SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2002
or
[ ] 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 1-7831
ELSINORE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0117544
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
202 FREMONT STREET, LAS VEGAS, NEVADA 89101
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (Including Area Code): 702/385-4011
Indicate by check mark whether the registrant (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 ninety (90) days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF STOCK NUMBER OF SHARES
CLASS DATE OUTSTANDING
Common ovember 13, 2002 4,993,965
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2002
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of 4
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations 6
for the Three Months Ended September 30, 2002 and
September 30, 2001
Condensed Consolidated Statements of Operations 8
for the Nine Months Ended September 30, 2002 and
September 30, 2001
Condensed Consolidated Statement of Shareholders' 10
Equity for the Nine Months Ended September 30, 2002
Condensed Consolidated Statements of Cash Flows for 11
the Nine Months Ended September 30, 2002 and
September 30, 2001
Notes to Condensed Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of 16
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 28
About Market Risk
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
CERTIFICATIONS 32
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(Dollars in Thousands)
September 30, December 31,
2002 2001
----------------------
---------------------
Assets
Current Assets:
Cash and cash equivalents $6,179 $4,643
Accounts receivable, less allowance for
doubtful accounts of $164 and $163,
respectively 475 1,163
Inventories 365 360
Prepaid expenses 1,555 1,165
--------------------- ----------------------
Total current assets 8,574 7,331
Property and equipment, net 24,036 23,637
Other assets 1,963 1,793
--------------------- ----------------------
Total assets $34,573 $32,761
===================== ======================
(continued)
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
Unaudited
(Dollars in Thousands)
September 30, December 31,
2002 2001
---------------------- --------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $1,410 $1,095
Accrued interest 92 316
Accrued expenses 5,053 4,024
Current portion of long-term debt 480 603
---------------------- --------------------
Total current liabilities 7,035 6,038
Long-term debt, less current portion 8,703 8,684
---------------------- --------------------
Total liabilities 15,738 14,722
---------------------- --------------------
Commitments and contingencies
Shareholders' Equity:
6% cumulative convertible preferred stock, no
par value. Authorized, issued and
outstanding 50,000,000 shares. Liquidation
preference and accrued dividends of $22,725
and $21,760 at September 30, 2002 and
December 31, 2001, respectively 22,725 21,760
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
and outstanding 4,993,965 shares at
September 30, 2002 and December 31, 2001,
respectively. 5 5
Additional paid-in capital 4,912 5,877
Accumulated deficit (8,807) (9,603)
---------------------- --------------------
Total shareholders' equity 18,835 18,039
---------------------- --------------------
Total liabilities and shareholders'
equity $34,573 $32,761
====================== ====================
See accompanying notes to the condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(Dollars in Thousands, Except Per Share Amounts)
Three Three
Months Months
Ended Ended
September 30, 2002 September 30, 2001
----------------------- ------------------------
Revenues, net:
Casino $10,128 $9,631
Hotel 1,935 2,088
Food and beverage 2,633 2,526
Other 433 359
----------------------- ------------------------
Total revenues 15,129 14,604
Promotional allowances (1,994) (2,010)
----------------------- ------------------------
Net revenues 13,135 12,594
----------------------- ------------------------
Costs and expenses:
Casino 3,648 3,467
Hotel 2,456 2,415
Food and beverage 1,752 1,656
Taxes and licenses 1,515 1,409
Selling, general and
administrative 1,830 1,805
Rents 1,022 1,068
Depreciation and
amortization 678 1,054
Interest 298 309
Merger and litigation costs, net 14 48
----------------------- ------------------------
Total costs and
expenses 13,213 13,231
----------------------- ------------------------
Net loss before income
taxes and undeclared dividends on
cumulative convertible preferred
stock (78) (637)
Income taxes - 15
----------------------- ------------------------
Net loss before undeclared
dividends on cumulative
convertible preferred stock (78) (622)
Undeclared dividends on cumulative
convertible preferred stock 322 303
----------------------- ------------------------
Net loss applicable
to common shares ($400) ($925)
======================= ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
Unaudited
Three Three
Months Months
Ended Ended
September 30, 2002 September 30, 2001
------------------------ ----------------------
Basic and diluted loss
per share:
Basic loss per share ($.08) ($.19)
======================== ======================
Weighted average number of
common shares outstanding 4,993,965 4,993,965
======================== ======================
Diluted loss per share ($.08) ($.19)
======================== ======================
Weighted average number of
common and common equivalent
shares outstanding 4,993,965 4,993,965
======================== ======================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(Dollars in Thousands, Except Per Share Amounts)
Nine Nine
Months Months
Ended Ended
September 30, 2002 September 30, 2001
----------------------- ------------------------
Revenues, net:
Casino $29,801 $29,644
Hotel 6,189 6,912
Food and beverage 8,349 8,059
Other 1,426 1,138
----------------------- ------------------------
Total revenues 45,765 45,753
Promotional allowances (4,880) (5,074)
----------------------- ------------------------
Net revenues 40,885 40,679
----------------------- ------------------------
Costs and expenses:
Casino 10,212 9,684
Hotel 7,072 7,315
Food and beverage 5,572 5,270
Taxes and licenses 4,445 4,385
Selling, general and
administrative 6,628 6,202
Rents 3,236 3,201
Depreciation and
amortization 678 3,089
Interest 919 1,114
Impairment loss 324 -
Merger and litigation costs, net 1,003 206
----------------------- ------------------------
Total costs and
expenses 40,089 40,466
----------------------- ------------------------
Net income before undeclared
dividends on cumulative
convertible preferred stock 796 213
Undeclared dividends on cumulative
convertible preferred stock 965 911
----------------------- ------------------------
Net loss applicable
to common shares ($169) ($698)
======================= ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
Unaudited
Nine Nine
Months Months
Ended Ended
September 30, 2002 September 30, 2001
------------------------ ----------------------
Basic and diluted loss
per share:
Basic loss per share ($.03) ($.14)
======================== ======================
Weighted average number of
common shares outstanding 4,993,965 4,993,965
======================== ======================
Diluted loss per share ($.03) ($.14)
======================== ======================
Weighted average number of
common and common equivalent
shares outstanding 4,993,965 4,993,965
======================== ======================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 2002
Unaudited
(Dollars in thousands)
Common Stock Preferred Stock
------------------------- ----------------------------
Out- Out- Total
Standing Standing Additional Accumulated Shareholders'
Shares Amount Shares Amount Paid-In-Capital Deficit Equity
-------------- ---------- ---------------- ----------- --------------- ----------------- -----------------
Balance,
January 1, 2002 4,993,965 $5 50,000,000 $21,760 $5,877 ($9,603) $18,039
Net income 796 796
Undeclared preferred
stock dividends 965 (965)
-------------- ---------- ---------------- ----------- --------------- ---------------- -----------------
Balance,
September 30, 2002 4,993,965 $5 50,000,000 $22,725 $4,912 ($8,807) $18,835
============== ========== ================ =========== =============== ================ =================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(Dollars in Thousands)
Nine Nine
Months Months
Ended Ended
September 30, 2002 September 30, 2001
----------------------- ------------------------
Cash flows from operating activities:
Net income $796 $213
Adjustments to reconcile
net income to net
cash provided by
operating activities:
Depreciation and
amortization 678 3,089
Impairment loss 324 -
Provision for uncollectible
accounts 36 -
Changes in assets and
liabilities:
Accounts receivable 652 69
Inventories (5) 95
Prepaid expenses (390) (108)
Other assets (170) (151)
Accounts payable 315 (245)
Accrued interest (224) 640
Accrued expenses 1,029 (166)
----------------------- ------------------------
Net cash provided by
operating activities 3,041 3,436
----------------------- ------------------------
Cash flows used in investing
activities - capital
expenditures (826) (1,205)
------------------------ ------------------------
Cash flows used in financing
activities - principal
payments on long-term debt (679) (1,994)
------------------------ ------------------------
Net increase in cash and
cash equivalents 1,536 237
Cash and cash equivalents
at beginning of period 4,643 5,008
------------------------ ------------------------
Cash and cash equivalents
at end of period $6,179 $5,245
======================== ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
Unaudited
(Dollars in Thousands)
Nine Months Nine Months
Ended Ended
September 30, 2002 September 30, 2001
--------------------- ---------------------
Supplemental disclosure of non-cash investing and
financing activities:
Equipment purchased with capital lease financing $575 $107
Supplemental disclosure of cash activities:
Cash paid for interest $1,144 $1,275
Cash paid for income taxes $- $50
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore
Corporation ("Elsinore" or the "Company") and its wholly owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
Impairment Loss
As discussed in Note 5, on March 14, 2002, Elsinore announced that its
wholly owned subsidiary, Four Queens, Inc. ("Four Queens"), which operates the
Four Queens Hotel & Casino ("Four Queens Casino") entered into a definitive
asset purchase agreement (the "Purchase Agreement") for the sale of
substantially all of Four Queens Casino's assets, including the hotel and
casino, to SummerGate, Inc., a Nevada corporation, for a purchase price, subject
to certain price adjustments, of approximately $22 million, plus the value of
cash on hand and the assumption of certain liabilities. The assets of the Four
Queens constitute substantially all of the assets of Elsinore. Subsequently, on
April 5, 2002, Four Queens amended the Purchase Agreement to, among other
things, extend the termination date to June 30, 2002, and reduce the $22 million
purchase price to approximately $21.15 million (plus the value of cash on hand
and the assumption of certain liabilities) if the sale of assets was consummated
after May 7, 2002.
In connection with the Purchase Agreement, the Company recognized a
non-cash impairment loss of approximately $13.2 million during 2001. The Company
recorded an additional impairment loss of approximately $324,000, in the first
quarter of 2002, due to the amendment of the Purchase Agreement and an increase
in the carrying value of assets being purchased at March 31, 2002. As
substantially all of the assets of the Four Queens were held for sale, no
depreciation was recorded on these assets for the six months ended June 30,
2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Purchase Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from SummerGate.
As such, assets held for sale as of June 30, 2002 were depreciated effective
July 1, 2002.
Basis of Presentation
The Company has prepared the accompanying unaudited condensed consolidated
financial statements, pursuant to rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that this report be read in conjunction with the Company's audited consolidated
financial statements included in the annual report for the year ended December
31, 2001. In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of September 30, 2002, the results of its operations for the nine
months ended September 30, 2002 and September 30, 2001, and the results of its
cash flows for the nine months ended September 30, 2002 and September 30, 2001.
The operating results and cash flows for these periods are not necessarily
indicative of the results that will be achieved for the full year or for future
periods.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates used by the Company include the estimated useful lives for depreciable
and amortizable assets, the estimated allowance for doubtful accounts
receivable, the estimated valuation allowance for deferred tax assets, and
estimated cash flows used in assessing the recoverability of long-lived assets.
Actual results may differ from those estimates.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A fundamental conclusion
reached by the FASB in this statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company plans to adopt
this statement in the fourth quarter of 2002 and it believes that this statement
will not have a material impact on its financial position and results of
operations.
Net Income Per Common Share
Basic per share amounts are computed by dividing net income by the average
shares outstanding during the year. Diluted per share amounts are computed by
dividing net income by the average shares outstanding plus the dilutive effect
of common share equivalents. Since the Company incurred a net loss for the three
and nine month periods ended September 30, 2002 and 2001, the effect of common
stock equivalents was anti-dilutive. Therefore, basic and diluted per share
amounts are the same for these periods.
2. Income Taxes
Due to the Company's regular tax and alternative minimum tax net operating
losses, the Company is not expected to pay federal income taxes for the year
ended December 31, 2002. Accordingly, the Company has not recorded a provision
for income taxes in the accompanying Condensed Consolidated Financial
Statements.
3. Commitments and Contingencies
The Company was a party to litigation involving a proposed merger with R&E
Gaming Corp. as discussed in Note 4 below.
The Company is a party to other claims and lawsuits that arose in the
ordinary course of business. Management believes that such matters are either
covered by insurance, or if not insured, will not have a material adverse effect
on the financial statements of the Company taken as a whole.
4. Paulson Litigation
Pursuant to a settlement agreement dated as of April 3, 2002, the lawsuit
between the Company and certain entities controlled by Allen E. Paulson has been
resolved. A Settlement Bar Order and Final Judgment was entered by the Court on
July 1, 2002. Pursuant to the settlement agreement, Elsinore agreed to pay the
sum of $1,100,000, which was paid on June 1, 2002. Total litigation and
settlement costs (including the settlement payment) incurred during nine months
ended September 30, 2002, were approximately $1,003,000, net. Approximately
$2,101,000 was incurred as a result of litigation and settlement costs. The
Company's directors' and officers' insurance carrier reimbursed the Company's
costs relating to this matter, during 2002, in the approximate amount of
$1,098,000.
5. Impairment Loss
In connection with a Purchase Agreement entered into between the Four
Queens and SummerGate, Inc. on March 14, 2002 pursuant to which the Four Queens'
proposed to sell substantially all of its assets to SummerGate (the "Purchase
Agreement"), the Company recognized a non-cash impairment loss of approximately
$13.2 million during 2001. An impairment loss was necessary as the proposed net
proceeds resulting from the sale of the assets of Four Queens, under the
Purchase Agreement, would have been less than the carrying value of the assets
to be sold as of December 31, 2001. Approximately $12.9 million of the
impairment loss was related to buildings and equipment and the remainder was
related to the impairment of reorganization value in excess of amounts allocable
to identifiable assets.
On April 5, 2002, Four Queens amended the Purchase Agreement to, among
other things, extend the termination date to June 30, 2002, and reduce the $22
million purchase price to approximately $21.15 million (plus the value of cash
on hand and the assumption of certain liabilities) if the sale of assets was
consummated after May 7, 2002. The Company recorded an adjustment to the
impairment loss of approximately $324,000, in the first quarter of 2002, due to
the amendment of the Purchase Agreement and an increase in the carrying value of
assets being purchased at March 31, 2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from SummerGate.
6. Olympia Gaming Corporation
Elsinore, through its wholly-owned subsidiary, Olympia Gaming Corporation
(collectively, with Elsinore, the "Company"), entered into a Gaming Project
Development and Management Agreement (the "Contract") dated as of September 28,
1993 with the Jamestown S'Klallam Tribe (the "JST") and JKT Gaming, Inc. ("JKT")
to operate the 7 Cedars Casino (the "7 Cedars"), which is located on the Olympic
Peninsula in the State of Washington and is owned by JST. Pursuant to a Loan
Agreement dated November 12, 1993 among the Company, JST and JKT, as amended,
and the documents related thereto (collectively, the "Loan Documents"), the
Company loaned $9,000,000 (the "7 Cedars Note") to JST for the construction of 7
Cedars.
During 1995, the Contract was terminated by 7 Cedars. As a result, the
Company recorded a reserve on the 7 Cedars Note and wrote off unamortized casino
development costs in the amount of $242,000 and all accrued interest. During
1997, the Company wrote off the 7 Cedars Note and related reserve. The Company
entered into a Settlement Agreement and Mutual Release (the "Settlement") on May
23, 2002 with JST and JKT to resolve any claims of the parties arising out of
the Loan Documents. Pursuant to the Settlement, JST agreed to pay the Company
$1.5 million, plus interest, over a 36 month period, with an option to prepay,
at a negotiated discount, the full amount at any time prior to the end of such
36 month period. Pursuant to the Settlement, the Company, JST and JKT have each
agreed to mutually release each party to the Settlement from all claims or
causes of action arising from the Loan Documents and related transactions.
The Company collected approximately $450,000 under the Settlement between
June and September of 2002. In October 2002, pursuant to certain pre-payment
terms under this Settlement, the Company received approximately $834,000 as the
full and discounted balance due.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation
This discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and notes thereto set forth
elsewhere herein.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include statements regarding the Company's expectations, hopes or intentions
regarding the future, including but not limited to statements regarding the
Company's strategy, competition, expenses, increased payroll costs, development
plans, capital expenditures, the adoption of certain accounting standards and
their anticipated effects on our business, financing, revenue, operations, the
impact of the terrorist attacks in the United States, regulations, management's
belief regarding the sufficiency of cash flow, the Company's ability to service
its debt and to refinance its debt (including paying down principal and
extending the maturity date), and compliance with applicable laws.
Forward-looking statements involve certain risks and uncertainties, and actual
results may differ materially from those discussed in any such statement. Among
the factors that could cause actual results to differ materially are the
following: declines in general economic conditions, increased labor costs,
including those resulting from collective bargaining negotiations on their
contract renewals, the Company's ability to refinance its debt, the Company's
plan to pay down principal on its debt and to extend the maturity date of its
debt, other financing needs, further terrorist attacks, the availability of
sufficient funds for capital improvements and other risks related to such
improvements, changes in gaming laws, loss of licenses or permits and other
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. All forward-looking statements in this
document are made as of the date hereof, based on information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any forward-looking statement.
The following tables sets forth certain operating information for the
Company for the three and nine months ended September 30, 2002 and 2001.
Revenues and promotional allowances are shown as a percentage of net revenues.
Departmental costs are shown as a percentage of departmental revenues. All other
percentages are based on net revenues.
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ ----------- ------------------ -----------
Revenues, net:
Casino $10,128 77.1% $9,631 76.5%
Hotel 1,935 14.7% 2,088 16.6%
Food and beverage 2,633 20.0% 2,526 20.1%
Other 433 3.3% 359 2.9%
------------------ ----------- ------------------ -----------
Total revenue 15,129 115.2% 14,604 116.0%
Promotional allowances (1,994) (15.2%) (2,010) (16.0%)
------------------ ----------- ------------------ -----------
Net revenues 13,135 100.0% 12,594 100.0%
------------------ ----------- ------------------ -----------
Costs and expenses:
Casino 3,648 36.0% 3,467 36.0%
Hotel 2,456 126.9% 2,415 115.7%
Food and beverage 1,752 66.5% 1,656 65.6%
Taxes and licenses 1,515 11.5% 1,409 11.2%
Selling, general and
administrative 1,830 13.9% 1,805 14.3%
Rents 1,022 7.8% 1, 068 8.5%
Depreciation and
amortization 678 5.2% 1,054 8.4%
Interest 298 2.3% 309 2.5%
Merger and litigation costs,
net 14 .1% 48 .4%
------------------ ----------- ------------------ -----------
Total costs and expenses 13,213 100.6% 13,231 105.1%
------------------ ----------- ------------------ -----------
Net loss before
income taxes and undeclared
dividends on cumulative
convertible preferred stock (78) (0.6%) (637) (5.1%)
Income taxes - .0% (15) (0.1%)
------------------ ----------- ------------------ -----------
Net loss before
undeclared dividends on
cumulative convertible (78) (0.6%) (622) (4.9%)
preferred stock
Undeclared dividends on
cumulative convertible
preferred stock 322 2.5% 303 2.4%
------------------ ----------- ------------------ -----------
Net loss applicable
to common shares
(400) (3.0%) (925) (7.3%)
------------------ ----------- ------------------ -----------
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ ----------- ------------------ -----------
Other Data:
Net loss before undeclared
dividends on cumulative
convertible preferred stock ($78) (0.6%) ($622) (4.9%)
Interest 298 2.2% 309 2.5%
Income taxes - 0.0% (15) (0.1%)
Depreciation and amortization(1) 678 5.2% 1,054 8.4%
------------------ ----------- ------------------ -----------
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) $898 6.8% $726 5.8%
================== =========== ================== ===========
(1) Pursuant to certain terms under the Purchase Agreement, on June 27,
2002, the Four Queens exercised its right to terminate the Purchase
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from
SummerGate. As such, substantially all of the assets of the Four Queens
that were held for sale as of June 30, 2002 were depreciated effective July
1, 2002.
EBITDA consists of earnings before interest, taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with accounting principles
generally accepted in the United States of America ("GAAP"), it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure, and working
capital requirements. Although EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs, management believes that certain
investors find EBITDA to be a useful tool for measuring the ability of the
Company to service its debt. EBITDA margin is EBITDA as a percentage of net
revenues. The Company's definition of EBITDA may not be comparable to other
companies' definitions.
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ ----------- ------------------ -----------
Revenues, net:
Casino $29,801 72.9% $29,644 72.9%
Hotel 6,189 15.1% 6,912 17.0%
Food and beverage 8,349 20.4% 8,059 19.8%
Other 1,426 3.5% 1,138 2.8%
------------------ ----------- ------------------ -----------
Total revenue 45,765 111.9% 45,753 112.5%
Promotional allowances (4,880) (11.9%) (5,074) (12.5%)
------------------ ----------- ------------------ -----------
Net revenues 40,885 100.0% 40,679 100.0%
------------------ ----------- ------------------ -----------
Costs and expenses:
Casino 10,212 34.3% 9,684 32.7%
Hotel 7,072 114.3% 7,315 105.8%
Food and beverage 5,572 66.7% 5,270 65.4%
Taxes and licenses 4,445 10.9% 4,385 10.8%
Selling, general and
Administrative 6,628 16.2% 6,202 15.2%
Rents 3,236 7.9% 3,201 7.9%
Depreciation and
Amortization 678 1.7% 3,089 7.6%
Interest 919 2.2% 1,114 2.7%
Impairment loss 324 0.8% - .0%
Merger and litigation costs,
net 1,003 2.5% 206 0.5%
------------------ ----------- ------------------ -----------
Total costs and expenses 40,089 98.1% 40,466 99.5%
------------------ ----------- ------------------ -----------
Net income before
undeclared dividends on
cumulative convertible
preferred stock 796 1.9% 213 0.5%
------------------ ----------- ------------------ -----------
Undeclared dividends on
cumulative convertible
preferred stock 965 2.4% 911 2.2%
------------------ ----------- ------------------ -----------
Net loss applicable
to common shares (169) (0.4%) (698) (1.7%)
------------------ ----------- ------------------ -----------
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ ----------- ------------------ -----------
Other Data:
Net income before undeclared
dividends on cumulative
convertible preferred stock $796 1.9% $213 0.5%
Interest 919 2.2% 1,114 2.7%
Depreciation and amortization(1) 678 1.7% 3,089 7.6%
------------------ ----------- ------------------ -----------
Earnings before interest,
Taxes, depreciation and
Amortization (EBITDA) $2,393 5.9% $4,416 10.9%
================== =========== ================== ===========
(1) Pursuant to certain terms under the Purchase Agreement, on June 27, 2002,
the Four Queens exercised its right to terminate the Purchase Agreement and
sent written notice to SummerGate of such termination. Subsequently, Four
Queens received a written termination notice from SummerGate. As such,
substantially all of the assets of the Four Queens that were held for sale
as of June 30, 2002 were depreciated effective July 1, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $541,000, or 4.3%, from $12,594,000
during the 2001 period, to $13,135,000 for the 2002 period. This increase was
due, in part, to payments received during 2002 under a settlement agreement
among the Company, through its wholly owned subsidiary, Olympia Gaming
Corporation and the Jamestown S'Klallam Tribe and JKT Gaming, Inc. (the "Olympia
Settlement"), as discussed below. However, the acts of terrorism that occurred
in New York City and Washington, D.C. on September 11, 2001, have resulted in a
disruption in travel which management believes has continued to contribute to
decreased customer visitation to our property. We have experienced declines,
most noticeably in room revenues, which, along with general economic conditions,
has adversely affected our operating results since September 11, 2001, also
discussed below. Although the Company cannot be certain of the impact that the
events of September 11, 2001 may continue to have, if any, on future operations,
management believes that the current results compared to the periods immediately
following September 11, 2001 are continuing to improve.
Casino revenues increased by approximately $497,000, or 5.2%, from
$9,631,000 during the 2001 period to $10,128,000 during the 2002 period. This
increase was primarily due to a $574,000, or 32%, increase in table games
revenue, and a $62,000, or .9%, increase in slot machine revenue for the 2002
period, partially offset by a $46,000, or 15.0%, decrease in slot promotion
revenue, a $38,000, or 29.9%, decrease in keno revenue, and a $55,000, or 40.1%,
decrease in live and tournament poker revenue for the 2002 period. The increase
in table games revenue was attributable to an increase in drop of $2,372,000, or
19.0%, and a decrease in the win percentage of 1.57%. The increase in slot
machine revenue was attributable to an increase in hold percentage of 0.08%,
partially offset, by a decrease in slot coin-in of $577,000, or 0.5%. The
decrease in slot promotion revenue was due to a decrease in the average daily
headcount of $21 WinsSM, a promotional slot program, of 25, or 15.1%, due to a
decline in foot traffic. The decrease in keno revenue was attributable to a
decrease in keno drop of $69,000, or 17.2%. Live and tournament poker revenue
decreased for the 2002 period as compared to the 2001 period as the 2002
tournament was held during the months of September and October, as opposed to
the 2001 tournament which was held only during the month of September.
Hotel revenues decreased by approximately $153,000, or 7.3%, from
$2,088,000 during the 2001 period to $1,935,000 during the 2002 period. This
decrease was primarily due to a decrease in room occupancy, as a percentage of
total rooms available for sale, from 89.1% for the 2001 period, to 86.8% for the
2002 period and a decrease in the average daily room rate of $1.56, from $34.41
in the 2001 period to $32.85 in the 2002 period. The overall decline in
performance was primarily attributed to a reduction in individual reservations
call volume which has not improved since the events September 11, 2001 and has
been affected by general economic conditions.
Food and beverage revenues increased approximately $107,000, or 4.2%, from
$2,526,000 during the 2001 period to $2,633,000 during the 2002 period. This
increase was primarily due to an increase in cash sales as a result of a higher
average check.
Other revenues increased by approximately $74,000, or 20.6%, from $359,000
during the 2001 period to $433,000 during the 2002 period. This increase was
primarily due to payments received from June to September, 2002 of approximately
$113,000 under the Olympia Settlement.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $424,000, or 4.7%, from $8,947,000 for
the 2001 period to $9,371,000 for the 2002 period.
Casino expenses increased $181,000, or 5.2%, from $3,467,000 during the
2001 period to $3,648,000 during the 2002 period, and expenses as a percentage
of revenue remained unchanged at 36.0%. The increase in expense was due, in
part, to an increase in labor costs associated with an increase in the number of
table games open for play as well as an increase in the reclassification of cost
of complimentary rooms, food, and beverage reflected as a casino expense.
Hotel expenses increased $41,000, or 1.7%, from $2,415,000 during the 2001
period to $2,456,000 during the 2002 period and expenses as a percentage of
revenue increased from 115.7% to 126.9%, respectively. The increase was due, in
part, to an increase in the reclassification of cost of complimentary rooms
reflected as a casino expense.
Food and beverage costs and expenses increased by approximately $96,000, or
5.8%, from $1,656,000 during the 2001 period to $1,752,000 during the 2002
period, and expenses as a percentage of revenues increased from 65.6% to 66.5%,
respectively. The increase was due, in part, to an increase in labor costs.
The Company concluded negotiations with the Culinary Workers Union Local
226 and Bartenders Union Local 165 as well as the International Union of
Operating Engineers Local 501 (AFL-CIO) on June 30, 2002. Pursuant to such
negotiations, the Company has commitments for various union payroll increases
retroactive to June 1, 2002, for a period of five years, which will increase
future payroll costs.
Taxes and licenses increased by approximately $106,000, or 7.56%, from
$1,409,000 in the 2001 period to $1,515,000 in the 2002 period as a result of
corresponding increases in casino revenues.
OTHER OPERATING EXPENSES
Rent expense decreased by approximately $46,000, or 4.3%, from $1,068,000
during the 2001 period to $1,022,000 during the 2002 period, due primarily to a
decrease in equipment rental, partially offset by Consumer Price Index increases
for land lease agreements.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by approximately $172,000, or 23.7%, from $726,000 during the 2001
period to $898,000 during the 2002 period. The increase is primarily due to an
increase in revenues, partially offset by an increase in direct costs and
expenses of operating departments, as discussed above.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with GAAP, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements.
Although EBITDA is not necessarily a measure of the Company's ability to fund
its cash needs, management believes that certain investors find EBITDA to be a
useful tool for measuring the ability of the Company to service its debt. EBITDA
margin is EBITDA as a percentage of net revenues.
OTHER EXPENSES
Depreciation and amortization expense decreased by approximately $376,000,
or 35.7% from $1,054,000 during the 2001 period to $678,000 during the 2002
period. The decrease was primarily due to an adjustment in the carrying value of
the Four Queens' assets previously held for sale (pursuant to the Purchase
Agreement with SummerGate) through the recording of an impairment loss in prior
reporting periods. Approximately $12.9 million of the impairment loss recorded
during 2001 was related to buildings and equipment and the remainder was related
to the impairment of reorganization value in excess of amounts allocable to
identifiable assets. For more information, see "- OTHER OPERATING EXPENSES".
NET INCOME BEFORE PROVISION FOR INCOME TAXES AND UNDECLARED DIVIDENDS ON
CUMULATIVE CONVERTIBLE PREFERRED STOCK
As a result of the factors discussed above, the Company experienced a net
loss before provision for income taxes and undeclared dividends on cumulative
convertible preferred stock in the 2002 period of $78,000 compared to $637,000
in the 2001 period, an increase of $559,000, or 87.8%.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $206,000, or 0.5%, from $40,679,000
during the 2001 period, to $40,885,000 for the 2002 period. This increase was
due, in part, to payments received during 2002 under the Olympia Settlement, as
discussed below. However, the acts of terrorism that occurred in New York City
and Washington, D.C. on September 11, 2001, have resulted in a disruption in
travel which management believes has continued to contribute to decreased
customer visitation to our property. We have experienced declines, most
noticeably in room revenues and slot revenues, which, along with general
economic conditions, has adversely affected our operating results since
September 11, 2001, also discussed below. Although the Company cannot be certain
of the impact that the events of September 11, 2001 may continue to have, if
any, on future operations, management believes that the current results compared
to the periods immediately following September 11, 2001 are continuing to
improve.
Casino revenues increased by approximately $157,000, or 0.5%, from
$29,644,000 during the 2001 period to $29,801,000 during the 2002 period. This
increase was primarily due to a $1,064,000, or 17.3%, increase in table games
revenue which was partially offset by a $749,000, or 3.4%, decrease in slot
machine revenue, a $64,000, or 15.7%, decrease in keno revenue, a $55,000, or
40.1%, decrease in live and tournament poker revenue and a $39,000, or 4.6%,
decrease in slot promotion revenue for the 2002 period. The increase in table
games revenue was attributable to an increase in the win percentage of 0.74% and
an increase in drop of $728,000, or 11.9%. The decrease in slot machine revenue
was attributable to a decrease in slot coin-in of $13,853,000, or 3.7%,
partially offset by an increase in the hold percentage of 0.02%. The decrease in
keno revenue was attributable to a decrease in keno drop of $145,000, or 11.2%.
Live and tournament poker revenue decreased for the 2002 period as compared to
the 2001 period as the 2002 tournament was held during the months of September
and October, as opposed to the 2001 tournament which was held only during the
month of September. The decrease in slot promotion revenue was due to a decrease
in the average daily headcount of $21 WinsSM, a promotional slot program, of 38,
or 20.5%, due to a decline in foot traffic.
Hotel revenues decreased by approximately $723,000, or 10.5%, from
$6,912,000 during the 2001 period to $6,189,000 during the 2002 period. This
decrease was primarily due to a decrease in room occupancy, as a percentage of
total rooms available for sale, from 90.7% for the 2001 period, to 87.6% for the
2002 period and a decrease in the average daily room rate of $2.34, from $37.09
in the 2001 period to $34.75 in the 2002 period. The overall decline in
performance was primarily attributed to a reduction in individual reservations
call volume which has not improved since the events of September 11, 2001 and
has been affected by general economic conditions.
Food and beverage revenues increased approximately $290,000, or 3.6%, from
$8,059,000 during the 2001 period to $8,349,000 during the 2002 period. This
increase was primarily due to an increase in cash sales as a result of a higher
average check.
Other revenues increased by approximately $288,000, or 25.3%, from
$1,138,000 during the 2001 period to $1,426,000 during the 2002 period. This
increase was primarily due to payments received from June to September, 2002 of
approximately $450,000 under the Olympia Settlement, partially offset, by a
decrease in parking garage revenue of $52,000, or 14.0%, due to a decline in the
number of cars parked.
Promotional allowances decreased by approximately $194,000, or 3.8%, from
$5,074,000 during the 2001 period to $4,880,000 during the 2002 period due to a
decrease in complimentary rooms, food and beverage resulting from a decrease in
casino complimentaries due, in part, to decreased slot machine play.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $647,000, or 2.4%, from $26,654,000 for
the 2001 period to $27,301,000 for the 2002 period.
Casino expenses increased $528,000, or 5.5%, from $9,684,000 during the
2001 period to $10,212,000 during the 2002 period, and expenses as a percentage
of revenue increased from 32.7% to 34.3%, respectively. The increase was due, in
part, to an increase in labor costs associated with an increase in the number of
table games open for play as well as an increase in the reclassification of cost
of complimentary rooms, food, and beverage reflected as a casino expense.
Hotel expenses decreased $243,000, or 3.3%, from $7,315,000 during the 2001
period to $7,072,000 during the 2002 period; however, expenses as a percentage
of revenue increased from 105.8% to 114.3%, respectively. The decrease in
expense was due, in part, to an increase in the reclassification of cost of
complimentary rooms reflected as a casino expense.
Food and beverage costs and expenses increased by approximately $302,000,
or 5.7%, from $5,270,000 during the 2001 period to $5,572,000 during the 2002
period, and expenses as a percentage of revenues increased from 65.4% to 66.7%,
respectively. The increase was due, in part, to an increase in labor costs.
Taxes and licenses increased $60,000, or 1.4%, from $4,385,000 in the 2001
period to $4,445,000 in the 2002 period as a result of corresponding increases
in casino revenues.
The Company concluded negotiations with the Culinary Workers Union Local
226 and Bartenders Union Local 165 as well as the International Union of
Operating Engineers Local 501 (AFL-CIO) on June 30, 2002. Pursuant to such
negotiations, the Company has commitments for various union payroll increases
retroactive to June 1, 2002, for a period of five years, which will increase
future payroll costs.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased $426,000, or 6.9%,
from $6,202,000 during the 2001 period to $6,628,000 during the 2002 period,
and, as a percentage of total net revenues, expenses increased from 15.2% to
16.2%, respectively. The increase was primarily due to expenses incurred
relating to the proposed sale of the Four Queens' assets which was not
ultimately consummated.
Rent expense increased by approximately $35,000, or 1.1%, from $3,201,000
during the 2001 period to $3,236,000 during the 2002 period, due primarily to
adjustments for rent increases pursuant to the terms of our land lease
agreements.
On March 14, 2002, the Company entered into a purchase agreement (the
"Purchase Agreement") for the sale of substantially all of Four Queens Casino's
assets, including the hotel and casino, to SummerGate, Inc., a Nevada
corporation, for a purchase price, subject to certain adjustments, of
approximately $22 million, plus the value of cash on hand and the assumption of
certain liabilities. On April 5, 2002, the Four Queens amended the Purchase
Agreement to, among other things, extend the termination date to June 30, 2002,
and reduce the $22 million purchase price to approximately $21.15 million (plus
the value of cash on hand and the assumption of certain liabilities) if the sale
of assets was consummated after May 7, 2002. In connection with the Purchase
Agreement, the Company recognized a non-cash impairment loss of approximately
$13.2 million during 2001. An impairment loss was necessary as net proceeds
resulting from the sale of the Four Queens would have been less than the
carrying value of the assets that were to be sold as of December 31, 2001.
Approximately $12.9 million of the impairment loss related to buildings and
equipment and the remainder related to the impairment of reorganization value in
excess of amounts allocable to identifiable assets. The Company recorded an
adjustment to the impairment loss by approximately $324,000, in the first
quarter of 2002, due to the amendment of the Purchase Agreement and an increase
in the carrying value of the Four Queens' assets that were to be purchased at
March 31, 2002. For more information, see Note 5. "Impairment Loss" in the notes
to the condensed consolidated financial statements.
During 2002, the Company incurred approximately $1,003,000, net, in merger
and litigation costs. Approximately $2,101,000 was incurred as a result of
litigation and settlement costs related to the Agreement and Plan of Merger,
between Elsinore and Allen E. Paulson. See discussion in the Notes of the
Condensed Consolidated Financial Statements. The Company's directors and
officers' insurance carrier reimbursed the Company's costs relating to this
matter, during 2002, in the approximate amount of $1,098,000.
EBITDA
EBITDA decreased by approximately $2,023,000, or 45.8%, from $4,416,000
during the 2001 period to $2,393,000 during the 2002 period. The decrease was
primarily due to an increase in selling, general, and administrative expenses
related to the proposed sale of assets of Four Queens, which was not
consummated, and expenses incurred in connection with the settlement of the
Paulson Litigation as discussed in the Notes to the Condensed Consolidated
Financial Statements.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with GAAP, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements.
Although EBITDA is not necessarily a measure of the Company's ability to fund
its cash needs, management believes that certain investors find EBITDA to be a
useful tool for measuring the ability of the Company to service its debt. EBITDA
margin is EBITDA as a percentage of net revenues.
OTHER EXPENSES
Depreciation and amortization expense decreased by approximately
$2,411,000, or 78.1% from $3,089,000 during the 2001 period to $678,000 during
the 2002 period. The decrease was primarily due to an adjustment in the carrying
value of the Four Queens' assets previously being held for sale through the
recording of an impairment loss in prior reporting periods. Approximately $12.9
million of the impairment loss recorded during 2001 was related to buildings and
equipment and the remainder was related to the impairment of reorganization
value in excess of amounts allocable to identifiable assets. The Company
recorded an adjustment to the impairment loss in the first quarter of 2002 by
approximately $324,000, due to the amendment of the Purchase Agreement and an
increase in the carrying value of the Four Queens' assets that would have been
purchased at March 31, 2002.
Interest expense decreased by approximately $195,000, or 17.5% from
$1,114,000 during the 2001 period to $919,000 for the 2002 period. The reduction
in interest expense was primarily due to a reduction in the principal balance of
the Company's 12.83% Mortgage Notes (the "Notes") as a result of a principal
payment by the Company in June 2001.
NET INCOME BEFORE PROVISION FOR INCOME TAXES AND UNDECLARED DIVIDENDS ON
CUMULATIVE CONVERTIBLE PREFERRED STOCK
As a result of the factors discussed above, the Company experienced net
income before provision for income taxes and undeclared dividends on cumulative
convertible preferred stock in the 2002 period of $796,000 compared to $213,000
in the 2001 period, an increase of $583,000, or 273.7%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $6.2 million at
September 30, 2002, as compared to approximately $4.6 million at December 31,
2001.
During the first nine months of 2002, the Company's net cash provided by
operating activities was $3.0 million compared to $3.4 million in the first nine
months of 2001. As a result of the acts of terrorism which occurred in New York
City and Washington, D.C. on September 11, 2001, there have been disruptions in
travel, which have resulted in decreased customer visitation to our property. We
have experienced declines, most noticeably in room and casino revenues, which,
along with general economic conditions, have materially adversely affected our
operating results since September 11, 2001 . The Company cannot be certain of
the impact that the events of September 11 may continue to have, if any, on
future operations. EBITDA, for the nine months ended 2002 and 2001 was $2.4
million and $4.4 million, respectively.
The following table summarizes our obligations and commitments as of September
30, 2002:
Payments Due by Year
(Amounts in Thousands)
----------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
Long-term debt $110 $7,417 $50 $- $- $- $7,577
Capital leases 40 95 3 3 4 1,461 1,606
Operating leases
703 4,116 4,059 4,059 4,059 104,268 121,264
Total $853 $11,628 $4,112 $4,062 $4,063 $105,729 $130,447
Significant debt service on the Company's Notes is paid in August and
February, during each fiscal year, which significantly affects the Company's
cash and cash equivalents in the second and fourth quarters and should be
considered in evaluating cash increases or decreases in the second and fourth
quarters.
In connection with the Purchase Agreement, Elsinore notified the trustee
under the Company's 12.83% Second Mortgage Notes due 2003 (the "Notes"), that
the Company was going to redeem the Notes on April 30, 2002, pursuant to the
originally scheduled closing date for the Purchase Agreement with SummerGate.
Both the failure to redeem the Notes on April 30, 2002 in accordance with the
Company's notice to the trustee, as well as the execution of the Purchase
Agreement to sell the Four Queens assets, were defaults under the Notes. The
Company obtained a waiver of such defaults on May 30, 2002. Subsequently, in
connection with an amendment to the Purchase Agreement and extension of the
closing date for the asset sale, the Company notified the trustee that it
intended to redeem the Notes on June 30, 2002. The failure to redeem the Notes
on this date was also a default under the Notes. The Company obtained a waiver
of this default on August 15, 2002. Since the Purchase Agreement was terminated
on June 27, 2002, the Company does not have any current plans to redeem the
Notes.
The Notes are due in full on October 20, 2003. The Notes are redeemable by
the Company at any time at 100% of par, without premium. The Company is required
to make an offer to purchase all Notes at 101% of face value upon any "Change of
Control" as defined in the indenture governing the Notes. The indenture also
provides for mandatory redemption of the Notes by the Company upon order of the
Nevada Gaming Authorities. The Notes are guaranteed by Elsub Management
Corporation, Four Queens and Palm Springs East Limited Partnership and are
collateralized by a second deed of trust on, and a pledge of, substantially all
the assets of the Company and the guarantors.
Scheduled interest payments on the Notes and other indebtedness is
approximately $900,000 in 2002 and 2003. Management believes that sufficient
cash flow from operating activities will be available to cover the Company's
debt service for the next twelve months and enable investment in budgeted
capital expenditures of approximately $2.1 million for 2002, of which $500,000
is expected to be financed. The Company's ability to service its debt is
dependent upon future performance, which will be affected by, among other
things, prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control.
Cash flow from operations is not expected to be sufficient to pay the
remaining $7.1 million of principal of the Notes at maturity on October 20,
2003, and the ability of the Company to repay the Notes at maturity would be
dependent upon its ability to refinance the Notes. The Company anticipates that
it will seek an extension of the maturity date for the Notes and anticipates
that it will pay down a portion of the principal balance of the Notes with all,
or a portion of, the proceeds from the Olympia Settlement. However, there can be
no assurance that the Company will be able to extend the maturity date of the
Notes or that it will have the ability to pay down the principal balance on the
Notes prior to the maturity date.
A note agreement executed in connection with the issuance of the Notes,
among other things, places significant restrictions on the incurrence of
additional indebtedness by the Company, the creation of additional liens on the
collateral securing the Notes, transactions with affiliates and payment of
certain restricted payments. In order for the Company to incur additional
indebtedness or make a restricted payment, the Company must, among other things,
meet a specified consolidated fixed charges coverage ratio and have earned an
EBITDA in excess of $0. The ratio is defined as the ratio of aggregate
consolidated EBITDA to the aggregate consolidated fixed charges for the
twelve-month reference period (the "Ratio"). As of the reference period ended
September 30, 2002 the Ratio was 2.54 to 1.00 and the Company was in compliance.
Pursuant to covenants applicable to the Notes and Third Supplemental Indenture,
the Company is required to maintain a minimum consolidated fixed charges
coverage ratio of 1.25 to 1.00. At September 30, 2002, the Company was in
compliance with the Ratio requirements. The Company must also maintain a minimum
consolidated net worth (pursuant to the terms of the indenture governing the
Notes) of not less than an amount equal to its consolidated net worth on the
Effective Date of the Plan, less $5 million. At September 30, 2002, the Company
was in compliance with the minimum net worth requirements; however, the Company
was not in compliance with a covenant pertaining to limitations on restricted
payments. Specifically, the Company paid approximately $869,000 in connection
with its ownership interest in the Fremont Street Experience, while the note
agreement limited such payments to $600,000. A waiver has been obtained by the
Company from the lender through December 31, 2002.
Management considers it important to the competitive position of the Four
Queens Casino that expenditures be made to upgrade the property. Uses of cash
included capital expenditures of $826,000 and $1,205,000 during the nine months
ended September 30, 2002 and 2001, respectively. Management has forecasted
mandatory and maintenance capital expenditures to be $2.1 million for the year
2002. The Company expects to finance such capital expenditures from cash on
hand, cash flow, and lease financing. Assuming that the Company is successful in
extending the maturity date of the Notes due October 20, 2003 and based upon
current operating results and cash on hand, the Company estimates it has
sufficient operating capital to fund its operations and capital expenditures for
the next twelve months. The Company's ability to make such expenditures is
dependent upon future performance, which will be affected by, among other
things, prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control.
- --------------------------------------------------------------------------------
RECENTLY ISSUED ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A fundamental conclusion
reached by the FASB in this statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company plans to adopt
this statement in the fourth quarter of 2002 and it believes that the statement
will not have a material impact on its financial position and results of
operations.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Our
accounting policies related to the allowance for receivables, useful lives and
potential impairment for long-lived assets, self-insurance reserves and certain
other accruals require that we use significant judgment in the determination of
estimates related to these items. We consider historical, as well as current and
projected social, economic and regulatory information in the determination of
these estimates, and there can be no assurance that actual results will not
differ from our estimates. Additionally, see a summary of our signficant
accounting policies in Note 1 to the Condensed Consolidated Financial Statements
for the quarter ended September 30, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary financial instruments include cash and long-term
debt. At September 30, 2002, the carrying values of the Company's financial
instruments approximated their fair values based on current market prices and
rates. It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies.
Therefore, the Company does not have significant overall market risk exposure at
September 30, 2002.
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, we carried out
an evaluation, under the supervision and with the participation of our President
and Principal Financial and Accounting Officer of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our President and Principal Financial and Accounting Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC filings. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to our
most recent evaluation of our internal controls.
Elsinore Corporation and Subsidiaries
Other Information
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
In the first half of 1997, Elsinore commenced discussions with Mr. Allen E.
Paulson ("Paulson") which culminated in an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of September 15, 1997, between Elsinore and
entities controlled by Paulson, namely R&E Gaming Corp. ("R&E") and Elsinore
Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") Elsinore's
outstanding common stock ("Common Stock"). The Merger Agreement provided for a
merger with EAS where Elsinore would become a wholly-owned subsidiary of R&E.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it
was R&E's position that the Merger Agreement was void and unenforceable against
R&E and EAS, or alternatively, R&E and EAS intended to terminate the Merger
Agreement. R&E alleged, among other things, violations by Elsinore of the Merger
Agreement, violations of law and misrepresentations by certain investment
accounts (the "MWV Accounts") managed by Morgens, Waterfall, Vintiadis and
Company, Inc. ("MWV") in connection with an Option and Voting Agreement executed
by MWV in connection with the Merger and the non-satisfaction of certain
conditions precedent to completing the Merger. Elsinore denied the allegations
and asked that R&E complete the Merger. Thereafter, in April 1998, Paulson, R&E,
EAS and certain other entities filed a lawsuit against 11 defendants, including
Elsinore and MWV (Paulson, et al. v Jeffries & Company, et al.). The lawsuit was
filed in the United States District Court for the Central District of
California.
Pursuant to a settlement agreement dated as of April 3, 2002, the lawsuit
between the Company and certain entities controlled by Allen E. Paulson has been
resolved. A Settlement Bar Order and Final Judgment was entered by the Court on
July 1, 2002. Pursuant to the settlement agreement, Elsinore agreed to pay the
sum of $1,100,000, which was paid on June 1, 2002. Total litigation and
settlement costs (including the settlement payment) incurred during nine months
ended September 30, 2002, were approximately $1,003,000, net. Approximately
$2,101,000 was incurred as a result of litigation and settlement costs. The
Company's directors' and officers' insurance carrier reimbursed the Company's
costs relating to this matter, during 2002, in the approximate amount of
$1,098,000.
Item 6. (a) Exhibits and Reports
10.73 Waiver of Default dated August 15, 2002
99.1 Certification of the President pursuant to
18 U.S.C., section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Principal Financial and
Accounting Officer pursuant to 18 U.S.C.,
section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Form 8-K filed during this quarter
(1) Current report on Form 8-K was filed on July 1,
2002, relating to the termination of the Asset
Purchase Agreement between by and between Four
Queens, Inc. and SummerGate, Inc.
(2) Current report on Form 8-K was filed on August
14, 2002, relating to certifications submitted
to the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto authorized.
ELSINORE CORPORATION
(Registrant)
By: /s/ Philip W. Madow
PHILIP W. MADOW, President
By: /s/ Gina L. Contner Mastromarino
GINA L. CONTNER MASTROMARINO,
Principal Financial and Accounting Officer
Dated: November 14, 2002
CERTIFICATION
I, Philip W. Madow, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elsinore Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Philip W. Madow
Philip W. Madow
President
CERTIFICATION
I, Gina L. Contner Mastromarino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elsinore Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Gina L. Contner Mastromarino
Gina L. Contner Mastromarino
Principal Financial and Accounting Officer