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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 1-7831
ELSINORE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0117544
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
202 FREMONT STREET, LAS VEGAS, NEVADA 89101
(Address of principal executive offices) (Zip Code)
(702) 385-4011
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Stock Exchange on Which Registered
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
On February 10, 1997 there were 15,891,793 shares of common stock
issued and outstanding.
Total number of sequentially numbered pages _______
Exhibit Index begins at sequential page number ________
TABLE OF CONTENTS
PART 1
Page
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a
Vote of Security-Holders
Part II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and
Supplementary Data
Item 9. Changes in and Disagreements
with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers
of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Item 13. Certain Relationships and
Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
SIGNATURES
PART I
ITEM 1. BUSINESS
SUMMARY AND RECENT DEVELOPMENTS
Elsinore Corporation ("Elsinore" or the "Company") owns,
operates and develops casinos and casino/hotels in the United
States. The Company owns and operates its principal property, the
Four Queens Hotel and Casino (the "Four Queens") in downtown Las
Vegas, Nevada. The Company has also assisted in the development
and management of two casinos on Native American land; the
Spotlight 29 Casino, located near Palm Springs, California, which
opened on January 14, 1995, and the 7 Cedars Casino, located on
the Olympic Peninsula in Washington State, which opened
February 3, 1995. However, the Company's primary business now is
concentrated on the operation of the Four Queens.
To assist in management's expansion strategy which began in
1993, the Company borrowed $60 million through the issuance of its
12.5% First Mortgage Notes due 2000 ("1993 First Mortgage Notes")
in October 1993 and an additional $3 million through the issuance
of its 20% Mortgage Notes due 1996 ("1994 Mortgage Notes") in
October 1994.
In January 1995, the Company completed an underwritten
public offering of 2.5 million shares of its common stock (the
"Equity Offering"). At that time, the Company believed the net
proceeds of the Equity Offering (approximately $4 million before
deducting the Company's offering expenses), together with cash on
hand and cash generated from operations, would be sufficient to
satisfy the Company's working capital requirements through the
first quarter of 1995. However, principally as a result of the
unanticipated poor initial performance of the Spotlight 29 Casino
following its opening, the Company was required to obtain
additional financing through the sale of $1,706,250 aggregate
principal amount of its 7.5% Convertible Subordinated Notes due
December 31, 1995 (the "Convertible Notes"). The private
placement of Convertible Notes was completed on March 31, 1996.
Chapter 11 Proceedings. On October 31, 1995, Elsinore and
certain of its subsidiaries filed a voluntary petition in the
United States Bankruptcy Court for the District of Nevada (Las
Vegas, Nevada) (the "Bankruptcy Court") to reorganize under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code"). The file number in the case is 95-24685 RCJ with Judge
Robert C. Jones presiding. On November 10, 1995, Olympia Gaming
Corporation, a wholly-owned subsidiary of the Company, also filed
a voluntary petition in the same Court. The Company is currently
operating as a debtor-in-possession under the supervision of the
Bankruptcy Court. As a debtor in possession, the Company may
operate its business but may not engage in transactions outside of
the ordinary course of business without the approval of the
Bankruptcy Court.
On February 28, 1996, the Company filed a plan of
reorganization and accompanying disclosure statement. On July 16,
1996 and July 18, 1996, the Bankruptcy Court conducted hearings
regarding the confirmation of the plan submitted by the Company.
At that time, due to objections by certain creditors and equity
holders, the Bankruptcy Court indicated that certain modifications
to the plan would be required for confirmation, including making
no distributions to the Company's equity holders. However, prior
to entry of an order confirming the modified plan, the objections
of creditors were withdrawn in return for a reallocation of the
equity interests in the reorganized Elsinore. See "Item 1.
Business--Chapter 11 Proceedings."
On August 8, 1996, the Bankruptcy Court entered an order
confirming the plan of reorganization submitted by the Company as
modified by the terms of that order (the "Plan") consistent with
the reallocation of equity interests. This order included an
accelerated confirmation date for the Plan of August 12, 1996.
Final effectiveness of the Plan is dependent upon a number of
conditions. The Company believes that the only condition
remaining to be satisfied is the receipt of approval from the
Nevada Gaming Authorities with respect to the post-effectiveness
significant Board Members. See "Item 1. Business--Chapter 11
Proceedings" and "Item 1. Business--Regulations -- Nevada Gaming
Operations." The Company expects the Plan to be fully effective
by March 1997.
Under the Plan, 80% of the equity interest in the
reorganized Elsinore will be distributed in specified percentages
to certain classes of the Company's creditors and equity holders.
The remaining 20% of the equity interests in the reorganized
Elsinore will be distributed pursuant to a rights offering which
will raise $5 million in additional capital for the reorganized
Elsinore. The unofficial committee of the 1993 First Mortgage Note
Holders (The "Bondholder Committee") has guaranteed a 100%
subscription for the $5 million rights offering. On or about
October 10, 1996, the rights offering commenced. As of December
31, 1996, the Company had received $4,287,000 (including interest
of $19,000 on subscription amounts paid into the account by
members of the Bondholders committee) in rights offering proceeds
of which over 99% was paid by the Bondholders Committee members.
As of February 10, 1997 , the Company had received an additional
$130,000 from the Bondholders Committee. The remaining amount of
approximately $583,000 must be paid by the Bondholders Committee
prior to the Plan's effective date. All rights proceeds are being
held in a restricted account until the Plan's effectiveness.
Management Change. The Company's confirmed Plan calls for a
change in the management of the reorganized Elsinore. Effective
August 12, 1996, the Company entered an Interim Management
Agreement with Riviera Gaming Corp. - Elsinore, Inc. to manage the
business operations of the Company subject to the direction of the
boards of directors of Elsinore and its subsidiaries.
Also, on August 12, 1996, pursuant to a Stipulation between
the Company and the unofficial committee of the First Mortgage
noteholders (the "Bondholder Committee"), senior management
(Thomas E. Martin, President and Chief Executive Officer and
Frank L. Burrell, Jr., Chairman of the Board) ceased to be
compensated employees of the Company, although they will continue
to serve both as directors and authorized officers until replaced.
When the Plan is fully effective, the existing board of the
Company will be reconstituted with new directors, four of whom
will be chosen by the Bondholders Committee, and one will be
chosen by the Equity Committee appointed in the bankruptcy case
(with input from other creditor constituencies). As of
February 17, 1997, the new directors had been nominated and the
Plan's effectiveness is awaiting final Nevada Gaming Authorities
approval of those nominees.
The Plan contemplated that management of the Company from
the date of the Plan's confirmation until the Plan's Effective
Date would be undertaken by a nominee of the Bondholders
Committee. The Company and Riviera Gaming Management Corp -
Elsinore ("Riviera"), the nominee of the Bondholders Committee,
have entered an Interim Management Agreement (the "Interim
Agreement") pursuant to which Riviera has assumed exclusive
managerial responsibility over the Four Queens Hotel and Casino,
and ancillary facilities (together the "Four Queens Hotel"),
subject to supervision of the Boards of Directors of Elsinore and
FQI. Under the Interim Agreement, Riviera is responsible for
providing training to Four Queens Hotel personnel, marketing and
sales at the Four Queens Hotel, internal accounting and other
managerial tasks. In return, the Riviera receives a management fee
of $83,333 per month. All personnel employed at the Four Queens
Hotel, other than those hired by the Riviera for purposes of
fulfilling its responsibilities, remain the employees of the
Company. In addition, during the Interim Agreement, the Company
retains full responsibility for payment of all expenses related to
operation of the Four Queens Hotel. Riviera has no obligation to
pay any expenses or to make any capital expenditure with respect
to the Four Queens Hotel which are not funded by the Company. The
Interim Agreement by its terms will terminate upon the
commencement of the first calendar quarter following the Plan's
Effective Date.
The bankruptcy process has provided an opportunity for
Elsinore to respond to changes in the industry and redirect its
strategy to become more competitive. In addition, the bankruptcy
process has afforded the Company an opportunity to eliminate or
renegotiate certain pre-petition debt to a more manageable level
resulting in greater financial flexibility.
The Four Queens; The Fremont Street Experience.
Based principally on results at the Four Queens, the Company's
earnings before interest, income taxes, depreciation and
amortization, (and before the provision for losses recognized on
loans receivable from Native American Tribes, the write-off of
casino development costs and expenses recognized as a result of
the reorganization proceedings in 1995) increased in 1996 to $7.0
million, from $1.4 million in 1995. The Company believes this
improvement was at least partially attributable to increased
visitors to downtown because of (1) the Fremont Street Experience
attraction and (2) the related improvement of vehicular traffic
flow to the downtown Fremont Street Experience area following
completion of its construction in November, 1995. However,
competition continues to intensify in the Las Vegas market as new
resorts are developed and existing resorts expand. The Company
believes that customers of the downtown casino/hotels who would
normally spend substantially all of their gaming and entertainment
budget at downtown casinos are being drawn to and spent a portion
of their budgets at these new Strip properties, resulting in a
loss of revenue to downtown casinos.
The Fremont Street Experience is a cooperative undertaking among
the downtown casinos to create a feature attraction along Fremont
Street in downtown Las Vegas. The Fremont Street Experience has
transformed four blocks of Fremont Street into a covered
pedestrian mall, connecting the Four Queens and nine other major
entertainment venues that together offer 17,000 slot machines,
over 500 blackjack and other table games, 41 restaurants and 8,000
hotel rooms. The Fremont Street Experience features a 10-story
celestial vault, sound effects and a high tech light show which
add to the neon signs and marquees for which the downtown area is
already famous. As part of the Fremont Street Experience, a new
1,500-space parking garage has been constructed. The Company
believes that the Fremont Street Experience will assist the
downtown area in its effort to draw increased patronage to the
downtown market.
Based on the observation of downtown gaming revenue patterns
in 1989-1991, the period during which two other themed mega-resort
casinos, the Mirage and Excalibur, opened on the Las Vegas Strip,
and on the opening of the Fremont Street Experience in December
1995, the Company believes that gaming revenues at the Four Queens
and at downtown casinos generally will increase, driven
principally by a greater number of gaming and hotel patrons in the
downtown market. However, there is no assurance that patronage or
gaming revenues at downtown casinos or the Four Queens will
increase.
Spotlight 29 Casino. Since March 1995, Elsinore, its wholly
owned subsidiary, Elsub Management Corporation ("Elsub") and Palm
Springs East Limited Partnership ("Palm Springs East"), of which
Elsub is the general partner, and the Twenty-Nine Palms Band of
Mission Indians (the "Band") have been involved in a dispute
regarding, among other things, the terms of a management contract
(the "Spotlight 29 Contract") under which Palm Springs East had
the exclusive right to manage and operate the Spotlight 29 Casino,
owned by the Band, located near Palm Springs, California.
As a result of this dispute, on April 17, 1995, the Company
was ousted as manager of the Spotlight 29 Casino. The Company then
declared a breach of the Spotlight 29 Contract and a related loan
agreement under which Palm Springs East had lent approximately
$12.5 million to the Band for construction of the Spotlight 29
Casino and for working capital contributions.
In light of the Company's disassociation with the operations
of the Spotlight 29 Casino, the Company's management determined to
write-off, in the quarter ended March 31, 1995, the unamortized
balance of casino development costs incurred on the project of
$1,037,000 and ceased accrual of interest on the project note and
loans evidencing working capital advances. On May 16, 1995, the
Band delivered to the Company "Notice to Terminate Management
Agreement" which asserted material breaches of the Spotlight 29
Contract and requested payment of approximately $1.5 million by
June 16, 1995 to cover working capital shortfalls.
On October 31, 1995, Elsinore, Palm Springs East and Elsub
filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code. In December 1995 the Company reserved the
$9,000,000 amount due from the Band.
As of March 29, 1996, the Company reached a settlement with
the Band, which has been approved by the Bankruptcy Court and the
Bureau of Indian Affairs. Pursuant to the settlement, the Company
has received a promissory note from the Band in the principal
amount of $9 million with a 36 month amortization schedule.
However, because of limitations on the funds from which the note
is to be paid, there is a possibility it will not be paid in full.
Given these limitations on the recovery of principal and interest
due on the note, management has not reduced the allowance for loss
in an amount of $9 million against the aggregate receivables
provided in the quarter ended December 31, 1995. The first
payment was made by the Band on October 29, 1996. See "Item 1.
Business -- Native American Gaming Projects -- Spotlight 29
Casino" for further detail.
7 Cedars Casino. Elsinore, through its wholly-owned
subsidiary, Olympia Gaming Corporation ("Olympia"), entered a
Gaming Project Development and Management Agreement (the "7 Cedars
Contract") to operate the 7 Cedars Casino located on the Olympic
Peninsula in the state of Washington and owned by the Jamestown
S'Klallam Tribe (the "S'Klallam Tribe"). In addition, the Company
lent, in the aggregate, $9 million to the S'Klallam Tribe for
construction of the casino pursuant to the 7 Cedars Contract.
Under the terms of the 7 Cedars Contract, the Company was
obligated to establish a reserve fund for "working capital," a
term which is not defined in the 7 Cedars Contract. The Company
believes the parties did not intend to apply a "working capital"
definition based on generally accepted accounting principles
which, in the Company's view, would be impracticable in the
context of the 7 Cedars Contract and which, in practice, has never
been followed. Since its opening on February 3, 1995, the 7 Cedars
Casino incurred a cumulative net loss and an attendant decrease in
working capital which has been substantial.
On November 1, 1995, the S'Klallam Tribe asserted that the
Company had defaulted on the June, July, August and September 1995
minimum guaranteed payments to the S'Klallam Tribe as defined by
the 7 Cedars Contract in the aggregate amount of $100,000 and
requested immediate payment. In addition, the S'Klallam Tribe
demanded that a minimum of $2,540,000 be paid immediately to cover
current expenses and up to $5,390,000 for working capital
shortfalls according to its interpretation of the 7 Cedars
Contract. On November 13, 1995 the Company received a letter from
the S'Klallam Tribe asserting that the 7 Cedars Contract had been
terminated.
On November 10, 1995, Olympia filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code with the
United States Bankruptcy Court for the District of Nevada (Las
Vegas, Nevada). The Company maintains that the 7 Cedars Contract
has not been terminated.
As a result of significantly lower than projected gaming
revenues, 7 Cedars has incurred substantial operating losses since
its opening. Based upon the cumulative net loss incurred for the 7
Cedars Casino and because the Company's $9 million loan to the
S'Klallam Tribe is payable solely from the 7 Cedars earnings,
management determined to write-off the remaining unamortized
balance of capitalized casino development costs of approximately
$242,000 in September 1995 and in December 1995 provided an
allowance for loss against the $9,000,000 outstanding balance of
the project loan and accrued interest thereon.
Changes in Management. Effective April 1, 1996, Gary R.
Acord, Chief Financial Officer, resigned his position with the
Company. Brent E. Duncan was named Treasurer and Secretary of the
Company on June 4, 1996.
The Company's confirmed Plan calls for a change in the
management of the reorganized Elsinore. Effective August 12,
1996, the Company entered an Interim Management Agreement with
Riviera Gaming Corp. - Elsinore, Inc. to manage the business
operations of the Company subject to the direction of the boards
of directors of Elsinore and its subsidiaries.
Also, on August 12, 1996, pursuant to a Stipulation between
the Company and the unofficial committee of the First Mortgage
noteholders (the "Bondholder Committee"), senior management
(Thomas E. Martin, President and Chief Executive Officer and
Frank L. Burrell, Jr., Chairman of the Board) ceased to be
compensated employees of the Company, although they will continue
to serve both as directors and authorized officers until replaced.
When the Plan is fully effective, the existing board of the
Company will be reconstituted with new directors, four of whom
will be chosen by the Bondholders Committee, and one will be
chosen by the Equity Committee appointed in the bankruptcy case
(with input from other creditor constituencies). As of
February 10, 1997, the new directors had been nominated and the
Plan's effectiveness is awaiting final Nevada Gaming Authorities
approval of those nominees.
Trading Halt/Potential Delisting. Trading in the Company's
common stock continues to be halted by the American Stock Exchange
("AMEX") and the Pacific Stock Exchange ("PSE"). Elsinore intends
to pursue reactivation of its listings with AMEX and PSE so that
the New Common Stock in the reorganized Elsinore can be traded
publicly following the effective date of the Plan. However, by
letter dated January 27, 1997, Elsinore was informed of AMEX's
intention to pursue the delisting of Elsinore's Common Stock. By
letter dated February 3, 1997, the Company requested that AMEX
defer a final decision on delisting until mid-March 1997 so that
the reconstituted board of directors has an opportunity to decide
on a course of action. By letter dated February 5,1997 AMEX
agreed to extend the Company's time to request an appeal to March
14, 1997.
CHAPTER 11 PROCEEDINGS
Initiation of Chapter 11 Proceedings.
On October 31, 1995, Elsinore and certain of its
subsidiaries (Four Queens, Inc., Four Queens Experience
Corporation, Elsub Management Corporation, and Palm Springs East
Limited Partnership) filed voluntary petitions in the United
States Bankruptcy Court for the District of Nevada (Las Vegas,
Nevada) (the "Bankruptcy Court") to reorganize under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code"). On
November 10, 1995, Elsinore's subsidiary, Olympia Gaming
Corporation, also filed a voluntary petition in the Bankruptcy
Court seeking reorganization under Chapter 11. The Company is
continuing to manage its business affairs as a debtor-in-possession
under the supervision of the Bankruptcy Court. The reorganization
of Elsinore and its subsidiaries is being jointly
administered. The file number in the case is 95-24685 RCJ with
Judge Robert C. Jones presiding.
The Company believes that no single factor led directly to
the filing of the Elsinore related bankruptcy cases; but rather,
that a combination of several factors led to the need to seek
Chapter 11 relief.
Initially in October 1994, the IRS delivered to Elsinore a
final assessment relating to certain adjustments to taxable income
taken by Elsinore for fiscal years ending January 31, 1980 through
December 31, 1983. The Company was advised and believed that
there would be no liability for taxes in these years above the
$3.5 million payment which was deposited with the IRS in 1991.
However, the IRS assessment called for Elsinore to pay
approximately $5.7 million, in addition to $3.5 million deposited
in 1991. A tax lien was recorded by the IRS in November 1994. In
December of 1994, Elsinore and the IRS entered into an agreement
whereby the assessment was to be paid in monthly installments over
the course of a year. In the nine months prior to the filing of
its bankruptcy petition, Elsinore paid approximately $3.5 million
to the IRS. The Company believes that these payments contributed
greatly to the liquidity problems faced by Elsinore prior to
commencing its bankruptcy case.
Second, as discussed more thoroughly below, Elsinore developed and
managed the Spotlight 29 Casino, a Class II gaming facility, on
the tribal land owned by the Twenty-Nine Palms Band. In March of
1995, in order to compete with other casinos in the area, the
Twenty-Nine Palms Band installed Class III electronic gaming
machines at the Spotlight 29 Casino. In March of 1995, as well as
today, there is no express state or federal authorization for the
use of Class III gaming devices at the Spotlight 29 Casino. The
installation of these Class III devices was brought to the
attention of the Nevada Gaming Authorities and Elsinore was
informed that the Nevada Gaming Authorities viewed the
installation of the devices as a violation of California and
Federal gaming law and expressed concerns regarding Elsinore's
continued association with the Twenty-Nine Palms Band. The
Company attempted to persuade the Twenty-Nine Palms Band to
discontinue use of the Class III devices at the Spotlight 29
Casino, but they refused. In view of the position taken by the
Nevada Gaming Authorities, the Company withdrew as manager of the
Spotlight 29 Casino and commenced action against the Twenty-Nine
Palms Band. See "Item 1. Business--Native American Gaming
Projects--Spotlight 29 Casino." The Company believes that the
resulting non-payment of principal and interest on the project
loan and management fees in 1995 together with the approximately
$1.2 million in working capital deficiencies funded by the Company
prior to its disassociation with the Spotlight 29 Casino
contributed to the Company's financial difficulties leading up to
the bankruptcy filings.
Third, revenues at the 7 Cedars Casino was much lower than
projected during 1995. See "Item 1. Business--Native American
Gaming Projects--7 Cedars Casino." The Company believes that the
resulting operating losses and consequent inability of 7 Cedars to
payback project loan interest and principal and management fees
contributed to the Company's financial difficulties leading up to
the bankruptcy filings.
Fourth, construction of the Fremont Street Experience and
related infrastructure improvements significantly disrupted
traffic flow into and around the Four Queens. As a result,
patronage and business at the Four Queens was down while the
Fremont Street Experience was under construction. Originally, the
Fremont Street experience was scheduled to open by September,
1995. However, a decision to significantly upgrade the quality of
the light show delayed the opening of the Fremont Street
Experience to December 1995. The Company believes that this delay
prolonged the drag on business at the Four Queens. See "Item 1.
Business--The Four Queens Hotel and Casino."
Fifth, the loan agreements between Elsinore and the holders
of the 1993 First Mortgage Notes and the 1994 Mortgage Notes
contain a number of financial and restrictive covenants. The
dispute between the Company and the Twenty-Nine Palms Band, and
the IRS assessment and tax lien, violated certain covenants in
these loan agreements. In the summer of 1995, Elsinore obtained
one time waivers of these loan covenant defaults from the holders
of the 1993 First Mortgage Notes and the 1994 Mortgage Notes.
Finally, after satisfying its debt service obligations on
the 1993 First Mortgage Notes and the 1994 Mortgage Notes in the
spring of 1995, the Company became aware of its inability to pay
the next installment due at the beginning of October to both the
holders of the 1993 First Mortgage Notes and the 1994 Mortgage
Notes without some form of additional financing. The Company
sought a consensual, out-of-court restructuring of its obligation
to the holders of the 1993 First Mortgage Notes. Although good
faith negotiations occurred, the Company and the 1993 First
Mortgage Noteholders were unable to reach an agreement. In
October 1995, the Company defaulted on its payments owing on the
1993 First Mortgage Notes and the 1994 Mortgage Notes and a
voluntary petition was filed on October 31, 1995 to permit
Elsinore (and its subsidiaries) to obtain financial relief.
The reorganization process is expected to result in the
cancellation and/or restructuring of substantial debt obligations
of the Company. However, it is anticipated that the interests of
the current common stockholders will be substantially reduced.
Plan of Reorganization.
General.
Under the Bankruptcy Code, the Company's pre-petition
liabilities are subject to settlement under a plan of
reorganization. The Bankruptcy Code also requires that all
administrative claims be paid on the effective date of the plan of
reorganization unless the respective claimants agree to different
treatment.
During the course of the bankruptcy proceedings, an
unofficial committee of a majority of the holders of the 1993
First Mortgage notes was formed (the "Bondholders Committee").
Beginning in approximately December 1995, the Company and the
Bondholders Committee participated in settlement negotiations in
an effort to consensually resolve their concerns in the case. The
result of these negotiations was an agreed upon conceptual
framework for a plan of reorganization, which was thereafter
embodied in a stipulation (the "Stipulation").
On February 28, 1996, the Company filed a plan of
reorganization, which was consistent with the terms of the
Stipulation, together with an accompanying disclosure statement.
The disclosure statement was approved on May 13, 1996 subject to
the insertion of certain language acceptable to the 1993 First
Mortgage Noteholders.
On July 16, 1996, the Bankruptcy Court conducted a hearing
regarding confirmation of the plan as submitted by the Company.
At that time, the Bankruptcy Court considered the various
objections to the plan raised by certain creditors and equity
holders. On July 18, 1996, the Bankruptcy Court conducted further
proceedings with respect to the plan of reorganization submitted
by the Company. At the July 18 hearing, the Bankruptcy Court
concluded that certain modifications to the plan would be
necessary for its confirmation. These modifications included,
among others, making no distribution to the Company's existing
equity holders.
Following the July 18 confirmation hearing , but before the
entry of an order incorporating the Bankruptcy Court's ruling on
the plan submitted by the Company, certain of the Company's
creditors filed a motion for reconsideration based upon their
withdrawal of objections to the plan. These creditors agreed to
withdraw their objections in return for a reallocation of equity
interests in the reorganized Elsinore.
On August 5, 1996, the Bankruptcy Court conducted a hearing on the
reconsideration motion. After that hearing, the Bankruptcy Court
determined that the relief sought by that motion should be
granted. Accordingly, on August 8, 1996, the Bankruptcy Court
entered an order confirming the plan of reorganization submitted
by the Company as modified by that order (the "Plan") with a
confirmation date of August 12, 1996.
The effective date of the Plan will be after all regulatory
approvals required by the State of Nevada, including approvals by
the gaming authorities, have been obtained and Elsinore has
sufficient cash to fund all distributions. Management believes
the only remaining condition to effectiveness to be satisfied is
the Nevada Gaming Authorities granting its approval of the members
of the Company's reconstituted Board of Directors. Currently, it
is expected that the Plan will be fully effective by March 1997.
Terms of Plan of Reorganization
The Plan provides for the continuation of Elsinore and at
least three of its subsidiaries (Four Queens, Inc., ElSub
Management Corporation and Palm Springs East Limited Partnership)
as going concerns. Under the Plan, the old common stock interests
in Elsinore will be canceled and Elsinore, as reorganized, will
issue new common stock (the "New Common Stock"). On the effective
date of the Plan, 80% of the New Common Stock will be distributed
to the following classes of creditors and equity holders in the
following proportions:
Interest Percentage
12.5% First Mortgage noteholders 87.5%
7.5% Convertible Subordinated noteholders 3.5%
Unsecured creditors of Four Queens, Inc 2.5%
Unsecured creditors of Elsinore Corporation 1.0%
Internal Revenue Service 1.9%
Old common stockholders 3.6%
100.0%
The remaining 20% of the New Common Stock will be issued through a
rights offering to raise $5,000,000 to assist in funding the Plan.
Initially, the entire amount of the rights offering will be made
available for subscription to the following classes of creditors
and equity holders in the percentages enumerated below:
Interest Percentage
12.5% First Mortgage noteholders 87.5%
7.5% Convertible Subordinated noteholders 3.5%
Unsecured creditors of Four Queens, Inc 2.5%
Old common stockholders 6.5%
100.0%
Each member of the above classes of creditors and equity
holders will be required to elect whether to exercise the right to
purchase the New Common Stock allocated and whether to purchase
additional shares of New Common Stock if one or more holders of
that class do not fully exercise their right to purchase New
Common Stock. The subscription rights of non-exercising members
of the above classes will be reallocated automatically among the
other members of the class electing to exercise their rights to
purchase additional shares of New Common Stock. If any of the
members of any class do not elect to exercise all of the rights
allocated to that class, the unexercised rights will be
automatically distributed to the members of the Bondholder
Committee. The Bondholder Committee has guaranteed a 100%
subscription for the $5 million rights offering, in the event the
percentages enumerated above are not otherwise fully subscribed.On
or about October 10, 1996 the rights offering process commenced
with the distribution of subscription rights materials to the
class members.
As defined in the Subscription Rights Agreement dated October 10,
1996, pursuant to the Plan of Reorganization, as confirmed by the
Bankruptcy court, the Company agreed to issue to the Rightholders
stock subscription rights ("Rights")to purchase up to an aggregate
of one million (1,000,000) shares of Common Stock, par value
$0.001 per share, of the Company, at an exercise price of $5.00
per share. In the event such Rights were not exercised by 5 P.M.
Pacific time on December 13, 1996, such non-exercised Rights were
transferred automatically to the members of the Bondholder
Committee in the proportions specified in a Standby Commitment.
As the Rights proceeds are received, they are deposited in a
separate Company bank account and are reflected in the
accompanying 1996 balance sheet classification "Cash and Cash
Equivalents Restricted". As of December 31, 1996 Rights proceeds
of $4,287,000 (including interest of $19,000) had been received by
the Company, representing exercise of Rights to approximately
854,000 shares. The Company will issue the related shares,
including shares applicable to the bondholders Standby Commitment,
upon the Plan of Reorganization Effective Date, which is expected
to occur in March, 1997.
As a result of the rights offering, members of the Bondholders
Committee will receive 995,280 shares of the New Common stock and
members of the creditor and equity holder constituencies will
receive an aggregate, 4,720 shares of New Common Stock. Therefore,
upon effectiveness of the Plan, it is expected that members of the
Bondholder Committee will hold, in the aggregate 4,495,280 shares
of the 5,000,000 issued and outstanding shares of New Common
Stock.
Proposed Treatment of Creditors and Equity Interests
The Plan is expected to be funded principally from cash
generated from operations and the $5,000,000 proceeds from the
rights offering. Specifically, the proposed treatment of each of
the creditor and equity interests is as follows:
The 1994 Mortgage Note holders have an allowed secured claim
equal to the $3,000,000 principal amount of the notes plus accrued
interest thereon at 20% through the date on which the confirmation
order was entered by the Bankruptcy Court(approximately $675,000)
and certain fees and disbursements related thereto (approximately
$125,000). On the effective date of the Plan, each 1994 Mortgage
Note holder will receive its prorata share of restated mortgage
notes (the "Restated Mortgage Notes"), due four years from the
confirmation date, in exchange for its allowed claim.
Interest on the Restated Mortgage Notes will accrue at an annual
rate of 11.5% or other appropriate interest rate approved by the
Bankruptcy Court and will be payable quarterly commencing on the
fourth month following the confirmation date. These noteholders
will retain their lien interests as collateral for repayment of
the restated mortgage notes.
The 1993 First Mortgage Note holders have an allowed claim
equal to approximately $61,000,000. Under the Plan, the secured
portion of the claim is allowed in the amount of $30,000,000. The
balance of the claim is unsecured. On the effective date of the
Plan, each 1993 First Mortgage Note holder will receive (i) in
exchange for the secured portion of its claim, its prorata share
of $30,000,000 face amount of restated first mortgage notes (the
"Restated First Mortgage Notes") which will accrue interest at an
annual rate of 13.5% per annum payable semi-annually and will be
due five years from the confirmation date, and (ii) in exchange
for the unsecured portion of its claim, prorata portion of the New
Common Stock (see above).
The Convertible Note holders have an allowed claim equal to
approximately $1,500,000. On the effective date of the Plan, each
Convertible Note holder will receive its prorata share of New
Common Stock (see above) in exchange for its allowed claim.
The Company's larger unsecured creditors, other than the
Convertible Note holders, will receive payments from a fund of
approximately $1,400,000 over a three-year period and their
prorata share, if any, of New Common Stock (see above).
The Internal Revenue Service ("IRS"), which has both secured and
unsecured claims aggregating approximately $3,000,000 will receive
full payment of its secured claim with interest at 8% per annum
over four years (commencing on the effective date) and will
receive, with respect to its unsecured claim, proportionately the
same type of recovery which is provided for the Company's larger
unsecured creditors. In addition, the IRS will receive its
prorata share of the New Common Stock (see above).
Management Agreements
The Plan also calls for a change in the management of the
reorganized Elsinore. Effective at noon on August 12, 1996,
Elsinore entered into an Interim Management Agreement with Riviera
Gaming Management Corp - Elsinore, Inc. to manage the business
operations of the Company subject to the direction of the existing
boards of directors of Elsinore and its subsidiaries.
Under the stipulation between the Company and the
Bondholders Committee, senior management (Thomas E. Martin,
President and Chief Executive Officer, and Frank L. Burrell, Jr.,
Chairman of the Board) ceased to be compensated employees of the
Company on Monday, August 12, 1996, although they will continue to
serve as directors and authorized officers until replaced.
Board of Directors
The Plan also calls for the Company's Board of Directors to
be reconstituted upon effectiveness of the Plan. Four of the new
directors are to be chosen by the Bondholders Committee and one
will be appointed by the Equity Committee appointed in the
Bankruptcy Case. Both the Bondholders Committee and the Equity
Committee have selected their proposed representatives to the
Company's Board. Those proposed directors have been submitted to
the Nevada Gaming Authority for approval. Upon such approval, the
Company believes all conditions to the Plan's effectiveness will
be satisfied.
Other Reorganization Matters
Certain pre-petition liabilities have been paid after
obtaining the approval of the Bankruptcy Court, including certain
wages and employee benefits, gaming related liabilities and hotel
room and other customer deposits. Subsequent to filing and with
the approval of the Bankruptcy Court, the Company assumed
executory contracts for all real estate and equipment leases.
In accordance with the Stipulation between the Company and
the Bondholders Committee, the Company (with the participation of
the Bondholders Committee) prior to confirmation of the Plan
decided which executory contracts would be assumed. All executory
contracts which were not expressly assumed by the Company were
deemed rejected at the confirmation date. All creditors claims
resulting from the rejection of an executory contract must have
been filed with the Bankruptcy Court no later than September 11,
1996. All such claims which are timely filed will be treated in a
manner identical to the treatment received by other members of the
appropriate class of creditors under the Plan. All such claims
which are not timely filed will be barred and discharged and the
creditor holding such claim will not receive or be entitled to any
distribution under the Plan on account of such claim.
Trading in the Company's common stock continues to be halted by
the American Stock Exchange ("AMEX") and the Pacific Stock
Exchange ("PSE"). Elsinore intends to pursue reactivation of its
listings with AMEX and PSE so that the New Common Stock in the
reorganized Elsinore can be traded publicly following the
effective date of the Plan. However, by letter dated January 27,
1997, Elsinore was informed of AMEX's intention to pursue the
delisting of Elsinore's Common Stock. By letter dated February 3,
1997, the Company requested that AMEX defer a final decision on
delisting until mid-March 1997 so that the reconstituted board of
directors has an opportunity to decide on a course of action. By
letter dated February 5,1997 AMEX agreed to extend the Company's
time to request an appeal to March 14, 1997.
THE FOUR QUEENS HOTEL AND CASINO
The Four Queens
Elsinore, through its wholly owned subsidiary, Four Queens,
Inc., owns and operates the Four Queens Hotel and Casino (the
"Four Queens"), located on the corner of Fremont Street and Casino
Center Boulevard in downtown Las Vegas. The property has been in
operation since 1966. The property is accessible via Interstate
15 and Interstate 515 and markets to a local population of
approximately one million residents and over 29 million visitors a
year to Las Vegas.
In 1994, the Company completed a $5 million refurbishment of the
Four Queens, which has gaming space of 32,000 square feet. The
casino is currently equipped with approximately 988 slot machines,
20 blackjack tables, four craps tables, one pai gow poker table,
one Caribbean Stud Poker table, two Let-It-Ride tables, two
roulette wheels, a keno game and a sports book. The hotel has 690
guest rooms and suites in two towers. The Four Queens features
four full-service restaurants, three cocktail lounges and one
entertainment lounge. As part of the refurbishment, meeting space
in the Four Queens was doubled to almost 15,000 square feet in
1993. The Four Queens also has parking facilities which can
accommodate 560 cars.
Based principally on results at the Four Queens, the
Company's earnings before interest, income taxes, depreciation and
amortization, (and before the provision for losses recognized on
loans receivable from Native American Tribes, the write-off of
casino development costs and expenses recognized as a result of
the reorganization proceedings in 1995) increased in 1996 to $7.0
million, from $1.4 million in 1995. The Company believes this
improvement was at least partially attributable to increased
visitors to downtown because of (1) the Fremont Street Experience
attraction and (2) the related improvement of vehicular traffic
flow to downtown Fremont Street following completion of its
construction in November, 1995. However, competition continues to
intensify in the Las Vegas market as new resorts are developed and
existing resorts expand. The Company believes that customers of
the downtown casino/hotels who would normally spend substantially
all of their gaming and entertainment budget at downtown casinos
are being drawn to and spent a portion of their budgets at these
new Strip properties, resulting in a loss of revenue to downtown
casinos.
Operations
The following table sets forth the contributions from major
activities to the Company's total revenues from the Four Queens
for the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994
(Dollars in Thousands)
Casino(1) $42,300 $39,964 $46,270
Hotel(2) 11,202 9,564 9,234
Food & Beverage(2) 12,373 12,136 12,693
Other(3) 1,502 1,983 2,020
67,377 63,647 69,935
Less: Promotional Allowances (6,178) (6,674) (7,511)
$61,199 $56,973 $62,706
(1) Consists of the net win from gaming activities (i.e., the
difference between gaming wins and losses).
(2) Includes revenues from services provided as promotional
allowances to casino customers and others on a complimentary
basis.
(3) Consists primarily of interest income, commissions from
credit card and automatic teller cash advances and
miscellaneous other income (including net royalties of
$198,000 in 1996, $185,000 in 1995, and $243,000 in 1994
from the licensing of MULTIPLE ACTION "registered trademark"
blackjack).
The following table summarizes the primary aspects of the
Company's operations at the Four Queens.
Casino:
Floor area (square foot) 32,296
Slot machines 988
Blackjack tables 20
Craps tables 4
Caribbean Stud Poker tables 1
Roulette wheels 2
Let-It-Ride tables 2
Pai Gow poker tables 1
Keno (seats) 46
Sports book 1
Hotel:
Rooms 690
Meeting areas (square feet) 14,600
Restaurants and entertainment and cocktail lounges:
Restaurants 4
Restaurant seats 454
Entertainment lounges 1
Entertainment lounge seats 147
Cocktail lounges 3
Other:
Gift Shops 1
Parking facilities (cars) 560
Elsinore has developed a marketing strategy employed for the
Four Queens that emphasizes a high level of customer service,
targeted marketing, value-oriented promotions, club memberships
and special events.
Customer Service. The Company believes that the Four Queens
is distinguished by its friendly "at home" atmosphere and the high
level of personalized service provided to its patrons. The
Company strives to maintain the level of service by actively
seeking customer feedback on suggestion cards, by senior floor
personnel asking patrons if their wants are being met, and by
employees engaging in friendly dialogue with the customers in
order to reinforce the "at home" feeling. In this respect,
customer service contributes to significantly reduced marketing
costs, since it is less costly to maintain and cultivate existing
customer relationships than it is to develop new ones.
Additionally, the Company believes that good service results in
word-of-mouth endorsement of the Four Queens by satisfied
customers to others.
Targeted Marketing. The Company maintains a database of
patrons that includes over 350,000 names of customers and
prospects. The Company has assembled this database from its
players clubs, reservation systems and tournaments and special
events. Using this database, the Company has identified a segment
of loyal core customers; management estimates that a significant
portion of this group has returned to the Four Queens at least
three times each year and spends an average of two to four days
per visit. The Company believes that an additional benefit of the
database is the ability to analyze the effectiveness of each
marketing event in terms of profitability. This analysis aids
management in developing future promotions for which there is a
high probability of success. Finally, the Company publishes a
periodic newsletter which announces upcoming tournaments and
special events.
Promotions. The Company believes that customers in the
downtown Las Vegas market are attracted to perceived "value" in a
gaming vacation. Accordingly, the Company promotes the value
theme in a number of ways, from a 99-cent shrimp cocktail
appetizer and $4.95 prime rib dinner to an assortment of value-oriented
vacation packages.
Club Memberships.
REEL Winners Club The largest component of the customer
database is the REEL Winners Club, a slot club with over 300,000
members. The objective of this club is to provide loyal and
valuable slot players the opportunity to accumulate points that
may be redeemed for cash. Special parties and priority room
reservations are also benefits for REEL Winners Club members.
Maintaining and operating the slot club enables the Company to
market continuously to a proven customer segment which is
attracted to casino gaming and the Four Queens.
VIP Database Through the visual observation of table game
activity on the casino floor, the Company has developed a database
of VIP players based on their average bet and length of play. The
Company continuously builds on this database in order to target
market to a segment of "high limit" players who enjoy the Four
Queens atmosphere. In order to maintain the loyalty and level of
play provided by this customer segment, management has instituted
a very aggressive and generous "comp" plan designed to make the
player's stay as comfortable and as long as possible. Management
utilizes a database to track the player's length of stay, average
bet, time played, estimated amount won or lost, comping limit and
comps used during the trip. This information affords the Company
the opportunity to provide the appropriate level of privileges in
order to maintain the loyalty and satisfaction of this customer
segment.
Special Events. The Four Queens hosts a variety of high and
low stakes table game and other gaming tournaments, including the
well known annual Queens Poker Classic, and caters to its VIP
players and core customers by purchasing and supplying them with
complimentary tickets to Las Vegas special events.
The Las Vegas Market
The Las Vegas gaming and entertainment market has generally
expanded in recent years. The number of visitors traveling to Las
Vegas increased from 11.6 million visitors in 1982 to over 30
million visitors in 1996. McCarran International Airport passenger
volume is estimated to have increased 4.4% during 1995. Expansive
themed properties such as Excalibur, The Mirage, The MGM Grand
Hotel and Theme Park, Treasure Island and Luxor have become
destination resorts. In addition, two additional themed resorts,
New York, New York (January 3, 1997) and Monte Carlo have recently
opened. New hotels and construction scheduled to debut in 1997
include the 1,025-suite tower in the Rio Suite Hotel and Casino:
1,694-room expansion of Harrah's on the Las vegas Strip and
completion of the 527-room Sunset Station in nearby Henderson,
Nevada. Las Vegas is one of the fastest growing cities in the
United States and the population has increased from approximately
507,000 in 1982 to over one million in 1996. This population
increase has been driven by growth in the gaming industry,
relocation of companies to Las Vegas because of favorable tax
conditions and increases in the number of retirement age residents
drawn to Las Vegas primarily by the warm climate, relatively low
cost of living, entertainment options and absence of state income
tax.
Despite the significant increase in the supply of rooms and
a series of competitive developments, including the expansion of
gaming in many jurisdictions nationwide and the introduction of
the California lottery, Las Vegas's hotel occupancy rate exceeded
85% in each of the last eight years and was 90.0% in 1996
(preliminary figure). Gaming revenues increased from $1.7 billion
in 1984 to $4.6 billion in 1996 in the Las Vegas Metropolitan
Area. The Company believes that several factors, including the
three new destination resorts and the expansion of McCarran
International Airport, will enable Las Vegas to continue to grow.
Each of the three principal segments of the Las Vegas
market--the Las Vegas Strip, the Boulder Strip and Downtown--has
exhibited generally steady growth during the past decade.
Set forth below is information concerning revenues and growth of
each of Las Vegas's three principal gaming markets:
Gaming Revenue ($000's)*
Fiscal Year Ended Las Vegas Strip Downtown BoulderStrip
June 30 Revenues Growth Revenues Growth Revenues Growth
1986 $1,371,208 4.0% $486,828 10.4% $80,328 %
1987 1,597,414 16.5 524,156 7.7 94,203 17.3
1988 1,739,265 8.9 592,616 13.1 104,161 10.6
1989 2,023,619 16.3 638,506 7.7 121,726 16.9
1990 2,278,666 12.6 641,990 0.5 137,265 12.8
1991 2,626,868 14.8 669,248 4.2 143,307 4.4
1992 2,530,932 (3.3) 646,577 (3.4) 150,854 5.3
1993 2,680,866 5.9 677,702 4.8 161,810 7.3
1994 3,188,994 19.0 657,173 (3.0) 179,042 10.6
1995 3,516,054 10.3 655,972 (0.2) 270,704 51.2
1996 3,629,745 3.2 654,362 (0.3) 333,852 23.3
Compound Annual
Growth Rate 10.2% 3.0% 15.3%
* For casinos with gaming revenue of $1 million and over.
The Las Vegas Strip has demonstrated strong growth, and
revenues have increased at a 10.2% compound annual growth rate to
approximately $3.6 billion in 1996 from $1.3 billion in 1985.
Based on 1996 statistics, the 5,000-room MGM Grand Hotel and Theme
Park, the 2,500-room Luxor Hotel and Casino,the 3,000-room
Treasure Island Hotel and Casino and other newly opened Las Vegas
resorts appear to be drawing more visitors to Las Vegas.
The downtown market has grown from approximately $441
million in 1985 to approximately $654 million in 1996 at a
compound annual growth rate of 3.0%. Downtown Las Vegas, with its
world famous neon lighting and its 12 major casinos all located
within close proximity of each other, is where Las Vegas started,
and the area continues to attract a significant number of loyal
customers comprised of both visitors to Las Vegas and local
residents. The Company believes many gaming patrons choose to
play downtown because the casinos traditionally offer more liberal
slot payouts and better odds on table games than casinos located
on the Las Vegas Strip and provide a more comfortable and less
intimidating environment. In addition, it is much easier to
stroll from one casino to another in the downtown market than on
the Strip.
Recent results of the downtown Las Vegas casino operators have
been adversely affected by, among other things, the opening of
themed mega-casinos on the Las Vegas Strip. In the 1989-1991
period, the opening of The Mirage and Excalibur casino/hotels
depressed the growth rate of downtown Las Vegas gaming revenues.
Similarly, the openings of the MGM Grand, Luxor and Treasure
Island casino/hotels have had an adverse effect on downtown gaming
revenue, which decreased 0.3% for the 12-month period ended
June 30, 1996. In addition, two new themed casino resorts opened
on the Strip in 1996, Monte Carlo (June 1996) and New York, New
York (December 1996). In addition, another major casino resort,
Stratosphere, opened just north of the Strip in April 1996.
The Fremont Street Experience
The casino operators in downtown Las Vegas formed the
Downtown Progress Association to improve the downtown area. A
product of the Downtown Progress Association's efforts is the
Fremont Street Experience, which features a celestial vault and
light show. The celestial vault is a 100-foot high, 100-foot
wide, 1,340 foot long space frame spanning Fremont Street, from
Main Street to Fourth Street, which is closed to traffic to create
a pedestrian mall. The celestial vault is the framework for a
high tech light show involving 2.1 million reflectors, 600 strobe
lights, and laser image projectors. Nine major entertainment
venues, including the Four Queens, that together offer 17,000 slot
machines, over 500 blackjack and other table games, 41 restaurants
and 8,000 hotel rooms are connected by the project. The project
also includes a 1,500 space parking facility. The goal of Fremont
Street Experience is to create an attraction for gaming customers
and other visitors to Las Vegas, drawing visitors to the historic
downtown area and providing competition for the larger and newer
gaming and entertainment complexes located on or near the Strip.
The total cost of the Fremont Street Experience was
approximately $67 million, $6.7 million of which was financed by
the Las Vegas Convention and Visitor Association, $28.7 million
(consisting of an $18 million equity investment plus additional
room taxes) was provided by six downtown casino operators
(including the Company) and the remainder was provided by a local
bond issuance and matching federal funds. The Company's share of
the project costs was approximately $3 million. Construction on
the project began in Spring 1994 and was completed in November of
1995. The grand opening of the project was on December 13, 1995.
The Company and several of the other downtown casino
operators collectively own the Fremont Street Experience.
Elsinore has a one-sixth ownership share and will be responsible
for a proportionate share of the project's operating costs. Since
the opening of the Fremont Street Experience, the Company's
business has been improving and operating profits appear to be
returning.
The Company believes this improvement was at least partially
attributable to increased visitors to downtown because of (1) the
Fremont Street Experience attraction and (2) the related
improvement of vehicular traffic flow to the downtown Fremont
Street Experience area following completion of its construction in
November, 1995. However, competition continues to intensify in the
Las Vegas market as new resorts are developed and existing resorts
expand. The Company believes that customers of the downtown
casino/hotels who would normally spend substantially all of their
gaming and entertainment budget at downtown casinos are being
drawn to and spent a portion of their budgets at these new Strip
properties, resulting in a loss of revenue to downtown casinos.
Competition
The gaming industry in Nevada and elsewhere in the United
States is highly competitive and this competition is increasing as
new gaming facilities are built and additional jurisdictions
license gaming establishments. Although the industry generally
has recently been able to absorb additional capacity without
significant loss of revenues to existing establishments, there is
no assurance that gaming in the United States will increase at a
rate sufficient to absorb the additional facilities expected to be
constructed. Many of the Company's actual and potential
competitors have greater financial resources, more diversified
operations, and a longer history of successful operation than does
the Company; each of these factors could afford a competitive
advantage.
Two themed resorts, the Monte Carlo and New York New York,
opened on the Strip in June 1996 and December 1996, respectively.
These two resorts added approximately 5,200 rooms. A themed mega-resort
casino, the Stratosphere Tower Casino and Hotel, featuring
an 1,149 foot observation tower, 1,500 rooms, a 97,000 square foot
casino and other amenities and attractions, opened north of the
Las Vegas Strip in April 1996. Although the occupancy levels
increased slightly in 1996, as compared to 1995, there can be no
assurances that the addition of such a large number of rooms will
not have negative impact on average hotel occupancy levels in Las
Vegas and at the Four Queens, unless visitor volume and other
sources of room demand increase proportionately.
The Company believes that the Four Queens primary
competitors are other downtown Las Vegas properties, casino hotels
located on the Las Vegas Strip and the Boulder Highway, local
neighborhood casinos, Laughlin casinos and casino properties
located near the Nevada/California state line. In addition, but
to a lesser extent, the Four Queens also competes with state-sponsored
lotteries, on- and off-track betting and other gaming
operations located in other jurisdictions in the U.S. The Company
believes that the legalization of gaming in other states, as well
as on various Native American lands including Native American
lands in Arizona and California, has not yet had an adverse impact
on its operations. However, there is no assurance that such
gaming in other jurisdictions will not have an adverse impact on
the Company's Las Vegas operations in the future. In particular,
the expansion of casino gaming, in or near any geographic area
from which the Company attracts or expects to attract a
significant number of its customers, such as Hawaii or California,
could have a material adverse affect on the Company's operations.
Casino hotels in Las Vegas generally compete on the basis of
promotional allowances, entertainment, advertising, service
provided to patrons, caliber of personnel, attractiveness of the
hotel and the casino areas and related amenities. The Company has
faced greater competition from new and existing Las Vegas
casino/hotels seeking to attract middle market slot machine
players, tour and travel agents, and Las Vegas area residents,
each of which is a market the Company actively seeks to attract to
the Four Queens.
Many operators in the downtown Las Vegas market have
observed that the new Las Vegas Strip properties have been drawing
gaming revenues away from downtown Las Vegas. However, the Company
believes that, like the 1989-1991 period when The Mirage and
Excalibur casino/hotels opened, following an initial period of
dilution of downtown Las Vegas patronage, the entire Las Vegas
market could benefit from an overall increase in tourism, with
those benefits being shared downtown. Further, as the Las Vegas
Strip becomes more congested, certain patrons may prefer the ease
and relative friendliness of the downtown market. Additionally,
the Company expects that the Four Queens, along with other
downtown operators, will benefit from the increased tourism that
the Company expects will result from the addition of the Fremont
Street Experience.
NATIVE AMERICAN GAMING PROJECTS
Background on Native American Gaming.
In 1988, Congress passed the federal Indian Gaming
Regulatory Act ("IGRA") providing a legal and regulatory framework
for Native American tribes to offer for profit any games allowed
by states. During the six-year period through 1994, approximately
200 Native American casino facilities, ranging from small bingo
halls to full-fledged gambling houses, were initiated in more than
20 states. As of February 1995, approximately 100 of these
facilities offered Class III gaming (as defined below) pursuant to
tribal-state compacts. Casinos on Native American lands are
subject to the regulatory authority of the federal National Indian
Gaming Commission ("NIGC"), tribal regulatory authorities and,
where applicable, state agencies. See "Regulations--Native
American Gaming Operations" below.
Spotlight 29 Casino
Background.
On January 14, 1995, Elsinore and the Twenty-Nine Palms Band
of Mission Indians ("Band") opened the Spotlight 29 Casino (the
"Spotlight 29"), a 74,000 square foot Class II gaming facility on
tribal lands located near Palm Springs, California. The
Spotlight 29 cost approximately $10 million to develop. Pursuant
to the terms of the management contract (the "Spotlight 29
Contract") between the Band and Palm Springs East L.P., of which
ElSub is the general partner and of which the Company owns 90%,
the Company was to receive management fee revenues equal to
approximately 27% of Spotlight 29's earnings from gaming
operations, after deducting certain expenses. In addition, the
Band was to repay from its share of casino earnings a $10 million
loan and certain other advances from the Company to finance the
development and construction of the Spotlight 29.
During its first six weeks of operations, Spotlight 29's
gaming revenues were significantly lower than anticipated,
resulting in a net operating loss through February 1995 of
approximately $1.1 million. This lower revenue is believed by the
Company to be attributable in part to the marketing plan of the
Spotlight 29 taking longer to implement than expected, and from
competition from other Native American gaming facilities in
Southern California that continue to operate electronic gaming
machines without an approved compact with the State of California.
Pursuant to its obligations under the Spotlight 29 Contract, the
Company through April 3, 1995 advanced $1.26 million to the casino
to cover working capital shortfalls.
The Company also loaned $10 million to the Band to finance
the development and construction of the Spotlight 29. This loan
was to bear interest at the rate of 10% per year, which was to be
payable solely from the Band's share of the Spotlight 29's
earnings and was to amortize over four years from the date the
Spotlight 29 opened. Pursuant to the Spotlight 29 Contract,
payments of principal on the loan and repayments of any operating
advances made by the Company (subject to a minimum payment to the
Band of $35,000) was to be deducted by Palm Springs East L.P. from
the Band's share of the Spotlight 29's earnings.
As a Class II gaming facility, the Spotlight 29 is permitted
under the IGRA to offer Class II games including bingo, pull-tabs
and non-house banked games. Class III games, which include slot
machines and house-banked games, are permitted under the IGRA on
Native American land if conditions applicable to Class II gaming
are met and, in addition, the gaming is in compliance with the
terms of a written agreement ("compact") between the tribal
government and the applicable state government. All compacts
between tribal governments and states require approval by the
Secretary of the United States Department of the Interior. To
date, the State of California has not entered into any tribal-state
compacts permitting Class III gaming (other than off-track
betting and authorized state lottery facilities).
1995 Developments
In February 1995, the Company learned from discussions with
tribal representatives that the Twenty-Nine Palms Band was
contemplating the installation of Class III gaming devices at the
Spotlight 29. In late February, in response to the Company's
written objection to the placement of any Class III gaming devices
on the Spotlight 29 premises, the Twenty-Nine Palms Band advised
the Company that, as the owner of the Spotlight 29, the Band would
install such devices if doing so was in the Band's best interest
and that the Band believed this position did not conflict with the
terms of the Spotlight 29 Contract. In early March 1995, the Band
caused approximately 70 Class III gaming devices to be installed
at Spotlight 29 and such devices currently are in operation.
The Company opposed these activities by the Band and in
early March 1995 notified the Nevada State Gaming Control Board
("Nevada Board") and the NIGC that it will not participate in
conduct that contravenes the IGRA. On March 6, 1995, the Company
served on the Band a notice and demand that the operation of the
Class III devices without the Company's consent and compliance
with applicable federal law violated the management contract and
that such activity must immediately cease. Following the Band's
failure to remove the gaming devices, the Company on March 16,
1995 filed suit in the United States District Court for the
Central District of California to enjoin their operation. See
"Item 3. Legal Proceeding."
On April 17, 1995, the Company was ousted as manager of
Spotlight 29 and on April 19, 1995, the Company issued a demand
letter to the Band declaring a breach of the Contract and a
related loan agreement under which the Company had lent
approximately $12,500,000 to the Band for construction of
Spotlight 29 and for working capital contributions. The demand
letter claimed damages in the full amount of the funds which had
been advanced to the Band.
In light of the Company's disassociation with the operations
of Spotlight 29, management determined to write off, during the
quarter ended March 31, 1995, the unamortized balance of casino
development costs incurred for the project of $1,037,000 and
ceased the accrual of interest on the project note and loans
evidencing working capital advances. On May 16, 1995, in response
to the Company's demand, the Band delivered to the Company a
"Notice to Terminate Management Agreement." The notice asserted
material breaches of the Contract and requested payment of
approximately $1,500,000 by June 16, 1995 to cover working capital
shortfalls or the Contract would be terminated.
On October 31, 1995, the Company filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code with
the United States Bankruptcy Court for the District of Nevada (Las
Vegas, Nevada). The Company was involved in protracted
negotiations during 1995 with the Band for a settlement of the
respective claims. Based upon the progress of those negotiations
at the time, in December 1995 the Company reserved the $9,000,000
amount advanced to the Band.
1996 Developments
On March 29, 1996, the Company reached a settlement with the
Band, which has been approved by the Bankruptcy Court and which
has received final clearance by the Bureau of Indian Affairs. The
Company has received a promissory note from the Band in the
principal amount of $9,000,000. While the note has an initial 36-month
amortization schedule, monthly payments are limited to 20%
of Spotlight 29's monthly net income. In the event that net
income is insufficient to pay the note in full at the end of 36
months, the note will be extended automatically for up to an
additional two years. If still not fully paid at the end of the
extension period, it may be extended up to an additional two years
upon the approval of the NIGC. If not paid at the end of the final
extension period, the note will be forgiven. Interest on the note
is at an annual rate equal to the greater of 10% or the maximum
rate allowed under California law, not to exceed 12%. The first
payment under the settlement was made by the band on October 29,
1996. Including the first and subsequent payments, a total of
$353,000 has been received through February 19, 1996 (all such
amounts were applied to, and recorded in, the year ended December
31, 1996). Given that the $9 million recovery is limited to 20% of
the net income generated by Spotlight 29, management determined
not to reduce the allowance for loss in the amount of $9,000,000
against the receivable, which was provided during the quarter
ended December 31, 1995.
7 CEDARS CASINO
On February 3, 1995, Elsinore, through its wholly owned
subsidiary Olympia Gaming Corporation ("Olympia") and the
Jamestown S'Klallam Tribe (the "Tribe") opened the 7 Cedars Casino
("7 Cedars"), on the Olympic Peninsula in Washington State,
approximately 70 miles northwest of Seattle. The 7 Cedars was
conceived as a Native American gaming operation that would cater
primarily to approximately 80,000 local citizens in Clallam and
Jefferson Counties in Washington state. Kitsap County, with a
population of approximately 180,000 people, was targeted as a
secondary market for the 7 Cedars.
To finance the development costs for the 7 Cedars, Elsinore
loaned the $9 million to the Tribe. This loan bears interest at a
rate of 10.9% per annum, is payable solely from casino earnings
and will amortize over five years from the date the casino opened.
Under the terms of the Olympia Contract, the Company is
obligated to establish a reserve fund for "working capital", which
is not defined in the Olympia Contract. The Company believes the
parties did not intend to apply a "working capital" definition in
the Olympia Contract based upon generally accepted accounting
principles which, in the Company's view, would be impracticable in
the context of the Olympia Contract and which, in practice, has
never been followed. Since its opening on February 3, 1995, the 7
Cedars has incurred a substantial cumulative net loss and an
attendant decrease in working capital.
On November 1, 1995, the Tribe asserted that the Company had
defaulted on the June, July, August and September 1995 minimum
guaranteed payments to the Tribe, as defined by the Olympia
Contract, in the aggregate amount of $100,000 and requested
immediate payment.
In addition, the Tribe demanded that sufficient monies be
paid to enable all current gaming project expenses to be paid and
working capital reserve to be maintained at the required funding
level. The Tribe demanded that a minimum of $2,540,000 be paid
immediately and also contended that the working capital shortfall
could be as high as approximately $5,390,000 according to its
interpretation of the Olympia Contract. On November 13, 1995, the
Company received a letter from the Tribe dated November 9, 1995
asserting that the Olympia Contract had been terminated as a
result of the Company's failure to make the payments which has
been demanded.
On November 10, 1995, Olympia Gaming filed a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court for the District of
Nevada (Las Vegas, Nevada). Based on the November 10, 1995
bankruptcy filing, the Company maintains that the Olympia Contract
has not been terminated.
Pursuant to the terms of the Olympia Contract, the Company is to
receive a management fee equal to 30% of the net distributable
profits of 7 Cedars (subject to the Tribe receiving a $25,000 per
month guaranteed payment). The Tribe is to receive the balance of
the net distributable profits. The Contract's initial term
expires February 2, 2000, subject to renewal for an additional two
years in the event that the project loan is not paid in full by
the end of the initial term. The project loan to finance the
development and construction of 7 Cedars is payable solely from
the Tribe's share of the net distributable profits of 7 Cedars,
and will amortize over the five-year term of the contract at an
annual interest rate of 10.9%.
As a result of significantly lower than projected gaming revenues,
7 Cedars has incurred substantial operating losses since its
opening. Management believes the following are the principal
factors contributing to the lower gaming revenues.
A significantly lower than anticipated propensity for the
3,000,000 plus tourists visiting the Olympic Peninsula in
the summer to gamble. This includes both the numbers of
tourist customers and their level of play in the casino.
A significantly higher than anticipated impact of
competition for the locals market. Native American casino
openings in May 1995 (Muckleshoot near Auburn, Washington)
and January 1996 (Suquamish, north of Bremerton, Washington)
have resulted in substantially reduced visitation to 7
Cedars from Kitsap County residents. While Kitsap County,
approximately 50 miles to the east of 7 Cedars, was
originally identified as a secondary market, its larger,
younger, population proved to be a significant market in the
first several months following the opening of 7 Cedars.
A substantially lower than expected average table games
wager.
In response to declining revenues following the first
several months of operations, management undertook certain cost-cutting
measures in the late spring and summer 1995 and increased
marketing activities in an effort to achieve profitability. In
November 1995 and January 1996, more substantial expense
reductions were effected through reductions in the hours of
operation of 7 Cedars and deeper, "across the board" cost cutting.
In light of the existing competition in the Puget Sound
area, the demographics of 7 Cedars primary local markets and the
apparent low propensity for destination tourists to the Olympic
Peninsula to gamble, there exists substantial uncertainty as to
whether, during the remaining term of the management and loan
agreements, 7 Cedars can achieve the level of profitability
required to obtain full recovery of the loan principal and accrued
interest thereon.
Based upon the foregoing, management determined in the
quarter ended December 31, 1995 to provide an allowance for loss
against the $9,000,000 outstanding balance of the project loan
plus accrued interest thereon. Previously, on September 1, 1995,
the Company ceased accruing interest on the project loan and wrote
off the remaining unamortized balance of capitalized casino
development costs of approximately $242,000.
Facilities
The 7 Cedars is a 54,000 square foot Class II and limited
Class III gaming facility on tribal lands fronting U.S. Interstate
Highway 101 on the Olympic Peninsula. An estimated 4 million
tourists visit the Olympic Peninsula annually. 7 Cedars' 12,500
square foot gaming area features Las Vegas-style table games,
including craps, blackjack and roulette, as well as bingo, poker,
and pull-tabs. The casino's Class III games are authorized
pursuant to a compact between the Tribe and the State of
Washington, which has been approved by the Secretary of the
Interior. In addition to the gaming operation, the Company also
operates a gift shop, a video arcade and dining facilities at the
site. The Tribe also operates a Native American arts and crafts
shop at the facility.
Marketing
The Company believes that the physical beauty of the site
and casino building differentiates 7 Cedars from competing
properties. In addition, the Company believes that its
implementation of an active marketing plan similar to the
techniques used at the Four Queens (e.g., player clubs, frequent
visitor drawings, special events and tournaments) will draw
traffic to the 7 Cedars. The Company will also emphasize a high
level of customer satisfaction to encourage repeat visits. These
programs will supplement standard brochure distributions and
comprehensive customer tracking systems.
The Washington Market
7 Cedars is located in Clallam County, Washington, which is
located at the northeastern corner of the Olympic Peninsula
approximately 70 miles northwest of Seattle. The state has
identified Clallam and Jefferson Counties as a rapid growth
county, designating it as a "growth management county."
Populations within a 50- and 100-mile radius of the site are
approximately 236,000 and 3 million, respectively. In addition to
targeting the local population in Clallam County, 7 Cedars expects
to derive visitors from the tourist traffic which flows through
the Olympic Peninsula, one of the most popular vacation
destinations for Washington State residents. Popular attractions
include the Olympic National Park, with over 3.7 million visitors
annually and Sequim Bay State Park, which attracts between 800,000
and 900,000 visitors annually. The primary target market of 7
Cedars is Clallam and Jefferson Counties which have a combined
population of approximately 80,000 (of which 24% are of retirement
age). 7 Cedars' secondary target markets include Victoria,
British Columbia with a population of approximately 280,000,
Kitsap County with a population of approximately 180,000, and the
Seattle/Tacoma area with a population of approximately 2 million.
REGULATIONS
Nevada Gaming Operations
The ownership and operation of casino gaming facilities in
Nevada are governed by: (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, "Nevada Act");
and (ii) various local regulations. The Company's gaming
operations are subject to the licensing and regulatory control of
the Nevada Commission, the Nevada Board and Liquor and Gaming
Licensing Board of the City of Las Vegas (the "City Board"). The
Nevada Commission, the Nevada Board and City Board are
collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the
Nevada Gaming Authorities are based upon declarations of public
policy which are concerned with, among other things: (i) the
prevention of unsavory or unsuitable persons from having a direct
or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible
accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal
fiscal affairs and the safeguarding of assets and reports to the
Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) the provision of a source of state
and local revenues through taxation and licensing fees. Change in
such laws, regulations and procedures could have an adverse effect
on the Company's gaming operations.
The Company is registered by the Nevada Commission as a
publicly traded corporation ("Registered Corporation") and as
such, it is required periodically to submit detailed financial and
operating reports to the Nevada Commission and furnish any other
information that the Nevada Commission may require. Pinnacle
Gaming Corporation ("Pinnacle"), a wholly owned subsidiary, is
licensed by the Nevada Gaming Authorities as a manufacturer and
distributor of gaming devices. Four Queens, Inc. ("FQI"), which
operates the Four Queens, is licensed by the Nevada Gaming
Authorities. The gaming licenses require the periodic payment of
fees and taxes and is not transferable. No person may become a
stockholder of, or receive any percentage of profits from, FQI or
Pinnacle without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company, Pinnacle and FQI have
obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order
to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual
who has a material relationship to, or material involvement with,
the Company or FQI in order to determine whether such individual
is suitable or should be licensed as a business associate of a
gaming licensee. Officers, directors and certain key employees of
FQI and Pinnacle must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable
by the Nevada Gaming Authorities. Officers, directors and key
employees of the Company who are actively and directly involved in
gaming activities of FQI and Pinnacle may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing
for any cause that they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of
detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming
Authorities and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a
corporate position.
If the Nevada Gaming Authorities were to find an officer,
director or key employee unsuitable for licensing or unsuitable to
continue to have a relationship with the Company, Pinnacle or FQI
the companies involved would have to sever all relationships with
such person. In addition, the Nevada Commission may require the
Company, Pinnacle or FQI to terminate the employment of any person
who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and FQI are required to submit detailed
financial and operating reports to the Nevada Commission.
Substantially all material loans, leases, sales of securities and
similar financing transactions by FQI must be reported to, or
approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by
FQI or Pinnacle, the gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, FQI,
Pinnacle, the Company and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate the
Company's gaming property in Nevada and, under certain
circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the
Company's gaming property in Nevada) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of any
gaming license or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely
affect the Company's gaming operations.
Any beneficial owner of the Company's voting securities,
regardless of the number of shares owned, may be required to file
an application, be investigated, and have his suitability as a
beneficial owner of the Company's voting securities determined if
the Nevada Commission has reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs incurred by the
Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5%
of the Company's voting securities to report the acquisition to
the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of the Company's voting securities apply
to the Nevada Commission for a finding of suitability within 30
days after the Chairman of the Nevada Board mails written notice
requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of the Company's
voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting
securities for investment purposes unless the voting securities
were acquired and are held in the ordinary course of business as
an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members
of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent
with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only
include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type
normally made by securities analysts for informational purposes
and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment
intent. If the beneficial owner of voting securities who must be
found suitable is a corporation, partnership or trust, it must
submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all
costs of investigation.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do
so by the Nevada Commission or the Chairman of the Nevada Board,
may be found unsuitable. The same restrictions apply to a record
owner if the record owner, after request, fails to identify the
beneficial owner. Any stockholder found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the common
stock of a Registered Corporation beyond such period of time as
may be prescribed by the Nevada Commission, may be guilty of a
criminal offense. The Company is subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a
stockholder or to have any other relationship with the Company or
FQI, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to
exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pays remuneration in
any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities for cash at fair market
value.
The Nevada Commission may, in its discretion, require the
holder of any debt security of a Registered Corporation to file
applications, be investigated and be found suitable to own the
debt security of a Registered Corporation. If the Nevada
Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its
approvals, if without the prior approval of the Nevada Commission,
it: (i) pays to the unsuitable person any dividend, interest, or
any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii)
pays the unsuitable person remuneration in any form; or (iv) makes
any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger
in Nevada which may be examined by the Nevada Gaming Authorities
at any time. If any securities are held in trust by an agent or
by a nominee, the record holder may be required to disclose the
identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the beneficial
owner. The Nevada Commission has the power to require the
Company's stock certificates to bear a legend indicating that the
securities are subject to the Nevada Act. The Nevada Commission
has imposed such a requirement on the Company.
The Company may not make a public offering of its securities
without the prior approval of the Nevada Commission if the
securities or the proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to
retire or extend obligations incurred for such purposes. Such
approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the
accuracy or adequacy of the prospectus or the investment merits of
the securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger,
consolidation, stock or asset acquisitions, management or
consulting agreements, or any act or conduct by a person whereby
he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may
also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the
transaction.
The Nevada Legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting
securities and corporate defense tactics affecting Nevada gaming
licenses, and Registered Corporations that are affiliated with
those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to
further Nevada's policy to: (i) assure the financial stability of
corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance
of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Company can make
exceptional repurchases of voting securities above the current
market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior
approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending
on the type of gaming or activity involved, are payable to the
State of Nevada and to the counties and cities in which the Nevada
licensee's respective operation are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either:
(i) a percentage of the gross revenues received; (ii) the number
of gaming devices operated; or (iii) the number of table games
operated. A casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with the
selling of food or refreshments. Nevada licensees that hold a
license as an operator of a slot route, or a manufacturer's or
distributor's license, must also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed,
registered, required to be registered, or is under common control
with such persons (collectively, "Licensees"), and who proposes to
become involved in a gaming venture outside of Nevada is required
to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of
investigation of the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or
decrease in the discretion of the Nevada Commission. Thereafter,
Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also
subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining
to the foreign gaming operation, fail to conduct the foreign
gaming operation in accordance with the standards of honesty and
integrity required of Nevada or its ability to collect gaming
taxes and fees, or employ a person in the foreign operation who
has been denied a license or finding of suitability in Nevada on
the ground of personal unsuitability.
Proceedings Before Nevada Gaming Authorities
In connection with its Mortgage Note Registration
Application in 1995, the Company appeared at a public hearing
before the Nevada Board. During this hearing, the Board inquired
at length concerning the decision of the Twenty-Nine Palms Band to
install Class III gaming devices at the Spotlight 29 Casino and
concerns about the Company's continued "association" with the
Twenty-Nine Palms Band because of the alleged illegal conduct of
that Band, which the Nevada Board apparently view as a violation
by the Company of the foreign gaming provisions of the Nevada Act.
See "Business--Native American Gaming Projects --Spotlight 29
Casino" above.
Nevada Gaming Authority approval was also required in
connection with the terms of the Plan. All approvals, other than
approval of the proposed post-effective Plan board members, have
been obtained. The Company currently expects that approval of the
post-effective board will be received by March 1997.
Native American Gaming Operations
Gaming on Native American lands, including the Spotlight 29
Casino and the 7 Cedars Casino, is extensively regulated under
federal law, tribal law and/or tribal-state compacts. Under IGRA,
management contracts for Native American gaming facilities may
provide for a management fee for up to 40% of net revenues and a
term of up to seven years if the Chairman of the NIGC determines
that capital investment required and the income projections for
the facility merit such terms. The NIGC has approved the
management contracts for both Spotlight 29 Casino and the 7 Cedars
Casino.
In connection with obtaining NIGC approval for these
management contracts, the Company, its directors, persons with
management responsibilities, certain owners of the Company and
certain persons with a financial interest in the management
agreements as determined by the NIGC and tribal regulatory
authorities must provide background information and be
investigated by the NIGC and tribal regulatory authorities, and be
approved in order for a management contract to be approved by the
NIGC and for the Company to be issued a license to operate a
gaming facility by tribal regulatory authorities. Persons who
acquire beneficial ownership of the Company's securities may be
subject to certain reporting and qualification procedures
established by the NIGC and tribal regulatory authorities.
The operations and management of the Company's Native
American casino projects are and will be subject to the regulating
authority of the NIGC, tribal regulatory authorities and, where
applicable, state agencies. Such regulatory authorities have
jurisdiction to inspect, supervise and audit gaming operations on
Native American lands and where warranted may restrict, suspend or
revoke licenses and approvals granted by the issuing agency. The
NIGC and tribal governments may impose taxes and licensing fees on
gaming operations located on Native American lands.
Should a management contract be suspended or revoked by the
NIGC, tribal officials or state regulatory agencies, the effect
could have an adverse impact on the business of the Company.
Similarly, changes in the IGRA, the governing tribal ordinance, or
applicable state law, or the termination of any existing tribal-
state compact for Class III gaming, could have an adverse effect
on the Company's gaming operations on Indian lands.
The Company has obtained NIGC approval of its settlement
with the Twenty-Nine Palms Board. However, further NIGC approvals
will be required for certain extensions of the term of the note
issued to the Company in connection with that settlement. See
"Item 1. Business -- Spotlight 29 Casino."
Internal Revenue Service and Treasury Regulations
The IRS requires operators of casinos located in the United
States to file information returns for United States citizens
(including names and addresses of winners) for Keno and slot
machine winnings in excess of stipulated amounts. The IRS also
requires casino operators to withhold taxes on certain Keno, bingo
and slot machine winnings of certain non-resident aliens. The
regulations of the Treasury Department and the Nevada Gaming
Authorities require the reporting of currency transactions in
excess of $10,000 occurring within a gaming day, including, in
certain circumstances, identification of the customer by name and
social security number. This practice commenced in May 1985, and
may have resulted in the loss of gaming revenue to other
jurisdictions where such reporting is not required.
Other Laws And Regulations
The Four Queens, Spotlight 29 and 7 Cedars each is subject
to extensive state and local regulations and must obtain various
licenses and permits, including those required to sell alcoholic
beverages, on a periodic basis. All licenses are revocable and
are not transferable. The agencies involved have full power to
limit, condition, suspend or revoke any such license, and any such
disciplinary action could (and revocation would) have a material
adverse effect upon the operations of the casino. Management
believes that FQI has obtained all required licenses and permits
and that the business is conducted in substantial compliance with
applicable laws.
Pursuant to federal law, sales of beer, wine and other
intoxicating beverages ("Liquor") must be in conformance with
tribal and state laws. Under the Nevada law, the sale of Liquor
by the drink at gaming facilities is subject to state regulation
and licensing. The Company is licensed to sell Liquor by the
drink at the Four Queens.
OTHER BUSINESS INFORMATION
Patents
The Company's only significant patent covers MULTIPLE
ACTION blackjack, a faster version of traditional blackjack that
was developed by an officer of the Company. The patent was issued
in 1992 and expires in 2017. MULTIPLE ACTION blackjack permits a
player to make three separate bets on his hand, and the dealer
uses a single up-card against the three-player bets. This results
in a higher volume of play.
The Company has licensed MULTIPLE ACTION blackjack to other
casinos in Las Vegas and throughout the United States and at
December 31, 1996 had licensed 82 locations for 128 tables.
Revenues from licensing MULTIPLE ACTION blackjack through
December 31, 1996 represented an immaterial part of the Company's
overall revenues.
Employees and Labor Relations
At December 31, 1996, the Four Queens employed 1,089
persons, of which less than 5% were covered by collective
bargaining agreements which expired in April 1987. The union
employees have continued to work under the terms of an expired
agreement. The Company believes that its relationship with the
employees of the Four Queens is good.
Control Procedures
The Company employs stringent controls, checks and record
keeping of all receipts and disbursements in connection with its
gaming operations and believes that its internal controls are in
compliance with the laws and regulations established by the Nevada
Gaming Authorities, the Washington State Gambling Commission,
NIGC, and the respective tribal gaming commissions. The audit and
cash controls employed by the Company include locked cash boxes,
independent counters and observers to perform daily cash and coin
counts, floor observations of the gaming area, closed circuit
television monitoring of critical activities and rapid analysis
and resolution of discrepancies or deviations from normal
performance.
Credit Policies
The Four Queens gaming operations are conducted on a credit
as well as cash basis. The Company believes that it is necessary
to extend credit to selected customers in order to compete
effectively with other casino/hotels. Credit play at the Four
Queens accounts for a relatively minor portion of total gaming
activities. Allowances for doubtful accounts are made on the
basis of a subjective analysis of the receivables involved and are
charged as an expense in the period in which such determination
are made. Credit is not issued at the Native American Casinos.
Certain Income Tax Matters
Management has reevaluated transactions which occurred in
prior years and as a result believes the Company possesses a total
net operating loss carryforward which was approximately
$103,500,000 at December 31, 19965. As a result of ownership
changes in prior years, Internal Revenue Code Section 382 limits
the amount of loss carryforward currently available to offset
federal taxable income. At December 31, 1995, the amount of loss
carryforward not limited by Section 382 and therefore available to
offset current federal taxable income was approximately
$64,600,000. These loss carryforwards begin to expire in the year
1999 and will be completely expired by 2007. Because of the
reorganization proceedings, the Company's net operating loss
carryforwards may, however, be eligible for special treatment
under Section 382. (See Note 9 of Notes to Consolidated Financial
Statements.)
ITEM 2. PROPERTIES.
Except for certain small parcels of land owned in fee and
one lease for approximately 7,000 square feet of casino space that
expires on December 31, 1997, the real property underlying the
Four Queens is leased pursuant to several long-term leases, none
of which expires before October 31, 2024. The adjoining garage is
occupied under a lease that expires in 2034. Such leases
generally provide for annual minimum rental and adjustments
relating to cost of living. The Four Queens is subject to the
mortgage security interest of the Company's 1993 First Mortgage
Notes and 1994 Mortgage Notes. These mortgage security interests
will survive effectiveness of the Plan and will secure the
Restated Mortgage Notes and the Restated First Mortgage Notes. See
Note 8 of Notes to Consolidated Financial Statements. The Four
Queens is more fully described under Item 1. The Company does
not own any fee or leasehold interests in the real property
underlying the Spotlight 29 Casino or the 7 Cedars Casino.
ITEM 3. LEGAL PROCEEDINGS
Chapter 11 Reorganization
On October 31, 1995, the Company and certain of its
subsidiaries filed a voluntary petition in the United States
Bankruptcy Court for the District of Nevada seeking to reorganize
under Chapter 11 of the United States Bankruptcy Code. See
"Item 1. Business-Chapter 11 Proceedings." On November 10, 1995,
Olympia Gaming Corporation filed a voluntary petition in the same
Court. Since the Bankruptcy filing, several entities have filed
administrative claims requesting the Bankruptcy Court order the
Company to reimburse or compensate such entities for goods, taxes
and services they allege the Company has received or collected,
but for which they claim the Company has not paid.
The Company currently estimates that the administrative
claims will be approximately $1.5 million; however, there can be
no assurance that additional amounts will not be claimed or the
extent to which administrative claims may be allowed by the
Bankruptcy Court. The Bankruptcy Code requires that all
administrative claims be paid on the effective date of a plan of
reorganization unless the respective claimants agree to different
treatment. Most of the administrative claims in the bankruptcy
case have been paid. The Company does not expect that the balance
of any outstanding administrative claims will affect its ability
to consummate the Plan of reorganization.
Hyland Litigation
Thomas Hyland, a professional card counter and blackjack
player, filed a complaint on August 23, 1995 in Federal District
Court in Camden, New Jersey, No. 95CV2236 (JEI), against the
Company and virtually every other casino company in the United
States. The complaint alleges violations of the antitrust,
consumer fraud and fair credit reporting laws by the defendants in
illegally conspiring to prevent Mr. Hyland and other professional
card counters from playing blackjack at their respective casinos.
The complaint alleges that the defendants share information
concerning card counters and then act in concert to implement
industry wide policy in banning them at the blackjack tables.
Management believes that the claims are without merit and
does not believe that the lawsuit will have a material adverse
effect on the Company's financial statements taken as a whole.
WARN Act Litigation
The Company is a defendant in two consolidated lawsuits
pending in the federal court for the District of New Jersey,
alleging violation by the Company and certain of its subsidiaries
and affiliates of the Worker Adjustment and Retraining
Notification Act ("WARN Act") and breach of contract. The
plaintiffs in the two consolidated cases are (i) former employees
of a casino/hotel in New Jersey formerly affiliated with the
Company bringing suit on behalf of a class of all employees laid
off as a result of the casino's closing and (ii) a union local
seeking to represent its members who were laid off at that time.
Plaintiffs claim that there are approximately 1,300 such employees
within the class who seek damages under the WARN Act providing for
up to 60 days' pay and lost benefits and payments for deferred
compensation allegedly due under a contract with certain
employees. Damages payable, if any, would be based on the basis
of the number of days' notice determined by the court to have been
required under the WARN Act and the wages, benefits and deferred
compensation applicable to each such employee.
The Company has vigorously defended the action on the basis
that even if the WARN Act does apply as a matter of law to a
regulatory-forced closing, the closing was due to unforeseeable
circumstances and, accordingly, the notice given was as timely as
practicable, among other grounds. The liability phase of the
trial of the two consolidated lawsuits concluded in August 1993.
On June 30, 1995, the presiding judge entered an Order for
Verdict Upon Liability Issues in which he ruled that: (i) the
plaintiffs had failed to prove any liability under the WARN Act;
but (ii) that Elsinore and certain of its subsidiaries are jointly
liable for certain retroactive wages due to former employees of
Elsinore Shore Associates under a collective bargaining agreement,
plus prejudgment interest on such wages. The total amount of
judgment the plaintiffs would be entitled to under this ruling has
not yet been determined. The plaintiffs' attorney asserts that
the amount due as of October 1, 1995, taking into account interest
on that date, was approximately $676,000. On March 4, 1996, the
plaintiffs' attorney submitted a proof of claim for retroactive
wages in the amount of $800,000 to the Bankruptcy Court. Because
of the filing of the bankruptcy petitions, the WARN Act litigation
in the New Jersey Court has been stayed by operation of Bankruptcy
Code Section 362(a). However, the plaintiff's $800,000 claim is
currently the subject of claims litigation in the Bankruptcy
Court. It is the Company's position that the claim submitted by
the plaintiffs should be reduced to zero. However there can be no
assurance as to the success of the Company's attempt to reduce the
claim.
Action Against Twenty-Nine Palms Band
On March 16, 1995, Elsinore Corporation, its wholly owned
subsidiary, ElSub Management Corporation, and Palm Springs East
Limited Partnership, of which ElSub Management is the General
Partner, filed a complaint against the 29 Palms Band in the United
States District Court for the Central District of California, case
no. CV 95-1669-RG(MCx). The suit was dismissed without prejudice
by the Company on April 21, 1995. As noted previously, the
Company has reached settlement of its dispute with the Band.
Poulos/Ahern Class Actions
In April and May 1993, two class action lawsuits were filed
in the United States District Court, Middle District of Florida,
against 41 manufacturers, distributors and casino operators of
video poker and electronic slot machines, including the Company.
The suits allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce persons to
play such games by collectively misrepresenting how the game
machines operate, as well as the extent to which there is an
opportunity to win. It also alleges violations of the Racketeer
Influenced and Corrupt Organizations Act, as well as claims of
common law fraud, unjust enrichment and negligent
misrepresentation, and seeks damages in excess of $6 billion. On
December 9, 1994, the Florida Court ordered that the consolidated
cases be transferred to the United States District Court for the
District of Nevada. That transfer has occurred and the Nevada
Court has assumed control of the cases. The new case number is
CV-S-94-1126-LDG(RJJ). Numerous defendants (including the
Company) have moved to dismiss the complaint for failure to state
a claim. No hearing has been set on this motion. The plaintiffs
have filed a motion seeking to certify the consolidated actions as
a class action. The defendants (including the Company) have
opposed certification of the class. During April, 1996, U.S.
District Judge Lloyd George approved defense motions to dismiss
such lawsuits holding that the plaintiffs had failed to state a
claim or prove their case. However, the plaintiffs were given
additional time to file an amended complaint. Management believes
the claims are wholly without merit and does not expect that the
lawsuit will have a material adverse effect on the Company's
financial statements taken as a whole.
Other
At December 31, 1996, the Company and its subsidiaries were
parties to various other claims and lawsuits arising in the normal
course of business. Management is of the opinion that all such
legal matters are either covered by insurance or, if not insured,
will not have a material adverse effect on the financial position
or the results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's
security holders during the last quarter of the last fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, par value $.001 per share (the
"Common Stock"), was traded on the American Stock Exchange
("AMEX") and the Pacific Stock Exchange ("PSE") under the symbol
"ELS." Trading in the Company's Common Stock continues to be
halted by the American Stock Exchange ("AMEX") and the Pacific
Stock Exchange ("PSE"). Elsinore has been in contact with both
AMEX and PSE to pursue reactivation of its listings so that the
Common Stock in the reorganized Elsinore can be traded following
the effective date of the Plan. However, by letter dated
January 27, 1997, Elsinore was informed of AMEX's intention to
pursue the delisting of Elsinore's Common Stock. By letter dated
February 3, 1997, Elsinore requested that AMEX defer a final
decision on delisting until mid-March 1997 so that the
reconstituted board of directors has an opportunity to decide on a
course of action. By letter dated February 5, 1997, AMEX agreed
to extend the Company's time to request an appeal to March 14,
1997.
On February 19, 1997, the number of holders of record of
Common Stock was approximately 4,179.
The Company has never declared or paid, nor does it have any
present intention to declare or pay, cash dividends on its Common
Stock. Any determination by the Board of Directors to pay cash
dividends in the future would depend upon numerous factors such as
the Company's earnings, financial condition and capital
requirements. In addition, certain covenants of the First
Mortgage Notes and Mortgage Notes restrict the payment of cash
dividends under certain circumstances.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated historical
financial data with respect to the Company for the five years
ended December 31, 1996. This data should be read in conjunction
with the consolidated financial statements and notes thereto set
forth elsewhere herein.
December 31,
1996 1995 1994 1993 1992
(Dollars in thousands except per share amounts)
Balance Sheet Data:
Total Assets $42,627 $37,101 $67,315 $71,923 $41,961
Current Portion
of Long-Term Debt 50 54 59 204 3,051
Long-Term Debt Net of
Current Portion:
Notes Payable 61,425 61,327 59,040 53,018 28,513
Capital Leases 1,487 1,531 1,290 1,350 1,555
Stockholder's Equity
(Deficit) (40,710) (43,441) (1,664) 4,567 (182)
Operations Data:
Revenues (Net) $61,199 $56,973 $62,706 $66,852 $63,998
(Loss) Before
Extraordinary Items $(1,556) $(45,749) $(10,176) $(2,252) $(1,780)
Extraordinary Items:
Gain (Loss) on
Extinguishment of Debt - - 735 (285) -
Net Loss $(1,556) $(45,749) $( 9,441) $(2,537) $(1,780)
Per Share Amounts:
Loss Before
Extraordinary Items $ (.10) $ (2.95) $ (.84) $ (.19) $ (.15)
Extraordinary Items - - .06 (.02) -
Net Loss $ (.10) $ (2.95) $ (.78) $ (.21) $ (.15)
Capital Costs:
Depreciation and
Amortization $ 3,816 $ 3,948 $ 3,990 $ 3,206 $ 3,302
Interest Related to Prior
Period Tax Obligation - 590 885 4,256 213
Interest Expense 2,505 8,006 9,086 1,385 3,124
$ 6,321 $ 12,544 $ 13,961 $ 8,847 $ 6,639
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto set forth
elsewhere herein.
OVERVIEW
Chapter 11 Proceedings: On October 31, 1995, the Company and
certain of its subsidiaries filed a voluntary petition in the
United States Bankruptcy Court for the District of Nevada to
reorganize under chapter 11 of Title 11 of the United States
Bankruptcy Code. On November 10, 1995 an additional subsidiary of
the Company also filed a voluntary petition to reorganize under
Chapter 11 in the same court. The Company is continuing to manage
its business affairs as a debtor-in-possession under the
supervision of the Bankruptcy Court.
On February 28, 1996, Elsinore and its subsidiaries filed a plan
of reorganization with the Bankruptcy Court. On August 8, 1996,
an order modifying and confirming, as modified, the plan of
reorganization was entered (the "Plan"). The Plan is expected to
be fully effective in March, 1997. See "Item 1. Business --
Chapter 11 Proceedings."
There can be no assurance that, with or without a plan of
reorganization, the Company can generate sufficient cash to
sustain operations.
Going Concern Basis: The accompanying financial statements have
been prepared on a going concern basis which assumes continuity of
operations and realization of assets and liquidation of
liabilities in the ordinary course of business. The consolidated
financial statements do not include all of the consequences of the
proceedings under Chapter 11 nor all adjustments that might be
necessary should the Company be unable to continue as a going
concern. The Company's ability to continue as a going concern is
dependent upon, among other things, its obtaining the required
regulatory approvals from the State of Nevada, including approvals
by the gaming authorities, obtaining sufficient cash to fund all
distributions and cash reserves required at the time the Plan
becomes effective and achieving profitable operations and
sufficient cash flows to meet future obligations required by the
plan. The outcome of these matters is not presently determinable.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources: On January 25, 1995 through an underwritten
public offering of its common stock, the Company raised
approximately $3,747,000 net of underwriting discounts and
commissions, and other direct offering costs in consideration for
the issuance of 2,500,000 shares of Common Stock. The net
proceeds have been used for debt service and other working capital
purposes.
On March 31, 1995, the Company sold, through a private placement
to six purchasers, an aggregate of $1,706,250 principal amount of
its 7.5% Convertible Subordinated Notes. The net proceeds of
$1,566,000 have been used for debt service and other working
capital purposes.
As defined in the Subcription Rights Agreement dated October 10,
1996, pursuant to the Plan of Reorganization, as confirmed by the
Bankruptcy court, the Company agreed to issue to the Rightholders
stock subscription rights ("Rights")to purchase up to an aggregate
of one million (1,000,000) shares of Common Stock, par value
$0.001 per share, of the Company, at an exercise price of $5.00
per share. In the event such Rights were not exercised by 5 P.M.
Pacific time on December 13, 1996, such non-exercised Rights were
transferred automatically to the members of the Bondholder
Committee in the proportions specified in a Standby Commitment.
As the Rights proceeds are received, they are deposited in a
separate Company bank account and are reflected in the
accompanying 1996 balance sheet classification "Cash and Cash
Equivalents Restricted". As of December 31, 1996 Rights proceeds
of $4,287,000 had been received by the Company, representing
exercise of Rights to approximately 854,000 shares. The Company
will issue the related shares, including shares applicable to the
bondholders Standby Commitment, upon the Plan's Effective Date,
which is expected to occur in March, 1997.
Cash and cash equivalents, (including restricted amounts of
$4,445,000 at December 31, 1996) increased $8,081,000 to
$11,653,000 at December 31, 1996. Net cash provided by operating
activities for the year ended December 31, 1996 was approximately
$4,852,000. Major uses of cash during 1996 included payments of
$1,431,000 of reorganization administrative costs, $578,000 of
reorganization severance costs, $139,000 of interest on the 1994
Mortgage notes and $1,001,000 of capital expenditures.
Liquidity: Currently, the Company's primary sources of liquidity
are cash flows from the operations of the Four Queens Hotel and
Casino. Four Queens revenues, operating results and cash flows
increased during the year ended December 31, 1996, primarily
because of an increase in Four Queens hotel guests and casino
visitors, because of an overall increase in the number of visitors
to Las Vegas and related visitor (and local residents) interest in
the Fremont Street Experience attraction in downtown Las Vegas.
During 1996, the Company experienced less liquidity pressure
because of the protection afforded by the bankruptcy laws in the
payment of obligations incurred prior to the filing and arising
under certain executory contracts entered into prior to the filing
of the bankruptcy petition and because of the increased visitors
to Las Vegas and the opening of the Fremont Street Experience.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Total revenues, net of promotional allowances, increased
$4,226,000 (7.4%). Casino revenues, increased $2,336,000 (5.8%),
as compared to 1995. Promotional allowances, which are subtracted
from gross revenues, decreased $496,000 (7.4%) in 1996 compared to
1995. Overall, management believes that the increase in 1996
revenues over 1995 was at least partially attributable to
increased visitors to downtown because of (1) the Fremont Street
Experience attraction and (2) the related improvement of vehicular
traffic flow to downtown Las Vegas following completion of its
construction in November, 1995.
The increase in casino revenues in 1996, as compared to
1995, included a $2,971,000 (10.9%) increase in slot revenues and
a $635,000 (5.0%) decrease in table games revenues. The increase
in slot revenues was in both the volume of play and win
percentage. The decrease in table games revenues resulted
primarily from a decrease in the volume of play.
Hotel revenues increased $1,638,000 (17.1%)during 1996 due
to an increase in average room rate and slightly higher room
occupancy. Food and Beverage revenues increased $237,000 (2.0%)
where an increase in beverage revenues reflecting increased
customer traffic was partially offset by decreased food
complimentary sales during the year.
Interest and other income decreased $481,000 primarily because of
decreases in interest income accrued on Native American loans,
which were fully reserved at December 31, 1995. However, in 1996,
the Company received its first payment under the settlement
agreement reached with the Twenty-nine Palms Band of Mission
Indians - For additional information see "Native American Gaming
Projects", elsewhere herein.
Total costs and expenses, excluding interest, depreciation
and amortization and provisions for losses on loans receivable
from Native American Tribes, casino development costs and
reorganization items decreased $1,337,000 (2.4%) in 1996 as
compared to 1995.
Casino costs and expenses decreased $2,011,000 (10.2%) primarily
due to a decrease in costs allocated to the casino for promotional
allowances (which was lower, as a result of a reduction in the
ratio of complimentary sales to total sales of rooms, food and
beverages) and to a lesser extent by cost containment.
Correspondingly hotel expenses increased $585,000 (7.4%) because
of lower promotional costs allocation to the casino and because of
slightly higher payroll costs. Food and beverage expenses
increased $1,078,000 (17.9%) over 1995 almost entirely because of
a lesser allocation of promotional costs to the casino.
Taxes and licenses were comparable with 1995 consisting of
increased payroll and slot taxes which were mostly offset by lower
table games and property taxes. Selling, general and
administrative expenses decreased $1,057,000 (9.3%) from 1995
primarily as a result of reduced payroll costs of corporate
administrative and development staff. Rent expenses were
comparable with 1995.
Depreciation and amortization decreased $132,000 (3.3%) in
1996 primarily because the remaining unamortized balance of debt
issue costs related to the 1993 First Mortgage Notes was charged
to reorganization items at October 31, 1995 (See notes 1 and 8 of
Notes to Consolidated Financial Statements) and slightly lower
depreciation of property and equipment, which was mostly offset by
the start-up (January 1, 1996) of amortization (over 60-months) of
the $3,000,000 investment in the Fremont Street Experience.
Interest expense for 1996 decreased $5,501,000 from 1995 as
reorganization proceedings continued. Interest expense of
approximately $1,575,000 has been accrued from the August 12, 1996
plan confirmation date on the face amount of the new restated
First Mortgage notes payable ($30 million at 13.5% per annum)
which are to be issued when the plan becomes fully effective,
which is expected to occur by the end of March 1997. In addition,
interest of approximately $170,000 has been accrued from the
confirmation date on the new restated 11.5% First Mortgage notes
payable (approximately $3.8 million face) which are to be issued
when the plan becomes fully effective. Because of the Chapter 11
proceedings, there has been no accrual of interest on the
$57,000,000, 12.5% First Mortgage notes since October 31, 1995. If
accrued to the plan confirmation date, the interest expense on the
12.5% notes would have been approximately $4,394,000 in 1996. (In
addition, the remaining unaccreted discount balance related to the
12.5% first mortgage notes was charged to expense as a
reorganization item at October 31, 1995). There also has been no
accrual of interest on the $1,425,000, 7.5% Convertible
Subordinated Notes since October 31, 1995. If accrued to the
confirmation date, the interest expense on the 7.5% notes would
have been approximately $67,000 in 1996. In addition, there has
been no accrual of interest on the $2,950,000 of prior period tax
obligations since October 31, 1995. If accrued, the interest
expense to the confirmation date on prior period tax obligations
would have been approximately $185,000 for 1996.
Reorganization expense is comprised of items incurred by the
Company as a result of reorganization under Chapter 11 of the
Bankruptcy Code. At the Plan confirmation date in August, 1996,
the Company expensed approximately $761,000 of executive severance
costs, of which approximately $318,000 was immediately due, with
the remainder payable in monthly installments which continue into
1997.
Reorganization expenses for 1996 follow:
December 31, 1996
($in thousands)
Officer severance expenses $ 761
Administrative expenses, net 1,431
Total reorganization items $2,192
1995 COMPARED TO 1994
Total revenues, net of promotional allowances, decreased
$5,733,000 (9.1%). Casino revenues, decreased $6,306,000 (13.6%),
as compared to 1994. Promotional allowances, which are subtracted
from gross revenues, decreased $837,000 (11.1%) in 1995 compared
to 1994 for the same reasons.
The decrease in casino revenues in 1995, as compared to
1994, consisted primarily of a $3,178,000 (20.1%)decrease in
table game revenues and a $3,078,000 (10.1%) decrease in slot
revenues. The decreases in table games revenues resulted from
decreases in both volumes of play and win percentages. The
decrease in slot revenues resulted from decreases in volumes of
play. Overall, management believes that these decreases were
primarily due to the disruption of traffic flow to downtown Las
Vegas caused by construction of the Fremont Street Experience
attraction and related infrastructure improvements and lower than
expected hold percentages in table games.
Hotel revenues increased slightly during 1995 due to a small
increase in average room rate which was partially offset by a
small decrease in occupancy. Food and Beverage revenues decreased
$557,000 (4.4% in 1995) reflecting the lower volume of customer
traffic during the period. Interest and other income was
comparable with 1994.
Casino costs and expenses decreased $3,161,000 (13.8%)
primarily as a result of reduced casino payroll expenses resulting
from cost containment programs and the decrease in casino volume.
Hotel expenses increased $252,000 (3.3%).
In 1995, food and beverage expenses decreased $240,000
(3.8%), as compared to 1994 due to cost containment programs.
Costs incurred as a result of taxes and license fees
decreased $328,000 (4.7%) in 1995 with higher payroll taxes offset
by lower gaming taxes expenses. Selling, general and
administrative expenses decreased $507,000 (4.3%) from 1994
primarily as a result of reduced payroll expenses resulting from
cost containment programs.
In 1995, rent expenses increased $642,000 (19.4%) primarily
because of an increase in gaming equipment leased under operating
leases.
Depreciation and amortization decreased 42,000 (1.1%) in
1995 primarily because the remaining unamortized balance of debt
issue costs related to the 1993 First Mortgage Notes was charged
to reorganization items at October 31, 1995 (See notes 1 and 8 of
Notes to Consolidated Financial Statements).
Interest on prior period income tax obligations decreased
$295,000 primarily because of adjustment of accruals to lower
effective rates for the year. Interest expense, excluding interest
on prior period income taxes, decreased $1,080,000 (11.9%)
because, in connection with the reorganization proceedings,
interest subsequent to October 31, 1995 was only accrued on the
$3,000,000 principal, 20% first mortgage notes. In addition, the
unaccreted debt discount balance related to the 1993 First
Mortgage Notes was charged to reorganization expense at
October 31, 1995.
During the year ended December 31, 1995, the Company
charged-off $23,598,000 of loans receivable from Native American
Tribes and wrote-off $2,323,000 of casino development costs
related to Native American Casino projects (for additional
information, see Note 4 of Notes to Consolidated Financial
Statements.)
For 1995, reorganization items consisted of the following:
(in thousands)
Debt issue costs charge-off $ 293
Debt discount charge-off 2,695
Administrative expenses, net 5,690
Total reorganization items $8,678
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are listed and
included under Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Name, Position with Company, Year
Principal Occupation First
and Other Directorships Age Elected
Frank L. Burrell, Jr. 69 1991
Chairman of the Company since January 1993;
Managing General Partner since 1977 of Burrell & Co.,
a securities broker-dealer.
Howard R. Carlson 75 1993
Retired business and banking executive.
Thomas E. Martin 54 1990
President and Chief Executive Officer of the Company
since January 1993 and May 1995, respectively; President
and Chief Executive Officer of Four Queens, Inc. since
March 1993.
Robert A. McKerroll 67 1993
Retired. President and Chief Executive Officer of Foothill
Bank, Mountain View, California from 1987 to 1995.
In addition to the executive officers of the Company who are also
directors, the executive officers of the Company are as follows:
Brent E. Duncan was named Treasurer and Secretary of the Company
on June 4, 1996. Mr. Duncan joined the Company in January 1993 and prior
to being named Treasurer and Secretary of the Company, held various
financial positions in which he reported to the Company's Chief
Financial Officer. Mr. Duncan has over 10 years of Nevada gaming
industry experience, including positions as Controller of a gaming
device distributor and of Vice President, Treasurer and Director of Del
E. Webb Hotels Corporation (where his responsibilities included
reporting financial results for eight hotels, including four Nevada
gaming properties). Formerly an audit manager with the Los Angeles
office of KPMG Peat Marwick LLP, for six years, Mr. Duncan's assignments
included audits of various public and private companies and included two
years as resident manager of the firm's Las Vegas, Nevada office. A
certified public accountant in Nevada, Mr. Duncan also holds a
bachelor's degree in accounting from San Jose State University, where he
was a member of the Accountants Honorary Society.
Effective April 1, 1996, Gary R. Acord, Chief Financial Officer,
resigned his position with the Company.
Committees and Meetings
The Board of Directors has established an Audit Committee, an
Executive Committee, a Finance Committee, a Personnel and Compensation
Committee (the "Compensation Committee") and a Nominating Committee.
The membership of such committees is determined from time to time by the
Board of Directors. Currently, the Audit Committee consists of Messrs.
Carlson and McKerroll. The Executive Committee consists of Frank L.
Burrell, Jr. (Chairman) and Messrs. Martin and Carlson. The Finance
Committee consists of Robert A. McKerroll (Chairman) and Thomas E.
Martin and Frank L. Burrell, Jr. and Brent E. Duncan. The Compensation
Committee consists of Howard R. Carlson (Chairman) and Messrs. Burrell
and McKerroll. The Nominating Committee consists of Messrs. Burrell and
Martin.
The functions of the Audit Committee include reviewing the
independence of the independent auditors, recommending to the Board of
Directors the engagement and discharge of independent auditors,
reviewing with the independent auditors the plan and results of auditing
engagements, approving or ratifying each material professional service
provided by independent auditors, considering the range of audit and
non-audit fees, reviewing the scope and results of the Company's
procedures for internal auditing and the adequacy of internal accounting
controls and directing and supervising special investigations.
The function of the Executive Committee is to meet periodically
between regular meetings of the full Board of Directors and to take any
and all required action at such meetings so as to carry out and perform
the duties of the Board to the fullest extent permitted by the By-Laws
of the Corporation and by law.
The primary function of the Finance Committee is to provide an
oversight discipline to the Company's operating performance with
particular emphasis on cash needs and availability through monitoring
such cash availability and needs on unconsolidated and consolidated
bases in time horizons of (a) 1-30 days, (b) 31-180 days, and (c)beyond
180 days up to one year. In addition, the Committee monitors the
Company's operating performance through monthly reports against approved
operating plan and budgets.
The functions of the Compensation Committee include reviewing and
establishing the general employment and compensation practices and
policies of the Company and approving procedures for the administration
thereof. The Compensation Committee also establishes the awards under
and administers the Incentive Plan for Senior Executives. The
Compensation Committee also makes recommendations to the Board of
Directors respecting the grant of options under the Company's 1991 Stock
Option Plan, the 1993 Long-Term Stock Incentive Plan and administers
such plans.
The functions of the Nominating Committee including advising the
Board of Directors on matters concerning the selection of candidates as
nominees for election as director. Stockholders who wish to recommend
qualified candidates to the Board of Directors should write to the
Secretary of the Company, stating in detail the candidate's
qualifications. All such recommendations will be brought to the
attention of the Nominating Committee.
In 1996, the Board of Directors held 9 meetings and took action by
written consent 6 times, the Audit Committee held 1 meeting, the
Executive Committee held 10 meetings, the Finance Committee held 9
meetings, and the Compensation Committee and Nominating Committee did
not meet in 1996. Each director attended more than 75% of the aggregate
number of meetings of the Board and the committees, if any, on which he
served in 1996.
Director's Fees
Each non-employee director of the Company receives an annual fee
of $25,000. The Executive Committee is paid $12,000 per year for up to
12 meetings. Over 12 meetings, the fee is $1,000 per meeting. The
Finance Committee is paid $6,000 per year for up to 12 meetings. Over
12 meetings, the fee is $500 per meeting. Audit, Compensation and
Nominating Committee chairs and members are paid an additional fee of
$5,000 and $2,500, respectively, for service as such. All fees are
payable monthly. In addition, directors are reimbursed for
out-of-pocket expenses incurred in connection with attendance at board
and committee meetings.
ITEM 11 . EXECUTIVE COMPENSATION
The following table provides certain summary information
concerning compensation paid to Frank L. Burrell, Jr., the Company's
Chairman during the three years ended December 31, 1996, and the one
executive officer whose total annual salary and bonus exceeded $100,000
in such year.
Annual Compensation Long Term Compensation Awards
Securities All Other
Name and Principal Underlying Compensation
Position Year Salary ($) Bonus($) Options (#) ($)
Frank L.
Burrell, Jr. 1996 361,678(1)(a) -0- -0- 524(1)
Chairman 1995 228,235 -0- -0- 2,310(1)
1994 227,991 -0- 100,000 2,310(1)
Thomas E. Martin 1996 540,683(2)(a) -0- -0- 672(2)
President and 1995 343,344 -0- -0- 2,310(2)
Chief Executive 1994 346,606 -0- 200,000 2,310(2)
Officer
(1) Mr. Burrell received compensation for matching contributions under
the Company's 401-k Plan. (1)(a)Pursuant to the Plan of Reorganization,
Mr. Burrell was given a severance of one (1) year's annual salary of
$240,000. As of December 31, 1996, Mr. Burrell had received $200,000 in
severance payments.
(2) Mr. Martin received compensation for matching contributions under
the Company's 401-k Plan. (2)(a) Pursuant to the Plan of
Reorganization, Mr. Martin was given a severance of one (1) year's
annual salary of $360,000. As of December 31, 1996, Mr. Martin had
received $300,000 in severance payments.
Table
No options were granted in 1996.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
During 1996, no stock options were exercised by executive officers
of the Company. In addition, as of December 31, 1996, Messers. Martin
and Burrell do not hold any unexercised stock options.
Employment Contracts and Termination of Employment and Change-of-Control
Arrangements
In March 1993, the Company adopted an Amended and Restated Senior
Executive Severance Plan (the "Severance Plan"). Pursuant thereto, the
Company has entered into severance agreements with Messrs. Burrell and
Martin as of same date. Under such agreements, all such officers were
to receive an amount equal to two times their respective annual
salaries, in each case, thirty days after termination (subject to
certain limitations) if such termination occurs within two years after a
change of control of the Company. The Severance Plan also provides that
a covered officer may "put" to the Company any stock options theretofore
granted to him under the Company's option plans in return for cash
payments equal to the difference (if greater than zero) between the
"fair market value" (as defined in the relevant option plan) and the
exercise price per share of such options. Pursuant to the Company's Plan
of Reorganization, Messrs. Burrell and Martin's severance agreements
were assumed, as modified, by the U.S. Bankruptcy Court to provide for a
severance payment of $240,000 and $360,000, respectively, to be paid in
equal installments over six-months commencing on the Confirmation Date
with a single lump sum of one-half of their total severance to be paid
on the Confirmation Date. See "Item 1. Business--Chaper 11
Proceedings--Plan of Reorganization."
Compensation Committee Report on Executive Compensation
The duties of the Compensation Committee are to establish the
salaries of the company's executive officers; to exercise the authority
of the Board of Directors concerning the Company's benefit plan; to
administer the Company's stock option plans; to make recommendations to
the Board of Directors concerning salary increases and bonus awards for
the Company's executives, including the Chairman and the President/Chief
Executive Officer; and to advise the Board of Directors on other
compensation and benefit matters. The members of the Compensation
Committee are Messrs. Carlson (Chairman), Burrell and McKerroll.
The Company's fundamental philosophy and policy is to provide a
total compensation program which will enable the Company to attract,
retain and motivate the high-caliber management team needed to achieve
the Company's longer-term objectives. Accordingly, each executive's
compensation package is comprised of four elements: (i) base salary,
which represents competitive pay within the gaming and hospitality
industry for a comparable level of responsibility and reflects
individual performance; (ii) annual variable performance awards payable
in cash, which are tied to the Company's achievement of financial goals
and individual performance; (iii) stock-based incentive awards which
strengthen the mutual interests of the executive officers and the
shareholders; and (iv) a cost effective and tax efficient benefits
package to provide security for officers and their families. It is the
Company's objective to pay "market rate" base salaries (i.e. at the 50th
percentile) and to pay above the market rate through variable
compensation vehicles (incentives and stock), contingent upon the
Company's performance and results attained.
Base Salary. The base salary of each officer is set on the basis
of the salary level in effect for comparable positions within the
Company's peer group (i.e. market or 50% percentile) and personal
performance. The factors considered when measuring personal performance
of an executive officer include, but are not limited to, the Company's
performance, the executive's departments and personal performance. The
executive's departments are evaluated by reviewing performance to budget
and goals, including such factors as profit. Other factors may include
development and retention of staff as well as the review of all audit
reports.
Due to the Company's financial performance, base salaries were
reduced by 5% and a salary freeze was instituted effective October 5,
1994. On or about April 1, 1996, all employees, excluding the Chairman
of the Board and Chief Executive Officer, were given a 2.5% increase in
their base salary.
Annual Incentive Compensation. Due to the financial condition of
the company and the filing of Chapter 11 Bankruptcy on October 31, 1995,
there was no incentive compensation paid in 1996.
Long-Term Incentive Compensation. The 1993 Long-Term Stock
Incentive Plan provides for grants of Company securities to executives
and other key individuals in the form of stock options, SARs, stock
units or restricted shares. The Compensation Committee grants stock
options to attract new executives to the Company and to retain current
officers. The grants are designed to align the interests of the
executive officers with those of shareholders and ensure long-term
commitment to the Company. Each stock option grant allows the executive
to acquire the Company's common stock at a fixed price per share (the
market price on the date of grant) over a specified period of time (up
to 10 years). Accordingly, the option will provide a return to the
executive officer only if the market price of the Company's common stock
appreciates over the option term. The number of options historically
awarded was compared to the option grants of the Company's industry.
The Company's practices with regard to stock option awards and holdings
were found to be below market when compared with practices within the
industry peer group.
No SARs, stock units, stock options, restricted stock or long term
incentive plan payouts were made during 1996.
Chief Executive Officer's Compensation
During 1996, Mr. Martin was paid a base salary of $342,000. In
setting Mr. Martin's salary, the Compensation Committee considered the
market survey and personal performance. The Committee believes that Mr.
Martin's salary is fair and appropriate in light of the obligations and
responsibilities of the Chief Executive Officer. Mr. Martin was not
awarded any cash bonuses during 1996. Mr. Martin received no grants of
options in 1996.
COMPENSATION COMMITTEE
Howard R. Carlson, Chairman
Frank L. Burrell, Jr.
Robert A. McKerroll
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the names and addresses of all
persons who beneficially owned, to the knowledge of the Company, more
than 5% of the outstanding shares of Common Stock on December 31, 1996,
and the number of shares beneficially owned by each director, each
executive officer named in the Summary Compensation Table and all
directors and executive officers as a group. Shares are beneficially
owned by a person if he or she currently owns such shares or has or will
have the right to acquire such shares within 60 days of December 31,
1996. Unless otherwise noted, the persons named in the table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
Beneficial Ownership
of Common Stock
Number of
Name and Address of Owner Shares Percent of Class
Goldsmith Financial Corporation 1,204,030(1) 7.6%
11350 McCormick Road, Suite 200
Hunt Valley, Maryland 21031
Mojave Partners, L.P. 1,053,417(2) 6.6%
181 Maple Street
Stowe, Vermont 05672
Howard R. Carlson 10,000(3) *
Thomas E. Martin 56,000 *
Robert A. McKerroll 2,000 *
All directors and executive officers as a group(4)68,000 *
* Less than one percent.
(1) Based solely on information set forth in Schedule 13D and
amendments thereto filed with the Securities and Exchange
Commission by Goldsmith Financial Corporation through
December 31, 1996.
(2) Based solely on information set forth in Schedule 13D and
amendments thereto filed with the Securities and Exchange
commission by Mojave Partners, L.P. through December 31, 1996.
Includes 122,382 shares of Common Stock subject to immediately
exercisable warrants at an exercise price of $5.50 per share.
(3) Consists of 10,000 shares held by the Howard R. and Jeanne M.
Carlson Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Performance Graph
The Commission requires that the Company include in this Form 10K
a graphical comparison of the Company's cumulative five-year shareholder
returns on an indexed basis with (i) a broad equity market index and
(ii) and industry index or peer group. Set forth below is a line graph
(table) comparing the percentage change in the cumulative total
shareholder return on the Company's Common Stock against the cumulative
total return of the Dow Jones Equity Market Index and the Entertainment
& Leisure Index for the five years ended December 31, 1996. "Total
return," for the purpose of the graph, assumes reinvestment of all
dividends.
Comparison of Five Year Cumulative Total Return
for Elsinore Corporation, the Dow Jones Equity Market Index and
the Entertainment and Leisure Index.
Elsinore Corporation
Equity Table
December 31, 1996
No.of
No.of shares Market value Total Market shares
o/s at 12/31 at 12/31 Value per $100
1991 12,017,164 0.7500 9,012,873 133
1992 12,017,164 0.9375 11,266,091 107
1993 12,062,164 4.6250 55,787,509 22
1994 13,135,214 1.9375 25,449,477 52
1995 15,891,793 0.6875 10,925,608 145
1996 15,891,793 0.5625 8,939,134 178
Elsinore
Index Dow Jones Dow Jones Dow Jones Dow Jones
Value of Equity Equity E&L E&L
YE Invest Index Base Index Base
1991 100 392 100 327 100
1992 125 413 105 402 123
1993 617 442 113 501 153
1994 258 433 111 450 137
1995 83 581 148 590 180
1996 13 702 179 641 196
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
Page
Number
A. Documents filed as part of this report on behalf of
Elsinore Corporation and Subsidiaries:
(i) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets, December 31, 1996 and 1995F-2
Consolidated Statements of Operations, Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows, Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity, (Deficit)
Years Ended December 31, 1996, 1995 and 1994F-7
Notes to Consolidated Financial StatementsF-8
(ii) Financial Statement Schedules:
All Schedules are omitted because they are either not
required or not applicable, or the required
information is presented in the Notes to the
Consolidated Financial Statements.
(iii) Exhibits:
2.1* First Amended Plan of Reorganization [2.1] (16)
2.2* Order Confirming First Amended Plan of Reorganization [2.2]
(16)
3.1* Amended and Restated Articles of Incorporation of Elsinore
Corporation [3.1](1)
3.2* Amended and Restated Bylaws of Elsinore Corporation (4)
10.1* Sublease, dated May 26, 1964, by and between A. W. Ham, Jr.
and Four Queens, Inc. [10.1](2)
10.2* Amendment of Sublease, dated June, 15, 1964, by and between
A. W. Ham, Jr. and Four Queens, Inc. [10.2] (2)
10.3* Amendment of Sublease, dated February 25, 1965, by and
between A. W. Ham, Jr. and Four Queens, Inc. [10.3](2)
10.4* Amendment of Sublease, dated January 29, 1973, by and
between A. W. Ham, Jr. and Four Queens, Inc. [10.4](2)
10.5* Supplemental Lease, dated January 29, 1973, by and between
A. W. Ham, Jr. and Four Queens, Inc. [10.5](2)
10.6* Lease Agreement, dated April 25,1972, by and between Bank
of Nevada and Leon H. Rockwell, Jr., as Trustees of Four Queens,
Inc. [10.6](2)
10.7* Lease, dated January 1, 1978, between Finley Company and
the Company [10.7](2)
10.8* Ground Lease, dated October 25, 1983, between Julia E.
Albers, Otto J, Westlake, Guardian, and Four Queens, Inc.
[10.8](2)
10.9* Ground Lease, dated October 25, 1983 between Katherine M.
Purkiss and Four Queens, Inc. [10.9](2) 10.10* Ground Lease,
dated October 25, 1983 between Otto J. Westlake and Four Queens,
Inc. [10.10](2)
10.11* Indenture of Lease, dated March 28, 1984, by and between
the City of Las Vegas and Four Queens, Inc. [10.11](2)
10.12* Lease Indenture, dated May 1, 1970, by and between Thomas
L. Carroll, et al. and Four Queens, Inc. [10.12](2)
10.13* Memorandum of Lease, dated January 26, 1973, between
President and Board of Trustees of Santa Clara College and Four
Queens, Inc. [10.13](2)
10.14* Elsinore Corporation 1991 Stock Option Plan (the "1991
Plan") [10.11](1)
10.15* Form of Option Agreement pursuant to the 1991 Plan.
[10.21](2)
10.16* Form of Director and Officer Indemnity Agreement.
[10.16](11)
10.17* Elsinore Corporation 1993 Long-Term Stock Incentive Plan
(the "1993 Plan"). [10.23](2)
10.18* Form of Option Agreement pursuant to the 1993 Plan.
[10.24](2)
10.19* Agreement, dated January 14, 1993, between Jeanne Hood,
the Company and Four Queens, Inc. [10.25](2)
10.20* Amended and Restated Elsinore Corporation Senior Executive
Severance Plan, dated March 15, 1993. [10.26] (2)
10.21* Form of Amended and Restated Senior Executive Severance
Agreement. [10.27](2)
10.22* Agreement, dated April 28, 1992, by and between Four
Queens, Inc., Jeanne Hood, Edward M. Fasulo and Richard A.
LeVasseur. [10.28](2)
10.23* 1995 Short Term Incentive Plan for Senior Executive,
adopted December 16, 1994 [10.23](11)
10.24* Agreement of Limited Partnership, dated January 28, 1993,
by and between ELSUB Management Corporation and Native American
Casino Corporation. [10.30](2)
10.25* Incentive Consulting Agreement, dated January 28, 1993, by
and among Palm Springs East, L.P. (the "Partnership"), James G.
Brewer, Donald Wright and Sparkesh Enterprises, Ltd. [10.31](2)
10.26* Revised Management Agreement for Gaming Activities, dated
November 11, 1993 by and between Twenty-Nine Palms Band of Mission
Indians and the Partnership [10.26](5)
10.27* Addendum to Revised Management Agreement for Gaming
Activities, dated January 25, 1994, between Twenty-Nine Palms Band
of Mission Indians and the Partnership [10.27](5)
10.28* Loan Agreement dated November 11, 1993, by and between
Twenty-Nine Palms Band of Mission Indians and the Partnership
[10.28](5)
10.29* Gaming Project Development and Management Agreement, dated
September 28, 1993, by and among Olympia Gaming Corporation, The
Jamestown S'Klallam Tribe and JKT Gaming, Inc., a Tribal
Corporation organized and chartered by the Jamestown S'Klallam
Tribe ("JKT Gaming"). [10.29](5)
10.30* Addendum to Gaming Project and Development Management
Agreement, dated January 28, 1994 by and among Olympia Gaming
Corporation, The Jamestown S'Klallam Tribe and JKT Gaming
[10.30](5)
10.31* Loan Agreement, dated November 12, 1993 by and among The
Jamestown S'Klallam Tribe and JKT Gaming [10.31](5)
10.32* First Amendment to Loan Agreement, dated January 28, 1994
by and among The Jamestown S'Klallam Tribe and JKT Gaming
[10.32](5)
10.33* Purchase Agreement, dated October 8, 1993, among the
Company, the Guarantors named therein and the Purchasers named
therein. [10.1](3)
10.34* Warrant Agreement, dated as of October 8, 1993, between
the Company and First Trust National Association, as warrant
agent. [10.3](3)
10.35* First Mortgage Notes Registration Rights Agreement, dated
as of October 8, 1993, among the Company, the Guarantors named
therein and the Purchasers named therein. [10.4](3)
10.36* Warrant Shares Registration Rights Agreement, dated as of
October 8, 1993, among the Company and the Purchasers named
herein. [10.5](3)
10.37* Amendment No. 1, dated as of April 21, 1994, to Warrant
Agreement, dated as of October 8, 1993, among the Company and
First Trust National Association, as warrant agent [10.2](6)
10.38* Indenture, dated as of October 8, 1993, by and among
Elsinore Corporation, the Guarantors named therein and First Trust
National Association, as trustee, including the form of Series B
Note registered on Form S-4 dated January 6, 1994. [10.2](3)
10.39* Escrow and Disbursement Agreement, dated as of October 8,
1993, among the Company, First Trust National Association and
First Interstate Bank of Nevada, N.A., as escrow agent. [10.6](3)
10.40* Pledge Agreement, as of dated October 8, 1993, from the
Company and ELSUB Management Corporation to First Trust National
Association [10.7](3)
10.41* Deed of Trust, Assignment of Rents and Security Agreement,
dated as of October 8, 1993, by and among Four Queens, Inc., Land
Title of Nevada, Inc. and First Trust National Association
[10.8](3)
10.42* Assignment of Operating Agreements, dated as of October 8,
1993 by Palm Springs East Limited Partnership to First Trust
National Association. [10.9](3)
10.43* Assignment of Operating Agreements, dated as of October 8,
1993 by Olympia Gaming Corporation to First Trust National
Association. [10.10](3)
10.44* Supplemental Indenture No. 1, dated as of April 21, 1994,
to the Indenture dated as of October 8, 1993, among the Company,
the Guarantors named therein and First Trust National Association,
as trustee. [10.1](6)
10.45* Operating Agreement of Nashville Nevada LLC. [10.52](9)
10.46* Amendment No. 1 to Operating Agreement of Nashville Nevada
LLC. [10.53](9)
10.47* Hotel/Casino Sublease for Owner-Operator between Mojave
Valley Resort, Inc. and Mojave Valley Resort Casino Company.
[10.54](9)
10.48* Installment Agreement (on Form 433-D) dated December 6,
1994 by and between the Company and the Internal Revenue Service.
[10.55](10)
10.49* Supplemental Indenture No. 2, dated December 14, 1994, to
the Indenture dated as of October 8, 1993 by and among the
Company, the Guarantors named therein and First Trust National
Association, as Trustee. [10.56](10)
10.50* Amendment no. 1 to Note and Stock Purchase Agreement,
dated December 14, 1994 by and among the Company, the Guarantors
named therein and the Purchasers named therein. [10.57](10)
10.51* First Mortgage Note and Common Stock Exchange Agreement,
dated as of December 29, 1994, by and among the Company, Mojave
Partners, L.P., a Delaware limited partnership, and Edward
Herrick, an individual. [10.51](11)
10.52* Amendment to Agreement, dated January 4, 1994, between
Jeanne Hood, the Company and Four Queens, Inc. [10.52](11)
10.53* Employment Agreement, dated December 5, 1994, between Rudy
Prieto and the Company. [10.53] (11)
10.54* Employment Agreement, dated July 1994, between John Cook
and the Company. [10.54.](11)
10.55* 1993 Long Term Stock Incentive Plan, as amended and
restated on July 1, 1994. [10.55] (11)
10.56* Restated and Amended Elsinore Corporation Senior Executive
Severance Plan, dated as of March 15, 1993 [10.56] (12)
10.57* Form of Senior Executive Severance Agreement by and
between the Company and certain senior executives. [10.57] (12)
10.58* Amendment No. 2 to Operating Agreement of Nashville Nevada
L.L.C., effective as of September 30, 1994, by and among the
Company, Mojave Gaming, Inc., Mojave Valley Resort Casino Company,
and Nashville Nevada, L.L.C. [10.58] (12)
10.59* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and Magnolia Partners, L.P., a Delaware
limited partnership. [10.59] (12)
10.60* Common Stock Registration rights Agreement, dated as of
March 31, 1995, between the Company and Magnolia Partners, L.P.
[10.60] (12)
10.61* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and Mojave Partners, L.P., a Delaware limited
partnership. [10.61] (12)
10.62* Common Stock Registration Rights Agreement, dated as of
March 31, 1995, between the Company and Mojave Partners, L.P.
[10.62] (12)
10.63* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and G & O Partners, L.P., a Delaware limited
partnership. [10.63] (12)
10.64* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and GroRan LLC1, a Delaware limited liability
company. [10.64] (12)
10.65* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and Paul Orwicz. [10.65] (12)
10.66* Note Purchase Agreement, dated as of March 30, 1995,
between the Company and David Ganek. [10.66] (12)
10.67* Common Stock Registration Rights Agreement, dated as of
March 31, 1995, between the Company and G & O Partners, L.P.,
GroRan LLC1, Paul Orwicz and David Ganek. [10.67] (12)
10.68* Stock Pledge Agreement, dated March 31, 1995, by and among
the Company, Magnolia Partners, L.P., Mojave Partners, L.P., G & O
Partners, L.P., GroRan LLC1, Paul Orwicz and David Ganek. [10.68]
(12)
10.69* Information Statement of Elsinore Corporation dated June
16, 1995, regarding the Consent to Waiver of Compliance and
Amendment of the Indenture governing its 12.5% First Mortgage
Notes due 2000, as amended by the Supplemental Information
Statement dated June 23, 1995. [10.1] (13)
10.70* Supplemental Indenture No. 3 dated as of June 30, 1995, by
and among the Company, the Guarantors named therein, and First
Trust National Association, as Trustee on behalf of the First
Mortgage Noteholders. [10.2] (13)
10.71* Amendment No. 2 dated as of June 23, 1995, to the Note and
Stock Purchase Agreement by and among the Company, each Guarantor
named therein and each Mortgage Noteholder. [10.3] (13)
10.72* Waiver of Compliance and Agreement to Amend Promissory
Notes, each dated as of June 30, 1995, by and among the Company
and each Convertible Noteholder. [10.4] (13)
10.73* Subscription Rights Agreement, dated October 10, 1996 [10]
(17)
10.74 Interim Management Agreement
21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedules
99.1* Voluntary Petition for Bankruptcy Pursuant to Chapter 11
of the Bankruptcy Code dated October 31, 1995.[99.2](14)
99.2* Olympia Gaming Corporation Voluntary Petition for
Bankruptcy Pursuant to Chapter 11 of the bankruptcy
Code dated October 31, 1995. [99]
* Previously filed with the Securities and Exchange Commission
as exhibits to the document shown below under the Exhibit
Number indicated in brackets and incorporated herein by
reference and made a part of hereof:
(1) Annual Report on Form 10-K for the year ended December 31,
1991
(2) Annual Report on Form 10-K for the year ended
December 31, 1992
(3) Current Report on Form 8-K dated October 19, 1993
(4) Current Report on Form 8-K dated November 12, 1993
(5) Annual Report on Form 10-K for the year ended December
31, 1993
(6) Current Report on Form 8-K dated April 28, 1994
(7) Registration Statement on Form S-4 filed January 6,
1994
(8) Current Report on Form 8-K dated October 24, 1994
(9) Registration Statement on Form S-2 filed October 24,
1994
(10) Amendment No. 2 to Registration Statement on Form S-2
filed December 23, 1994
(11) Registration Statement on Form S-4 filed January 23,
1995
(12) Annual Report on Form 10-K for the year ended December
31, 1994
(13) Current Report on Form 8-K dated July 7, 1995
(14) Current Report on Form 8-K dated November 7, 1995
(15) Annual Report on Form 10-K for the year ended
December 31, 1995.
(16) Current Report on Form 8-K dated August 8, 1996
(17) Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996
B. Reports on Form 8-K
During the fourth quarter of 1996, the Company filed
the following Current Report on Form 8-K:
Form 8-K dated December 9, 1996 (regarding extension
of Plan effective date.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Thomas E. Martin
THOMAS E. MARTIN, President
Dated: February 19, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities as indicated on February 19, 1997.
/s/ Frank L. Burrell, Jr. /s/ Howard Carlson
Frank L. Burrell, Jr. Howard Carlson
Chairman of the Board of Directors Director
/s/ Robert A. McKerroll /s/ Thomas E. Martin
Robert A. McKerroll Thomas E. Martin
Director Director
/s/ Brent E. Duncan
Brent E. Duncan
Treasurer
Independent Auditors' Report
The Board of Directors and Shareholders
Elsinore Corporation, Debtor-In-Possession
We have audited the consolidated balance sheets of Elsinore
Corporation and subsidiaries, Debtor-In-Possession, as of December
31, 1996 and 1995 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Elsinore Corporation and subsidiaries, Debtor-In-Possession,
as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three- year period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, on October 31, 1995 the Company filed a voluntary
petition seeking to reorganize under Chapter 11 of the United
States Bankruptcy Code. The Company is currently operating as a
Debtor-In-Possession under the jurisdiction of the Bankruptcy
Court and this event and circumstances relating to this event
raise substantial doubt about the Company's ability to continue as
a going concern. On August 8, 1996, the Bankruptcy Court entered
an order confirming the Company's plan of reorganization, as
modified, with a confirmation date of August 12, 1996. The
Company's ability to continue as a going concern is dependent
upon, among other things, its obtaining the required regulatory
approvals from the State of Nevada, including approvals by the
gaming authorities, obtaining sufficient cash to fund all
distributions and cash reserves required at the time the plan
becomes effective and achieving profitable operations and
sufficient cash flows to meet future obligations required by the
plan. The consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
KPMG Peat Marwick LLP
Las Vegas, Nevada
February 19, 1997 F-1
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Balance Sheets
December 31, 1996 and 1995
(Dollars in Thousands)
1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 7,208 $ 3,572
Accounts receivable, less allowance for
doubtful accounts of $347 and $201,
respectively 815 729
Inventories 354 248
Prepaid expenses 1,177 1,029
Total current assets 9,554 5,578
Cash and cash equivalents - restricted(note 1) 4,445 -
Property and equipment, net(notes 5 and 8) 23,544 25,473
Leasehold acquisition costs, net of accumulated
amortization of $4,898 and $4,691,
respectively 1,941 2,148
Investment in Fremont Street Experience, LLC 2,400 3,000
Other assets(note 6) 743 902
$ 42,627 $ 37,101
See accompanying notes to consolidated financial statements.
F-2
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Balance Sheets (continued)
December 31, 1996 and 1995
(Dollars in Thousands)
1996 1995
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 1,065 $ 676
Accrued interest 2,137 100
Accrued expenses(note 7) 6,176 5,352
Current portion of capital lease obligations
(note 12) 50 54
Total current liabilities 9,428 6,182
Prepetition liabilities not subject to compromise:
Long-term debt, subject to demand for
acceleration(note 8) 3,000 2,902
Capital lease obligations, net of current
portion(note 12) 1,487 1,531
4,487 4,433
Prepetition liabilities subject to compromise:
Accounts payable 3,565 4,070
Prior period income taxes and related
interest (note 9) 2,985 2,985
Accrued interest 4,419 4,419
Accrued expenses 28 28
Long-term debt subject to
demand for acceleration(note 8) 58,425 58,425
69,422 69,927
Total liabilities 83,337 80,542
Shareholders' deficit(note 10):
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
and outstanding 15,891,793 shares 16 16
Additional paid-in capital 69,602 65,315
Accumulated deficit (110,328) (108,772)
Total shareholders' deficit (40,710) (43,441)
Commitments and contingencies (notes 4, 11 and 12)
$ 42,627 $ 37,101
See accompanying notes to consolidated financial statements.
F-3
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands, Except Per Share Amounts)
1996 1995 1994
Revenues, net:
Casino $ 42,300 $ 39,964 $ 46,270
Hotel 11,202 9,564 9,234
Food and beverage 12,373 12,136 12,693
Interest and other 1,502 1,983 2,020
Promotional allowances (6,178) (6,674) (7,511)
61,199 56,973 62,706
Costs and Expenses:
Casino 17,694 19,705 22,866
Hotel 8,482 7,897 7,645
Food and beverage 7,088 6,010 6,250
Taxes and licenses(note 14) 6,592 6,627 6,955
Selling, general and administrative 10,328 11,385 11,892
Rents 4,055 3,955 3,313
Provision for losses on loans
receivable from Native American
Tribes (note 4) - 23,598 -
Casino development costs (note 4) - 2,323 -
Depreciation and amortization 3,816 3,948 3,990
Interest (contractual interest for
1996 and 1995 of $7,661
and $9,212) respectively (note 8) 2,505 8,006 9,086
Interest, prior period income tax
obligation(note 9) - 590 885
60,563 94,044 72,882
Income (loss) before
reorganization items 636 (37,071) (10,176)
Reorganization items(note 2) (2,192) (8,678) -
Loss before income taxes and (1,556) (45,749) (10,176)
extraordinary item
Income taxes(note 9) - - -
Loss before extraordinary item (1,556) (45,749) (10,176)
Extraordinary item(note 15) - - 735
Net loss $ (1,556) $(45,749) $(9,441)
Loss per common share:
Loss before extraordinary item $ (0.10) $ (2.95) $ (0.84)
Extraordinary item - - (0.06)
$ (0.10) $ (2.95) $ (0.78)
Weighted average number of common
shares outstanding 15,891,793 15,511,983 12,106,778
See accompanying notes to consolidated financial statements.
F-4
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands)
1996 1995 1994
Cash flows from operating activities:
Net loss $ (1,556) $(45,749) $ (9,441)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 3,816 3,948 3,990
Accretion of discount on long-term debt 98 1,170 1 171
Provision for loss on loans receivable
from Native American Tribes - 23,598 -
Write-off of casino development costs - 2,323 -
Write-off of Fremont Street Experience
operating costs - 525 -
Extraordinary loss on extinguishment
of debt - - (735)
Reorganization items 2,192 8,678 -
Accrued expenses (1,368) 5,352 -
Change in other assets and liabilities,
net 2,166 3,111 (227)
Liabilities subject to compromise:
Accounts payable (505) 1,982 (204)
Prior period income taxes
and related interest - (3,475) (50)
Accrued interest and other
expenses - (2,119) 2,059
Total adjustments 6,399 45,093 6,004
Cash provided by (used in)
operating activities 4,843 (656) (3,437)
Cash flows from investing activities:
Notes and loans receivable from Native
American Tribes - (6,646) (15,908)
Casino development costs - (1,073) (302)
Investment in Fremont St. Experience LLC - (525) (1,122)
Capital expenditures (1,001) (148) (4,364)
Cash used in investing
activities (1,001) (8,392) (21,696)
See accompanying notes to consolidated financial statements.
F-5
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands)
1996 1995 1994
Cash flows from financing activities:
Issuance of long-term debt - 1,706 3,000
Principal repayments of long-term debt (48) (62) (204)
Proceeds from issuance of common stock,
net of underwriting discounts and
commissions and other direct costs - 3,747 15
Proceeds from issuance of common stock
subscription rights(note 1) 4,287 - -
Debt issuance costs - (140) (1,416)
Modification of capital lease obligation - 277 -
Cash provided by
financing activities 4,239 5,528 1,395
Increase (decrease) in cash
and cash equivalents 8,081 (3,520) (23,738)
Cash and cash equivalents at beginning
of year 3,572 7,092 30,830
Cash and cash equivalents at end of year
(Including restricted amounts of $4,445
and $3,685 at December 31, 1996 and
1994, respectively) $ 11,653 $ 3,572 $ 7,092
Supplemental Disclosures of Cash Flow Information:
The Company paid $367,000, $3,998,000 and $7,750,000 for interest in 1996,
1995 and 1994, respectively, and $0, $3,475,000 and $50,000 for income taxes
in 1996, 1995 and 1994, respectively.
Supplemental Schedule of Non-Cash Financing and Investing Activities:
The Company reduced equipment and related accumulated depreciation by
$1,909,000 in 1994, to reflect the write-off of fully depreciated assets taken
out of service.
In connection with the supplemental issuance in 1994 of 750,000 stock purchase
warrants, the Company recorded a discount on the First Mortgage Notes and
increased additional paid-in capital by $1,125,000, the fair market value of
the stock purchase warrants.
In connection with the Private Placement in 1994 of the Company's 20.0%
Mortgage Notes due 1996, the Company recorded a discount on the Notes and
increased additional paid-in capital by $268,000, the fair value of the
126,050 shares of common stock issued with the notes.
In 1995, the holders of Convertible Notes with a face amount of $281,250
effected conversion of the notes into 256,579 shares of the Company's common
stock.
See accompanying Notes to Consolidated Financial Statements.
F-6
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands)
Additional
Common Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
Balance, December 31, 1993 12,070,017 12 58,149 (53,582) (12) 4,567
Issuance of stock purchase
warrants to First mortgage
noteholders (note 8) - - 1,125 - - 1,125
Issuance of 17,000 shares,
including 7,853 shares held
in treasury, upon exercise
of stock options 9,147 - 3 - 12 15
Issuance of shares as partial
consideration for debt
(note 8) 126,050 - 268 - - 268
Issuance of shares in exchange
for First mortgage notes
(notes 8 and 15) 930,000 1 1,801 - - 1,802
Net loss - - - (9,441) - (9,441)
Balance, December 31, 1994 13,135,214 13 61,346 (63,023) - (1,664)
Issuance of shares(note 10) 2,500,000 3 3,744 - - 3,747
Issuance of shares upon
partial conversion of
7.5% convertible notes 256,579 - 225 - - 225
Net loss - - - (45,749) - (45,749)
Balance, December 31, 1995 15,891,793 16 65,315 (108,772) - (43,441)
Issuance of common stock
subscription rights - - 4,287 - - 4,287
Net loss - - - (1,556) - (1,556)
Balance, December 31, 1996 15,891,793 16 69,602 (110,328) - (40,710)
See accompanying notes to consolidated financial statements.
F-7
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
1. Reorganization Under Chapter 11, Liquidity and Financial
Condition
Chapter 11 Proceedings.
On October 31, 1995, Elsinore and certain of its
subsidiaries filed a voluntary petition in the United States
Bankruptcy Court for the District of Nevada (Las Vegas, Nevada)
(the "Bankruptcy Court") to reorganize under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). The file
number in the case is 95-24685 RCJ with Judge Robert C. Jones
presiding. On November 10, 1995, Olympia Gaming Corporation, a
wholly-owned subsidiary of the Company, also filed a voluntary
petition in the same Court. The Company is currently operating as
a debtor-in-possession under the supervision of the Bankruptcy
Court. As a debtor in possession, the Company may operate its
business but may not engage in transactions outside of the
ordinary course of business without the approval of the Bankruptcy
Court.
Plan of Reorganization.
General.
Under the Bankruptcy Code, the Company's pre-petition
liabilities are subject to settlement under a plan of
reorganization. The Bankruptcy Code also requires that all
administrative claims be paid on the effective date of the plan of
reorganization unless the respective claimants agree to different
treatment.
During the course of the bankruptcy proceedings, an
unofficial committee of a majority of the holders of the 1993
First Mortgage notes was formed (the "Bondholders Committee").
Beginning in approximately December 1995, the Company and the
Bondholders Committee participated in settlement negotiations in
an effort to consensually resolve their concerns in the case. The
result of these negotiations was an agreed upon conceptual
framework for a plan of reorganization, which was thereafter
embodied in a stipulation (the "Stipulation").
On February 28, 1996, the Company filed a plan of
reorganization, which was consistent with the terms of the
Stipulation, together with an accompanying disclosure statement.
The disclosure statement was approved on May 13, 1996 subject to
the insertion of certain language acceptable to the 1993 First
Mortgage Noteholders.
On July 16, 1996, the Bankruptcy Court conducted a hearing
regarding confirmation of the plan as submitted by the Company.
At that time, the Bankruptcy Court considered the various
objections to the plan raised by certain creditors and equity
holders. On July 18, 1996, the Bankruptcy Court conducted further
proceedings with respect to the plan of reorganization submitted
by the Company. At the July 18 hearing, the Bankruptcy Court
concluded that certain modifications to the plan would be
necessary for its confirmation. These modifications included,
among others, making no distribution to the Company's existing
equity holders.
Following the July 18 confirmation hearing , but before the
entry of an order incorporating the Bankruptcy Court's ruling on
the plan submitted by the Company, certain of the Company's
creditors filed a motion for reconsideration based upon their
withdrawal of objections to the plan. These creditors agreed to
withdraw their objections in return for a reallocation of equity
interests in the reorganized Elsinore.
On August 5, 1996, the Bankruptcy Court conducted a hearing
on the reconsideration motion. After that hearing, the Bankruptcy
Court determined that the relief sought by that motion should be
granted. Accordingly, on August 8, 1996, the Bankruptcy Court
entered an order confirming the plan of reorganization submitted
by the Company as modified by that order (the "Plan") with a
confirmation date of August 12, 1996.
The effective date of the Plan will be after all regulatory
approvals required by the State of Nevada, including approvals by
the gaming authorities, have been obtained and Elsinore has
sufficient cash to fund all distributions. Management believes
the only remaining condition to effectiveness to be satisfied is
the Nevada Gaming Authorities granting its approval of the members
of the Company's reconstituted Board of Directors. Currently, it
is expected that the Plan will be fully effective by March 1997.
Terms of Plan of Reorganization
The Plan provides for the continuation of Elsinore and at
least three of its subsidiaries (Four Queens, Inc., ElSub
Management Corporation and Palm Springs East Limited Partnership)
as going concerns. Under the Plan, the old common stock interests
in Elsinore will be canceled and Elsinore, as reorganized, will
issue new common stock (the "New Common Stock"). On the effective
date of the Plan, 80% of the New Common Stock will be distributed
to the following classes of creditors and equity holders in the
following proportions:
Interest Percentage
12.5% First Mortgage noteholders 87.5%
7.5% Convertible Subordinated noteholders 3.5%
Unsecured creditors of Four Queens, Inc 2.5%
Unsecured creditors of Elsinore Corporation 1.0%
Internal Revenue Service 1.9%
Old common stockholders 3.6%
100.0%
The remaining 20% of the New Common Stock will be issued through a
rights offering to raise $5,000,000 to assist in funding the Plan.
Initially, the entire amount of the rights offering will be made
available for subscription to the following classes of creditors
and equity holders in the percentages enumerated below:
Interest Percentage
12.5% First Mortgage noteholders 87.5%
7.5% Convertible Subordinated noteholders 3.5%
Unsecured creditors of Four Queens, Inc 2.5%
Old common stockholders 6.5%
100.0%
Each member of the above classes of creditors and equity
holders will be required to elect whether to exercise the right to
purchase the New Common Stock allocated and whether to purchase
additional shares of New Common Stock if one or more holders of
that class do not fully exercise their right to purchase New
Common Stock. The subscription rights of non-exercising members
of the above classes will be reallocated automatically among the
other members of the class electing to exercise their rights to
purchase additional shares of New Common Stock. If any of the
members of any class do not elect to exercise all of the rights
allocated to that class, the unexercised rights will be
automatically distributed to the members of the Bondholder
Committee. The Bondholder Committee has guaranteed a 100%
subscription for the $5 million rights offering, in the event the
percentages enumerated above are not otherwise fully subscribed.
On or about October 10, 1996 the rights offering process commenced
with the distribution of subscription rights materials to the
class members.
As defined in the Subsription Rights Agreement dated October 10,
1996, pursuant to the Plan of Reorganization, as confirmed by the
Bankruptcy court, the Company agreed to issue to the Rightholders
stock subscription rights ("Rights")to purchase up to an aggregate
of one million (1,000,000) shares of Common Stock, par value
$0.001 per share, of the Company, at an exercise price of $5.00
per share. In the event such Rights were not exercised by 5 P.M.
Pacific time on December 13, 1996, such non-exercised Rights were
transferred automatically to the members of the Bondholder
Committee in the proportions specified in a Standby Commitment.
As the Rights proceeds are received, they are deposited in a
separate Company bank account and are reflected in the
accompanying 1996 balance sheet classification "Cash and Cash
Equivalents Restricted". As of December 31, 1996, Rights proceeds
of $4,287,000 (including interest of $19,000) had been received by
the Company, representing the exercise of Rights to approximately
854,000 New Common Shares. The Company will issue the related
shares, including shares applicable to the bondholders Standby
Commitment, when the Plan becomes Effective, which is expected to
occur in March, 1997.
As a result of the rights offering, members of the Bondholders
Committee will receive 995,280 shares of the New Common stock and
members of the creditor and equity holder constituencies will
receive an aggregate, 4,720 shares of New Common stock. Therefore,
upon effectiveness of the plan, it is expected that members of the
bondholders committee will hold, in the aggregate 4,495,280 shares
of the 5,000,000 issued and outstanding shares of New Common
stock.
Proposed Treatment of Creditors and Equity Interests
The Plan is expected to be funded principally from cash
generated from operations and the $5,000,000 proceeds from the
rights offering. Specifically, the proposed treatment of each of
the creditor and equity interests is as follows:
The 1994 Mortgage Note holders have an allowed secured claim
equal to the $3,000,000 principal amount of the notes plus accrued
interest thereon at 20% through the date on which the confirmation
order was entered by the Bankruptcy Court(approximately $675,000)
and certain fees and disbursements related thereto (approximately
$125,000). On the effective date of the Plan, each 1994 Mortgage
Note holder will receive its prorata share of restated mortgage
notes (the "Restated Mortgage Notes"), due four years from the
confirmation date, in exchange for its allowed claim.
Interest on the Restated Mortgage Notes will accrue at an
annual rate of 11.5% or other appropriate interest rate approved
by the Bankruptcy Court and will be payable quarterly commencing
on the fourth month following the confirmation date. These
noteholders will retain their lien interests as collateral for
repayment of the restated mortgage notes.
The 1993 First Mortgage Note holders have an allowed claim
equal to approximately $61,000,000. Under the Plan, the secured
portion of the claim is allowed in the amount of $30,000,000. The
balance of the claim is unsecured. On the effective date of the
Plan, each 1993 First Mortgage Note holder will receive (i) in
exchange for the secured portion of its claim, its prorata share
of $30,000,000 face amount of restated first mortgage notes (the
"Restated First Mortgage Notes") which will accrue interest at an
annual rate of 13.5% per annum payable semi-annually and will be
due five years from the confirmation date, and (ii) in exchange
for the unsecured portion of its claim, prorata portion of the New
Common Stock (see above).
The Convertible Note holders have an allowed claim equal to
approximately $1,500,000. On the effective date of the Plan, each
Convertible Note holder will receive its prorata share of New
Common Stock (see above) in exchange for its allowed claim.
The Company's larger unsecured creditors, other than the
Convertible Note holders, will receive payments from a fund of
approximately $1,400,000 over a three-year period and their
prorata share, if any, of New Common Stock (see above).
The Internal Revenue Service ("IRS"), which has both secured
and unsecured claims aggregating approximately $3,000,000 will
receive full payment of its secured claim with interest at 8% per
annum (commencing on the effective date) over four years and will
receive, with respect to its unsecured claim, proportionately the
same type of recovery which is provided for the Company's larger
unsecured creditors. In addition, the IRS will receive its
prorata share of the New Common Stock (see above).
Management Agreements
The Plan also calls for a change in the management of the
reorganized Elsinore. Effective at noon on August 12, 1996,
Elsinore entered into an Interim Management Agreement with Riviera
Gaming Management Corp - Elsinore, Inc. to manage the business
operations of the Company subject to the direction of the existing
boards of directors of Elsinore and its subsidiaries.
Under the stipulation between the Company and the
Bondholders Committee, senior management (Thomas E. Martin,
President and Chief Executive Officer, and Frank L. Burrell, Jr.,
Chairman of the Board) ceased to be compensated employees of the
Company on Monday, August 12, 1996, although they will continue to
serve as directors and authorized officers until replaced.
The Plan contemplated that management of the Company from the date
of the Plan's confirmation until the Plan's Effective Date would
be undertaken by a nominee of the Bondholders Committee. The
Company and Riviera Gaming Management Corp. - Elsinore
("Riviera"), the nominee of the Bondholders Committee, have
entered an Interim Management Agreement (the "Interim Agreement")
pursuant to which Riviera has assumed exclusive managerial
responsibility over the Four Queens Hotel and Casino and ancillary
facilities (together the "Four Queens Hotel"), subject to
supervision of the Boards of Directors of Elsinore and FQI. Under
the Interim Agreement, Riviera is responsible for providing
training to Four Queens Hotel personnel, marketing and sales at
the Four Queens Hotel , internal accounting and other managerial
tasks. In return, Riviera receives a management fee of $83,333 per
month. All personnel employed at the Four Queens Hotel, other than
those hired by Riviera for purposes of fulfilling its
responsibilities, remain the employees of the Company. In
addition, during the interim agreement, the Company retains full
responsibility for payment of all expenses related to the
operation of the Four Queens Hotel. Riviera has no obligation to
pay any expenses or to make any capital expenditure with respect
to the Four Queens hotel which are not funded by the Company. The
interim agreement by its terms will terminate upon the
commencement of the first calendar quarter following the Plan's
Effective Date.
Board of Directors
The Plan also calls for the Company's Board of Directors to
be reconstituted upon effectiveness of the Plan. Four of the new
directors are to be chosen by the Bondholders Committee and one
will be appointed by the Equity Committee appointed in the
Bankruptcy Case. Both the Bondholders Committee and the Equity
Committee have selected their proposed representatives to the
Company's Board. Those proposed directors have been submitted to
the Nevada Gaming Authority for approval. Upon such approval, the
Company believes all conditions to the Plan's effectiveness will
be satisfied.
Other Reorganization Matters
Certain pre-petition liabilities have been paid after
obtaining the approval of the Bankruptcy Court, including certain
wages and employee benefits, gaming related liabilities and hotel
room and other customer deposits. Subsequent to filing and with
the approval of the Bankruptcy Court, the Company assumed
executory contracts for all real estate and equipment leases.
In accordance with the Stipulation between the Company and
the Bondholders Committee, the Company (with the participation of
the Bondholders Committee) prior to confirmation of the Plan
decided which executory contracts would be assumed. All executory
contracts which were not expressly assumed by the Company were
deemed rejected at the confirmation date. All creditors claims
resulting from the rejection of an executory contract must have
been filed with the Bankruptcy Court no later than September 11,
1996. All such claims which are timely filed will be treated in a
manner identical to the treatment received by other members of the
appropriate class of creditors under the Plan. All such claims
which are not timely filed will be barred and discharged and the
creditor holding such claim will not receive or be entitled to any
distribution under the Plan on account of such claim.
Trading in the Company's common stock continues to be halted by
the American Stock Exchange ("AMEX") and the Pacific Stock
Exchange ("PSE"). Elsinore intends to pursue reactivation of its
listings with AMEX and PSE so that the New Common Stock in the
reorganized Elsinore can be traded publicly following the
effective date of the Plan. However, by letter dated January 27,
1997, Elsinore was informed of AMEX's intention to pursue the
delisting of Elsinore's Common Stock. By letter dated February 3,
1997, the Company requested that AMEX defer a final decision on
delisting until mid-March 1997 so that the reconstituted board of
directors has an opportunity to decide on a course of action. By
letter dated February 5,1997 AMEX agreed to extend the Company's
time to request an appeal to March 14, 1997.
2. Reorganization Items
Reorganization expense is comprised of items incurred by the
Company as a result of reorganization under Chapter 11 of the
Federal Bankruptcy Code. Such items for 1996 and 1995 (none in
1994) consisted of the following (in thousands):
1996 1995
Administrative expenses $1,431 $ 293
Severance expenses 761 -
Write-off of debt issuance costs - 2,695
Write-off of original issue discount on debt - 5,690
$2,192 $8,678
3. Summary of Significant Accounting Policies
(a) Financial Reporting for Bankruptcy Proceedings
The accompanying financial statements have been prepared on a
going concern basis which assumes continuity of operations and
realization of assets and liquidation of liabilities in the
ordinary course of business. As a result of the reorganization
proceedings, there are significant uncertainties relating to the
ability of the Company to continue as a going concern. The
financial statements do not include any adjustments that might be
necessary as a result of the outcome of the uncertainties
discussed herein including the effect of the plan of
reorganization.
The American Institute of Certified Public Accountant's Statement
of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") provides
guidance for financial reporting by entities that have filed
petitions with the Bankruptcy Court and expect to reorganize under
Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter
11 reorganization proceeding should distinguish transactions and
events that are directly associated with the reorganization from
those of the operations of the ongoing business as it evolves.
Accordingly, SOP 90-7 requires the following financial
reporting/accounting treatments in respect to each of the
financial statements. The Company will the adopt fresh-start
reporting provisions of SOP 90-7 upon the effective date of the
Plan and anticipates reporting the results for the quarter ending
March 31, 1997 under those provisions.
Balance Sheet
The balance sheet separately classifies pre-petition and post-petition
liabilities. A further distinction is made between pre-petition
liabilities subject to compromise (generally unsecured
and undersecured claims) and those not subject to compromise
(fully secured claims). Pre-petition liabilities are reported on
the basis of the expected amount of such allowed claims, as
opposed to the amounts for which those allowed claims will be
settled. Under the approved final plan of reorganization, those
claims will be settled at amounts substantially less than their
allowed amounts.
When debt subject to compromise has become an allowed claim and
that claim differs from the net carrying amount of the debt
(defined as the face amount of the debt less unamortized debt
issuance costs and unaccreted discount), the net carrying amount
is adjusted to the amount of the allowed claim. The resulting
gain or loss is classified as a reorganization item.
Statement of Operations
Pursuant to SOP 90-7, revenues and expenses, realized gains and
losses, and provisions for losses resulting from the
reorganization and restructuring of the business are reported in
the statement of operations separately as reorganization items.
Professional fees are expensed as incurred. Interest expense is
reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed
claim.
Statement of Cash Flows
Reorganization items are reported separately within the operating,
investing and financing categories of the statement of cash flows.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
Elsinore Corporation and its wholly-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated in consolidation.
(c) Accounting for Casino Revenue and Promotional Allowances
In accordance with industry practice, the Company recognizes as
casino revenue the net win from gaming activities, which is the
difference between gaming wins and losses. The retail value of
complimentary food, beverages and hotel services furnished to
customers is included in the respective revenue classifications
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
and then deducted as promotional allowances. The estimated costs
of providing such promotional allowances are included in casino
costs and expenses and consist of the following:
Years Ended December 31,
1996 1995 1994
(Dollars in Thousands)
Hotel $1,215 $1,608 $2,179
Food & Beverage 3,908 4,869 5,022
Total $5,123 $6,477 $7,201
(d) Cash Equivalents
Cash equivalents include highly liquid investments purchased with
an original maturity date of 90 days or less.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided over the estimated useful lives of the assets using the
straight-line method. Useful lives range from 8 to 40 years.
Equipment held under capital lease are recorded at the net present
value of minimum lease payments at the inception of the lease and
are amortized over the shorter of the terms of the leases or
estimated useful lives of the related assets.
(g) Leasehold Acquisition Costs
The costs of acquiring leasehold interests are deferred and
amortized using the straight-line method over the shorter of the
term of the lease or the useful life of the property which is 33
years.
(h) Amortization of Original Issue Discount and Debt Issuance
Costs
Original issue discount is accreted over the life of the related
indebtedness using the effective interest method.
Costs associated with the issuance of the debt are deferred and
amortized over the life of the related indebtedness using the
straight-line method.
See discussion in notes 2 and 8 regarding the write-off of
unamortized amounts as of December 31, 1995 in connection with the
reorganization proceedings.
(i) Casino Development Costs
Casino development costs consist of costs incurred by the Company
in connection with the development of the Palm Springs and
Washington Casinos and legal and other costs incurred to enter
into management contracts with the respective Indian Tribes and to
obtain necessary federal and state regulatory approvals. Pursuant
to the respective management contracts, costs incurred by the
Tribes (as defined in the contracts) to construct and develop the
casinos were loaned to the Tribal enterprises in the form of
promissory notes. Other casino development costs were deferred to
be amortized over the five-year terms of the related management
contracts. See note 4 for discussion of the write-off of
previously deferred amounts as of December 31, 1995.
(j) Investment in Fremont Street Experience
The Company and seven other downtown Las Vegas property owners,
who together operate ten casinos, have formed the Fremont Street
Experience LLC (FSELLC), a limited liability company of which the
Company is a one-sixth owner, to develop the Fremont Street
Experience. The Fremont Street Experience has transformed four
blocks of Fremont Street into a covered pedestrian mall featuring
a 10-story celestial vault, sound effects and a high tech light
show which add to the neon signs and marquees for which the
downtown area is already famous. The Company's $3,000,000 capital
contribution for its one-sixth ownership of FSELLC was paid in
full by January 1994. The project was completed at the end of
November 1995 and the grand opening ceremonies held on December
13, 1995. During 1995, the Company paid approximately $525,000 to
FSELLC, representing its allocated share of the 1995 operating
costs of the Fremont Street Experience. These costs were
capitalized and expensed upon the opening of the project. As
FSELLC is expected to operate at a loss for the foreseeable
future, the $3,000,000 capital contribution will be amortized over
five years using the straight line method. The Company's
allocated share of the operating costs of the Fremont Street
Experience ($1,000,000 in 1996) are expensed as incurred.
(k) Income Taxes
Income taxes have been provided for using the asset and liability
method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under the
asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
(l) Loss Per Share
Loss per share has been computed by dividing net loss by the
weighted average common shares outstanding during the year.
(m) Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees , and its related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation , which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide proforma
net income and proforma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(n) Long-lived Assets
In March, 1995, the FASB issued Statement Of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", which
requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121
also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 in
the first quarter of 1996 and there was no write-down of assets.
(O) Reclassification
Certain items in the 1995 and 1994 financial statements have been
reclassified for comparability with the 1996 presentation.
(p) Use of Estimates
Management of the Company has made estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(q) Fair Value of Financial Instruments
The carrying amounts of cash equivalents, receivables and accounts
payable approximates fair value because of the short term maturity
of these instruments. It is not practical to estimate the fair
market value of prepetition liabilities subject to compromise due
to the bankruptcy and the fact that there has been no active
trading of long-term debt subject to compromise. The carrying
amount of the long-term debt which is not subject to compromise
approximates fair value because it is deemed to be fully secured
and bears interest at an appropriate rate.
4. Native American Casino Operations
Spotlight 29 Casino
Since March 1995, Elsinore Corporation, its wholly owned
subsidiary, Elsub Management Corporation and Palm Springs East
Limited Partnership, of which Elsub is the general partner
(collectively the "Company"), and the Twenty-Nine Palms Band of
Mission Indians (the "Band") have been involved in a dispute
regarding, among other things, the terms of a management contract
(the "contract") under which the Company had the exclusive right
to manage and operate the Spotlight 29 Casino (the "Spotlight
29"), owned by the Band, located near Palm Springs, California.
On April 17, 1995, the Company was ousted as manager of Spotlight
29 and on April 19, 1995, the Company issued a demand letter to
the Band declaring a breach of the Contract and a related loan
agreement under which the Company had lent approximately
$12,500,000 to the Band for construction of Spotlight 29 and for
working capital Contributions. The demand letter claimed damages
in the full amount of the funds which had been advanced to the
Band.
In light of the Company's disassociation with the operations of
the Spotlight 29, management determined to write off, during the
quarter ended March 31, 1995, the unamortized balance of casino
development costs incurred for the project of $1,037,000 and
ceased the accrual of interest on the project note and loans
evidencing working capital advances.
On May 16, 1995, in response to the Company's demand, the Band
delivered to the Company a "Notice to Terminate Management
Agreement." The notice asserted material breaches of the Contract
and requested payment of approximately $1,500,000 million by June
16, 1995 to cover working capital shortfalls or the Contract would
be terminated.
On October 31, 1995, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code with the
United States Bankruptcy Court for the District of Nevada (Las
Vegas, Nevada).
The Company has been involved in protracted negotiations with the
Band for a settlement of the respective claims asserted by the
parties since the events described above. Based upon the progress
of the aforementioned negotiations at the time, as of December 31,
1995 the Company wrote off the accrued interest and fully reserved
the $9,000,000 principal balance.
On March 29, 1996, the Company reached a settlement with the Band
which has been approved by the Bankruptcy Court and which has
received final clearance by the Bureau of Indian Affairs. The
Company has received a promissory note from the Band in the
principal amount of $9,000,000. While the note has a 36-month
amortization schedule, monthly payments are limited to 20% of
Spotlight 29's monthly net income. In the event that net income
is insufficient to fully pay the note at the end of 36 months, the
note will be automatically extended for up to an additional two
years. If still not fully paid at the end of the extension
period, it may be extended up to an additional two years upon the
approval of the National Indian Gaming Commission (the "NIGC").
If not paid at the end of the final extension period, the note
will be forgiven. Interest on the note is at an annual rate equal
to the greater of 10% or the maximum rate allowed under California
law, not to exceed 12%. The Company has received a total of
$353,000 of interest which was recorded in the year ended December
31, 1996 Given that the $9 million recovery is limited to 20% of
the net income generated by Spotlight 29 management determined not
to reduce the allowance for loss in the amount of $9,000,000
against the receivable which was provided during the quarter ended
December 31, 1995.
7 Cedars Casino
Elsinore Corporation, through its wholly-owned subsidiary, Olympia
Gaming Corporation (collectively the "Company"), has a Gaming
Project Development and Management Agreement (the "Contract") 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
the Jamestown S'Klallam Tribe (the "Tribe"). In addition,
pursuant to a loan agreement, the Company lent $9,000,000 to the
Tribe for the construction of 7 Cedars.
Under the terms of the Contract, the Company is obligated to
establish a reserve fund for "working capital", which is not
defined in the Contract, in the amount of $500,000 for the
operation of 7 Cedars. The Company believes that in negotiating
the contract the parties did not intend to apply a "working
capital" definition based upon generally accepted accounting
principles which, in the Company's view, would be impracticable in
the context of the Contract and which, in practice, has never been
followed. Since its opening on February 3, 1995, the Casino has
incurred a substantial cumulative net loss and an attendant
decrease in working capital.
On November 1, 1995, the Tribe asserted that the Company had
defaulted on the June, July, August and September 1995 minimum
guaranteed payments to the Tribe, as defined by the Contract, in
the aggregate amount of $100,000 and requested immediate payment.
In addition, the Tribe demanded that sufficient monies be paid to
enable all current gaming project expenses to be paid and working
capital reserve to be maintained at the required funding level.
The Tribe demanded that a minimum of $2,540,000 be paid
immediately and also contended that the working capital shortfall
could be as high as approximately $5,390,000 according to their
interpretation of the Contract. On November 13, 1995, the Company
received a letter from the Tribe dated November 9, 1995 asserting
that the Contract had been terminated as a result of the Company's
failure to make the payments which has been demanded.
On November 10, Olympia Gaming filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code with the
United States Bankruptcy Court for the District of Nevada (Las
Vegas, Nevada).
Pursuant to the terms of the Contract, the Company is to receive a
management fee equal to 30% of the net distributable profits of 7
Cedars (subject to the Tribe receiving a $25,000 per month
guaranteed payment) and the Tribe 70%. The Contract has an
initial term of five years (expires February 2, 2000), subject to
renewal for an additional two years in the event that the project
loan is not paid in full by the end of the initial term. The
project loan to finance the development and construction of 7
Cedars is payable solely from the Tribe's share of the net
distributable profits of 7 Cedars, and will amortize over the
five-year term of the contract at an annual interest rate of
10.9%.
In response to declining revenues following the first several
months of operations, management undertook certain cost-cutting
measures in the late spring and summer 1995 and increased
marketing activities in an effort to achieve profitability. In
November 1995 and January 1996, more substantial expense
reductions were effected through reductions in the hours of
operation of 7 Cedars and deeper, "across the board" cost cutting.
In light of the existing competition in the Puget Sound area, the
demographics of 7 Cedars primary locals' markets and the apparent
low propensity for destination tourists to the Olympic Peninsula
to gamble, there exists substantial uncertainty as to whether,
during the remaining term of the management and loan agreements, 7
Cedars can achieve the level of profitability required to obtain
full recovery of the loan principal and accrued interest thereon.
Based upon the foregoing, management determined during the quarter
ended December 31, 1995 to provide an allowance for loss against
the $9,000,000 outstanding balance of the project loan plus
accrued interest thereon.
On September 1, 1995, the Company ceased accruing interest on the
project loan and wrote-off the remaining unamortized balance of
capitalized casino development costs of approximately $242,000.
Mojave Valley Resort Project
As a condition to its participation in the Mojave Valley Resort
Project, a joint venture between Mojave Gaming, Inc. ("Mojave
Gaming"), a wholly owned subsidiary of Elsinore Corporation and
Mojave Valley Resort Casino Company, an affiliate of Temple
Development Company, to develop a master planned casino resort on
land leased from the Fort Mojave Indian Tribe, Mojave Gaming was
required to make a capital contribution to the venture by
September 30, 1995. The contribution was not made and therefore,
the contract terminated. Based upon the foregoing, in September
1995 management wrote-off as casino development costs
approximately $807,000, representing all capitalized costs
incurred for the project.
5. Property and Equipment, Net
Property and equipment, net, consists of the following:
December 31,
1996 1995
(Dollars in Thousands)
Land $ 1,275 $ 1,275
Buildings 39,240 39,207
Equipment 24,488 23,564
Construction in Progress 53 -
65,056 64,046
Less Accumulated Depreciation
and Amortization 41,512 38,573
$23,544 $25,473
6. Other Assets
Other assets consist of the following:
December 31,
1996 1995
(Dollars in Thousands)
Debt Issuance Costs, Net $ - $ 79
Deposits and Other 743 823
$ 743 $ 902
7. Accrued Expenses:
Accrued expenses consist of the following:
December 31,
1996 1995
(Dollars in Thousands)
Salaries and Wages $1,584 $1,559
Payroll Taxes and Employee Benefits 883 617
Gaming Taxes 107 625
Slot Club Liability 546 396
Outstanding chip & token liability 692 843
Other 2,364 1,312
$6,176 $5,352
8. Long-Term Debt:
Long-term debt subject to demand for acceleration consists of the
following:
December 31,
1996 1995
(Dollars in Thousands)
12.5% First Mortgage Notes Payable $57,000 $57,000
20% Mortgage Notes Payable,
Net of unaccreted Discount of $0 and $ 98,
at December 31, 1996 and 1995,
respectively 3,000 2,902
7.5% Convertible Subordinated Notes
Payable 1,425 1,425
Total long-term debt 61,425 61,327
Long-term debt subject to demand for
acceleration-not subject to compromise 3,000 2,902
Long-term debt subject to demand for
acceleration-subject to compromise $ 58,425 $58,425
First Mortgage Notes
On October 8, 1993, the Company completed a private placement of
$60,000,000 aggregate principal amount of the Company's 12.5%
First Mortgage Notes due 2000 (the "First Mortgage Notes") and
warrants (the "Warrants") to purchase 3,100,340 shares of the
Company's common stock at an exercise price of $5.50 per share,
subject to certain anti-dilution provisions. The net proceeds of
the offering were approximately $57.4 million. In December 1994,
$3,000,000 aggregate principal amount of the First Mortgage Notes
were redeemed and retired, in consideration for which the Company
issued to the noteholder 930,000 shares of common stock.
Convertible Subordinated Notes
On March 31, 1995, the Company completed the private placement of
$1,706,250 of the Company's 7.5% Convertible Subordinated Notes
due December 31, 1996 (Convertible Notes). The convertible notes
are convertible into the Company's common stock at $1.125 per
share subject to certain antidilution provisions.On September 6,
1995, the holders of Convertible Notes with a face amount of
$281,250, effected the conversion of the notes and accrued
interest thereon into 256,579 shares of the Company's common
stock.
Adjustments To Long-Term Debt Pursuant to Reorganization
Proceedings
The First Mortgage Notes and Convertible Notes are classified as
pre-petition liabilities subject to compromise (the First Mortgage
Notes on the basis that the claim is undersecured considering the
rorganization value for the Company) and the outstanding principal
and accrued interest thereon through the date of filing have
become allowed claims, SOP 90-7 requires that the recorded amount
of the debt be adjusted to the amount of the allowed claim.
Accordingly, unamortized debt issuance costs of $2,695,000 and
unaccreted original issue discount of $5,690,000 were written off
to adjust the carrying amounts of these notes to the allowed
amounts.
Further, interest expense on the First Mortgage Notes and
Convertible Notes was not recognized since the date of petition
through August 12, 1996, the confirmation date of the Plan.
The first Mortgage Notes, Mortgage notes and Convertible
Subordinated notes are expected to be treated under the Plan as
described in note 1.
The 1993 first Mortgage Note holders have an allowed claim equal
to approximately $61,000,000. Under the Plan, the secured portion
of the claim is allowed in the amount of $30,000,000. The balance
of the claim is unsecured. On the effective date of the Plan, each
1993 First Mortgage Note holder will receive (i) in exchange for
the secured portion of its claim, its prorata share of $30,000,000
face amount of restated first mortgage notes (the "Restated First
Mortgage Notes") which will accrue interest at an annual rate of
13.5% per annum payable semi-annually and will be due five years
from the confirmation date, and (ii) in exchange for the unsecured
portion of its claim, a prorata portion of the New Common Stock.
The 1994 mortgage note holders have an allowed secured claim equal
to the $3,000,000 principal amount of the notes plus accrued
interest thereon at 20% through the date on which the confirmation
order was entered by the Bankruptcy Court (approximately $675,000)
and certain fees and disbursements related thereto (approximately
$125,000). On the effective date of the Plan, each 1994 Mortgage
Note Holder will receive its prorata share of restated mortgage
notes (the "Restated Mortgage Notes"), due four years from the
confirmation date, in exchange for its allowed claim.
Interest on the Restated Mortgage Notes will accrue at an annual
rate of 11.5% and is payable quarterly commencing in the fourth
month following the confirmation date. These noteholders will
retain their lien interests as collateral for repayment of the
restated mortgage notes.
The Convertible Note holders have an allowed claim of
approximately $1,500,000. On the effective date of the Plan, each
Convertible Note holder will receive its prorata share of New
Common stock in exchange for its allowed claim.
9. Income Taxes:
No income tax benefit related to the 1996, 1995 and 1994 losses
has been recorded due to the uncertain ability of the Company to
utilize its net operating loss carryforwards.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
December 31,
1996 1995
(Dollars in Thousands)
Deferred Tax Assets:
Accounts Receivable Principally
Due to Allowance for Doubtful
Accounts $ 135 $ 68
Accrued Compensation, Principally
Due to Accrual for Financial
Reporting Purposes 738 500
Progressive Slot Accrual 143 74
Net Operating Loss Carryforwards 34,887 36,210
General Business Credit Carryforward,
Principally Due to Investment
Tax Credit Generated in Prior Years 640 640
Alternative Minimum Tax (AMT)
Credit Carry-forward from AMT
Paid in Prior Years 312 253
Contribution Deduction Carryforward,
Principally Due to Amounts
Not Deductible in Prior Periods 63 58
Tax Loss Due to Sale of New Jersey
Subsidiaries in Prior Periods 714 702
Loan Receivable Principal Due to
Allowance For Uncollectibility 8,023 8,023
Reorganization items, principally due
to amounts not currently
Deductible for tax purposes 3,723 2,951
Total Gross Deferred Tax Assets 49,378 49,479
Less Valuation Allowance (45,099) (44,965)
Net Deferred Tax Assets 4,279 4,514
Deferred Tax Liabilities:
Plant and Equipment, Principally Due to
Differences in Depreciation (3,966) (4,219)
Prepaid Expenses, Principally Due to
Deduction for Tax Purposes ( 313) (295)
Total Gross Deferred Tax Liabilities (4,279) (4,514)
Net Deferred Tax Liability $ - $ -
As of December 31, 1996, the Company has a net operating loss
carryforward for federal income tax purposes of approximately
$102,600,000. As a result of ownership changes in prior years,
Internal Revenue Code Section 382 (Section 382)limits the amount
of loss carryforward currently available to offset federal taxable
income. As of December 31, 1996, the amount of loss carryforward
not limited by Section 382 and therefore available to offset
current federal taxable income is approximately $64,000,000. The
amount of the loss carryforward which is not limited by Section
382 increases annually by $4,653,000. The loss carryforwards
begin to expire in the year 1999 and will be completely expired by
2007.
The Company has general business tax credit carryforwards for
federal income tax purposes of approximately $640,000 which are
available to reduce future federal income taxes, if any, through
1999. In addition, the Company has alternative minimum tax credit
carryforwards of approximately $312,000 which are available to
reduce future federal income taxes, if any, over an indefinite
period.
Special Provisions of IRS Section 382 Available to Corporations in
Bankruptcy.
A corporation in Bankruptcy may be eligible for treatment under
Section 382(1)(5) whereby the corporation's existing net operating
losses will not be subject to the Section 382 limitation even
though the magnitude of the ownership changes effected by the plan
of reorganization would otherwise cause the corporation to exceed
Section 382's 50% change threshold. The key difference in the 50%
ownership change calculation applied in Section 382(1)(5) is that
creditors who will be converting all or a portion of their debt to
equity are, in effect, not counted as part of the ownership change
if they have held their debt more than 18 months (the "Qualified
Debt"). Even if Section 382(1)(5) applies, the existing net
operating losses are reduced by cancellation of debt income and
interest on the Qualified debt during a specific period.
Section 382(1)(5), if available to the Company based upon the
provisions of the final plan of reorganization approved by the
Bankruptcy Court, would severely limit further ownership changes
for the three-year period following plan effectiveness.
As the applicability of Section 382(1)(5) is dependent upon the
ownership changes provided in the final plan of reorganization by
the Bankruptcy Court and changes in the ownership of the First
Mortgage Notes that may occur prior to the effective date of the
plan, it is not possible to determine with any degree of
certainty, such section's ultimate applicability.
In the event that the Company elects out of Section 382(1)(5), or
fails to qualify under its terms, existing net operating losses
will be subject to the Section 382 limitation. However, in this
case, the stock value used for purposes of computing the
limitation is the market value immediately after the ownership
change,(rather than immediately preceding the change, as is the
case in the general Section 382 calculation) thereby taking into
account the increase in stock value attributable to the conversion
of debt pursuant to the reorganization.
Prior Period Tax Obligation
In August 1984, the IRS commenced an examination of the Company's
consolidated income tax returns for the fiscal years ended January
31, 1980, 1981 and 1982, and in October 1988 commenced
examinations of the fiscal year ended January 31, 1983 and the
eleven months ended December 31, 1983. As a result of its
examination, the IRS proposed certain adjustments for the fiscal
years ended January 31, 1980, 1981 and 1982 regarding the
deductibility of pre-opening costs associated with the Atlantis
facility (a former Atlantic City New Jersey hotel casino operated
by the Company) and utilization of certain investment tax credits
regarding the Four Queens and Atlantis facilities. In October
1994, the IRS completed and delivered to the Company a final
assessment (the "IRS Assessment") relating to such adjustments and
in November 1994, the IRS filed and recorded a Notice of Tax Lien
against the Company and its subsidiaries in the amount of the IRS
Assessment. The IRS Assessment called for the Company to pay
aggregate tax and interest of approximately $5.7 million
(exclusive of interest accruing during any period of repayment),
in addition to $3.5 million the Company deposited with the IRS in
March 1991. On December 6, 1994, the Company and the IRS entered
into an installment payment agreement (the "Installment
Agreement"). As of December 31, 1995, the Company had a remaining
obligation to the IRS in the amount of approximately $2,985,000.
The Company believes that it has available sufficient net
operating loss ("NOL") carryforwards to satisfy any tax
liabilities with respect to periods subsequent to 1983.
The Internal Revenue Service ("IRS"), which has both secured and
unsecured claims aggregating approximately $3,000,000 will receive
full payment of its secured claim with interest at 8% per annum
over four years (commencing on the effective date) and will
receive with respect to its unsecured claim, proportionately the
same type of recovery which is provided to the Company's larger
unsecured creditors. In addition, the IRS will receive its prorata
share of the New Common Stock.
10. Common Stock Offering
On January 25, 1995, the Company completed a public offering of
2,500,000 shares of the Company's common stock for $1.75 per
share. Net proceeds to the Company after payment of underwriting
discounts and commissions and other direct costs of the offering
was approximately $3,747,000.
11. Commitments and Contingencies
Chapter 11 Reorganization
On October 31, 1995, the Company and certain of its
subsidiaries filed a voluntary petition in the United States
Bankruptcy Court for the District of Nevada seeking to reorganize
under Chapter 11 of the United States Bankruptcy Code. See
"Item 1. Business-Chapter 11 Proceedings." On November 10, 1995,
Olympia Gaming Corporation filed a voluntary petition in the same
Court. Since the Bankruptcy filing, several entities have filed
administrative claims requesting the Bankruptcy Court order the
Company to reimburse or compensate such entities for goods, taxes
and services they allege the Company has received or collected,
but for which they claim the Company has not paid.
The Company currently estimates that the administrative claims
will be approximately $2.1 million; however, there can be no
assurance that additional amounts will not be claimed or the
extent to which administrative claims may be allowed by the
Bankruptcy Court. The Bankruptcy Code requires that all
administrative claims be paid on the effective date of a plan of
reorganization unless the respective claimants agree to different
treatment. Most of the administrative claims in the bankruptcy
case have been paid. The Company does not expect that the balance
of any outstanding administrative claims will affect its ability
to consummate the Plan of reorganization.
Hyland Litigation
Thomas Hyland, a professional card counter and blackjack
player, filed a complaint on August 23, 1995 in Federal District
Court in Camden, New Jersey, No. 95CV2236 (JEI), against the
Company and virtually every other casino company in the United
States. The complaint alleges violations of the antitrust,
consumer fraud and fair credit reporting laws by the defendants in
illegally conspiring to prevent Mr. Hyland and other professional
card counters from playing blackjack at their respective casinos.
The complaint alleges that the defendants share information
concerning card counters and then act in concert to implement
industry wide policy in banning them at the blackjack tables.
Management believes that the claims are without merit and does
not believe that the lawsuit will have a material adverse effect
on the Company's financial statements taken as a whole.
WARN Act Litigation
The Company is a defendant in two consolidated lawsuits pending
in the federal court for the District of New Jersey, alleging
violation by the Company and certain of its subsidiaries and
affiliates of the Worker Adjustment and Retraining Notification
Act ("WARN Act") and breach of contract. The plaintiffs in the
two consolidated cases are (i) former employees of a casino/hotel
in New Jersey formerly affiliated with the Company bringing suit
on behalf of a class of all employees laid off as a result of the
casino's closing and (ii) a union local seeking to represent its
members who were laid off at that time. Plaintiffs claim that
there are approximately 1,300 such employees within the class who
seek damages under the WARN Act providing for up to 60 days' pay
and lost benefits and payments for deferred compensation allegedly
due under a contract with certain employees. Damages payable, if
any, would be based on the basis of the number of days' notice
determined by the court to have been required under the WARN Act
and the wages, benefits and deferred compensation applicable to
each such employee.
The Company has vigorously defended the action on the basis
that even if the WARN Act does apply as a matter of law to a
regulatory-forced closing, the closing was due to unforeseeable
circumstances and, accordingly, the notice given was as timely as
practicable, among other grounds. The liability phase of the
trial of the two consolidated lawsuits concluded in August 1993.
On June 30, 1995, the presiding judge entered an Order for
Verdict Upon Liability Issues in which he ruled that: (i) the
plaintiffs had failed to prove any liability under the WARN Act;
but (ii) that Elsinore and certain of its subsidiaries are jointly
liable for certain retroactive wages due to former employees of
Elsinore Shore Associates under a collective bargaining agreement,
plus prejudgment interest on such wages. The total amount of
judgment the plaintiffs would be entitled to under this ruling has
not yet been determined. The plaintiffs' attorney asserts that
the amount due as of October 1, 1995, taking into account interest
on that date, was approximately $676,000. On March 4, 1996, the
plaintiffs' attorney submitted a proof of claim for retroactive
wages in the amount of $800,000 to the Bankruptcy Court. Because
of the filing of the bankruptcy petitions, the WARN Act litigation
in the New Jersey Court has been stayed by operation of Bankruptcy
Code Section 362(a). However, the plaintiff's $800,000 claim is
currently the subject of claims litigation in the Bankruptcy
Court. It is the Company's position that the claim submitted by
the plaintiffs should be reduced to zero. However there can be no
assurance as to the success of the Company's attempt to reduce the
claim.
Poulos/Ahern Class Actions
In April and May 1993, two class action lawsuits were filed in
the United States District Court, Middle District of Florida,
against 41 manufacturers, distributors and casino operators of
video poker and electronic slot machines, including the Company.
The suits allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce persons to
play such games by collectively misrepresenting how the game
machines operate, as well as the extent to which there is an
opportunity to win. It also alleges violations of the Racketeer
Influenced and Corrupt Organizations Act, as well as claims of
common law fraud, unjust enrichment and negligent
misrepresentation, and seeks damages in excess of $6 billion. On
December 9, 1994, the Florida Court ordered that the consolidated
cases be transferred to the United States District Court for the
District of Nevada. That transfer has occurred and the Nevada
Court has assumed control of the cases. The new case number is
CV-S-94-1126-LDG(RJJ). Numerous defendants (including the
Company) have moved to dismiss the complaint for failure to state
a claim. No hearing has been set on this motion. The plaintiffs
have filed a motion seeking to certify the consolidated actions as
a class action. The defendants (including the Company) have
opposed certification of the class. During April, 1996, U.S.
District Judge Lloyd George approved defense motions to dismiss
such lawsuits holding that the plaintiffs had failed to state a
claim or prove their case. However, the plaintiffs were given
additional time to file an amended complaint. Management believes
the claims are wholly without merit and does not expect that the
lawsuit will have a material adverse effect on the Company's
financial statements taken as a whole.
Other
At December 31, 1996, the Company and its subsidiaries were
parties to various other claims and lawsuits arising in the normal
course of business. Management is of the opinion that all such
legal matters are either covered by insurance or, if not insured,
will not have a material adverse effect on the Company's financial
statements taken as a whole.
12. Leases:
All non-cancelable leases have been classified as capital or
operating leases. At December 31, 1996, the Company had leases
for real and personal property which expire in various years
through 2075. Under most leasing arrangements, the Company pays
the taxes, insurance, and the operating expenses related to the
leased property. Certain leases on real property provide for
adjustments of rents based on the cost-of-living index. Buildings
and equipment leased under capital leases, included in property
and equipment, are as follows:
December 31,
1996 1995
(Dollars in Thousands)
Building $2,062 $2,062
Equipment 324 316
2,386 2,378
Less Accumulated Amortization ( 817) (663)
$1,569 $1,715
Amortization of assets held under capital leases is included with
depreciation and amortization expense in the Consolidated
Statements of Operations.
The following is a schedule of future minimum lease payments for
capital and operating leases (with initial or remaining terms in
excess of one year) as of December 31, 1995:
Capital Operating
Leases Leases
(Dollars in Thousands)
Years Ending December 31,
1997 $280 $3,810
1998 223 2,979
1999 223 2,967
2000 223 2,945
2001 223 2,945
Thereafter 7,134 94,709
Total Minimum Lease Payments 8,306 $110,355
Less: Amount Representing
Interest(at imputed rates
ranging from 11.5%
to 15.0% 6,769
Present Value of Net
Minimum Capital Lease
Payments 1,537
Less: Current Portion 50
Capital lease obligations,
excluding current portion $1,487
13. Benefit Plans:
Four Queens, Inc. makes contributions to several multi-employer
pension and welfare benefit plans covering its union employees.
The plans provide defined benefits to covered employees. Amounts
charged to pension cost and contributed to the plans for the years
1996, 1995 and 1994 totaled $87,000, $97,000 and $103,000,
respectively. While the Company is liable for its share of
unfunded vested benefits, the Company believes the amount, if any,
would not be material to the consolidated financial statements.
On October 1, 1990, the Company instituted a savings plan
qualified under Section 401(k) of the Internal Revenue Code of
1986, as amended. The savings plan covers substantially all
employees who are not covered by a collective bargaining
agreement. Employee contributions to the savings plan are
discretionary. The Company matches and contributes to each
employee's account an amount equal to 25% of the employee's
contributions to the savings plan up to a maximum employee
contribution of 8% of each employee's gross compensation. The
Company's contribution was $130,488, $138,000 and $147,000 for
1996, 1995 and 1994, respectively. There were 469, 496 and 465
participants in the savings plan as of December 31, 1996,
1995 and 1994, respectively.
In 1991, the Board of Directors adopted, and the stockholders
approved, the Elsinore Corporation 1991 Stock Option Plan (the
"1991 Plan"). The Board reserved 600,000 shares of common stock
for issuance thereunder. The 1991 Plan provides for the grant of
non-statutory options to purchase common stock to salaried
officers and key employees of the Company and its corporate
subsidiaries. The exercise price for options granted under the
1991 Plan may not be less than the fair market value of the stock
on the date of grant.
On March 15, 1993, the Board of Directors adopted and the
stockholders approved, the Elsinore Corporation 1993 Long-Term
Stock Incentive Plan (the "1993 Plan") and reserved 600,000 shares
of common stock for issuance thereunder. On April 8, 1994, the
Board of Directors adopted and the shareholders approved an
increase of the number of shares reserved under the 1993 Plan to
1,200,000 shares. On May 11, 1995, the Board of Directors
approved an additional increase in the number of shares reserved
to 1,980,000 shares. The 1993 Plan provides for awards of
restricted shares, stock units, options or stock appreciation
rights to all employees of the Company and its subsidiaries.
Non-statutory stock options granted under the 1993 Plan are granted at
fair market value at date of grant and generally vest in equal
annual increments over a three-year period.
At December 31, 1996, there were 509,500 and 1,702,300 additional
shares available for grant under the 1991 and 1993 Plans,
respectively. There were no shares granted during 1993. Therefore
the per share weighted average fair value of stock options granted
during 1996 and 1995 was $0 and $.07 on the date of grant using
the black Scholes option -pricing model with the following
weighted-average assumptions for 1995: expected dividend yield of
0%, risk free interest rate of 6.01% and an expected life of one
year.
The Company applies APB Opinion No. 25 in accounting for their
Plans and, accordingly, no compensation cost has been recognized
for their stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for their stock options under SFAS 123, the impact
on the Company's net income would not be material, therefore
proforma net income and earnings per share disclosures have not
been presented.
Stock option activity during the periods indicated for the
Company's two stock option plans is as follows:
Number of Weighted Average
Shares Exercise Price
Outstanding at
December 31, 1993 1,130,300 $3.41
Granted 829,400 2.65
Exercised (17,000) (.88)
Cancelled (64,100) (5.22)
Outstanding at
December 31, 1994 1,878,600 3.03
Granted 171,000 1.32
Exercised - -
Cancelled (543,400) (2.51)
Outstanding at
December 31, 1995 1,506,200 3.03
Granted - -
Exercised - -
Cancelled (1,200,000) (2.94)
Outstanding at
December 31, 1996 306,200 3.40
All outstanding options will be cancelled upon the effective date
of the plan when the old common stock interests in Elsinore are
cancelled.
14. Taxes and Licenses, Other Than Income Taxes
Taxes and licenses, other than income taxes, principally include
payroll taxes, gaming licenses and gross revenue taxes, and are
summarized as follows:
Operating Departments
(Dollars in Thousands)
Food and
Casino Hotel Beverage Other Total
1996 $4,496 $ 468 $ 497 $1,132 $6,592
1995 4,377 454 483 1,313 6,627
1994 4,710 474 535 1,236 6,955
15. Extraordinary Item:
On December 29, 1994, $3 million of the original $60 million
principal amount of First Mortgage Notes was repurchased by the
Company and retired in exchange for the issuance to the noteholder
of 930,000 shares of Common Stock of the Company. The Company
recorded an extraordinary gain of $735,000 as a result of this
debt retirement. Income taxes are not applicable to this
extraordinary item.
16. Supplemental Financial Information
A summary of additions and deductions to the allowance for
doubtful accounts receivable for the years ended December 31,
1996, 1995 and 1994 follows:
Balance at Balance
Allowance for Beginning At End
Doubtful Accounts of Year Additions Deductions of Year
Years Ended
1996 $201 $321 $175 $347
1995 214 68 81 201
1994 200 40 26 214