machines and table games. Thisfacility is operated by our wholly owned subsidiary SNFGC. On May 1, 2004,we opened our second Class III gaming facility, Seneca Allegany Casino, onthe Nation’s Territory in the City of Salamanca, New York. This facilityfeatures Class III slot machines, table games and keno. This facility isoperated by our wholly owned subsidiary STGC.

 

Our consolidated results of operations for the threeand six months ended March 31, 2005 are impacted by the May 1, 2004opening of our Seneca Allegany Casino. Since our Seneca Niagara Casino openedapproximately 18 months prior to the opening of our Seneca Allegany Casino, comparisonsof consolidated results of operations are not meaningful.

 

Under the Compact, the Nation also has an exclusiveright to establish and operate a third Class III gaming facility in ErieCounty, New York. This exclusive right may terminate if the Nation fails tocommence construction of a Class III gaming facility in Erie County by December 9,2005 or if the Nation fails to commence Class III Gaming operations by December 9,2007. On April 9, 2004, we entered into a non-binding letter of intentwith Uniland Development Company, or Uniland, to purchase approximately 57.1acres of property for this

 

16

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facility near theBuffalo-Niagara International Airport in Cheektowaga, New York, or theCheektowaga Site. In May 2004, various parties, including the Mayor of theCity of Buffalo, filed a complaint against Governor Pataki, the State of NewYork, the Town of Cheektowaga and Uniland to prohibit the sale of theCheektowaga Site to us. On June 16, 2004, Justice Makowski of the SupremeCourt of the State of New York agreed with the plaintiffs and held that theCompact provision allowing the Nation to locate a Class III gamingfacility anywhere in Erie County “in the event a site in the City of Buffalo isrejected by the Nation for any reason” is unconstitutional. The Court’s decision further permanentlyrestrained and enjoined (1) Governor Pataki and the State of New York fromany action or activity that would assist the Nation in owning and operating a Class IIIgaming casino in Erie County other than the City of Buffalo and (2) Unilandfrom the sale or transfer of the Cheektowaga Site to us. On April 27,2005, the Town of Cheektowaga filed a brief to appeal the Supreme Courtdecision and we support its decision to appeal. Subsequent to the Supreme Courtdecision, Uniland requested certain amendments to the executed letter of intentfor the Cheektowaga Site. We are evaluating their requested changes, but canprovide you with no assurance that we will be able to reach a mutuallyacceptable agreement with Uniland, that Justice Makowski’s decision will besuccessfully appealed, or that we will be able to commence construction oroperations of our third Class III gaming facility in the City of Buffaloor Erie County prior to the termination of our exclusivity period.  As aresult of the ongoing litigation, the Nation and SGC may consider alternativesites.

 

**Executive Summary**

** **

*Our Current Operations.*  Wecurrently operate two Class III gaming facilities, Seneca Niagara Casino,in the City of Niagara Falls, New York, and Seneca Allegany Casino, in the Cityof Salamanca, New York. Our casino operations include gaming, dining,entertainment and retail. For each of the three and six month periods ended March 31,2005, approximately 95% of our net revenue was derived from our gamingactivities.

 

*Key Performance Indicators.*  Ouroperating results are dependent on the volume of profitable patrons visitingour casinos, our ability to attract them for repeat visits and to providesuperior service to our patrons.

 

*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, net revenue and profitability. We believe that the proposedexpansion of Seneca Niagara Casino, including the addition of a luxury hoteland other amenities, will enable us to increase profitable patron volume andgaming activity, extend our geographic penetration and appeal to a more diversedemographic base. The first phase of this expansion is expected to open in December 2005,and will add over 35,000 square feet of gaming space, approximately 300 rooms,a multi-purpose room for conventions, banquets and entertainment events, and an18,000 square-foot spa.

 

To date, we have paid for substantially all of ourcompleted expansion projects out of cash flow from operations. Our completedexpansion projects include the addition of Turtle Island, a non-smoking casinoroom, the Blue Heron Club, a gaming salon designed exclusively

 

17

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for high stakestable game patrons, a new 2,400-space parking garage, and the Western Door, anupscale steakhouse. In May 2004, we opened a non-smoking poker room withsixteen tables. In June 2004, we opened our “Pennies From Heaven” slotroom located on the mezzanine level overlooking our casino, addingapproximately 6,600 square feet of gaming space and 242 additional ticketedslot machines. In addition, this project added approximately 7,800 square feetof banquet space for up to 350 patrons.

 

*Seneca Allegany 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. Through March 31, 2005, approximately62%, of its patrons originated outside of the State of New York.

 

We are building a 1,850-space parking garage, and areconstructing a 225-room hotel at Seneca Allegany Casino. We believe thisexpansion is necessary to provide a first-class gaming experience for ourpatrons and to maintain the competitive position of the facility in light ofexpected future competition in Pennsylvania. We expect that this expansion willcost between $180.0 to $185.0 million and we plan to fund this expansion withcash flows from operations and cash on hand. As previously disclosed in ourCurrent Report on Form 8-K filed with the SEC on January 13, 2005,the garage construction has been delayed by an out of plumb condition on aportion of the garage. We now expect the garage to open in August 2005 andthe hotel to open in the latter part of 2006. We funded all the construction,equipment and pre-opening costs of Seneca Allegany Casino with intercompanyloans from SGC.

 

We intend to purchase the site of our future casino inErie County from our cash flow. We currently rely and will continue to rely onour ability to generate cash flow from operations to repay our debt financing,fund the maintenance of our facilities and provide funds for our planned futureexpansions.

 

To date, our results of operations have not beenseasonal in nature.

 

*Overall Outlook.*  Asdiscussed in more detail above, since inception, we have invested heavily inour operations and plan to continue to do so during the remainder of fiscal2005 and in fiscal 2006. We believe that investments in additional gaming spaceand non-gaming amenities at our facilities and our exclusive ability to offer Class IIIgaming in Western New York, will enable us to capitalize on what we believe isan underserved market in Western New York, Pennsylvania and parts of Ohio.

 

**CriticalAccounting Policies and Estimates**

** **

There have been no changes in accounting policiessince the filing of our 2004 Form 10-K.

 

18

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**Operating ResultsThree Months Ended March 31, 2005 Compared to the Three Months Ended March 31,2004**

 

*Operating Results*

* *
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net revenue                              |       | $                                      | 106,281    |   | $ | 78,351 |   |
| Operating  expenses:                     |       |                                   |       |   |   |
| Gaming                                   |       | 27,925                                 |       | 20,168 |   |
| Food and  beverage                       |       | 8,346                                  |       | 5,356 |   |
| Retail,  entertainment and other         |       | 2,311                                  |       | 1,454 |   |
| Advertising,  general and administrative |       | 29,637                                 |       | 18,547 |   |
| Pre-opening  costs                       |       | 119                                    |       | 925 |   |
| Depreciation and  amortization           |       | 6,469                                  |       | 3,343 |   |
| Operating income                         |       | $                                      | 31,474     |   | $ | 28,558 |   |

 

The most important factors and trends contributing toour operating performance during the three month periods ended March 31,2005 and 2004 were:

 

•      Our ability to successfullymarket Seneca Niagara Casino and, since its May 1, 2004 opening, SenecaAllegany Casino, to our primary target markets located within 100 miles of ourcasinos.

 

•      Our ability to enroll over 777,000patrons in our cross-property Seneca Link Player’s Card program, which hasincreased our ability to use effective direct mail and targeted marketingprograms to establish patron loyalty to the Seneca brand at a profitable level.

 

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

 

•      Our use of currentinformation technology, including “ticket-in/ticket-out” slot machines,automated jackpot payment machines, electronic slot bonusing and databaseprograms to increase operating efficiencies.

 

•      Our ability to operate at ahigh margin, which we achieve through the careful monitoring and control oflabor costs and the effective use of our marketing and advertisingexpenditures.

 

•      Our continued expansion atand reinvestment in both of our properties.

 

19

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*Detailed Revenue Information*

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Gaming revenue:                          |       |                                   |       |   |   |
| Slots                                    |       | $                                      | 87,514     |   | $ | 59,309 |   |
| Table games                              |       | 15,802                                 |       | 14,645 |   |
| Other                                    |       | 179                                    |       | 142 |   |
| Gaming revenue                           |       | 103,495                                |       | 74,096 |   |
| Non-gaming  revenue:                     |       |                                   |       |   |   |
| Food and  beverage                       |       | 9,873                                  |       | 6,394 |   |
| Retail,  entertainment and other         |       | 4,049                                  |       | 2,493 |   |
| Non-gaming  revenue                      |       | 13,922                                 |       | 8,887 |   |
| Less promotional  allowances and credits |       | (11,136                                | )          | (4,632 | ) |
| Net revenue                              |       | $                                      | 106,281    |   | $ | 78,351 |   |

 

Our gaming revenue for the three months ended March 31,2005 increased relative to the comparable period last year due to the openingof Seneca Allegany Casino on May 1, 2004, which added approximately 1,886slot machines and 24 table games to our operations, the addition of 315 slotmachines at Seneca Niagara Casino and continued growth in our patron base. Asof March 31, 2005, our casinos had an aggregate of 122 table games, and 5,127slot machines available to our patrons, representing a net increase of 48 tablegames, and 2,193 slot machines from March 31, 2004. During these periods,the number of patrons enrolled in our Seneca Link Player’s Card program hassteadily increased. As of March 31, 2005, we had over 777,000 patronsenrolled, an increase of approximately 377,000 patrons over the number ofenrolled members at March 31, 2004.

 

Our net gaming revenue, net of promotional credits of$3.0 million in 2005 only, increased $26.4 million, or 36%, for the threemonth period ended March 31, 2005 relative to the comparable period ended March 31,2004. During the three month period ended March 31, 2005, Seneca NiagaraCasino net gaming revenue decreased $3.9 million, or 5%. This decrease wasprincipally related to a decline in table games revenues of $3.1 million, or21%. Drop declined by $8.7 million, or 10%, and the hold percentage decreasedfrom 17% in the three month period ended March 31, 2004 to 15% in thethree month period ended March 31, 2005. We attribute this decline toseveral factors including the opening of our Seneca Allegany Casino, increased competitionfrom casinos located in Ontario, Canada, a loss of over $600,000 to a premiumplayer and adverse weather. As a result, we intend to reduce the number of tablegames offered to 79 by June 30, 2005, add additional slot machines, and improveaccess to our slot machines making our casino more comfortable for our guests. SenecaAllegany Casino accounted for $30.3 million of net gaming revenue for thethree months ended March 31, 2005.

 

Our food and beverage revenue and retail revenue haveincreased in direct relation to our increase in gaming revenue. There is adirect relation between our food and beverage revenue and retail revenue to ourgaming revenue because a significant portion of this revenue is from players’point redemptions. For the three month periods ended March 31, 2005 and2004, 57% and 52% of our food and beverage revenue and 86% and 86% of ourretail revenue, respectively, represented players’ point redemptions. For thethree month period ended March 31, 2005, food and beverage revenueincreased $3.5 million, or 54% to $9.9 million. For the three month period endedMarch 31, 2005 Seneca Niagara Casino generated an additional $0.8 millioncompared to the prior period, primarily due to increased utilization of players’points and the opening in May 2004 of our steakhouse. Seneca AlleganyCasino generated $2.6 million in food and beverage revenue during theperiod.

 

20

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For the three month period ended March 31, 2005,our retail, entertainment and other revenue increased by $1.6 millioncompared to the comparable 2004 period. This increase is primarily attributedto higher revenue at our Seneca Niagara Casino of $0.6 million and $0.6 millionof retail revenues at Seneca Allegany Casino

 

*Detailed Operating Expenses Information*

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Operating  expenses:                     |       |                                   |       |   |   |
| Gaming                                   |       | $                                      | 27,925     |   | $ | 20,168 |   |
| Food and  beverage                       |       | 8,346                                  |       | 5,356 |   |
| Retail,  entertainment and other         |       | 2,311                                  |       | 1,454 |   |
| Advertising,  general and administrative |       | 29,637                                 |       | 18,547 |   |
| Pre-opening  costs                       |       | 119                                    |       | 925 |   |
| Depreciation and  amortization           |       | 6,469                                  |       | 3,343 |   |
| Operating  expenses                      |       | $                                      | 74,807     |   | $ | 49,793 |   |

 

Gaming expenses principally consist of costs incurredfrom operating our table games and slot machines, of which the primarycomponents are related payroll and employee benefit costs, and the slotexclusivity fee due to the State of New York pursuant to the Compact. For thethree months ended March 31, 2005 and 2004, the slot exclusivity fee was$15.9 million and $11.2 million, respectively. Seneca Allegany Casinoincurred a slot exclusivity fee of $4.9 million during the three monthperiod ended March 31, 2005. In January 2005, we transferred $57.1million to the Nation for payment of the exclusivity fee for the 2004 calendaryear. Effective January 1, 2005, we are transferring the monthly slotexclusivity fee to the Nation in the month subsequent to the liability beingincurred. Currently, the exclusivity fee is 18% of the slot machine net drop(money dropped into the machines after payout but before our expenses). Thisfee will increase to 22% on January 1, 2007 and to 25% on January 1,2010.

 

Food and beverage expenses are costs we incur for theoperation of our restaurants, snack bars and beverage outlets. The primarycomponents of these expenses are the cost of food and beverages and relatedpayroll and employee benefit expenses. For the three months ended March 31,2005 our food and beverage costs increased $3.0 million, or 56%. This increasewas due to the higher food and beverage revenue at Seneca Niagara Casino primarilyassociated with the opening of our steakhouse restaurant in May 2004, and$2.6 million of costs at Seneca Allegany Casino incurred in the threemonth period ended March 31, 2005.

 

Retail, entertainment and other expenses represent ourcosts to operate our retail shops and entertainment offerings. The componentsof these expenses include related payroll and employee benefit costs, thepurchase of products offered for sale in our retail outlets, and contract costsfor entertainers. For the three months ended March 31, 2005, these costsincreased approximately $0.9 million, or 59%. Of the increase, $0.2 million isattributed to the operation of the Seneca Allegany retail store.

 

21

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Advertising, general and administrative expenses areincurred to support our operations. These expenses consist primarily of relatedpayroll and employee benefits costs, regulatory, advertising, marketing,insurance, legal and energy costs. The three month period ended March 31,2005 includes $11.0 million of such costs related to our Seneca AlleganyCasino. In addition, we made lease payments to the Nation for the land uponwhich we operate Seneca Niagara Casino totaling $3.0 million during eachof the three month periods ended March 31, 2005 and 2004, respectively.

 

*Non-Operating Expenses*

 

The following table summarizes information related tointerest on our long-term debt:

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Interest expense           |       | $                                      | 10,849     |   | $ | 5,104 |   |
|                            |            |                                        |            |  |  |  |  |

 

Our interest cost for the three months ended March 31,2005 is attributable to the $300 million aggregate principal amount of the2004 senior notes, issued in May 2004 by SGC, and SNFGC’s Term Loan, netof capitalized interest. The Term Loan requires us to make monthly interestpayments on the outstanding balance at one-month LIBOR plus 29%. As of March 31,2005 and 2004, $80.0 million was outstanding under the Term Loan. Theincrease in interest cost results from the issuance of the 2004 senior notes inMay 2004 and the increased amount outstanding under the Term Loan,partially offset by the May 2004 retirement of equipment loans fromproceeds of the 2004 senior notes.

 

**Operating ResultsSix Months Ended March 31, 2005 Compared to the Six Months Ended March 31,2004**

** **

*Operating Results*

* *
| ** **                               | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net revenue                              |       | $                                    | 214,157    |   | $ | 150,085 |   |
| Operating  expenses:                     |       |                                 |       |   |   |
| Gaming                                   |       | 56,552                               |       | 38,950 |   |
| Food and  beverage                       |       | 17,037                               |       | 10,445 |   |
| Retail,  entertainment and other         |       | 5,192                                |       | 3,078 |   |
| Advertising,  general and administrative |       | 58,867                               |       | 37,268 |   |
| Pre-opening  costs                       |       | 183                                  |       | 1,027 |   |
| Depreciation and  amortization           |       | 12,836                               |       | 6,501 |   |
| Operating income                         |       | $                                    | 63,490     |   | $ | 52,816 |   |

 

22

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The most important factors and trends contributing toour operating performance during the six month periods ended March 31,2005 and 2004 were the same as noted for the three month periods ended March 31,2005 and 2004.

 

*Detailed Revenue Information*

* *
| ** **                               | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Gaming revenue:                          |       |                                 |       |   |   |
| Slots                                    |       | $                                    | 171,727    |   | $ | 114,390 |   |
| Table games                              |       | 32,316                               |       | 27,286 |   |
| Class II  and other                 |       | 3,743                                |       | 278 |   |
| Gaming revenue                           |       | 207,786                              |       | 141,954 |   |
| Non-gaming  revenue:                     |       |                                 |       |   |   |
| Food and  beverage                       |       | 19,550                               |       | 12,466 |   |
| Retail,  entertainment and other         |       | 8,283                                |       | 5,120 |   |
| Non-gaming  revenue                      |       | 27,833                               |       | 17,586 |   |
| Less promotional  allowances and credits |       | (21,462                              | )          | (9,455 | ) |
| Net revenue                              |       | $                                    | 214,157    |   | $ | 150,085 |   |

 

Our gaming revenue for the six months ended March 31,2005 increased relative to the comparable period last year due to the openingof Seneca Allegany Casino on May 1, 2004, which added approximately 1,886slot machines and 24 table games to our operations, the addition of 315 slotmachines at Seneca Niagara Casino and continued growth in our patron base. Asof March 31, 2005, our casinos had an aggregate of 122 table games, and 5,127slot machines available to our patrons, representing a net increase of 48 tablegames, and 2,193 slot machines from March 31, 2004. During these periods,the number of patrons enrolled in our Seneca Link Player’s Card program hassteadily increased. As of March 31, 2005, we had over 777,000 patronsenrolled, an increase of approximately 377,000 patrons over the number ofenrolled members at March 31, 2004.

 

Our net gaming revenue, net of promotional credits of$5.4 million in 2005 only, increased $60.5 million, or 43%, for the sixmonth period ended March 31, 2005 relative to the comparable period ended March 31,2004. During the six month period ended March 31, 2005, Seneca NiagaraCasino net gaming revenue decreased $0.6 million. Increases experienced inthe first three months of the fiscal year were offset by a decline in tablegames revenues experienced in the three month period ended March 31, 2005.Seneca Allegany Casino accounted for $61.0 million of net gaming revenuefor the six months ended March 31, 2005.

 

Our food and beverage revenue and retail revenue haveincreased in direct relation to our increase in gaming revenue. There is adirect relation between our food and beverage revenue and retail revenue to ourgaming revenue because a significant portion of this revenue is from players’point redemptions. For the six month periods ended March 31, 2005 and2004, 55% and 51% of our food and beverage revenue and 87% and 87% of ourretail revenue, respectively, represented players’ point redemptions. For the sixmonth periods ended March 31, 2005, food and beverage revenue increased $7.1million, or 57% to $19.5 million. For the six month period

 

23

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ended March 31,2005  Seneca Niagara Casino generated anadditional $1.9 million compared to the prior period, primarily due to highergaming revenues,  increased utilizationof players’ points and the opening in May 2004 of our steakhouse. SenecaAllegany Casino generated $5.2 million in food and beverage revenue duringthe period.

 

For the six month period ended March 31, 2005,our retail, entertainment and other revenue increased by $3.2 millioncompared to the comparable 2004 period. This increase is primarily attributedto higher revenue at our Seneca Niagara Casino of $1.3 million, principallyretail,  and $1.8 million of revenues atSeneca Allegany Casino

 

*Detailed Operating Expenses Information*

 
| ** **                               | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating  expenses:                     |       |                                 |       |   |   |
| Gaming                                   |       | $                                    | 56,552     |   | $ | 38,950 |   |
| Food and  beverage                       |       | 17,037                               |       | 10,445 |   |
| Retail,  entertainment and other         |       | 5,192                                |       | 3,078 |   |
| Advertising,  general and administrative |       | 58,867                               |       | 37,268 |   |
| Pre-opening costs                        |       | 183                                  |       | 1,027 |   |
| Depreciation and  amortization           |       | 12,836                               |       | 6,501 |   |
| Operating  expenses                      |       | $                                    | 150,667    |   | $ | 97,269 |   |

 

Gaming expenses principally consist of costs incurredfrom operating our table games and slot machines, of which the primarycomponents are related payroll and employee benefit costs, and the slotexclusivity fee due to the State of New York pursuant to the Compact. For the sixmonth periods ended March 31, 2005 and 2004, the slot exclusivity fee was$31.5 million and $21.3 million, respectively. Seneca Allegany Casinoincurred a slot exclusivity fee of $9.6 million during the six monthperiod ended March 31, 2005. In January 2005, we transferred $57.1million to the Nation for payment of the exclusivity fee for the 2004 calendaryear. Effective January 1, 2005, we are transferring the monthly slotexclusivity fee to the Nation in the month subsequent to the liability beingincurred. Currently, the exclusivity fee is 18% of the slot machine net drop(money dropped into the machines after payout but before our expenses). Thisfee will increase to 22% on January 1, 2007 and to 25% on January 1,2010.

 

Food and beverage expenses are costs we incur for theoperation of our restaurants, snack bars and beverage outlets. The primarycomponents of these expenses are the cost of food and beverages and relatedpayroll and employee benefit expenses. For the six month period ended March 31,2005 our food and beverage costs increased $6.6 million, or 63%. This increasewas due to the higher food and beverage revenue at Seneca Niagara Casino, primarilyassociated with the opening of our steakhouse restaurant in May 2004, and$5.1 million of costs at Seneca Allegany Casino incurred in the six monthperiod ended March 31, 2005.

 

Retail, entertainment and other expenses represent ourcosts to operate our retail shops and entertainment offerings. The componentsof these expenses include related payroll and employee benefit costs, thepurchase of products offered for sale in our retail outlets, and contract

 

24

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costs forentertainers. For the six month period ended March 31, 2005, these costsincreased approximately $2.1 million, or 69%. Of the increase, $1.0 million isattributed to the operation of the Seneca Allegany retail store.

 

Advertising, general and administrative expenses areincurred to support our operations. These expenses consist primarily of relatedpayroll and employee benefits costs, regulatory, advertising, marketing,insurance, legal and energy costs. The six month period ended March 31,2005 includes $21.3 million of such costs related to our Seneca AlleganyCasino. In addition, we made lease payments to the Nation for the land uponwhich we operate Seneca Niagara Casino totaling $6.0 million during eachof the six months ended March 31, 2005 and 2004, respectively.

 

*Non-Operating Expenses*

 

The following table summarizes information related tointerest on our long-term debt:

 
| ** **                 | ** ** | **Six Months Ended  March 31,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Interest expense           |       | $                                    | 22,805     |   | $ | 10,289 |   |
|                            |            |                                      |            |  |  |  |  |

 

Our interest cost for the six month period ended March 31,2005 is attributable to the $300 million aggregate principal amount of the2004 senior notes, issued in May 2004 by SGC, and SNFGC’s Term Loan, netof capitalized interest. The Term Loan requires us to make monthly interestpayments on the outstanding balance at one-month LIBOR plus 29%. As of March 31,2005 and 2004, $80.0 million and $57.3 million, respectively, wasoutstanding under the Term Loan. The increase in interest cost results from theissuance of the 2004 senior notes in May 2004 and the increased amountoutstanding under the Term Loan, partially offset by the May 2004 retirement of equipment loansfrom proceeds of the 2004 senior notes.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 
| ** **                                       | ** ** | **Six Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net cash  provided by operations                 |       | $                                    | 18,149     |   | $ | 36,701 |   |
| Investing cash  flows                            |       |                                 |       |   |   |
| Capital  expenditures                            |       | (85,984                              | )          | (51,983 | ) |
| Payments for  land acquisitions and other assets |       | (580                                 | )          | (5,093 | ) |
| Purchase of  investments                         |       | (53,859                              | )          | — |   |
| Net cash used in  investing activities           |       | $                                    | (140,423   | ) | $ | (57,076 | ) |
| Financing cash  flows                            |       |                                 |       |   |   |
| Deposits to  sinking fund                        |       | (17,631                              | )          | (6,008 | ) |
| Proceeds from  notes payable                     |       | —                               |       | 1,128 |   |
| Repayments of  notes payable                     |       | (278                                 | )          | (6,626 | ) |
| Payment of  deferred financing costs             |       | (519                                 | )          | (487 | ) |
| Dividends paid  to the Nation                    |       | (1,092                               | )          | (434 | ) |
| Net cash used in  financing activities           |       | (19,520                              | )          | (12,427 | ) |
| Net decrease in  cash and cash equivalents       |       | $                                    | (141,794   | ) | $ | (32,802 | ) |

 

25

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*Cash Flows—Operating Activities.*  Thedecrease in cash flows from operations during the six months ended March, 2005compared to the same period in 2004 resulted principally from the payment ofthe exclusivity fees during 2005 for January and February 2005 aswell as for the 2004 calendar year, whereas the payment in 2004 was only forthe 2003 calendar year.  This waspartially offset by six months of operations at Seneca Allegany Casino duringthis period, continued market penetration, and the increase in the membershipof our Seneca Link Player’s Card program.

 

*Cash Flows—Investing Activities.*  Ourcapital expenditures of $86.0 million during the six months ended March 31,2005 were comprised of $37.2 million of costs associated with the constructionof the Seneca Niagara luxury hotel, and $28.8 million related to theconstruction of the Seneca Allegany garage and hotel. Purchases of investmentsrepresent short-term investments of excess cash in instruments having amaturity of more than 90 days.

 

*Cash Flows—Financing Activities.*  SNFGC is obligated to maintain a minimum cash balance of $10.0 million anda pro rata share of the sinking fund obligation relating to its Term Loan,which required a payment of $5.5 million by March 31, 2005 and was made onMarch 31, 2005.

 

*Principal Debt Arrangements.*  Asof March 31, 2005, our long-term debt consists of the 2004 senior notes onwhich we will pay a fixed interest rate of 71⁄4%, and the $80.0 million onour Term Loan, upon which we pay variable interest based on LIBOR plus 29%.

 

During the next 24 months, we plan to makesubstantial capital improvements to our gaming facilities. In May 2004, atSeneca Niagara Casino we commenced construction of a new 600-room luxury hotel,including 35,000 square feet of additional gaming space with approximately 950slot machines. We expect the cost of constructing and equipping of this hotelto be approximately $200.0 million, which includes $153.0 million inconstruction costs pursuant to a guaranteed maximum fixed price design andconstruction contract for the luxury hotel, which includes a constructioncontingency of approximately $8.6 million, and approximately$47.0 million for furniture, fixtures and equipment. Seneca Niagara Casinowill remain open during the construction and completion of the luxury hotel.

 

The Nation intends to acquire the remaining 26 acresof the approximately 50 acres in the City of Niagara Falls, New York,designated by the State of New York under the Compact for ownership by theNation. Under the Compact, the Nation is required to fund the acquisition ofthis property, including all related costs and expenses. As initial securityfor the Nation’s obligations to pay site acquisition costs and as a conditionto the initiation of the condemnation proceeding, the Nation must deliver tothe Empire State Development Corporation, a letter of credit or cash escrow inthe aggregate amount of the greater of (a) approximately 150% of theestimate of the total remaining site acquisition costs not yet paid by theNation, and (b) any other

 

26

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amount required bythe court, or the Escrow Amount. We currently estimate 150% of site acquisitioncosts to be approximately $30.0 million.

 

We have been constructing a 1,850 space-parking garageand a 225-room hotel at our Seneca Allegany Casino. We estimate the cost toconstruct and equip the garage and hotel to be between $180.0 million and$185.0 million. We presently expect the garage to open by August 2005and the hotel by October 2006. The opening of the garage and hotel hasbeen delayed due to weather and construction issues. The construction issuesrelate to a portion of the garage being out of acceptable plumb tolerancelimits. The SGC board of directors has accepted the recommendation of thegarage’s construction manager to dismantle partially, to the extent necessary,and reassemble, to correct the out of plumb condition with the southeastportion of the garage. The Board accepted this recommendation because, based onthe construction manager’s representations, it will correct the problem withcertainty.

 

On May 10, 2005, SGC announced that it iscommencing an offering of an aggregate principal amount of $200.0 million ofadditional 71⁄4% senior notes due 2012 pursuant to an exemption from registrationunder the Securities Act of 1933.  The issuance would be an add-on to theexisting aggregate principal amount of $300 million of 71⁄4% senior notes due2012 that were issued in May 2004.  The add-on senior notes wouldhave substantially identically terms to, and form a single series with, thepreviously issued senior notes.

 

On May 9, 2005 SNFGC, the Nation and FreemantleLimited, or Freemantle, entered into an agreement to terminate the Term Loan,or the Termination Agreement. The Termination Agreement allows SNFGC to pay offthe Term Loan at a negotiated amount of approximately $126.0 million on orprior to May 23, 3005. The termination amount of $126.0 million reflectsthe payment of (i) the outstanding principal amount of $80.0 million underthe Term Loan, plus (ii) the aggregate amount of interest on suchprincipal at a prescribed interest rate that would otherwise be payable if theTerm Loan were not being paid on or about May 23, 2005. Payment of thisamount will result in a charge to earnings of approximately $50.0 million,including the write-off of $4.0 million of deferred financing costs. Theinterest rate is equal to one-month LIBOR as in effect three business daysimmediately preceding the closing of the senior note offering plus 29% perannum. Payment in full and termination of the Term Loan is expected to occur onor about May 23, 2005. The Company expects to use the proceeds from thesenior note offering described above or other financing in order to pay thenegotiated amount to Freemantle. There can be no assurance that we will be ableto complete the offering or an alternative financing in order to pay the Freemantletermination amount on or prior to May 23, 2005.

 

We expect cash generated from our operations,available cash as of March 31, 2005 and proceeds from our $200 millionsenior notes offering to be sufficient to fund our expansion plans describedabove, service our debt, and meet our working capital requirements for the nearfuture. However, our ability to fund our operations, make planned capitalexpenditures and service our debt depends on our future operating performance,cash flow and ability to raise funds in the public debt market,  which are in turn subject to prevailingeconomic conditions and to financial, business and other factors, some of whichare beyond our control. Additionally, unlike traditional corporations, we areprohibited by law from generating cash through an offering of equity securitiesand, as a result of completing the offering of the 2004 senior notes, ourability to incur additional indebtedness is limited under the terms of theindenture governing the 2004 senior notes.

 

27

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We are highly leveraged and have significant interestand sinking fund payment requirements pursuant to our 2004 senior notes andTerm Loan agreement. As such, limitations on our capital resources could forceus to delay or abandon capital projects as well as the construction anddevelopment of new properties.

 

**CapitalObligations and Commercial Commitments**

** **

The Company’s contractual obligations and commercialcommitments have not changed materially from the disclosures in our 2004 Form 10-K.

 

**Item3.**                    Quantitativeand Qualitative Disclosures About Market Risk

** **

Refer to our 2004 Form 10-K for a completediscussion of the Company’s market risk. There have been no material changes inthe current year regarding this market risk information.

 

**Regulation**

** **

Our operations are regulated by Nation laws, theCompact and federal statutes, most notably the Indian Gaming Regulatory Act, orIGRA. Several bills have been proposed during the current and recent sessionsof U.S. Congress that could affect Indian gaming. Notably, though its proposedlegislation has yet to be presented to Congress, the Policies and ProceduresSubproject of the Bureau of Indian Affairs has proposed sweeping changes to thefederal laws concerning Indians. Certain of such bills, if enacted, couldimpair the ability of the Nation and SGC to expand its gaming operations andadversely impact the future growth of the Nation’s revenue base. In addition,from time to time, various government officials have proposed taxing Indiancasino gaming or otherwise limiting or restricting the conduct of gamingoperations by Indian tribes. Senator John McCain, Chairman of the Senate IndianCommittee, has announced a series of hearings to consider a variety of possibleamendments to IGRA. If Congress were to enact comprehensive amendments to IGRA,such legislation could have a material affect on the operations of SGC. Inaddition, under federal law, gaming on the Nation’s lands may be dependent uponthe permissibility under New York law of certain forms of gaming or similaractivities. If the State of New York were to make various forms of gamingillegal or against public policy (or the courts were to rule similarly),or otherwise to take a legal position adverse to the Compact or any of itsprovisions, such actions could have a material adverse effect on the ability ofour casinos to conduct their gaming operations as currently conducted.Moreover, a 1996 U.S. Supreme Court decision may permit a state to avoid orrefuse to negotiate amendments to existing compacts such as the Compact.

 

**New AccountingPronouncements**

** **

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

 

**Item 4. Controlsand Procedures**

** **

Evaluation ofDisclosure Controls and Procedures

 

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We maintain disclosure controls and procedures thatare designed pursuant to Securities and Exchange Act Rule 13a-15 and 15d-15to ensure that information required to be disclosed in our Securities ExchangeAct of 1934 reports are 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 ourformer President and Chief Executive Officer, our interim President and ChiefExecutive Officer, Chief Financial Officer, and Senior Vice President ofFinance and Administration as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated have inherent limitations due to cost issues,the possibility of human error, judgments and assumptions regarding thelikelihood of future events, and the circumvention and overriding of thecontrols and procedures. Accordingly, even effective disclosure of controls andprocedures can provide only reasonable assurance of achieving the desiredcontrol objectives.  Notwithstanding theissues discussed above, we believe we have designed our disclosure controls andprocedures to provide reasonable assurance for our management to conclude thatour control systems are effective.

 

We carried out an evaluation as of March 31, 2005,under the supervision and with the participation of our management, includingour interim President and Chief Executive Officer, Chief Financial Officer, andSenior Vice President of Finance and Administration of the effectiveness of thedesign and operation of our disclosure controls and procedures. Our formerPresident and Chief Executive Officer, Chief Financial Officer, and Senior VicePresident of Finance and Administration concluded that our disclosure controlsand procedures as of March 31, 2005 were effective at the reasonableassurance level.

 

**Changes inInternal Control over Financial Reporting**

** **

There have not been any changes in our internalcontrol over financial reporting during the quarter-ended March 31, 2005that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II.****               ****OTHER INFORMATION**

 

**Item 1.**                    LegalProceedings

** **

None.

 

**Item2.**                    Changesin Securities and Use of Proceeds

** **

None.

 

**Item3.**                    Defaultsupon Senior Securities

** **

None.

 

**Item4.**                    Submissionof Matter to a Vote of Security Holders

** **

None.

 

**Item 5.**                    OtherInformation

** **

As previously disclosed in our Current Report on Form 8-Kfiled with the SEC on April 6, 2005, effective April 6, 2005, G.Michael Brown resigned as our President and Chief Executive Officer. Our boardof directors elected John Pasqualoni as interim President & CEO,effective April 6, 2005. Mr. Brown will continue to assist us as anoutside consultant until the end of the year.

 

As previously disclosed in our Current Report on Form 8-Kfiled with the SEC on May 10, SGC has commenced an offering of anaggregate principal amount of $200.0 million of additional 71⁄4% senior notes due2012 pursuant to an exemption from registration under the Securities Act of1933.  The issuance would be an add-on to the existing aggregate principalamount of $300 million of 71⁄4% senior notes due 2012 that were issued in May 2004. The add-on senior notes would have substantially identically terms to, and forma single series with, the previously issued senior notes.

 

As previously disclosed in our Current Report on Form 8-Kfiled with the SEC on May 9, 2005, SNFGC, the Nation and Freemantle haveentered into the Termination Agreement. The Termination Agreement allows SNFGCto pay off the Term Loan at a negotiated amount of approximately $126.0 millionon or prior to May 23, 3005. The termination amount of $126.0 millionreflects the payment of (i) the outstanding principal amount of $80.0million under the Term Loan, plus (ii) the aggregate amount of interest onsuch principal at a prescribed interest rate that would otherwise be payable ifthe Term Loan were not being paid on or about May 23, 2005. Payment ofthis amount will result in a charge to earnings of approximately $50.0 million,including the write-off of $4.0 million of deferred financing costs. Theinterest rate is equal to one-month LIBOR as in effect three business daysimmediately preceding the closing of the senior note offering plus 29% perannum. Payment in full and termination of the Term Loan is expected to occur onor about May 23, 2005. The Company expects to use the proceeds from the

 

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senior noteoffering described above or other financing in order to pay the negotiatedamount to Freemantle. There can be no assurance that we will be able tocomplete the offering or an alternative financing to pay the Freemantle terminationamount on or prior to May 23, 2005.

 

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**Item6.**                    Exhibitsand Reports of Form 8-K

 

(a)                Exhibits (listed according to the numberassigned in the table in item 601 of Regulation S-K):

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                      | ** ** | **Document  If incorporated by Reference** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                           | ** ** | ** **                                 |
| 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**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| Dated May 16, 2005                            |
|----------------------------------------------------|
|                                               |
|                                               |
| /s/ John  Pasqualoni                               |   |
| John Pasqualoni                                    |
| Interim  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)      |
|                                               |
| /s/ Annette M.  Smith                              |   |
| Annette M. Smith                                   |
| Chief Financial  Officer                           |

 

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