UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

OR

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File Number:  333-117633

 

SENECA GAMING CORPORATION

(Exact name of registrant as specified in its charter)

 

 

310 Fourth Street

Niagara Falls, New York (Seneca Nation Territory) 14303

(716) 299-1100

(Address, including zip code, and telephone number,

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

 

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

 

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

 

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

 

 

TABLE OF CONTENTS

 

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

 

 

PART I. FINANCIAL INFORMATION

 

Item I.             Financial Statements

 

SENECA GAMING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

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

 

See accompanying notes.

 

1

 

SENECA GAMING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

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

 

See accompanying notes.

 

2

 

SENECA GAMING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

 

See accompanying notes.

 

3

 

SENECA GAMING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.             Organization and Basis of Presentation

 

The consolidated financial statements include the accounts of Seneca Gaming Corporation, or SGC, and its wholly owned subsidiaries, or collectively, the Company. In consolidation, all intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended September 30, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2004 or 2004 Form 10-K.

 

SGC, which was formed on August 1, 2002, is wholly owned by the Seneca Nation of Indians, or the Nation. The Nation is a federally recognized Indian tribe with total territorial land comprising approximately 54,000 acres in the Western New York region. SGC was organized by the Nation to operate and manage its Class III Gaming activities pursuant to the Indian Gaming Regulatory Act of 1988, or IGRA. Under IGRA, federally recognized Indian tribes are permitted to 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 with the State of New York dated April 12, 2002, or the Compact, which has been approved by the Federal Bureau of Indian Affairs, Department of the Interior. The Compact provides the Nation the exclusive right to conduct Class III gaming activities at three sites in the western region of the State of New York.

 

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

 

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

 

•      Seneca Niagara Falls Gaming Corporation, or SNFGC

•      Seneca Territory Gaming Corporation, or STGC

•      Seneca Erie Gaming Corporation, or SEGC

 

4

 

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

 

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

 

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

 

2.             Long-Term Debt

 

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

 

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

 

2004 7 ¹/₄% Senior Notes

 

On May 5, 2004, SGC issued $300.0 million in senior notes with fixed interest payable at a rate of 7¼% per annum due 2012, or the 2004 senior notes. These securities are guaranteed by STGC and SEGC, or collectively, the Guarantors. SNFGC, or the
Non-Guarantor, will guarantee the debt securities after repayment of its existing Term Loan (defined below).

 

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

 

The 2004 senior notes indenture contains certain financial and non-financial covenants. The financial covenants include limitations on restricted payments and the incurrence of indebtedness, while the non-financial covenants include reporting obligations and compliance with laws and regulations. As of March 31, 2005, SGC complied with all of its respective covenant requirements, other than its financial reporting requirement, which it satisfied upon the filing of its 2004 Form 10-K with the Securities and Exchange Commission, or

 

5

 

SEC, on May 9, 2005 and the filing of its Quarterly Report on Form 10-Q for the period ended December 31, 2004 with the SEC on May 9, 2005. The reports were delayed due to the independent investigation called for by the Council, which SGC disclosed in its Current Reports on Form 8-K filed with the SEC on December 3, 2004 and January 13, 2005. The independent investigation has been concluded with regard to matters involving the Company’s financial reporting. The covenants contained in the indenture permit the Company to borrow an additional $15.0 million for equipment and obtain an unsecured subordinate credit facility up to $150.0 million less the amount outstanding under the Term Loan.

 

Term Loan

 

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

 

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

 

SNFGC has pledged substantially all of its assets as collateral for the outstanding amounts due under the Term Loan. SNFGC is also obligated to make payments into a sinking fund account to be held for the benefit of and as additional collateral for the Lender. Sinking fund payments totaling $23.5 million through March 31, 2005 have been made by SNFGC. Commencing January 1, 2005 and through December 31, 2006, equal quarterly payments for $5.5 million each are due on or before the last day of each calendar 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 the last day of the first three calendar quarters and one final payment is due on the maturity date, of $4.5 million, or $18.0 million in total. At the maturity date of the Term Loan, $80.0 million of payments will have been made to the sinking fund that will be used to fully satisfy the outstanding balance. SNFGC may satisfy these amounts by entering into an unconditional bank loan commitment or irrevocable standby letter of credit for the benefit of the Lender.

 

The Term Loan contains various covenants; these include, but are not limited to, restrictions on SNFGC’s ability to pay dividends, guarantee debt, limitations on additional borrowings, uses of cash, minimum debt coverage, and debt coverage threshold ratios. In addition, the Term Loan requires SNFGC to maintain, at all times through the maturity of the Term Loan, a minimum cash balance of $10.0 million. In addition, the Term Loan requires SNFGC to establish a segregated bank account where 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 as additional collateral. SNFGC may obtain a release of the collateral pledged as support for the borrowings by depositing funds sufficient to cover the $80.0 million principal balance of the Term Loan and all cumulative successive interest payments until the maturity date of the Term Loan. As of March 31, 2005, SGC has been in compliance with all of its respective

 

6

 

covenant requirements, other than its financial reporting requirement, which it satisfied upon the filing of its 2004 Form 10-K with the SEC on May 9, 2005 and the filing of its Quarterly Report on Form 10-Q for the period ended December 31, 2004 with the SEC on May 9, 2005. The reports were delayed due to the independent investigation called for by the Council which SGC disclosed in its Current Reports on Form 8-K filed with the SEC on December 3, 2004 and January 13, 2005. The independent investigation has been concluded with regard to matters involving the Company’s financial reporting.

 

Equipment Financing

 

SNFGC entered into five financing arrangements with certain slot machine vendors providing approximately $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 Company’s 2004 senior notes.

 

Derivative Instruments

 

SGC is considered an “end user” of derivative instruments and engages in derivative transactions for risk management purposes only. Effective on May 25, 2004, SGC entered into two interest rate cap agreements for an aggregate notional amount of $80.0 million, equal to the outstanding balance of the Term Loan. The instruments 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. These interest rate caps limit the Company’s exposure on the Term Loan to 29% plus 4% on the thirty-day LIBOR, effectively capping the interest rate on the Term Loan at 33%.

 

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

 

3.             Related-Party Transactions

 

Land Lease from the Nation

 

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

 

7

 

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

 

Other Related-Party Transactions

 

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

 

The Company is charged by the Nation for SGA regulatory costs, which are incurred by the Nation. SGA regulatory costs charged to the Company were approximately $2.2 million and $1.3 million for the three months ended March, 2005 and 2004, respectively, and $4.1 million and $2.5 million for the six months ended March 31, 2005 and 2004, respectively. The Company also incurs costs, which are passed through the Nation for the State of New York gaming regulatory services, and the State of New York Police and Cattaraugus County Sheriff Department services. The Company has recorded approximately $2.1 million and $1.0 million for the three months ended March 31, 2005 and 2004, respectively, and $4.2 million and $1.7 million for the six months ended March 31, 2005 and 2004, respectively in connection with these services.

 

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

 

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

 

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

 

8

 

4.             Commitments and Contingencies

 

The Seneca Nation Compact

 

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

 

Pursuant to the Compact, amounts due to the State of New York are payable by the Nation. Effective January 1, 2005 Seneca Niagara Casino and Seneca Allegany Casino commenced monthly payments to the Nation of each entity’s prior month’s exclusivity fees. In the three months ended March 31, 2005 such payments totaled $10.0 million. At March 31, 2005, the exclusivity fee payable to the Nation for the month of March is $5.9 million, and was paid to the Nation in April 2005.  The SNFGC and STGC portions of the March 31, 2005 liability are $4.0 million and $1.9 million, respectively. SGC transferred $57.1 million in January 2005 to the Nation for the exclusivity fee owed to the State of New York. On April 29, 2005, the Nation transferred the exclusivity fee to the State of New York. For the three month periods ended March 31, 2005 and 2004, total exclusivity fees were $15.9 million and $11.2 million, respectively.  For the six month periods ended March 31, 2005 and 2004, total exclusivity fees were $31.5 million and $21.3 million, respectively.

 

Additional Casino Location and Expansions

 

As described in Note 1, the Compact provides the Nation the exclusive right to conduct Class III gaming activities at three sites in the western region of the State of New York. On April 9, 2004, we entered into a non-binding letter of intent with Uniland to purchase approximately 57.1 acres of property for the Cheektowaga Site. In May 2004, various parties, including the Mayor of the City of Buffalo, filed a complaint against Governor Pataki, the State of New York, the Town of Cheektowaga and Uniland to prohibit the sale of the Cheektowaga Site to SEGC. On June 16, 2004, Justice Makowski of the Supreme Court of the State of New York agreed with the plaintiffs and held that the Compact provision allowing the Nation to locate a Class III gaming facility anywhere in Erie County in the event a site in the City of Buffalo is rejected 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.  Because of litigation, the Nation and SGC may consider alternative sites.  This facility, as well as planned expansions of Seneca Niagara Casino and Seneca Allegany Casino will require significant capital outlays.  The amount and timing of these capital expenditures are dependent on various factors including financing availability, certain Nation and governmental approvals, construction timelines and the performance of its two operating facilities.

 

9

 

5.             Class II Gaming Operations Transfer

 

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

 

6.             Condensed Consolidating Financial Statement Information

 

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

 

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

 

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

 

10

 

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

 

11

 

Condensed Consolidating Statement of Income

For the Three Months Ended March 31,  2005

 

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

 

Condensed Consolidating Statement of Income

For the Three Months Ended March 31, 2004

 

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

 

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Condensed Consolidating Statement of Income

For the Six Months Ended March 31, 2005

 

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

 

Condensed Consolidating Statement of Income

For the Six Months Ended March 31, 2004

 

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

 

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Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2005

 

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

 

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Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2004

 

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

 

7. Subsequent Events

 

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

 

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On May 10, 2005, SGC announced that it is commencing an offering of an aggregate principal amount of $200 million of additional 7¼% senior notes due 2012 pursuant to an exemption from registration under the Securities Act of 1933.  The issuance would be an add-on to the existing aggregate principal amount of $300 million of 7¼% senior notes due 2012 that were issued in May 2004.  The add-on senior notes would have substantially identically terms to, and form a single series with, the previously issued senior notes.

 

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

 

Item 2.    Management’s Discussion of Financial Condition and Results of Operation

 

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

 

Overview

 

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

 

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

 

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

 

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facility near the Buffalo-Niagara International Airport in Cheektowaga, New York, or the Cheektowaga Site. In May 2004, various parties, including the Mayor of the City of Buffalo, filed a complaint against Governor Pataki, the State of New York, the Town of Cheektowaga and Uniland to prohibit the sale of the Cheektowaga Site to us. On June 16, 2004, Justice Makowski of the Supreme Court of the State of New York agreed with the plaintiffs and held that the Compact provision allowing the Nation to locate a Class III gaming facility anywhere in Erie County “in the event a site in the City of Buffalo is rejected by the Nation for any reason” is unconstitutional. The Court’s decision further permanently restrained and enjoined (1) Governor Pataki and the State of New York from any action or activity that would assist the Nation in owning and operating a Class III gaming casino in Erie County other than the City of Buffalo and (2) Uniland from the sale or transfer of the Cheektowaga Site to us. On April 27, 2005, the Town of Cheektowaga filed a brief to appeal the Supreme Court decision and we support its decision to appeal. Subsequent to the Supreme Court decision, Uniland requested certain amendments to the executed letter of intent for the Cheektowaga Site. We are evaluating their requested changes, but can provide you with no assurance that we will be able to reach a mutually acceptable agreement with Uniland, that Justice Makowski’s decision will be successfully appealed, or that we will be able to commence construction or operations of our third Class III gaming facility in the City of Buffalo or Erie County prior to the termination of our exclusivity period.  As a result of the ongoing litigation, the Nation and SGC may consider alternative sites.

 

Executive Summary

 

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

 

Key Performance Indicators.   Our operating results are dependent on the volume of profitable patrons visiting our casinos, our ability to attract them for repeat visits and to provide superior service to our patrons.

 

Seneca Niagara Casino.   Seneca Niagara Casino currently relies primarily on drive-in and bus patrons from the Buffalo, Niagara Falls, and Rochester areas in New York and secondarily from the Erie, Pennsylvania area, 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 Seneca Niagara Casino, including the addition of a luxury hotel and other amenities, will enable us to increase profitable patron volume and gaming activity, extend our geographic penetration and appeal to a more diverse demographic base. The first phase of this expansion is expected to open in December 2005, and will add over 35,000 square feet of gaming space, approximately 300 rooms, a multi-purpose room for conventions, banquets and entertainment events, and an 18,000 square-foot spa.

 

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

 

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for high stakes table game patrons, a new 2,400-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, we opened our “Pennies From Heaven” slot room located on the mezzanine level overlooking our casino, adding approximately 6,600 square feet of gaming space and 242 additional ticketed slot machines. In addition, this project added approximately 7,800 square feet of banquet space for up to 350 patrons.

 

Seneca Allegany Casino.   Since opening on May 1, 2004, Seneca Allegany Casino has experienced steady growth in its patron base, net revenue, and profitability. Seneca Allegany Casino has attracted patrons from the southern portion of western New York, Erie and Pittsburgh Pennsylvania, and Ohio. Through March 31, 2005, approximately 62%, of its patrons originated outside of the State of New York.

 

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

 

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

 

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

 

Overall Outlook.   As discussed in more detail above, since inception, we have invested heavily in our operations and plan to continue to do so during the remainder of fiscal 2005 and in fiscal 2006. We believe that investments in additional gaming space and non-gaming amenities at our facilities and our exclusive ability to offer Class III gaming in Western New York, will enable us to capitalize on what we believe is an underserved market in Western New York, Pennsylvania and parts of Ohio.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Operating Results

 

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

 

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

 

•      Our ability to successfully market Seneca Niagara Casino and, since its May 1, 2004 opening, Seneca Allegany Casino, to our primary target markets located within 100 miles of our casinos.

 

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

 

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

 

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

 

•      Our ability to operate at a high margin, which we achieve through the careful monitoring and control of labor costs and the effective use of our marketing and advertising expenditures.

 

•      Our continued expansion at and reinvestment in both of our properties.

 

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Detailed Revenue Information

 

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

 

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

 

Our net gaming revenue, net of promotional credits of $3.0 million in 2005 only, increased $26.4 million, or 36%, for the three month period ended March 31, 2005 relative to the comparable period ended March 31, 2004. During the three month period ended March 31, 2005, Seneca Niagara Casino net gaming revenue decreased $3.9 million, or 5%. This decrease was principally related to a decline in table games revenues of $3.1 million, or 21%. Drop declined by $8.7 million, or 10%, and the hold percentage decreased from 17% in the three month period ended March 31, 2004 to 15% in the three month period ended March 31, 2005. We attribute this decline to several factors including the opening of our Seneca Allegany Casino, increased competition from casinos located in Ontario, Canada, a loss of over $600,000 to a premium player and adverse weather. As a result, we intend to reduce the number of table games offered to 79 by June 30, 2005, add additional slot machines, and improve access to our slot machines making our casino more comfortable for our guests. Seneca Allegany Casino accounted for $30.3 million of net gaming revenue for the three months ended March 31, 2005.

 

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

 

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