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 June 30, 2003
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.)
2330 PASEO DEL PRADO, SUITE C308, LAS VEGAS, NEVADA 89102
------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
702/387-5115
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Registrant's Telephone Number (Including Area Code)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [X]
202 Fremont Street, Las Vegas, NV 89101
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Former Address, if changed since last report
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 August 18, 2003 4,993,965
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 2003
INDEX
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PART I. FINANCIAL INFORMATION: PAGE
- ------------------------------ ----
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of 3
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations 5
for the Three Months Ended June 30, 2003 and
June 30, 2002
Condensed Consolidated Statements of Operations 6
for the Six Months Ended June 30, 2003 and
June 30, 2002
Condensed Consolidated Statement of Shareholders' 7
Equity for the Six Months Ended June 30, 2003
Condensed Consolidated Statements of Cash Flows for 8
the Six Months Ended June 30, 2003 and
June 30, 2002
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of 16
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 29
About Market Risk
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION:
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
CERTIFICATIONS 33
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(Dollars in Thousands)
June 30, December 31,
2003 2002
---------------------- ---------------------
Assets
Current Assets:
Cash and cash equivalents $407 $1,795
Accounts receivable, net 15 15
Prepaid expenses 91 61
Assets of discontinued operations
held for sale 28,118 32,215
--------------------- ----------------------
Total current assets 28,631 34,086
Other assets 10 10
--------------------- ----------------------
Total assets $28,641 $34,096
===================== ======================
(continued)
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
Unaudited
(Dollars in Thousands)
June 30, December 31,
2003 2002
---------------------- --------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $5 $-
Accrued interest 230 317
Accrued expenses 59 31
Current portion of long-term debt 8 8
Liabilities of discontinued operations
held for sale 7,619 7,353
---------------------- --------------------
Total current liabilities 7,921 7,709
Long-term debt, less current portion 5,104 7,104
---------------------- --------------------
Total liabilities 13,025 14,813
---------------------- --------------------
Commitments and contingencies
Shareholders' Equity:
6% cumulative convertible preferred stock, no
par value. Authorized, issued and
outstanding 50,000,000 shares. 23,748 23,066
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
and outstanding 4,993,965 shares at
June 30, 2003 and December 31, 2002,
respectively. 5 5
Additional paid-in capital 3,889 4,571
Accumulated deficit (12,026) (8,359)
---------------------- --------------------
Total shareholders' equity 15,616 19,283
---------------------- --------------------
Total liabilities and shareholders'
equity $28,641 $34,096
====================== ====================
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
June 30, 2003 June 30, 2002
----------------------- ------------------------
Revenues:
Other, non-operating - 339
----------------------- ------------------------
Total revenues - 339
----------------------- ------------------------
Costs and expenses:
Selling, general and
administrative 172 145
Interest 164 228
Merger and litigation costs, net - 798
----------------------- ------------------------
Total costs and expenses 336 1,171
----------------------- ------------------------
Loss from continuing operations (336) (832)
Income from discontinued
operations 155 869
----------------------- ------------------------
Net income (loss) (181) 37
Undeclared dividends on cumulative
convertible preferred stock 341 321
----------------------- ------------------------
Net loss applicable
to common shares ($522) ($284)
======================= ========================
Basic and diluted income (loss)
per common share:
Basic and diluted income (loss) per
share before discontinued operations ($.14) ($.23)
======================= ========================
Basic and diluted loss per share
after discontinued operations ($.10) ($.06)
======================= ========================
Weighted average number of
common 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)
Six Six
Months Months
Ended Ended
June 30, 2003 June 30, 2002
----------------------- ------------------------
Revenues:
Other, non-operating - 341
----------------------- ------------------------
Total revenues - 341
----------------------- ------------------------
Costs and expenses:
Selling, general and
administrative 355 325
Interest 332 456
Merger and litigation costs, net - 989
----------------------- ------------------------
Total costs and expenses 687 1,770
----------------------- ------------------------
Loss from continuing operations (687) (1,429)
Income (loss) from discontinued
operations (2,980) 2,303
----------------------- ------------------------
Net income (loss) (3,667) 874
Undeclared dividends on cumulative
convertible preferred stock 682 643
----------------------- ------------------------
Net income (loss) applicable
to common shares ($4,349) $231
======================= ========================
Basic and diluted income (loss)
per common share:
Basic income (loss) per share
before discontinued operations ($.27) ($.41)
======================= ========================
Basic income (loss) per share
after discontinued operations ($.87) $.05
======================= ========================
Weighted average number of
common shares outstanding 4,993,965 4,993,965
======================= ========================
Diluted income (loss) per share
before discontinued operations ($.27) ($.41)
======================= ========================
Diluted income (loss) per share
after discontinued operations ($.87) $.01
======================= ========================
Weighted average number of
common and common equivalent
shares outstanding 4,993,965 97,993,965
======================= ========================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2003
Unaudited
(Dollars in thousands)
Common Stock Preferred Stock
------------------------- ----------------------------
Total
Out-Standing Out-Standing Additional Accumulated Shareholders'
Shares Amount Shares Amount Paid-In-Capital Deficit Equity
-------------- ---------- ---------------- ----------- --------------- ----------------- -------------------
Balance,
January 1, 2003 4,993,965 $5 50,000,000 $23,066 $4,571 ($8,359) $19,283
Net loss (3,667) (3,667)
Undeclared preferred
stock dividends 682 (682)
-------------- ---------- ---------------- ----------- --------------- ----------------- -------------------
Balance,
June 30, 2003 4,993,965 $5 50,000,000 $23,748 $3,889 ($12,026) $15,616
============== ========== ================ =========== =============== ================ ====================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(Dollars in Thousands)
Six Six
Months Months
Ended Ended
June 30, 2003 June 30, 2002
---------------------- ------------------
Cash flows used in operating
activities of continuing operations ($771) ($1,197)
Cash flows used in financing
activities - principal payments on
long-term debt (2,000) (3)
Cash flows provided by
discontinued operations 1,383 1,210
---------------------- ------------------
Net increase (decrease) in cash and
cash equivalents (1,388) 10
Cash and cash equivalents at beginning
of period 1,795 451
---------------------- ------------------
Cash and cash equivalents at end
of period $407 $461
====================== ==================
Supplemental disclosure of cash activities:
Cash paid for interest $417 $456
====================== ==================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)
1. Recent Developments
On July 31, 2003, Elsinore Corporation ("Elsinore" or the "Company")
completed the sale of all of the capital stock of its wholly-owned subsidiary,
Four Queens, Inc., a Nevada corporation doing business as the Four Queens Hotel
& Casino (the "Four Queens"), to TLC Casino Enterprises, Inc., a Nevada
corporation ("TLC"), for $20.5 million. Four Queens was Elsinore's sole
operating asset and the capital stock of Four Queens was substantially all of
Elsinore's assets.
Elsinore's Board of Directors anticipates that it will adopt a plan of
dissolution and begin the process of winding-up and dissolving Elsinore.
Elsinore used a portion of the proceeds from the sale to pay down the
outstanding 12.83% Mortgage Notes (the "Notes"), and to pay all accrued and
unpaid dividends on Elsinore's outstanding 6% cumulative convertible preferred
stock (the "Preferred Stock") through July 31, 2003. At August 1, 2003, the date
the payments were made, Elsinore had $5,380,489 in principal amount of the Notes
outstanding, including accrued and unpaid interest and had outstanding
approximately 50,000,000 shares of Preferred Stock, with accumulated accrued and
unpaid dividends of $5,860,815. Following the anticipated conversion of the
Preferred Stock, Elsinore would have approximately 940 common stockholders.
After establishing an adequate hold-back for the anticipated costs of winding-up
of Elsinore's affairs, the remaining funds are expected to be paid to the
holders of Elsinore's common stock on a pro rata basis. Once all remaining
obligations have been satisfied and Elsinore is dissolved, the remaining assets,
if any, are expected to be distributed a second time to the holders of
Elsinore's common stock.
Certain investment accounts (the "MWV Accounts") managed by Morgens,
Waterfall, Vintiadis and Company, Inc. ("MWV") own approximately 93% of the
Company's Common Stock and all of the Preferred Stock (approximately 99.6% of
the outstanding Common Stock on an as-converted basis). John C. "Bruce"
Waterfall, the Chairman of the Company's Board, is the President and a principal
stockholder of MWV. Mr. Waterfall exercises voting and investment authority over
the Preferred Stock owned by the MWV Accounts. On August 1, 2003 Mr. Madow
resigned from the Board of Directors and Ms. Joann McNiff was elected by the
remaining Board members to fill the vacancy created by Mr. Madow's resignation.
Ms. McNiff is an attorney licensed to practice law in the state of New York, and
has been independently practicing law since April 1, 2003. Prior to establishing
her solo practice, Ms. McNiff was employed by MWV. Ms. McNiff began working for
MWV in June 1994, and became its in-house counsel in 1996. As in-house counsel
for MWV, Ms. McNiff worked on various matters relating to Four Queens and
Elsinore.
The assets and liabilities of Four Queens have been presented in the June
30, 2003 and December 31, 2002 balance sheets as assets and liabilities of
discontinued operations held for sale. In addition, the results of operations of
the Four Queens for the three and six month periods ended June 30, 2003 and 2002
have been presented as discontinued operations. See discussion in Note 3, below.
Beginning August 1, 2003, the Company expects that there will be no revenues
from operations.
2. Summary of Significant Critical Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Impairment Loss
On March 14, 2002, Elsinore announced that Four Queens 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, ("SummerGate") 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 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 $324,000 in the first quarter of 2002,
due to the amendment of the Purchase Agreement. As substantially all of the
assets of the Four Queens were held for sale, no depreciation was recorded on
these assets for the three 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.
As discussed in Note 7, on April 29, 2003, the Company announced that it
entered into a definitive stock purchase agreement (the "Stock Purchase
Agreement") for the sale of all the capital stock of Four Queens and its
interest in the Fremont Street Experience, LLC, to TLC for a purchase price of
approximately $20.5 million.
In connection with the execution of the Stock Purchase Agreement, the
Company recognized a non-cash impairment loss of approximately $4.4 million as
of March 31, 2003. An impairment loss was necessary as carrying values of the
assets to be sold as of June 30, 2003 were greater than the fair market value of
the assets. Depreciation expense on the assets owned by Four Queens was ceased
subsequent to April 29, 2003.
The assets and liabilities of Four Queens have been presented in the June
30, 2003 and December 31, 2002 balance sheets as assets held for sale. In
addition, the results of operations of the Four Queens for the three and six
month periods ended June 30, 2003 and 2002 have been presented as discontinued
operations. Discontinued operations were also presented to include a subsequent
write-down of the investment in the capital stock of Four Queens relating to the
results of operations during the same period in the amount of $561,000.
The sale of Four Queens was consummated on July 31, 2003.
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, 2002. 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 June 30, 2003, the results of its operations for the three and
six months ended June 30, 2003 and June 30, 2002, and the results of its cash
flows for the six months ended June 30, 2003 and June 30, 2002. 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
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 May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company has adopted this standard on July 1, 2003, and
expects that it will have no 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 average
shares outstanding during the year. Diluted per share amounts are computed by
dividing net income by average shares outstanding plus the dilutive effect of
common share equivalents. Since the Company incurred net losses for the three
and six month period ended June 30, 2003 and the three month period ended June
30, 2002, the effect of common stock equivalents was anti-dilutive. Therefore,
basic and diluted per share amounts are the same for this period.
Six Months Ended
June 30, 2002
----------------------- ----------------- --------------------
Income Shares Per Share
Amounts
----------------------- ----------------- --------------------
Basic EPS:
Net income available to common
shareholders after discontinued
operations $231,000 4,993,965 $0.05
Less: net income from discontinued
operations (2,303,000) 4,993,965 (.46)
----------------------- ----------------- --------------------
Net income before discontinued
operations (2,072,000) 4,993,965 (.41)
Effect of Dilutive Securities:
Cumulative convertible preferred
stock 643,000 93,000,000 (0.04)
----------------------- ----------------- --------------------
Diluted EPS:
Net income available to common
shareholders plus assumed
conversions after discontinued
operations $874,000 97,993,965 $0.01
======================= ================= ====================
3. Discontinued Operations
The following is a summary of the assets and liabilities of the Four
Queens, which has been included in the balance sheet as assets and liabilities
of discontinued operations held for sale (in thousands):
June 30, December 31,
2003 2002
------------------------ ----------------------
Cash and cash equivalents $5,564 $4,538
Accounts receivable 408 401
Other current assets 1,820 1,803
Property and equipment, net 18,160 23,515
Other assets 2,166 1,958
------------------------ ----------------------
Assets of discontinued operations
held for sale $28,118 $32,215
======================== ======================
Accounts payable $1,221 $848
Accrued expenses 4,704 4,577
Long-term debt and other obligations 1,694 1,928
------------------------ ----------------------
Liabilities of discontinued operations
held for sale $7,619 $7,353
======================== ======================
The following is a summary of the results of operations of the Four Queens,
which has been included in the statement of operations for the three and six
month periods ended June 30, 2003 and 2002 as net income (loss) from
discontinued operations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------------
2003 2002 2003 2002
------------- ------------ -------------- ---------------
Total revenues, net $13,434 $13,617 $28,294 $27,207
Total costs and expenses 12,718 12,748 26,264 24,580
------------- ------------ -------------- ---------------
Income from discontinued
operations 716 869 2,030 2,627
Impairment loss on assets
held for sale 561 - 5,010 324
------------- ------------ -------------- ---------------
Income from
discontinued operations $155 $869 ($2,980) $2,303
============= ============ ============== ===============
The income from discontinued operations increases the Company's investment
in its Four Queens' subsidiary, but is eliminated upon consolidation. However,
since the Company sold all of the capital stock it held in the Four Queens on
July 31, 2003, which constituted substantially all of assets of the Company, for
a fixed sales price of $20.5 million, the Company recorded an impairment loss
during the three months ended June 30, 2003 equal to the amount of net income
from discontinued operations of Four Queens less $155,000 of cash transferred
from the Four Queens to the Company during the period.
4. 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, 2003. Accordingly, the Company has not recorded a provision
for income taxes in the accompanying Condensed Consolidated Financial
Statements.
5. Commitments and Contingencies
The President and Executive Director of Finance of Four Queens had
employment agreements with Four Queens which became effective on January 1,
2003. In the event of a change of ownership or control, the President and
Executive Director of Finance of Four Queens had the option to elect to be
employed with the entity or person having acquired such control or terminate
their respective employment agreement. If the executive elected to terminate
their respective employment agreement upon a change of ownership or control, the
Four Queens would pay them an amount equal to one year's base salary and COBRA
benefits. "Change of ownership or control" meant that all or substantially all
of the assets of Four Queens are directly, or through transfer of equity
interests, transferred or otherwise disposed of in one or a series of related
transactions after (1) the Four Queens ceased to own directly or indirectly
substantially all equity interests in the Four Queens; (2) the Four Queens sold
51% or more of the assets of Four Queens; or (3) the Company ceased to own
directly or indirectly at least 51% of all outstanding shares of Four Queens.
The President's annual compensation pursuant to his employment agreement was
$255,000 and the Executive Director of Finance's annual compensation under her
employment agreement was $145,000. These employment agreements were required to
be terminated pursuant to the Stock Purchase Agreement as discussed in Note 7,
prior to consummation of the sale of Four Queens. On July 31, 2003 the
employment agreements were terminated and the sale of Four Queens was
consummated. The Company has assumed the liability under the employment
agreements.
Upon the consummation of the sale of Four Queens, the Company paid
performance bonuses in the amount of $75,000 each to Mr. Madow and Ms.
Mastromarino, as compensation for their efforts in facilitating, effectuating
and consummating the closing of the stock sale transaction.
Upon consummation of the sale of Four Queens, the Company paid Kennedy-
Wilson International a fee of approximately $153,000 for its assistance in
marketing the Company.
The Company is a party to 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.
6. 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. Merger and litigation expense
incurred during the second quarter of 2002, was approximately $798,000, net, as
approximately $1,312,000 was incurred as a result of litigation and settlement
costs and was partially offset by a receivable due from the Company's directors
and officers' insurance carrier related to this matter in the approximate amount
of $514,000. Merger and litigation expense incurred during the six months ended
June 30, 2003, was approximately $989,000, net, as approximately $2,054,000 was
incurred as a result of litigation and settlement costs and was partially offset
by a receivable due from the Company's directors and officers' insurance carrier
related to this matter in the approximate amount of $1,065,000.
7. Impairment Losses
On March 14, 2002, the Company entered into the Purchase Agreement with
SummerGate, Inc. pursuant to which the Four Queens proposed to sell
substantially all of its assets to SummerGate, the Company recognized a non-cash
impairment loss of approximately $13.2 million during 2001 and an impairment
loss of approximately $324,000, in the first quarter of 2002, due to the
amendment of the Purchase Agreement.
On June 27, 2002, the Four Queens terminated the Purchase Agreement and
sent written notice to SummerGate of such termination.
On April 29, 2003, the Company announced that it entered into the Stock
Purchase Agreement for the sale of all the capital stock of Four Queens and its
interest in the Fremont Street Experience, LLC, to TLC for a purchase price of
approximately $20.5 million.
On July 31, 2003, the sale of Four Queens was consummated. The Four Queens
was Elsinore's sole operating asset and the capital stock of Four Queens was
substantially all of Elsinore's assets. Elsinore's Board of Directors
anticipates that it will adopt a plan of dissolution and begin the process of
winding-up and dissolving Elsinore. Elsinore used a portion of the proceeds from
the sale to pay down the outstanding Notes, and to pay all accrued and unpaid
dividends on Elsinore's Preferred Stock through July 31, 2003. At August 1,
2003, the date the payments were made, Elsinore had $5,380,489 in principal
amount of the Notes outstanding, including accrued and unpaid interest and had
outstanding approximately 50,000,000 shares of Preferred Stock, with accumulated
accrued and unpaid dividends of $5,860,815.
In connection with the execution of the Stock Purchase Agreement, the
Company recognized a non-cash impairment loss of approximately $5 million during
the first six months of 2003. An impairment loss was necessary under the
provision of Statement on Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"), as the
carrying values of the net assets to be sold as of June 30, 2003 ($24.9 million)
were greater than the fair market value of the assets ($20.5 million). In
accordance with SFAS No. 144, the Company ceased depreciation of these assets
beginning on April 29, 2003.
8. Preferred Stock
On September 29, 1998, as part of a recapitalization, the Company issued to
the MWV Accounts 50,000,000 shares of Series A Convertible Preferred Stock of
the Company in exchange for the surrender to the Company of $18,000,000 original
principal amount of certain second mortgage notes held by the MWV Accounts. The
50,000,000 shares of Series A Convertible Preferred Stock have (i) the right to
receive cumulative dividends at the rate of 6% per year; (ii) the right to
receive the amount of $.36 per share, plus all accrued or declared but unpaid
dividends on any shares then held, upon any liquidation, dissolution or
winding-up of the Company for an aggregate liquidation preference of
$18,000,000; (iii) voting rights equal to the number of shares of the Company's
Common Stock into which the shares of Preferred Stock may be converted, and
(iv) the right to convert the shares of Preferred Stock into 93,000,000 shares
of the Company's Common Stock. Upon the consummation of the sale of Four Queens
the Company declared dividends on the Preferred Stock in the approximate amount
of approximately $5.86 million on August 1, 2003.
9. Long-term Debt
Long-term debt, upon the consummation of the sale of Four Queens, was as
follows:
June 30, 2003 December 31, 2002
------------- -----------------
(In Thousands)
12.83% Mortgage Notes $5,104 $7,104
====== ======
In January 2003, the Company made an additional principal payment on the
12.83% Mortgage Notes in the amount of $2 million.
Upon the consummation of the sale of Four Queens on July 31, 2003, the
Company redeemed the Mortgage Notes due October 2004 on August 1, 2003.
10. Subsequent events
The sale of Four Queens was consummated on July 31, 2003. Elsinore used a
portion of the proceeds from the sale to pay down the outstanding Notes, and to
pay all accrued and unpaid dividends on its Preferred Stock through July 31,
2003. At August 1, 2003, the date the payments were made, Elsinore had
$5,380,489 in principal amount of the Notes outstanding, including accrued and
unpaid interest and had outstanding approximately 50,000,000 shares of Preferred
Stock, with accumulated accrued and unpaid dividends of $5,860,815.
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
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included
herein and in other materials filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Company) contains statements that are forward looking,
such as statements relating to the anticipated dissolution of Elsinore, the
establishment of a hold-back for the anticipated costs of wind-up of Elsinore's
affairs, the expectation that Elsinore will have funds remaining to distribute
to its stockholders from the proceeds of the sale of the capital stock of the
Four Queens and the Company's expectations, beliefs and future plans following
the sale of Four Queens. These statements may also include information about the
Company's adoption of certain accounting standards and their anticipated effects
on our business, financing, revenue, operations, regulations, management's
belief regarding the sufficiency of cash flow and compliance with applicable
laws. Such forward-looking statements involve important known and unknown risks
and uncertainties that could cause actual results and liquidity to differ
materially from those expressed or anticipated in any forward-looking
statements. Such risks and uncertainties include, but are not limited to,
general economic conditions; expenses incurred in connection with the
transaction; liabilities and indemnification obligations which may be incurred
by the Company; the amount of funds that Elsinore must hold-back for costs to
satisfy its anticipation of the wind-up of its business; actions taken or
omitted to be taken by third parties; and other factors described from time to
time in the Company's reports filed with the Securities and Exchange Commission.
Accordingly, actual results may differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Any
forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995, and, as such, speak only as of the date made. The
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect subsequent events or circumstances.
The following tables sets forth certain continuing and discontinued
operating information for the Company for the three and six months ended June
30, 2003 and 2002. 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
June 30, 2003 June 30, 2002
------------------------------------ ------------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------- ------------- ------------------ --------------
Continuing Operations:
Revenues, net:
Other, non-operating $- .0% $339 100.0%
----------------- ------------- ------------------ --------------
Net revenues - .0% 339 100.0%
----------------- ------------- ------------------ --------------
Costs and expenses:
Selling, general and
administrative 172 .0% 145 42.8%
Interest 164 .0% 228 67.3%
Merger and litigation costs,
net - .0% 798 235.4%
----------------- ------------- ------------------ --------------
Total costs and expenses 336 .0% 1,171 345.4%
----------------- ------------- ------------------ --------------
Income (loss) from
continuing operations ($336) .0% ($832) (245.4%)
----------------- ------------- ------------------ --------------
Discontinued Operations:
Revenues, net:
Casino $9,682 72.1% $9,880 72.6%
Hotel 2,052 15.3% 2,068 15.2%
Food and beverage 2,794 20.8% 2,770 20.4%
Other 475 3.5% 333 2.4%
----------------- ------------- ------------------ --------------
Total revenue 15,003 111.7% 15,051 110.5%
Promotional allowances (1,569) (11.7%) (1,434) (10.5%)
----------------- ------------- ------------------ --------------
Net revenues 13,434 100.0% 13,617 100.0%
----------------- ------------- ------------------ --------------
Costs and expenses:
Casino 3,479 35.9% 3,350 33.9%
Hotel 2,435 118.7% 2,410 116.5%
Food and beverage 1,905 68.2% 1,902 68.7%
Taxes and licenses 1,497 11.1% 1,476 10.8%
Selling, general and
administrative 1,994 14.8% 2,392 17.6%
Rents 1,098 8.2% 1,125 8.3%
Depreciation and
amortization 250 (1) 1.9% - (2) .0%
Interest 60 .4% 93 .7%
Impairment loss 561 4.2% - .0%
Merger and litigation costs,
net - .0% - .0%
----------------- ------------- ------------------ --------------
Total costs and expenses 13,279 98.8% 12,748 93.6%
----------------- ------------- ------------------ --------------
Income from
discontinued operations $155 1.2% $869 6.4%
----------------- ------------- ----------------- ------------
Undeclared dividends on
cumulative convertible
preferred stock 341 2.5% 321 2.4%
----------------- ------------- ----------------- ------------
Net income (loss) applicable
to common shares (522) (3.9%) (284) (2.1%)
================= ============= ================= ============
(1) In connection with the Stock Purchase Agreement, and SFAS No. 144, the
Company ceased depreciation of these assets beginning on April 29, 2003.
(2) As substantially all of the assets of the Four Queens were held for sale,
no depreciation was recorded on these assets for the three months ended
June 30, 2002.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------------------------------ ------------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------- ------------- ------------------ --------------
Continuing Operations:
Revenues, net:
Other, non-operating $- .0% $341 100.0%
---------------- ------------ ----------------- --------------
Net revenues - .0% 341 100.0%
---------------- ------------ ----------------- --------------
Costs and expenses:
Selling, general and
administrative 355 .0% 325 95.3%
Interest 332 .0% 456 133.7%
Merger and litigation costs,
net - .0% 989 290.0%
---------------- ------------ ----------------- --------------
Total costs and expenses 687 .0% 1,770 519.1%
---------------- ------------ ----------------- --------------
Income (loss) from
continuing operations (687) .0% (1,429) (419.1%)
---------------- ------------ ----------------- --------------
Discontinued Operations:
Revenues, net:
Casino 20,494 72.4% 19,673 72.3%
Hotel 4,349 15.4% 4,254 15.6%
Food and beverage 5,882 20.8% 5,716 21.0%
Other 826 2.9% 652 2.4%
---------------- ------------ ----------------- --------------
Total revenue 31,551 111.5% 30,295 111.4%
Promotional allowances (3,257) (11.5%) (3,088) (11.4%)
---------------- ------------ ----------------- --------------
Net revenues 28,294 100.0% 27,207 100.0%
---------------- ------------ ----------------- --------------
Costs and expenses:
Casino 6,919 33.8% 6,564 33.4%
Hotel 4,935 113.5% 4,616 108.5%
Food and beverage 3,830 65.1% 3,820 66.8%
Taxes and licenses 3,099 11.0% 2,930 10.8%
Selling, general and
administrative 4,131 14.6% 4,271 15.7%
Rents 2,186 7.7% 2,214 8.1%
Depreciation and
amortization 1,038 (1) 3.7% - (2) .0%
Interest 126 .4% 165 .6%
Impairment loss 5,010 17.7% 324 1.2%
---------------- ------------ ---------------- ------------
Total costs and expenses 31,274 110.5% 24,904 91.5%
---------------- ------------ ---------------- ------------
Income (loss) from
discontinued operations (2,980) (10.5%) 2,303 8.5%
---------------- ------------ ---------------- ------------
Undeclared dividends on
cumulative convertible
preferred stock 682 2.4% 643 2.4%
---------------- ------------ ---------------- ------------
Net income (loss) applicable to common shares
(4,349) (15.4%) 231 .8%
================ ============ ================ ============
(1) In connection with the Stock Purchase Agreement, and SFAS No. 144, the
Company ceased depreciation of these assets beginning on April 29, 2003.
(2) 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.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED
TO THREE MONTHS ENDED JUNE 30, 2002
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
On July 31, 2003, Elsinore completed the sale of all of the capital stock
of its wholly-owned subsidiary, Four Queens, to TLC for $20.5 million. Four
Queens was Elsinore's sole operating asset and the capital stock of Four Queens
was substantially all of Elsinore's assets.
Elsinore's Board of Directors anticipates that it will adopt a plan of
dissolution and begin the process of winding-up and dissolving Elsinore.
Elsinore used a portion of the proceeds from the sale to pay down the
outstanding Notes, and to pay all accrued and unpaid dividends on Elsinore's
Preferred Stock through July 31, 2003. At August 1, 2003, the date the payments
were made, Elsinore had $5,380,489 in principal amount of the Notes outstanding,
including accrued and unpaid interest and had outstanding approximately
50,000,000 shares of Preferred Stock, with accumulated accrued and unpaid
dividends of $5,860,815. Following the anticipated conversion of the Preferred
Stock, Elsinore would have approximately 940 common stockholders. After
establishing an adequate hold-back for the anticipated costs of winding-up of
Elsinore's affairs, the remaining funds are expected to be paid to the holders
of Elsinore's common stock on a pro rata basis. Once all remaining obligations
have been satisfied and Elsinore is dissolved, the remaining assets, if any, are
expected to be distributed a second time to the holders of Elsinore's common
stock.
The results of operations of the Four Queens for the three month period
ended June 30, 2003 and 2002 have been presented as discontinued operations.
Beginning August 1, 2003, the Company expects that there will be no revenues
from operations.
CONTINUING OPERATIONS
REVENUES
Other non-operating revenues decreased by approximately $339,000, or 100%,
from $339,000 during the 2002 period to $0 during the 2003 period. This decrease
was primarily due to payments received during 2002 of approximately $339,000
under a settlement agreement between the Company, through its wholly owned
subsidiary, Olympia Gaming Corporation and the Jamestown S'Klallam Tribe and JKT
Gaming, Inc.
COSTS AND EXPENSES
Selling, general and administrative expenses increased $27,000, or 18.6%,
from $145,000 during the 2002 period to $172,000 during the 2003 period. The
increase in expense was primarily due to increased corporate expenses and
general legal fees.
Interest expense decreased by approximately $64,000, or 28.1% from $228,000
during the 2002 period to $164,000 for the 2003 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 January 2003.
During the quarter ended June 30, 2002, the Company incurred approximately
$798,000, net, in merger and litigation costs. Approximately $1,312,000 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
Note 6 to the Condensed Consolidated Financial Statements. A receivable due from
the Company's directors and officers' insurance carrier related to this matter
partially offset this expense by $514,000. 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.
LOSS FROM CONTINUING OPERATIONS
As a result of the factors discussed above, the Company experienced a net
loss from continuing operations in the 2003 period of $336,000 compared to
$832,000 in the 2002 period.
DISCONTINUED OPERATIONS
REVENUES
Net revenues decreased by approximately $188,000, or 1.3%, from $13,617,000
during the 2002 period, to $13,434,000 for the 2003 period. This decrease was
due, in part, to a decrease in casino and other revenues, as discussed below.
Casino revenues decreased by approximately $198,000, or 2.0%, from
$9,880,000 during the 2002 period to $9,682,000 during the 2003 period. This
decrease was primarily due to a $133,000, or 1.8%, decrease in slot machine
revenue and a $67,000, or 3.0%, decrease in table games revenue. The decrease in
slot machine revenue was attributable to a decrease in slot coin-in of
$2,238,000, or 1.9%, while the hold percentage remained unchanged. The decrease
in table games revenue was attributable to a decrease in the win percentage of
1.2%, partially offset, by an increase in drop of $822,000, or 5.6%.
Hotel revenues decreased by approximately $16,000, or 0.8%, from $2,068,000
during the 2002 period to $2,052,000 during the 2003 period. This decrease was
primarily due to a decrease in the average daily room rate of $2.25, from $35.09
in the 2002 period to $32.84 in the 2003 period, partially offset by an increase
in room occupancy, as a percentage of total rooms available for sale, from 85.4%
for the 2002 period, to 90.2% for the 2003 period.
Food and beverage revenues increased approximately $24,000, or 0.9%, from
$2,770,000 during the 2002 period to $2,794,000 during the 2003 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 $142,000, or 42.6%, from $333,000
during the 2002 period to $475,000 during the 2003 period. This increase was
primarily due to an increase in miscellaneous and tenant income.
Promotional allowances increased by approximately $135,000, or 9.4%, from
$1,434,000 during the 2002 period to $1,569,000 during the 2003 period due to an
increase in complimentary rooms and food and beverage primarily from an increase
in table games play.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $178,000, or 1.9%, from $9,138,000 for
the 2002 period to $9,316,000 for the 2003 period.
Casino expenses increased $129,000, or 3.9%, from $3,350,000 during the
2002 period to $3,479,000 during the 2003 period, and expenses as a percentage
of revenue increased from 33.9% to 35.9%, respectively. The increase in expenses
was partially due to an increase in labor costs associated with culinary union
benefits and an increase in the number of table games open for play.
Hotel expenses increased $25,000, or 1.0%, from $2,410,000 during the 2002
period to $2,435,000 during the 2003 period, and expenses as a percentage of
revenue increased from 116.5% to 118.7%, respectively. The increase in expense
was due primarily to an increase in union labor costs.
Taxes and licenses increased $21,000, or 1.4%, from $1,476,000 in the 2002
period to $1,497,000 in the 2003 period as a result of corresponding increases
in table games 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.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $398,000, or 16.6%,
from $2,392,000 during the 2002 period to $1,994,000 during the 2003 period;
and, as a percentage of total net revenues, expenses decreased from 17.6% to
14.8%, respectively. The decrease in expense was primarily due to a reduction in
expenses relating to sales efforts of the Company's holdings in the Four Queens,
partially offset by an increase in marketing expenses.
Rent expense decreased by approximately $27,000, or 2.4%, from $1,125,000
during the 2002 period to $1,098,000 during the 2003 period, due primarily to a
decrease in equipment rental.
On March 14, 2002, the Company entered into a Purchase Agreement for the
sale of substantially all of the assets of Four Queens, Inc., which operates the
Four Queens including the hotel and casino, to SummerGate. In connection with
the Purchase Agreement, the Company recognized a non-cash impairment loss of
approximately $13.2 million during 2001 and subsequently 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
the Four Queens' assets that were to be purchased at June 30, 2002.
On June 27, 2002, the Four Queens terminated the Agreement and began
depreciating the fixed assets on July 1, 2002.
On April 29, 2003, the Company announced that it entered into a definitive
Stock Purchase Agreement for the sale of all the capital stock of Four Queens
and its interest in the Fremont Street Experience, LLC, to TLC Casino
Enterprises, Inc., a Nevada corporation, for a purchase price of approximately
$20.5 million.
In connection with the Stock Purchase Agreement, the Company recognized an
additional non-cash impairment loss of approximately $561,000 during the second
quarter of 2003. The impairment loss was necessary in order to adjust the
Company's investment in Four Queens to the purchase price of $20.5 million. The
sale of Four Queens was consummated on July 31, 2003. See Note 7 to the
Condensed Consolidated Financial Statements.
OTHER EXPENSES
Depreciation and amortization expense increased by approximately $250,000
from $0 during the 2002 period to $250,000 during the 2003 period. As a result
of the Four Queens' assets being held for sale, no depreciation was recorded
during the 2002 period. In connection with the Purchase Agreement the Company
ceased depreciation of assets again beginning on April 29, 2003.
Interest expense decreased by approximately $33,000, or 35.5% from $93,000
during the 2002 period to $60,000 for the 2003 period. The reduction in interest
expense was primarily due to a reduction in capital lease obligations.
NET INCOME FROM DISCONTINUED OPERATIONS
As a result of the factors discussed above, the Company experienced net
income from discontinued operations in the 2003 period of $155,000 compared to
$869,000 in the 2002 period.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED
TO SIX MONTHS ENDED JUNE 30, 2002
- --------------------------------------------------------------------------------
The results of operations of the Four Queens for the six month period ended
June 30, 2003 and 2002 have been presented as discontinued operations. Beginning
August 1, 2003, the Company expects that there will be no revenues from
operations.
CONTINUING OPERATIONS
REVENUES
Other revenues decreased by approximately $341,000, or 100%, from $341,000
during the 2002 period to $0 during the 2003 period. This decrease was primarily
due to payments received during 2002 of approximately $341,000 under a
settlement agreement between the Company, through its wholly owned subsidiary,
Olympia Gaming Corporation and the Jamestown S'Klallam Tribe and JKT Gaming,
Inc.
COSTS AND EXPENSES
Selling, general and administrative expenses increased $30,000, or 9.2%,
from $325,000 during the 2002 period to $355,000 during the 2003 period. The
increase in expense was primarily due to increased corporate expenses and legal
fees.
Interest expense decreased by approximately $124,000, or 27.3% from
$456,000 during the 2002 period to $332,000 for the 2003 period. The reduction
in interest expense was primarily due to a reduction in the principal balance of
the Company's Notes as a result of a principal payment by the Company in January
2003.
During 2002, the Company incurred approximately $989,000, net, in merger
and litigation costs. Approximately $2,054,000 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 Note 6 to the Condensed Consolidated
Financial Statements. A receivable due from the Company's directors and
officers' insurance carrier related to this matter partially offset this expense
by $1,065,000.
LOSS FROM CONTINUING OPERATIONS
As a result of the factors discussed above, the Company experienced a net
loss from continuing operations in the 2003 period of $687,000 compared to
$1,429,000 in the 2002 period.
DISCONTINUED OPERATIONS
REVENUES
Net non-operating revenues increased by approximately $1,087,000, or 4.0%,
from $27,207,000 during the 2002 period, to $28,294,000 for the 2003 period.
This increase was due, in part, to an increase in casino revenues, as discussed
below.
Casino revenues increased by approximately $821,000, or 4.2%, from
$19,673,000 during the 2002 period to $20,494,000 during the 2003 period. This
increase was primarily due to a $638,000, or 4.5%, increase in slot machine
revenue, a $178,000, or 3.7%, increase in table games revenue, and a $22,000, or
4.0%, increase in slot promotion revenue, partially offset by a $17,000, or
6.7%, decrease in keno revenue. The increase in slot machine revenue was
attributable to an increase in slot coin-in of $1,421,000, or 0.6%, and an
increase in the hold percentage of 0.23%. The increase in table games revenue
was attributable to an increase in drop of $2,279,000, or 7.5%, partially offset
by a decrease in the win percentage of 0.55%. The increase in slot promotion
revenue was due to an increase in the average daily headcount of $21 WinsSM, a
promotional slot program, of 6, or 4.0%, due to an increase in foot traffic. The
decrease in keno revenue was attributable to a decrease in keno drop of $56,000,
or 7.0%.
Hotel revenues increased by approximately $95,000, or 2.2%, from $4,254,000
during the 2002 period to $4,349,000 during the 2003 period. This increase was
primarily due to an increase in room occupancy, as a percentage of total rooms
available for sale, from 86.7% for the 2002 period, to 90.2% for the 2003 period
and an increase in the average daily room rate of $0.49, from $35.69 in the 2002
period to $35.20 in the 2003 period. The overall improvement in performance was
primarily attributed to an increase in individual reservations call volume which
has improved since the events of September 11, 2001 which affected call volumes
during the first six months of 2002.
Food and beverage revenues increased approximately $166,000, or 2.9%, from
$5,716,000 during the 2002 period to $5,882,000 during the 2003 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 $174,000, or 26.7%, from $652,000
during the 2002 period to $826,000 during the 2003 period. This increase was
primarily due to an increase in tenant income and slot tokens taken into income.
Promotional allowances increased by approximately $169,000, or 5.5%, from
$3,088,000 during the 2002 period to $3,257,000 during the 2003 period due to an
increase in complimentary rooms and food and beverage primarily resulting from
an increase in table games and 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 $853,000, or 4.8%, from $17,930,000 for
the 2002 period to $18,783,000 for the 2003 period.
Casino expenses increased $355,000, or 5.4%, from $6,564,000 during the
2002 period to $6,919,000 during the 2003 period, and expenses as a percentage
of revenue increased from 33.4% to 33.8%, respectively. The increase in expenses
was partially due to an increase in labor costs associated with culinary union
benefits and an increase in the number of table games open for play, an increase
in promotional gifts, and an increase in the reclassification of the cost of
complimentary rooms, food and beverage reflected as a casino expense.
Hotel expenses increased $319,000, or 6.9%, from $4,616,000 during the 2002
period to $4,935,000 during the 2003 period, and expenses as a percentage of
revenue increased from 108.5% to 113.5%, respectively. The increase in expense
was due, in part, to an increase in union labor costs and an increase in the
reclassification of cost of complimentary rooms reflected as a casino expense.
Taxes and licenses increased $169,000, or 5.8%, from $2,930,000 in the 2002
period to $3,099,000 in the 2003 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.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $140,000, or 3.3%,
from $4,271,000 during the 2002 period to $4,131,000 during the 2003 period,
and, as a percentage of total net revenues, expenses decreased from 15.7% to
14.6%, respectively. The decrease in expense was primarily due to a reduction in
expenses relating to sales efforts of the Company's holdings in the Four Queens,
partially offset by an increase in marketing expenses.
Rent expense decreased by approximately $28,000, or 1.3%, from $2,214,000
during the 2002 period to $2,186,000 during the 2003 period, due primarily to
decrease in equipment rental.
On March 14, 2002, the Company entered into a Purchase Agreement for the
sale of substantially all of the assets of Four Queens to SummerGate. In
connection with the Purchase Agreement, the Company recognized a non-cash
impairment loss of approximately $13.2 million during 2001 and subsequently
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 the Four Queens' assets that were to be purchased at
June 30, 2002.
On June 27, 2002, the Four Queens terminated the Agreement and began
depreciating the fixed assets on July 1, 2002.
On April 29, 2003, the Company announced that it entered into a Stock
Purchase Agreement for the sale of all the capital stock of Four Queens and its
interest in the Fremont Street Experience, LLC, to TLC for a purchase price of
approximately $20.5 million.
In connection with the Stock Purchase Agreement, the Company recognized a
non-cash impairment loss of approximately $5 million during the first six months
of 2003. The impairment loss was necessary in order to adjust the Company's
investment in Four Queens to the purchase price of $20.5 million. The sale of
Four Queens was consummated on July 31, 2003. For more information, see Note 1
and Note 7 to the Condensed Consolidated Financial Statements.
OTHER EXPENSES
Depreciation and amortization expense increased by approximately
$1,038,000, from $0 during the 2002 period to $1,038,000 during the 2003 period.
As a result of the Four Queens' assets being held for sale, no depreciation was
recorded during the 2002 period. In connection with the Purchase Agreement the
Company ceased depreciation of assets again beginning on April 29, 2003.
Interest expense decreased by approximately $39,000, or 23.5% from $165,000
during the 2002 period to $126,000 for the 2003 period. The reduction in
interest expense was primarily due to a reduction in capital lease obligations.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
As a result of the factors discussed above, the Company experienced a net
loss from discontinued operations in the 2003 period of $2,980,000 compared to
net income from discontinued operations of $2,303,000 in the 2002 period.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 2003, Elsinore completed the sale of all of the capital stock
of its wholly-owned subsidiary, Four Queens, to TLC for $20.5 million. Four
Queens was Elsinore's sole operating asset and the capital stock of Four Queens
was substantially all of Elsinore's assets.
Elsinore used a portion of the proceeds from the sale to pay down the
outstanding Notes, and to pay all accrued and unpaid dividends on Elsinore's
Preferred Stock through July 31, 2003. At August 1, 2003, the date the payments
were made, Elsinore had $5,380,489 in principal amount of the Notes outstanding,
including accrued and unpaid interest and had outstanding approximately
50,000,000 shares of Preferred Stock, with accumulated accrued and unpaid
dividends of $5,860,815.
Elsinore's Board of Directors anticipates that it will adopt a plan of
dissolution and begin the process of winding-up and dissolving Elsinore. After
establishing an adequate reserve for the anticipated winding-up of Elsinore's
affairs, the remaining funds are expected to be paid to the holders of
Elsinore's common stock on a pro rata basis. Once all remaining obligations have
been satisfied and Elsinore is dissolved, the remaining assets, if any, are
expected to be distributed a second time to the holders of Elsinore's common
stock.
Beginning August 1, 2003, the Company expects that there will be no
revenues from operations.
At June 30, 2003, prior to the consummation of the transaction, the Company
had cash and cash equivalents of approximately $6.0 million, as compared to
approximately $6.3 million at December 31, 2002.
During the first six months of 2003, the Company's net cash used in
operating activities of continuing operations was $771,000 compared to $1.2
million in the first six months of 2002. As a result of consummation of the sale
of Four Queens on July 31, 2003, the Company no longer has an operating asset.
The following table summarizes the Company's obligations and commitments as
of June 30, 2003, upon the consummation of the sale of Four Queens:
Payments Due by Year (a)
(Amounts in Thousands)
-----------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Employment/other $953 $- $- $- $- $- $953
Long-term debt - 5,104 - - - - 5,104
---- ------ -- -- -- -- ------
Total $953 $5,104 $- $- $- $- $6,057
==== ====== == == == == ======
(a) Upon consummation of the sale of Four Queens, the Company paid down the
remaining $5.1 million of principal on the Company's Notes held by MWV.
The MWV Accounts own 94.3% of the outstanding Common Stock, and upon
conversion of their 50,000,000 shares of Series A Convertible Preferred Stock
into shares of Common Stock, will own 99.6% of the Common Stock. The Common
Stock held by the MWV Accounts is deemed beneficially owned by John C. "Bruce"
Waterfall, Elsinore's Chairman of the Board, and Elsinore's directors and
executive officers as a group are deemed to own beneficially 99.6% of the
outstanding Common Stock. The remaining .4% of the outstanding shares is widely
dispersed among numerous shareholders. Mr. Waterfall is the only individual who
exercises voting and investment authority over the Common Stock on behalf of any
of the MWV Accounts.
Interest on the Notes was paid in February and August of each fiscal year,
which significantly affected the Company's cash and cash equivalents in the
second and fourth quarters.
The Notes were due in full on October 20, 2003, however, the Notes were
also redeemable by the Company at any time at 100% of par, without premium. The
Company was required to make an offer to purchase all Notes at 101% of face
value upon the consummation of the transaction contemplated by the Stock
Purchase Agreement, which was deemed a "Change of Control" under the indenture
governing the Notes. The indenture also provided for mandatory redemption of the
Notes by the Company upon order of the Nevada Gaming Authorities.
The Notes were redeemed by the Company on August 1, 2003.
Management considered 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 $693,000 and $400,000 during 2003 and 2002,
respectively. Based upon its cessation of operations and cash on hand, the
Company estimates that it has sufficient operating capital to fund its limited
operations for the next twelve months, or until the wind-up and liquidation of
the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company has adopted this standard on July 1, 2003, and
expects that it will have no material impact on its financial position and
results of operations.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements requires
the Company's management to adopt accounting policies and to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses and provision for income taxes. Management periodically evaluates its
policies, estimates and assumptions related to these policies. The Company
operates in a highly regulated industry. The Company is subject to regulations
that describe and regulate operating and internal control procedures. The
majority of our casino revenue is in the form of cash, personal checks or gaming
chips and tokens, which by their nature do not require complex estimations. We
estimate certain liabilities with payment periods that extend for longer than
several months. Such estimates include customer loyalty liabilities and
self-insured medical and workers' compensation costs. We believe that these
estimates are reasonable based upon our past experience with the business and
based upon our assumptions related to possible outcomes in the future. Future
actual results will likely differ from these estimates.
Long-lived Assets
The Company has a significant investment in long-lived property and
equipment. We evaluate our property and equipment and other long-lived assets
for impairment in accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For
assets to be disposed of, we recognize the asset at the lower of carrying value
or fair market value less costs of disposal, as estimated based on comparable
asset sales, solicited offers, or a discounted cash flow model. For assets to be
held and used, we review for impairment whenever indicators of impairment exist.
We then compare the estimated future cash flows of the asset, on an undiscounted
basis, to the carrying value of the asset. If the undiscounted cash flows exceed
the carrying value, no impairment is indicated. If the undiscounted cash flows
do not exceed the carrying value, then an impairment is recorded based on the
fair value of the asset, typically measured using a discounted cash flow model.
There are several estimates, assumptions and decisions in measuring
impairments of fixed assets. First, management must determine the usage of the
asset. To the extent management decides that an asset will be sold, it is more
likely that an impairment may be recognized. Should the actual useful life of a
class of assets differ from the estimated useful life, the Company would record
an impairment charge. The Company reviews useful lives, obsolescence, and
assesses commercial viability of these assets periodically.
See Note 7 in the Notes to Condensed Consolidated Financial Statements for
a discussion of impairments recorded in 2001, 2002 and 2003. On April 29, 2003,
the Company announced that it entered into a definitive stock purchase agreement
for the sale of all the capital stock of Four Queens and its interest in the
Fremont Street Experience, LLC, to TLC Casino Enterprises, Inc., a Nevada
corporation, for a purchase price of approximately $20.5 million. In connection
therewith, we reviewed our assets for potential impairment, and determined that
an impairment was indicated. Other than these items, we are not aware of events
or circumstances that would cause us to review any material long-lived assets
for impairment. The sale of Four Queens was consummated on July 31, 2003.
Deferred Income Tax Assets
We utilize estimates related to cash flow projections for the application
of SFAS 109 to the realization of deferred tax assets. Our estimates are based
upon recent operating results and budgets for future operating results. These
estimates are made using assumptions about the economic, social and regulatory
environments in which we operate. These estimates could be negatively impacted
by numerous unforeseen events including changes to regulations affecting how we
operate our business, changes in the labor market or economic downturns in the
areas where we operate.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Company's primary financial instruments include cash and
long-term debt. At June 30, 2003, the carrying values of the Company's financial
instruments approximated their fair values based on current market prices and
rates and long-term fixed rate borrowings represented approximately 95% of our
total borrowings. 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 June 30, 2003. A 1% increase in interest rates would not have a
material effect on net income.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by 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.
There has been no change in our internal control over financial reporting
that occurred during our most recent fiscal quarter that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
Elsinore Corporation and Subsidiaries
Other Information
PART II. OTHER INFORMATION
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Item 6.
(a) Exhibits and Reports
31.1 Certification of the Principal Executive Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(a).
31.2 Certification of the Principal Financial Officer of the
Registrant pursuant to Exchange Act Rule 13a-14(a).
32.1 Certification of the Principal Executive Officer of the
Registrant pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Principal Financial Officer of the
Registrant pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Forms 8-K filed during this quarter
(1) Current report on Form 8-K was filed on April 11, 2003,
relating to the rescheduling of Elsinore's annual meeting of
stockholders.
(2) Current report on Form 8-K was filed on April 30, 2003,
relating to the announcement of the sale of the capital stock of
Four Queens.
(3) Current report on Form 8-K was filed on June 25, 2003, to
clarify the date of the annual meeting of stockholders.
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 duly authorized.
ELSINORE CORPORATION
--------------------
(Registrant)
By: /s/ Joann McNiff
-------------------------
JOANN MCNIFF, President
By: /s/ Gina L. Mastromarino
-------------------------
GINA L. MASTROMARINO, Principal
Financial & Accounting Officer
Dated: August 19, 2003
---------------
EXHIBIT 31.1
CERTIFICATION
I, Joann McNiff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elsinore Corporation;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 19, 2003
---------------
/s/ Joann McNiff
- -----------------
Joann McNiff
President
EXHIBIT 31.2
CERTIFICATION
I, Gina L. Mastromarino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elsinore Corporation;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 19, 2003
---------------
/s/ Gina L. Mastromarino
- -----------------------------
Gina L. Mastromarino
Principal Financial and Accounting Officer
EXHIBIT 32.1
ELSINORE CORPORATION
CERTIFICATION
-------------
In connection with the periodic report of Elsinore Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission (the "Report"), I, Joann McNiff, President of the Company,
hereby certify as of the date hereof, solely for purposes of Title 18, Chapter
63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company at the dates and for the periods indicated.
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Elsinore
Corporation and will be retained by Elsinore Corporation and furnished to the
Securities and Exchange Commission or its staff upon request. This Certification
has not been, and shall not be deemed, "filed" with the Securities and Exchange
Commission.
Date: August 19, 2003 /s/ Joann McNiff
--------------- ---------------------
Joann McNiff, President
EXHIBIT 32.2
ELSINORE CORPORATION
CERTIFICATION
-------------
In connection with the periodic report of Elsinore Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission (the "Report"), I, Gina L. Mastromarino, Principal Financial
and Accounting Officer, hereby certify as of the date hereof, solely for
purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that
to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company at the dates and for the periods indicated.
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Elsinore Corporation and will be
retained by Elsinore Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
Date: August 19, 2003 /s/ Gina L. Mastromarino
--------------- -----------------------------
Gina L. Mastromarino
Principal Financial and Accounting Officer