**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended December 31, 2004**

 

**OR**

 

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

 

**For thetransition period from                       to                       **

** **

**CommissionFile Number:**

 

**SENECA GAMING CORPORATION**

(Exact name of registrant as specified in its charter)

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

 

**310Fourth Street**

**NiagaraFalls, New York (Seneca Nation Territory) 14303**

**(716) 299-1100**

(Address, including zip code, and telephone number,including area code, of registrant’s principal executive offices)

 

Indicateby check mark whether the registrant has (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  o          No  ý

 

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

 

AtApril 30, 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**

 
| ** **   | ** **                                                                                            | **PAGE** |
|--------------|-------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                             | 1        |
| Item 1.      | Financial Statements                                                                                  | 1        |
|         | Consolidated Balance Sheets  at December 31, 2004 and September 30, 2004 (unaudited)             | 1        |
|         |                                                                                                  |     |
|         | Consolidated Statements  of Income for the quarters ended December 31, 2004 and 2003 (unaudited) | 2        |
|         |                                                                                                  |     |
|         | Consolidated  Statements of Cash Flows for the quarters ended December 31, 2004 and 2003  (unaudited) | 3        |
|         |                                                                                                  |     |
|         | Notes to  Consolidated Financial Statements                                                           | 4        |
|         |                                                                                                  |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 14       |
|         |                                                                                                  |     |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                           | 22       |
|         |                                                                                                  |     |
| Item 4.      | Controls  and Procedures                                                                              | 22       |
|         |                                                                                                  |     |
| **PART II.** | **OTHER INFORMATION**                                                                                 | 24       |
| Item 1.      | Legal  Proceedings                                                                                    | 24       |
| Item 2.      | Changes in  Securities and Use of Proceeds                                                            | 24       |
| Item 3.      | Defaults  upon Senior Securities                                                                      | 24       |
| Item 4.      | Submission  of Matter to a Vote of Security Holders                                                   | 24       |
| Item 5.      | Other  Information                                                                                    | 24       |
| Item 6.      | Exhibits  and Reports of Form 8-K                                                                     | 25       |

 

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**Part I.     FINANCIAL INFORMATION**

 

**Item I.     Financial Statements**

 

**SENECA GAMING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

 
| ** **                         | ** ** | **December 31,  2004**     | ** ** | **September 30,  2004** | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------------|------------|
|                               |       | **(dollars in thousands)** |       |
|                               |       | ** **                 |       |
| **Assets**                         |       |                       |       |                    |       |
| Cash and cash  equivalents         |       | $                          | 152,340    |                    | $          | 211,595 |   |
| Short-term  investments            |       | 91,869                     |       | 57,963                  |       |
| Receivables                        |       | 1,466                      |       | 1,348                   |       |
| Inventories                        |       | 2,249                      |       | 2,123                   |       |
| Other current  assets              |       | 3,371                      |       | 3,171                   |       |
| Total current  assets              |       | 251,295                    |       | 276,200                 |       |
|                               |       |                       |       |                    |       |
| Property and  equipment, net       |       | 312,836                    |       | 282,797                 |       |
| Other long-term  assets            |       | 36,576                     |       | 25,059                  |       |
| Total assets                       |       | $                          | 600,707    |                    | $          | 584,056 |   |
|                               |       |                       |       |                    |       |
| **Liabilities  and capital**       |       |                       |       |                    |       |
| Liabilities:                       |       |                       |       |                    |       |
| Current portion  of long-term debt |       | $                          | 187        |                    | $          | 325 |   |
| Trade payables                     |       | 2,238                      |       | 3,415                   |       |
| Construction  payables             |       | 17,401                     |       | 28,807                  |       |
| Dividends  payable – Nation   |       | —                     |       | 655                     |       |
| Exclusivity fees                   |       | 57,101                     |       | 41,549                  |       |
| Accrued interest                   |       | 5,780                      |       | 10,866                  |       |
| Other current  liabilities         |       | 30,253                     |       | 31,752                  |       |
| Total current  liabilities         |       | 112,960                    |       | 117,369                 |       |
|                               |       |                       |       |                    |       |
| Long-term debt                     |       | 380,000                    |       | 380,000                 |       |
| Total  liabilities                 |       | 492,960                    |       | 497,369                 |       |
|                               |       |                       |       |                    |       |
| Capital:                           |       |                       |       |                    |       |
| Retained  earnings                 |       | 107,747                    |       | 86,687                  |       |
| Total  liabilities and capital     |       | $                          | 600,707    |                    | $          | 584,056 |   |

 

*Seeaccompanying notes.*

 

1

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**SENECA GAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**(unaudited)**

 
| ** **                               | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                               |       | **(dollars in thousands)**           |       |
| ** **                               |       | ** **                           |       |
| **Revenues**                             |       |                                 |       |   |   |
| Gaming                                   |       | $                                    | 104,291    |   | $ | 67,858 |   |
| Food and  beverage                       |       | 9,676                                |       | 6,072 |   |
| Retail,  entertainment and other         |       | 4,234                                |       | 2,627 |   |
| Less-promotional  allowances             |       | (10,325                              | )          | (4,823 | ) |
| Net revenues                             |       | 107,876                              |       | 71,734 |   |
|                                     |       |                                 |       |   |   |
| **Expenses**                             |       |                                 |       |   |   |
| Gaming                                   |       | 28,627                               |       | 18,782 |   |
| Food and  beverage                       |       | 8,691                                |       | 5,089 |   |
| Retail,  entertainment and other         |       | 2,881                                |       | 1,624 |   |
| Advertising,  general and administrative |       | 29,231                               |       | 18,722 |   |
| Pre-opening  costs                       |       | 63                                   |       | 102 |   |
| Depreciation and  amortization           |       | 6,367                                |       | 3,158 |   |
| Total operating  costs and expenses      |       | 75,860                               |       | 47,477 |   |
|                                     |       |                                 |       |   |   |
| Operating income                         |       | 32,016                               |       | 24,257 |   |
| Interest income                          |       | 1,003                                |       | 39 |   |
| Interest expense                         |       | 11,956                               |       | 5,185 |   |
| Net income                               |       | $                                    | 21,063     |   | $ | 19,111 |   |

 

*Seeaccompanying notes.*

 

2

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**SENECA GAMING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                                         |       | **(dollars in thousands)**           |       |
| **Cash flows from operating activities**                                           |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 21,063     |   | $ | 19,111 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 6,367                                |       | 3,158 |   |
| Amortization of deferred financing costs                                           |       | 620                                  |       | 299 |   |
| Provision for bad debts                                                            |       | 20                                   |       | 25 |   |
| Fair market value adjustment of interest rate cap                                  |       | 117                                  |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                                 |       |   |   |
| Other current assets                                                               |       | (465                                 | )          | (23 | ) |
| Long-term assets                                                                   |       | 10                                   |       | — |   |
| Current liabilities                                                                |       | 7,790                                |       | 9,613 |   |
| Net cash provided by operating activities                                          |       | 35,522                               |       | 32,183 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from investing activities**                                           |       |                                 |       |   |   |
| Purchases of property and equipment                                                |       | (47,812                              | )          | (4,778 | ) |
| Payments for land acquisitions                                                     |       | (198                                 | )          | (3,612 | ) |
| Purchase of investments                                                            |       | (33,906                              | )          | — |   |
| Net cash used in investing activities                                              |       | (81,916                              | )          | (8,390 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from financing activities**                                           |       |                                 |       |   |   |
| Payments to sinking fund                                                           |       | (11,973                              | )          | (6,000 | ) |
| Repayments of notes payable                                                        |       | (138                                 | )          | (3,081 | ) |
| Payment of deferred financing costs                                                |       | (95                                  | )          | (209 | ) |
| Dividends paid to the Nation                                                       |       | (655                                 | )          | — |   |
| Net cash used in financing activities                                              |       | (12,861                              | )          | (9,290 | ) |
|                                                                               |       |                                 |       |   |   |
| (Decrease) increase in cash and cash equivalents                                   |       | (59,255                              | )          | 14,503 |   |
| Cash and cash equivalents at beginning of the period                               |       | 211,595                              |       | 59,628 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and cash equivalents at end of the period                                     |       | $                                    | 152,340    |   | $ | 74,131 |   |

 

*Seeaccompanying notes.*

 

3

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**SENECA GAMING CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**1.**             Organizationand Basis of Presentation

** **

The consolidatedfinancial statements include the accounts of Seneca Gaming Corporation, or SGCor the Company, and its wholly owned subsidiaries, or collectively, theCompany. In consolidation, all intercompany balances and transactions have beeneliminated. The accompanying unaudited consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information. Accordingly, they do notinclude 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-month period ended December 31, 2004 are not necessarilyindicative of the results that may be expected for the year endedSeptember 30, 2005. For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the period ended September 30, 2004, or the 2004 Form10-K.

 

SGC, which was formed onAugust 1, 2002, is wholly owned by the Seneca Nation of Indians, or theNation. The Nation is a federally recognized Indian tribe with totalterritorial land comprising approximately 54,000 acres in the Western New Yorkregion. SGC was organized by the Nation to operate and manage itsClass III Gaming activities pursuant to the Indian Gaming Regulatory Actof 1988, or IGRA. Under IGRA, federally recognized Indian tribes are permittedto conduct full-scale casino gaming operations on tribal land, subject to,among other things, the negotiation of a compact with the affected state.Pursuant to IGRA, the Nation entered into the Nation-State Gaming Compact withthe State of New York dated April 12, 2002, or the Compact, which has beenapproved by the Federal Bureau of Indian Affairs, U.S. Department of theInterior. The Compact provides the Nation the exclusive right to conductClass III gaming activities at three sites in the western region of theState of New York.

 

The Nation’s Constitutionestablished the Tribal Council, or the Council, to act as the Nation’slegislative authority. The Council acts on the Nation’s behalf with respect toSGC, and the Council established the Seneca Gaming Authority, or SGA, toregulate the gaming activities of SGC under the Compact.

 

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

 

•                  Seneca Niagara Falls Gaming Corporation, orSNFGC

•                  Seneca Territory Gaming Corporation, or STGC

•                  Seneca Erie Gaming Corporation, or SEGC

 

4

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SNFGC was formed onAugust 1, 2002 to operate the Nation’s gaming activities in Niagara Falls,New York. Operations at SNFGC’s casino, or Seneca Niagara Casino, commencedDecember 31, 2002.

 

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

 

SEGC was formed on August9, 2003 to operate the Nation’s gaming activities in Erie County, New York andhas selected a site for this facility near the Buffalo-Niagara InternationalAirport in Cheektowaga, New York. The purchase of this site is currentlysubject to litigation and SEGC is considering alternative sites. The exclusiveright, under the Compact, for the third site may terminate if the Nation orSEGC fails to commence construction of a Class III gaming facility in ErieCounty, New York by December 9, 2005, or if the Nation or SEGC fails tocommence Class III gaming operations by December 9, 2007.

 

**2.****             Long-TermDebt**

 

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

 
| ** **                                 | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **(In Thousands)**     | ** ** |
| 71⁄4% senior notes                      |       | $                      | 300,000    |                    | $          | 300,000 |   |
|                                       |       |                   |       |                    |       |
| Term Loan                                  |       | 80,000                 |       | 80,000                  |       |
|                                       |       |                   |       |                    |       |
| Other                                      |       | 187                    |       | 325                     |       |
|                                       |       | 380,187                |       | 380,325                 |       |
| Less current  maturities of long-term debt |       | 187                    |       | 325                     |       |
| Long-term debt                             |       | $                      | 380,000    |                    | $          | 380,000 |   |

 

**2004 71⁄4% SeniorNotes**

 

On May 5, 2004, SGCissued $300.0 million in senior notes with fixed interest payable at arate of 71⁄4% per annum due 2012, or the 2004 senior notes. These securities areguaranteed by STGC and SEGC, or collectively, the Guarantors. SNFGC, or theNon-Guarantor, will guarantee the debt securities after repayment of itsexisting Term Loan (defined below) in November 2007.

 

5

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The proceeds from the2004 senior notes were used to repurchase all of the outstanding equipmentfinancing (discussed below) and is being used principally to fund SNFGC’sconstruction and equipping of a 604-room hotel and the acquisition of land inNiagara Falls, as provided for in the Compact. In addition, $22.0 million ofthe proceeds was used to satisfy the obligation to the Empire State DevelopmentCorporation in connection with the transfer of certain property to the Nationfor use by the Nation as the location for the Seneca Niagara Casino. Intereston the 2004 senior notes is payable semi-annually on November 1 andMay 1. The 2004 senior notes are uncollateralized general obligations andare effectively junior to the Term Loan to the extent of the value of theassets securing the Term Loan. As of December 31, 2004, accrued interest on the2004 senior notes was $3.6 million.

 

The 2004 senior notesindenture contains certain financial and non-financial covenants. The financialcovenants include limitations on restricted payments and the incurrence ofindebtedness, while the non-financial covenants include reporting obligationsand compliance with laws and regulations. As of January 28, 2005, SGC has beenin compliance with all of its respective covenant requirements, other than itsfinancial reporting requirement, which it satisfied upon the filing of its 2004Form 10-K with the Securities and Exchange Commission, or SEC, on May 9, 2005and the filing of our Quarterly Report on Form 10-Q for the period ended December31, 2004 with the SEC on May 9, 2005. The reports were delayed due to theindependent investigation called for by the Council, which we disclosed in aCurrent Report on Form 8-K filed with the SEC on December 3, 2004 and January13, 2005.  See “Item 5—Other Information”for a discussion regarding the conclusion of the independent investigation. Thecovenants contained in the indenture permit the Company to borrow an additional$15.0 million for equipment and obtain a secured or unsecured credit facilityup to $150.0 million less the amount outstanding under the Term Loan.

 

**Term Loan**

 

SNFGC entered into a five-yearTerm Loan with Freemantle Limited, or the Lender, dated November 22, 2002,or the Term Loan. The Term Loan provided $80.0 million in financing forthe initial construction of the Seneca Niagara Casino and other related costs.As of December 31, 2004, $80.0 million was outstanding. The entireoutstanding balance is due on November 22, 2007.

 

SNFGC pays interest on amonthly basis in arrears at the one-month LIBOR plus twenty-nine percent (29%).In addition, SNFGC incurred an availability fee of 0.5% on any unborrowedbalance. On April 15, 2004, SNFGC borrowed the remaining $22.7 millionavailable under the Agreement.

 

SNFGC has pledgedsubstantially all of its assets as collateral for the outstanding amounts dueunder the Term Loan. SNFGC is also obligated to make payments into a sinkingfund account to be held for the benefit of and as additional collateral for theLender. A payment of $6.0 million was made in December 2003 and $12.0million was made in December 2004 into the sinking fund. CommencingJanuary 1, 2005 and through December 31, 2006, equal quarterlypayments for $5.5 million each are due on or before the last day of eachcalendar quarter, resulting in annual payments of $22.0 million.Commencing January 1, 2007 through the maturity date of the Term Loan,November 22, 2007, three equal quarterly payments are due on or before thelast day of the first three calendar quarters and one final payment is due onthe maturity date, of $4.5 million, or $18.0 million in total. At thematurity date of the Term Loan,

 

6

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$80.0 million of payments will have been made to the sinking fund thatwill be used to fully satisfy the outstanding balance. SNFGC may satisfy theseamounts by entering into an unconditional bank loan commitment or irrevocablestandby letter of credit for the benefit of the Lender.

 

The Term Loan containsvarious covenants; these include, but are not limited to, restrictions on SNFGC’sability to pay dividends, guarantee debt, limitations on additional borrowings,uses of cash, minimum debt coverage, and debt coverage threshold ratios. Inaddition, the Term Loan requires SNFGC to maintain, at all times through thematurity of the Term Loan, a minimum cash balance of $10.0 million. Inaddition, the Term Loan requires SNFGC to establish a segregated bank accountwhere its operating and investment cash is maintained. In the event of default,as defined in the Term Loan, the Lender has recourse to these funds asadditional collateral. SNFGC may obtain a release of the collateral pledged assupport for the borrowings by depositing funds sufficient to cover the$80.0 million principal balance of the Term Loan and all cumulativesuccessive interest payments until the maturity date of the Term Loan. Basedupon the $80.0 million principal amount borrowed under the Term Loan, thetotal funding required at December 31, 2004, in addition to the Sinking Fundbalance, would be approximately $138.1 million. As of January 28, 2005,SGC has been in compliance with all of its respective covenant requirements,other than its financial reporting requirement, which it satisfied upon thefiling of its 2004 Form 10-K with the Securities and Exchange Commission, orSEC, on May 9, 2005 and the filing of our Quarterly Report on Form 10-Q for theperiod ended December 31, 2004 with the SEC on May 9, 2005. The reports weredelayed due to the independent investigation called for by the Council, whichwe disclosed in a Current Report on Form 8-K filed with the SEC on December 3,2004 and January 13, 2005. See “Item 5—Other Information” for a discussionregarding the conclusion of the independent investigation..

 

**Equipment Financing**

 

SNFGC entered into fivefinancing arrangements with certain slot machine vendors providingapproximately $37.0 million of loans to finance SNFGC’s gaming equipment,including its slot machines. Interest rates on these loans ranged from 6.0% to 6.42%.These notes were retired in May 2004 using the proceeds from the 2004 senior notes. A gain of $415,000 wasrecognized, net of a $467,000 write-off of deferred financing fees related tothe settlement of these financing arrangements.

 

7

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**Derivative Instruments**

 

SGC is considered an “enduser” of derivative instruments and engages in derivative transactions for riskmanagement purposes only. Effective on May 25, 2004, SGC entered into twointerest rate cap agreements for an aggregate notional amount of$80.0 million, equal to the outstanding balance of the Term Loan. Theinstruments were purchased for approximately $1.1 million each,$2.2 million in total. Both instruments terminate on November 22,2007 simultaneously with the Term Loan. Interest rate caps limit the Company’sexposure on the Term Loan to 29% plus 4% on the thirty-day LIBOR, effectivelycapping the interest rate on the Term Loan at 33%.

 

The aggregate fair marketvalue change of SGC’s interest rate caps during the quarter ended December 31,2004 was an increase of $117,000 and is recorded as a reduction of interestexpense since the Company is not using hedge accounting. The value of theinterest rate caps at December 31, 2004 is $743,000 and is classified as otherlong-term assets in the accompanying balance sheet.

 

**3.**             Related-PartyTransactions

** **

**Land Lease fromthe Nation**

 

The Nation entered intoan operating lease agreement, or Head Lease, with SNFGC on October 25,2002, for use of the land and the building, which is currently the SenecaNiagara Casino. The Seneca Niagara Casino lease term is for 21 years andrequires monthly rent payments of $1.0 million. Rent payments commencedJuly 1, 2003. Rent is payable only to the extent that sufficient funds areavailable from the net proceeds derived from the operation of the SenecaNiagara Casino and other commercial activities related to the operation of theCasino. Rent payments are subordinate to the payment required under the TermLoan. During the three month periods ended December 31, 2004 and 2003, SNFGCmade lease payments to the Nation of $3.0 million and $3.0 million,respectively.

 

STGC leases the land uponwhich the Seneca Allegany Casino operates from the Nation pursuant to a verbalagreement. STGC and the Nation are finalizing a written lease for the land.During the three month period ended December 31, 2004 and 2003, STGC made leasepayments to the Nation of $3.0 million and $0, respectively. On February 16,2005, the lease payments were increased to $1.25 million per month effectiveMarch 1, 2005.

 

**Other Related-PartyTransactions**

 

The Company is charged bythe Nation for SGA regulatory costs, which are incurred by the Nation. SGAregulatory costs charged to the Company were approximately $1.9 millionand $1.2 million for the three months ended December 31, 2004 and 2003,respectively. The Company also incurs costs, which are passed through theNation for New York State gaming regulatory services, and New York State Policeand Cattaraugus County Sheriff Department services. The Company has recordedapproximately $2.1 million and $771,000 for the three months endedDecember 31, 2004 and 2003, respectively, in connection with these services.

 

8

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SGC incurred legal feesof $22,000 and $53,000 primarily for regulatory and Compact matters during thethree months ended December 31, 2004 and 2003, respectively, from a law firmthat specializes in gaming regulatory issues in which the former President/CEOof SGC, G. Michael Brown, is a partner. The former President/CEO did notreceive any remuneration from the law firm during 2004, and was not activelyinvolved in its management. The Company ceased using the services of this lawfirm effective November 8, 2004.

 

Duringthe three months ended December 31, 2004 and 2003, the Company purchased$107,000 and $109,000, respectively, of tobacco products from an entity wherethe owner is a member of the Council and a former SGA Commissioner.

 

During the three monthsended December 31, 2004 and 2003, the Company purchased $63,000 and $26,000 ofbottled water from an entity, which is owned by a member of the Council. As ofNovember 2, 2004 this individual is no longer a member of Council.

 

**4**.             Commitmentsand Contingencies

 

**The Seneca NationCompact**

 

As part of its Compact,the Nation agrees to contribute to the State of New York a portion of theproceeds from the operation and conduct of each category of gaming device forwhich exclusivity exists, based on the win of such machines (cash dropped intomachines, after payouts but before expenses) and totaled on a cumulativequarterly basis to be adjusted annually at the end of the relevant calendaryear. The exclusivity fee to the State of New York for years 1-4 is 18.0% paidon an annual basis. Thereafter, the exclusivity fee is 22.0% for years 5-7 on asemi-annual basis and 25.0% for years 8-14 on a quarterly basis.

 

Amounts due to New YorkState were $57.1 million and $41.5 million as of December 31, 2004, and September 30,2004, respectively, and are recorded as exclusivity fees on the accompanyingbalance sheet. The SNFGC and STGC portions’ of the December 31, 2004 liabilityare $44.8 million and $12.3 million, respectively. SGC transferred $57.1million in January 2005 to the Nation for the exclusivity fee owed to New YorkState. The Nation transferred the exclusivity fee to the State of New York onApril 28, 2005.

 

**Additional CasinoLocation and Expansions**

** **

As described inNote 1, the Compact provides the Nation the exclusive right to conductClass III gaming activities at three sites in the western region of theState of New York. On April 9, 2004, we entered into a non-binding letterof intent with Uniland to purchase approximately 57.1 acres of property for 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 SEGC. On June 16, 2004, Justice Makowski of theSupreme Court of the State of New York agreed with the plaintiffs and held thatthe Compact 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. On April 27, 2005,the Town of Cheektowaga filed a brief to appeal the Supreme Court decision.

 

9

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This facility as well as planned expansions of Seneca Niagara Casinoand Seneca Allegany Casino will require significant capital outlays. The amountand timing of these capital expenditures are dependent on various factorsincluding financing availability, certain Nation and governmental approvals,construction timelines, and the performance of its two operating facilities.

 

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

 

Effective January 1,2005, at the direction of the Council, the Class II gaming operations at SenecaNiagara Casino and Seneca Allegany Casino, were transferred to the Nation’sClass II gaming division.  The Companyhad total revenues from these Class II gaming operations of approximately $3.4million in the three months ended December 31, 2004 and none in the threemonths ended December 31, 2003.  Alsoequipment with a net book value of $2.2 million was transferred to the Nationon January 1, 2005; this was recorded as a distribution to the Nation inJanuary 2005.

 

**6.**             CondensedConsolidating Financial Statement Information

** **

SGC, or the Parent,issued $300 million of senior notes in May 2004. These securities areguaranteed by STGC and SEGC or collectively, the Guarantors. SNFGC, or theNon-Guarantor, will guarantee the debt securities after repayment of itsexisting Term Loan.

 

Condensed consolidating financial information for theParent and Guarantors and Non-Guarantor is as follows:

 

**Condensed Consolidating BalanceSheetDecember 31, 2004**

 
| ** **                              | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                    |       |                       |       |              |       |             |       |      |       |
| **Assets**                              |       |                       |       |              |       |             |       |      |       |
| Cash and cash  equivalents              |       | $                          | 93,828     |              | $          | 58,512           |       | $         | —     |   | $ | 152,340 |   |
| Short-term  investments                 |       | 91,869                     |       | —            |       | —           |       | 91,869    |       |
| Other current  assets                   |       | 813                        |       | 6,273             |       | —           |       | 7,086     |       |
| Total current  assets                   |       | 186,510                    |       | 64,785            |       | —           |       | 251,295   |       |
| Property and  equipment, net            |       | 111,397                    |       | 201,439           |       | —           |       | 312,836   |       |
| Other long-term  assets                 |       | 13,046                     |       | 23,530            |       | —           |       | 36,576    |       |
| Investment in  non-guarantor subsidiary |       | 128,951                    |       | —            |       | (128,951         | )          | —    |       |
| Total assets                            |       | $                          | 439,904    |              | $          | 289,754          |       | $         | (128,951   | ) | $ | 600,707 |   |
|                                    |       |                       |       |              |       |             |       |      |       |
| **Liabilities  and Capital**            |       |                       |       |              |       |             |       |      |       |
|                                    |       |                       |       |              |       |             |       |      |       |
| Current  liabilities                    |       | $                          | 32,157     |              | $          | 80,803           |       | $         | —     |   | $ | 112,960 |   |
| Long-term debt                          |       | 300,000                    |       | 80,000            |       | —           |       | 380,000   |       |
| Total capital                           |       | 107,747                    |       | 128,951           |       | (128,951         | )          | 107,747   |       |
| Total  liabilities and capital          |       | $                          | 439,904    |              | $          | 289,754          |       | $         | (128,951   | ) | $ | 600,707 |   |

 

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**Condensed Consolidating BalanceSheetSeptember 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 |   |

 

**Condensed Consolidating Statement of IncomeFor the Three Months Ended December 31, 2004**

 
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total**      | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|----------------|------------|
|                                            |       |                       |       |              |       |             |       |           |       |
| Net revenue                                     |       | $                          | 32,326     |              | $          | 75,550           |       | $ —  |       | $ | 107,876 |   |
| Expenses                                        |       |                       |       |              |       |             |       |           |       |
| Gaming and other  operations                    |       | 11,840                     |       | 28,359            |       | —           |       | 40,199         |       |
| Advertising,  general and administrative        |       | 10,450                     |       | 18,781            |       | —           |       | 29,231         |       |
| Pre-opening  costs                              |       | 51                         |       | 12                |       | —           |       | 63             |       |
| Depreciation and  amortization                  |       | 2,015                      |       | 4,352             |       | —           |       | 6,367          |       |
| Total operating  expenses                       |       | 24,356                     |       | 51,504            |       | —           |       | 75,860         |       |
|                                            |       |                       |       |              |       |             |       |           |       |
| Operating income  (loss)                        |       | 7,970                      |       | 24,046            |       | —           |       | 32,016         |       |
| Interest income                                 |       | 884                        |       | 119               |       | —           |       | 1,003          |       |
| Interest expense                                |       | (5,579                     | )          | (6,377            | )          | —           |       | (11,956        | )          |
| Equity in  earnings of non-guarantor subsidiary |       | 17,788                     |       | —            |       | (17,788          | )          | —         |       |
|                                            |       |                       |       |              |       |             |       |           |       |
| Net income                                      |       | $                          | 21,063     |              | $          | 17,788           |       | $ (17,788 | )          | $ | 21,063 |   |

 

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**Condensed Consolidating Statement of IncomeFor the Three Months Ended December 31, 2003**

 
| ** **                                      | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-----------|------------|
|                                            |       |                       |       |              |       |             |       |      |       |
| Net revenue                                     |       | $                          | —     |              | $          | 71,734           |       | $         | —     |   | $ | 71,734 |   |
| Expenses                                        |       |                       |       |              |       |             |       |      |       |
| Gaming and other  operations                    |       | —                     |       | 25,496            |       | —           |       | 25,496    |       |
| Advertising,  general and administrative        |       | 64                         |       | 18,657            |       | —           |       | 18,721    |       |
| Pre-opening  costs                              |       | 102                        |       | —            |       | —           |       | 102       |       |
| Depreciation and  amortization                  |       | —                     |       | 3,158             |       | —           |       | 3,158     |       |
| Total operating  expenses                       |       | 166                        |       | 47,311            |       | —           |       | 47,477    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Operating income                                |       | (166                       | )          | 24,423            |       | —           |       | 24,257    |       |
| Interest income                                 |       | —                     |       | 39                |       | —           |       | 39        |       |
| Interest expense                                |       | —                     |       | (5,185            | )          | —           |       | (5,185    | )          |
| Equity in  earnings of non-guarantor subsidiary |       | 19,277                     |       | —            |       | (19,277          | )          | —    |       |
|                                            |       |                       |       |              |       |             |       |      |       |
| Net income                                      |       | $                          | 19,111     |              | $          | 19,277           |       | $         | (19,277    | ) | $ | 19,111 |   |

 

**CondensedConsolidating Statement of Cash FlowsFor the Three Months Ended December 31, 2004**

 
| ** **                                            | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-----------|------------|
| Net cash flows provided by operations                 | ** ** | $                          | 1,271      | ** **         | $          | 34,251    | ** ** | $ | 35,522 | ** ** |
| Net cash used in investing activities                 | ** ** | (64,187                    | )          | (17,729            | )          | (81,916   | )          |
| Repayment of  notes payable                           |       | (138                       | )          | —             |       | (138      | )          |
| Payment to sinking  fund                              |       | —                     |       | (11,973            | )          | (11,973   | )          |
| Payment of  deferred financing costs                  |       | (64                        | )          | (31                | )          | (95       | )          |
| Intercompany  transactions                            |       | 313                        |       | (313               | )          | —    |       |
| Transfers to  Nation                                  |       | (655                       | )          | —             |       | (655      | )          |
| Net cash used in  financing activities                |       | (544                       | )          | (12,317            | )          | (12,861   | )          |
| Net increase  (decrease) in cash and cash equivalents |       | (63,460                    | )          | 4,205              |       | (59,255   | )          |
| Cash and cash  equivalents at beginning of period     |       | 157,288                    |       | 54,307             |       | 211,595   |       |
| Cash and cash  equivalents at end of period           |       | $                          | 93,828     |               | $          | 58,512    |       | $ | 152,340 |   |

 

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**CondensedConsolidating Statement of Cash FlowsFor the Three Months Ended December 31, 2003**

 
| ** **                                           | ** ** | **Parent and  Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-----------|------------|
| Net cash flows provided by (used in) operations      |       | $                          | (148       | )                  | $          | 32,331    |       | $ | 32,183 |   |
| Net cash used in  investing activities               |       | (3,575                     | )          | (4,815             | )          | (8,390    | )          |
| Repayment of  notes payable                          |       | —                     |       | (3,081             | )          | (3,081    | )          |
| Payment to  sinking fund                             |       | —                     |       | (6,000             | )          | (6,000    | )          |
| Payment of  deferred financing costs                 |       | —                     |       | (209               | )          | (209      | )          |
| Intercompany  transactions                           |       | 39                         |       | (39                | )          | —    |       |
| Distribution to  SGC                                 |       | 15,000                     |       | (15,000            | )          | —    |       |
| Net cash  provided by (used in) financing activities |       | 15,039                     |       | (24,329            | )          | (9,290    | )          |
| Net increase in  cash and cash equivalents           |       | 11,316                     |       | 3,187              |       | 14,503    |       |
| Cash and cash  equivalents at beginning of period    |       | —                     |       | 59,628             |       | 59,628    |       |
| Cash and cash  equivalents at end of period          |       | $                          | 11,316     |               | $          | 62,815    |       | $ | 74,131 |   |

 

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

** **

You should read thefollowing discussion and analysis in conjunction with the sections titled “FinancialStatements and Notes to Consolidated Financial Statements” included elsewherein this Form 10-Q. References below to years are to fiscal years of SenecaGaming Corporation unless otherwise noted. Seneca Gaming Corporation’s fiscalyear is from October 1 through September 30.

 

**Overview**

** **

Seneca Gaming Corporationis wholly owned by the Seneca Nation of Indians of New York and chartered tomanage and direct all of the Nation’s Class III gaming operations. The Nationentered into a Compact with New York State on August 18, 2002 thatprovides the Nation with the right to establish and operate threeClass III gaming facilities in Western New York. We opened our firstClass III gaming facility on Nation Territory in the City of NiagaraFalls, New York on December 31, 2002, featuring both Class III slotmachines and table games. This facility is operated by our wholly ownedsubsidiary SNFGC. On May 1, 2004, we opened our second Class IIIgaming facility, Seneca Allegany Casino, on the Nation’s Territory in the Cityof Salamanca, New York. This facility features Class III slot machines andtable games. The Nation formed this facility on September 20, 2003. Thisfacility is operated by our wholly owned subsidiary STGC.

 

Our consolidated resultsof operations for the quarter ended December 31, 2004 are impacted by theMay 1, 2004 opening of our Seneca Allegany Casino. Comparisons ofconsolidated results of operations are not meaningful due to this fact.

 

Under the Compact, theNation has the right to establish and operate a third Class III gamingfacility in Erie County, New York. If the Nation fails to commence constructionof a Class III gaming facility in Erie County by December 9, 2005, orif the Nation fails to commence Class III Gaming operations by December 9,2007, the Nation’s exclusive right under the Compact to own and operate a Class IIIgaming facility in Erie County may terminate. On April 9, 2004, we enteredinto a non-binding letter of intent with Uniland to purchase the CheektowagaSite. The letter of intent provides that our purchase of this property issubject to our ability to enter into a definitive purchase agreement, have thisland placed in restricted fee for gaming by the U.S. Department of the Interiorand Uniland’s ability to enter into an agreement with the Town of Cheektowagafor various make-whole benefits for Uniland. 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 us on the basis that the Nation’s ability,pursuant to the Compact, to locate a Class III gaming facility anywhere inErie County in the event a site in the City of Buffalo is rejected by theNation for any reason is unconstitutional. On June 16, 2004, JusticeMakowski of the Supreme Court of the State of New York agreed with theplaintiffs and held that the Compact provision allowing the Nation to locate aClass III gaming facility in Erie County outside the City of Buffalo isunconstitutional. The Court’s decision further permanently restrained andenjoined (1) Governor Pataki and the State of New York from any action oractivity 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 and Uniland filed a brief to appeal the SupremeCourt decision and we support its decision to appeal. Subsequent to thisdecision, 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 a result of the ongoing litigation, theNation and SGC may consider alternative sites.

 

**Executive Summary**

** **

*OurCurrent Operations.*  We currently operate twoClass III gaming facilities, Seneca Niagara Casino, in the City of NiagaraFalls, New York, and Seneca Allegany Casino, in the City of Salamanca, NewYork. Our casino operations include gaming, dining, entertainment and

 

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retail. For the three month period ended December 31, 2004,approximately 91%, of our net revenue was derived from our Class IIIgaming activities.

 

*KeyPerformance Indicators.*  Our operating results aredependent on the volume of profitable patrons visiting our casinos and ourability to attract them for repeat visits.

 

*SenecaNiagara Casino.*  Seneca Niagara Casino currentlyrelies primarily on drive-in and bus patrons from the Buffalo, Niagara Falls,and Rochester areas in New York and secondarily from the Erie, Pennsylvaniaarea, Ohio and other parts of New York. Since opening on December 31,2002, Seneca Niagara Casino has experienced steady growth in its patron base,net revenue and profitability. We believe that the proposed expansion of SenecaNiagara Casino, including the addition of a luxury hotel and other amenities,will enable us to increase profitable patron volume and gaming activity, extendour geographic penetration and appeal to a more diverse demographic base. Thefirst phase of this expansion is expected to open in December 2005, and willadd over 35,000 square feet of gaming space, 600 rooms, a multi-purpose roomfor conventions, banquets and entertainment events, and an 18,000 square-footspa.

 

As of December 31, 2004,we had paid for substantially all of our completed expansion projects out ofcash flow from operations. Our completed expansion projects include theaddition of Turtle Island, a non-smoking casino room, the Blue Heron Club, agaming salon designed exclusively for high stakes table game patrons, a new2,400-space parking garage, and the Western Door, an upscale steakhouse. In May 2004,we opened a non-smoking poker room with sixteen tables. In June 2004, weopened our “Pennies From Heaven” slot room located on the mezzanine leveloverlooking our casino, adding approximately 6,600 square feet of gaming spaceand 242 additional ticketed slot machines. In addition, this project addedapproximately 7,800 square feet of banquet space for up to 350 patrons.

 

*SenecaAllegany Casino.*  Since opening on May 1, 2004,Seneca Allegany Casino has experienced steady growth in its patron base, netrevenue, and profitability. Seneca Allegany Casino has attracted patrons fromthe southern portion of Western New York, Erie and Pittsburgh Pennsylvania, andOhio. Through December 31, 2004, 50%, of its patrons originated outside of theState of New York.

 

We are building a1,850-space parking garage, and are constructing a 225-room hotel at SenecaAllegany Casino. We believe this expansion is necessary to provide afirst-class gaming experience for our patrons and to maintain the competitiveposition of the facility in light of expected future competition inPennsylvania. We expect that this expansion will cost between $180.0 to$185.0 million and we plan to fund this expansion with cash flows fromoperations and cash on hand. As previously disclosed in our Current Report on Form8-K filed with the Securities and Exchange Commission on January 13, 2005, thegarage construction has been delayed by an out of plumb condition on a portionof the garage. We now expect the garage to open in August 2005 and the hotel toopen by November 2006. We funded all the construction, equipment andpre-opening costs of Seneca Allegany Casino entirely from Seneca NiagaraCasino’s free cash flow, in the form of inter-company loans from SGC.

 

We intend to purchase thesite of our future casino in Erie County from our cash flow. We currently relyand will continue to rely on our ability to generate cash flow from operationsto

 

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repay our debt financing, fund the maintenance of our facilities andprovide funds for our planned future expansions.

 

As of December 31, 2004,our results of operations have not been seasonal in nature.

 

*OverallOutlook.*  As discussed in more detail above, sinceinception, we have invested heavily in our operations and plan to continue todo so during the remainder of fiscal 2005 and in fiscal 2006. We believe thatinvestments in additional gaming space and non-gaming amenities at ourfacilities and our exclusive ability to offer Class III gaming in WesternNew York, will enable us to capitalize on what we believe is an underservedmarket 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.

 

**Operating Results**

** **

*Operating Results*

 
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**              | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Net revenue                             | ** ** | $                                    | 107,876    | ** ** | $ | 71,734 | ** ** |
| Operating expenses:                     |       |                                 |       |   |   |
| Gaming                                  |       | 28,627                               |       | 18,782 |   |
| Food and beverage                       |       | 8,691                                |       | 5,089 |   |
| Retail, entertainment and other         |       | 2,881                                |       | 1,624 |   |
| Advertising, general and administrative |       | 29,231                               |       | 18,722 |   |
| Pre-opening costs                       |       | 63                                   |       | 102 |   |
| Depreciation and amortization           |       | 6,367                                |       | 3,158 |   |
|                                    |       |                                 |       |   |   |
| Operating income                        |       | $                                    | 32,016     |   | $ | 24,257 |   |

 

The most important factorsand trends contributing to our operating performance during the three monthperiods ended December 31, 2004 and 2003 were:

 

•                  Ourability to successfully market Seneca Niagara Casino and, since its May 1,2004 opening, Seneca Allegany Casino, to our primary and secondary targetmarkets.

 

•                  Ourability to enroll over 710,000 patrons in our cross-property Seneca Link Player’sCard program, which has increased our ability to use effective direct mail andtargeted marketing programs to establish patron loyalty to the Seneca brand ata profitable level.

 

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

 

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•                  Ouruse of current information technology, including “ticket-in/ticket-out” slotmachines, automated jackpot payment machines, electronic slot bonusing anddatabase programs to increase operating efficiencies.

 

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

 

•                  Ourcontinued expansion at and reinvestment in both of our properties.

 

*Detailed Revenue Information*

* *
| ** **                       | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**       | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                             |       |                                 |       |   |   |
| Gaming revenue:                  |       |                                 |       |   |   |
| Slots                            |       | $                                    | 84,213     |   | $ | 55,081 |   |
| Table games                      |       | 16,514                               |       | 12,641 |   |
| Class II and  other              |       | 3,564                                |       | 136 |   |
| Gaming revenue                   |       | 104,291                              |       | 67,858 |   |
|                             |       |                                 |       |   |   |
| Non-gaming revenue:              |       |                                 |       |   |   |
| Food  and beverage               |       | 9,676                                |       | 6,072 |   |
| Retail,  entertainment and other |       | 4,234                                |       | 2,627 |   |
| Non-gaming  revenue              |       | 13,910                               |       | 8,699 |   |
| Less promotional  allowance      |       | (10,325                              | )          | (4,823 | ) |
| Net revenue                      |       | $                                    | 107,876    |   | $ | 71,734 |   |

 

Our gaming revenue forthe three months ended December 31, 2004 increased relative to the comparableperiods last year due to the opening of Seneca Allegany Casino on May 1,2004, which added approximately 1,886 slot machines and 24 table games to ouroperations, the addition of 315 slot machines at Seneca Niagara Casino andcontinued growth in our patron base. As of December 31, 2004, our casinos hadan aggregate of 122 table games, 32 poker tables, and 5,127 slot machinesavailable to our patrons, representing a net increase of 8 table games, 32poker tables and 2,201 slot machines from December 31, 2003. During theseperiods, the number of patrons enrolled in our Seneca Link Player’s Cardprogram has steadily increased. As of December 31, 2004, we had over 710,000patrons enrolled, an increase of approximately 368,000 patrons over the numberof enrolled members at December 31, 2003.

 

Our net gaming revenueincreased $34.1 million, or 50%, for the three-month period endedDecember 31, 2004 relative to the comparable period ended December 31,2003. During the three month period ended December 31, 2004, Seneca NiagaraCasino net revenue increased $3.4 million, or 5%. Seneca Allegany Casinoaccounted for $30.7 million of our increased net revenue for the threemonths ended December 31, 2004. Class II gaming operations were transferred tothe Nation on January 1, 2005. Included in the net gaming revenues for thethree-month period ended December 31, 2004 was $3.4 million of Class II gamingrevenues, which includes poker.

 

Our food and beveragerevenue and retail revenue have increased in direct relation to our increase ingaming revenue. There is a direct relation of our food and beverage revenue

 

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and retail revenue to our gaming revenue because a significant portionof this revenue is from players’ point redemptions. For the three-month periodended December 31, 2004 and 2003, 50% and 50% of our food and beverage revenueand 87% and 87% of our retail revenue, respectively, represented players’ pointredemptions. For the three month period ended December 31, 2004, food andbeverage revenue increased $3.6 million, or 59% to $9.7 million. For thethree month period ended December 31, 2004, Seneca Niagara Casino generated anadditional $1.0 million compared to the prior period, primarily due tohigher gaming revenue and the opening in May 2004 of our steakhouse. SenecaAllegany Casino generated $2.6 million in food and beverage revenue duringthe period.

 

For the three-monthperiod ended December 31, 2004, our retail, entertainment and other revenueincreased by $1.6 million, or 61%, compared to the comparable 2003 period.This increase is primarily attributed to higher revenue at our Seneca NiagaraCasino of $0.7 million and $0.9 million of retail and other revenues at SenecaAllegany Casino.

 

*DetailedOperating Expenses Information*

 
| ** **                               | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                     |       |                                 |       |   |   |
| Operating  expenses:                     |       |                                 |       |   |   |
| Gaming                                   |       | $                                    | 28,627     |   | $ | 18,782 |   |
| Food and beverage                        |       | 8,691                                |       | 5,089 |   |
| Retail,  entertainment and other         |       | 2,881                                |       | 1,624 |   |
| Advertising,  general and administrative |       | 29,230                               |       | 18,722 |   |
| Pre-opening  costs                       |       | 63                                   |       | 102 |   |
| Depreciation and  amortization           |       | 6,367                                |       | 3,158 |   |
| Operating  expenses                      |       | $                                    | 75,860     |   | $ | 47,477 |   |

 

Gaming expensesprincipally consist of costs incurred from operating our table games and slotmachines, of which the primary components are related payroll and employeebenefit costs, and the slot exclusivity fee due to New York State pursuant tothe Compact. For the three months ended December 31, 2004 and 2003, the slotexclusivity fee was $15.5 million and $10.1 million, respectively.Seneca Allegany Casino incurred a slot exclusivity fee of $4.7 millionduring the three month period ended December 31, 2004. The increase in theSeneca Niagara Casino portion of the slot exclusivity fee is attributed tohigher slot revenue. In January 2005, we transferred $57.1 million to theNation for payment of the exclusivity fee for the 2004 calendar year. Currently,the exclusivity fee is 18% of the slot machine net drop (money dropped into themachines after payout but before our expenses). This fee will increase to 22%on January 1, 2007 and to 25% on January 1, 2010.

 

Food and beverageexpenses are costs we incur for the operation of our restaurants, snack barsand beverage outlets. The primary components of these expenses are the cost offood and beverages and related payroll and employee benefit expenses. For thethree months ended December 31, 2004 our food and beverage costs increased $3.6million, or 71%. This increase was due to the higher food and beverage revenueat Seneca Niagara Casino associated with the opening of our steakhouserestaurant in May 2004, and $2.5 million of costs at Seneca Allegany Casinoincurred in the three-month period ended December 31, 2004.

 

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Retail, entertainment andother expenses represent our costs to operate our retail shops andentertainment offerings. The components of these expenses include relatedpayroll and employee benefit costs, the purchase of products offered for salein our retail outlets, and contract costs for entertainers. For the threemonths ended December 31, 2004, these costs increased approximately $1.3million, or 77%. Of the increase, $1.0 million is attributed to higher pointredemptions by our patrons at Seneca Niagara Casino for retail merchandise.

 

Advertising, general andadministrative expenses are incurred to support our operations. These expensesconsist primarily of related payroll and employee benefits costs, regulatory,advertising, marketing, insurance, legal and energy costs. The three-monthperiod ended December 31, 2004 includes $10.4 million of advertising, generaland administrative expenses related to our Seneca Allegany Casino. In addition,we made lease payments to the Nation for the land upon which we operate SenecaNiagara Casino totaling $3.0 million and $3.0 million during thethree months ended December 31, 2004 and 2003, respectively.

 

*Non-Operating Expenses*

 

The following tablesummarizes information related to interest on our long-term debt:

 
| ** **                 | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                       |       |                                 |       |   |   |
| Interest expense           |       | $                                    | 11,956     |   | $ | 5,185 |   |
|                            |            |                                      |            |  |  |  |  |

 

Our interest cost for thethree months ended December 31, 2004 is attributable to the $300 millionaggregate principal amount of the 2004 senior notes, issued in May 2004 bySGC, and SNFGC’s Term Loan, net of capitalized interest. The Term Loan requiresus to make monthly interest payments on the outstanding balance at one-monthLIBOR plus 29%. As of December 31, 2004 and 2003, $80.0 million and$57.3 million were outstanding respectively 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 retirement of equipment loans retired in May 2004 fromproceeds of the 2004 senior notes.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 
|                                                 |       | **Three Months Ended  December 31,** |       |
|------------------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**                           | ** ** | **2004**                             | ** ** | **2003** |   |
|                                                 |       |                                 |       |   |   |
| Net cash provided by operations                      |       | $                                    | 35,522     |   | $ | 32,183 |   |
| Investing cash flows                                 |       |                                 |       |   |   |
| Capital expenditures                                 |       | (47,812                              | )          | (4,778 | ) |
| Payments for land acquisitions and other assets      |       | (198                                 | )          | (3,612 | ) |
| Purchase of investments                              |       | (33,906                              | )          | — |   |
|                                                 |       |                                 |       |   |   |
| Net cash used in investing activities                |       | (81,916                              | )          | (8,390 | ) |
| Financing cash flows                                 |       |                                 |       |   |   |
| Deposits to sinking fund                             |       | (11,973                              | )          | (6,000 | ) |
| Repayments of notes payable                          |       | (138                                 | )          | (3,081 | ) |
| Payment of deferred financing costs                  |       | (95                                  | )          | (209 | ) |
| Cash dividends to the Nation                         |       | (655                                 | )          | — |   |
|                                                 |       |                                 |       |   |   |
| Net cash used in financing activities                |       | (12,861                              | )          | (9,290 | ) |
|                                                 |       |                                 |       |   |   |
| Net increase (decrease) in cash and cash equivalents |       | $                                    | (59,255    | ) | $ | (14,503 | ) |

 

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*CashFlows—Operating Activities.*  The increase in cashflows from operations during the three months ended December 31, 2004 comparedto the same period in 2003 resulted from three months of operations at SenecaAllegany Casino during this period, continued market penetration,  and the increase in the membership of ourSeneca Link Player’s Card program.

 

*CashFlows—Investing Activities.*  Our capitalexpenditures of $47.8 million during the three months ended December 31,2004 were comprised of $17.6 million of costs associated at the SenecaNiagara Casino related principally to the construction of the luxury hotel, and$30.2 million related to the construction of the Seneca Allegany garageand hotel. Purchases of investments represent short-term investments of excesscash in instruments having a maturity of more than 90 days.

 

*CashFlows—Financing Activities.*   SNFGC is obligatedto maintain a minimum cash balance of $10.0 million and a pro rata shareof the sinking fund obligation relating to its Term Loan, which required apayment of $12.0 million by December 31, 2004 and was made onDecember 30, 2004. Repayments of notes payable principally represents paymentsagainst equipment financing arrangements that were outstanding as of December31, 2003.

 

*PrincipalDebt Arrangements.*  As of December 31, 2004, ourlong-term debt consists of the 2004 senior notes on which we will pay a fixedinterest rate of 71⁄4%, and the $80.0 million on our Term Loan, upon whichwe pay variable interest based on LIBOR plus 29%.

 

During the next24 months, we plan to make substantial capital improvements to our gamingfacilities. In May 2004, at Seneca Niagara Casino we commencedconstruction of a new 604-room luxury hotel, including 35,000 square feet ofadditional gaming space with approximately 950 slot machines. We expect thecost of constructing and equipping of this hotel to be approximately$200.0 million, which includes $153.0 million in construction costspursuant to a guaranteed maximum fixed price design and construction contractfor the luxury hotel, which includes a construction contingency ofapproximately $8.6 million, and approximately $47.0 million forfurniture, fixtures and equipment. Seneca Niagara Casino will remain openduring the construction and completion of the luxury hotel.

 

The Nation intends toacquire the remaining 26 acres of the approximately 50 acres in the City ofNiagara Falls, New York, designated by New York State under the Compact forownership by the Nation. Under the Compact, the Nation is required to fund theacquisition of this property, including all related costs and expenses. Asinitial security for the Nation’s obligations to pay site acquisition costs andas a condition to the initiation of the condemnation proceeding, the Nationmust deliver to the Empire State Development Corporation, a letter of credit orcash escrow in the aggregate amount of the greater of (a) approximately150% of the estimate of the total remaining site acquisition costs not yet paidby the Nation, and (b) any other

 

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amount required by the court, or the Escrow Amount. We currentlyestimate 150% of site acquisition costs to be approximately $30.0 million.

 

We have been constructinga 1,850 space-parking garage and a 225-room hotel at our Seneca AlleganyCasino. We estimate the cost to construct and equip the garage and hotel to bebetween $180.0 million and $185.0 million. We presently expect thegarage to open by August 2005 and the hotel by November 2006. The openingof the garage and hotel has been delayed due to weather and constructionissues. The construction issues relate to a portion of the garage being out ofacceptable plumb tolerance limits. The SGC board of directors has accepted therecommendation of the garage’s construction manager to dismantle partially, tothe extent necessary, and reassemble, to correct the out of plumb conditionwith the southeast portion of the garage. The Board accepted thisrecommendation because, based on the construction manager’s representations, itwill correct the problem with certainty.

 

We expect cash generatedfrom our operations and available cash as of December 31, 2004 to be sufficientto fund our expansion plans described above, service our debt, and meet ourworking capital requirements for the near future. However, our ability to fundour operations, make planned capital expenditures and service our debt dependson our future operating performance and cash flow, which are in turn subject toprevailing economic conditions and to financial, business and other factors,some of which are beyond our control. Additionally, unlike traditionalcorporations, we are prohibited by law from generating cash through an offeringof equity securities and, as a result of completing the offering of the 2004senior notes, our ability to incur additional indebtedness is limited under the terms of the indenturegoverning the 2004 senior notes.

 

SNFGC, the Nation andLender, have reached a tentative agreement to terminate the Term Loan, allowingSNFGC to pay the term loan at a negotiated amount. The parties are still in theprocess of finalizing a definitive agreement to effectuate the payment of thenegotiated amount. At this time, we cannot provide any assurance that the partieswill be able to agree to a definitive agreement.

 

**CapitalObligations and Commercial Commitments**

** **

TheCompany’s contractual obligations and commercial commitments have notchanged materially from the disclosures in the 2004 Form 10-K.

 

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**Item 3**.                                   Quantitative andQualitative Disclosures About Market Risk

** **

Please refer to the 2004 Form10-K for a complete discussion of the Company’s market risk. There have been nomaterial changes in the current fiscal year regarding this market riskinformation.

 

**Regulation**

** **

Our operations areregulated by Nation laws, the Compact and federal statutes, most notably theIndian Gaming Regulatory Act, or IGRA. Several bills have been proposed duringthe current and recent sessions of U.S. Congress that could affect Indiangaming. Notably, though its proposed legislation has yet to be presented toCongress, the Policies and Procedures Subproject of the Bureau of IndianAffairs has proposed sweeping changes to the federal laws concerning Indians.Certain of such bills, if enacted, could impair the ability of the Nation andSGC to expand its gaming operations and adversely impact the future growth ofthe Nation’s revenue base. In addition, from time to time, various governmentofficials have proposed taxing Indian casino gaming or otherwise limiting orrestricting the conduct of gaming operations by Indian tribes. We cannot assureyou that such legislation, if and when enacted by Congress, would not have amaterial adverse effect on the operations of SGC. Senator John McCain, Chairmanof the Senate Indian Committee, has announced a series of hearings to considera variety of possible amendments to IGRA. If Congress were to enactcomprehensive amendments to IGRA, such legislation could have a material affecton the operations of SGC. In addition, under federal law, gaming on the Nation’slands may be dependent upon the permissibility under New York law of certainforms of gaming or similar activities. If New York State were to make variousforms of gaming illegal or against public policy (or the courts were to rulesimilarly), or otherwise to take a legal position adverse to the Compact or anyof its provisions, such actions could have a material adverse effect on theability of our casinos to conduct their gaming operations as currentlyconducted. Moreover, a 1996 U.S. Supreme Court decision may permit a state toavoid or refuse to negotiate amendments to existing compacts such as theCompact.

 

**New AccountingPronouncements**

** **

There are no accountingstandards that have not yet been adopted which are expected to have a materialimpact on our financial reporting.

 

**Item 4**.                                   Controls andProcedures

** **

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosurecontrols and procedures that are designed pursuant to Securities and ExchangeAct Rule 13a-15 and 15d-15 to ensure that information required to be disclosedin our Securities Exchange Act of 1934 reports are recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our former President and Chief Executive Officer, ourinterim President and Chief Executive Officer, Chief Financial Officer, andSenior Vice President of Finance and Administration as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated have inherent limitationsdue to cost issues, the possibility of human error, judgments and assumptionsregarding the likelihood of future events, and the circumvention and overridingof the controls and procedures. Accordingly, even effective disclosure ofcontrols and

 

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procedures can provide only reasonable assurance of achieving thedesired control objectives. Notwithstanding the issues discussed above, we believe we have designedour disclosure controls and procedures to provide reasonable assurance for ourmanagement to conclude that our control systems are effective.

 

We carried out anevaluation as of December 31, 2004, under the supervision and with the participationof our management, including our former President and Chief Executive Officer, interimPresident and Chief Executive Officer, Chief Financial Officer, and Senior VicePresident of Finance and Administration of the effectiveness of the design andoperation of our disclosure controls and procedures. Our former President andChief Executive Officer, interim President and Chief Executive Officer, ChiefFinancial Officer, and Senior Vice President of Finance and Administrationconcluded that our disclosure controls and procedures as of December 31,2004 were effective at the reasonable assurance level.

 

**Changes inInternal Control over Financial Reporting**

** **

There have not been anychanges in our internal control over financial reporting during the quarter-endedDecember 31, 2004 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**Part II.   OTHER INFORMATION**

 

**Item 1**.                                   Legal Proceedings

** **

None.

 

**Item 2**.                                   Changes inSecurities and Use of Proceeds

** **

None.

 

**Item 3**.                                   Defaults upon SeniorSecurities

** **

None.

 

**Item 4**.                                   Submission of Matterto a Vote of Security Holders

** **

None.

 

**Item 5**.                                   Other Information

 

As previously disclosed in our Current Report on Form8-K filed with the SEC on April 6, 2005, effective April 6, 2005, G. MichaelBrown resigned as our President and Chief Executive Officer. Our board ofdirectors elected John Pasqualoni as interim President and Chief ExecutiveOfficer, effective April 6, 2005. Mr. Brown will continue to assist us as anoutside consultant until the end of the year.

 

As wepreviously disclosed in our Current Report on Form 8-K filed on December 3,2004 and January 13, 2005 (which are incorporated herein by reference), one ofthe initial actions taken by the newly elected government of the Seneca Nationsof Indians was to appoint an independent and special counsel to investigate andreview the management and operations of the Nation’s gaming facilities,including, but not limited to, all financing and construction transactionsentered into by the Seneca Gaming Corporation and its subsidiaries.

 

OnApril 5, 2005, the Nation’s newly elected government concluded that based onthe reports presented by independent and special counsel to date that they weresatisfied and had no further concerns regarding the operation and management ofthe Nation’s gaming facilities, including the management and operations of theNation’s Class III gaming facilities by us. The newly elected government wasalso satisfied that the financial transactions conducted by us in connectionwith our Class III gaming operations were conducted at arm’s length, in thebest interest of the Nation, free of conflicts of interest, and in conformitywith applicable laws. The newly elected government, however, having beensatisfied with our management and operation of their Class III gamingoperations had continuing concerns regarding unresolved issues raised byindependent counsel pertaining to the construction of our gaming facilities.Having been satisfied with our management and financing of the Nation’s ClassIII gaming facilities, the newly elected government directed that independentand special counsel brief our board of directors of their findings to date.

 

OnApril 7, 2005, the independent and special counsel reported their findings todate to the audit committee of the SGC board of directors. This reportincluded, but was not limited to a supposed lack of documentation forapproximately $6.6 million of change orders in connection with the renovationof the Niagara Falls Convention Center in 100 days to open the Seneca NiagaraCasino on December 31, 2002 and a potential interest free loan to ourconstruction managers for the Seneca Niagara Casino and Seneca AlleganyCasino.  The supposed lack of supportingdocumentation for the change orders also led to a concern by the independentcounsel that this issue could be a concern with our other construction projectsas well.  After the report, the auditcommittee directed senior management to further investigate the constructionrelated issues raised by independent counsel. We subsequently discovered thatthe schedule presented and prepared by independent counsel and their forensicaccountants contained a clerical error and that the finding regarding aninterest free loan to our construction managers was incorrect. The independentcounsel and their forensic accountants concurred with us on this and confirmedthis in writing to the audit committee. We also extensively reviewed the filesof our construction managers and the architects and were able to present andreport to the audit committee sufficient supporting documentation for all ofthe $6.6 million of change orders cited by the independent counsel. The auditcommittee after being presented with our internal findings instructed that anexternal forensic accountant be engaged to confirm our findings, which theyhave done.

 

Afterhearing the report of the external forensic accountant, on May 5, 2005, theaudit committee concluded that there were no findings that impacted ourfinancial statements or evidence of wrongdoing and that their internal reviewhas been completed.

 

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**Item 6****.****                                   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 186 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 9, 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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