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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, 1998
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:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK
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. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
On March 15, 1999 there were 4,929,313 shares of common stock issued and
outstanding. The market value of the common stock held by non-affiliates of the
registrant as of March 15, 1999 was approximately $106,077.38. The market value
was computed by reference to the closing sales price of 3/8 ($0.375) per share
reported on the NASDAQ "Bulletin Board" as of March 15, 1999.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a
Vote of Security Holders 17
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 29
Item 8. Financial Statements and
Supplementary Data 30
Item 9. Changes in and Disagreements
with Accountants
on Accounting and Financial Disclosure 54
PART III
Item 10. Directors and Executive Officers
of the Registrant 55
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain
Beneficial Owners and Management 58
Item 13. Certain Relationships and
Related Transactions 61
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 62
SIGNATURES 69
PART I
Item 1. BUSINESS.
General.
Elsinore Corporation ("Elsinore" or the "Company") is registered with
the Nevada Gaming Commission (the "Commission") as a publicly traded holding
company of Four Queens, Inc. ("Four Queens"), the licensed operator of the Four
Queens Hotel and Casino in Las Vegas, Nevada (the "Four Queens Casino") and a
wholly owned subsidiary of the Company. Four Queens also held a casino service
license in New Jersey allowing it to distribute its casino game "multiple action
blackjack." Four Queens currently distributes the game to eight casinos in New
Jersey. The Four Queens' New Jersey license was renewed on May 11, 1998 and will
expire on May 31, 2001. Four Queens must renew this license no later than 120
days prior to expiration. Gaming management activities conducted by Elsinore's
other subsidiaries prior to the bankruptcy reorganization, discussed below, have
terminated.
The Company's principal executive office is located at 202 Fremont
Street, Las Vegas, Nevada 89101 and its telephone number is (702) 385-4011.
Change in Control Pursuant to Elsinore's Bankruptcy Reorganization.
On October 31, 1995, Elsinore and certain of its wholly owned
subsidiaries filed for protection pursuant to Chapter 11 of the U.S. Bankruptcy
Code. The resulting plan of reorganization of Elsinore and those subsidiaries
(the "Plan") was confirmed on August 12, 1996 (the "Confirmation Date") and
became effective following the close of business on February 28, 1997 (the "Plan
Effective Date"). All motions for rehearing or reconsideration of the Bankruptcy
Court's orders confirming the Plan and allowing the Plan to become effective
have been denied or withdrawn. The time allowed for appeals of such orders have
expired without any appeal having been taken. Pursuant to the Plan, a change in
control of the Company occurred as of the Plan Effective Date, as described
below.
Under the Plan, the Company's common stock that was outstanding prior
to the Plan Effective Date was canceled and 4,929,313 shares of new common
stock, par value $.001, of the Company (the "Common Stock") were issued. The
Plan also provides for the future issuance of an additional 70,687 shares of
Common Stock to certain classes of creditors of the Company and Four Queens,
whose claims have not yet been resolved. Of the 4,929,313 shares of Common Stock
issued pursuant to the Plan, 4,646,440 shares or 94.3% of the total outstanding
were acquired by certain investment accounts (the "MWV Accounts") managed by
Morgens, Waterfall, Vintiadis and Company, Inc. ("MWV"). Of the shares which the
MWV Accounts acquired, 995,280 shares were purchased at $5.00 per share under a
Subscription Rights Agreement dated October 10, 1996 (the "Rights Agreement"),
which was called for by the Plan. Under the Rights Agreement, a total of
1,000,000 shares of Common Stock were subscribed for at $5.00 per share and were
issued on the Plan Effective Date. The other 4,720 shares were subscribed for by
certain holders of the common stock that was canceled on the Plan Effective
Date.
The shares of Common Stock acquired by the MWV Accounts, other than the
995,280 shares which they purchased under the Rights Agreement, were issued to
the MWV Accounts under the Plan (i) in partial satisfaction of the MWV Accounts'
respective allowed claims relating to the Company's 12.5% First Mortgage Notes
due 2000 that were issued in October 1993 or (ii) as a premium for the MWV
Accounts' purchase of Common Stock under the Rights Agreement which was not
subscribed for by other persons entitled to participate under the Rights
Agreement.
Holders of the approximately 15.9 million shares of old common stock
that were canceled on the Plan Effective Date received, in the aggregate, 77,426
shares of Common Stock (including 4,720 shares purchased under the Rights
Agreement). This represents 1.6% of the Common Stock outstanding on the Plan
Effective Date.
As a condition to the approvals by the State Gaming Control Board (the
"Board") and the Commission which were required for the Plan to become
effective, limitations were placed on the persons who could exercise voting and
investment power (including dispositive power) with respect to Common Stock
owned by any of the MWV Accounts. Under those limitations, John C. "Bruce"
Waterfall is the only individual who exercises voting and investment authority
over the Common Stock on behalf of any of the MWV Accounts. Mr.
Waterfall is also the Company's Chairman of the Board.
Recapitalization.
On September 29, 1998, MWV Accounts contributed $4,641,000, net of
$260,000 of expenses, to the capital of Elsinore, which Elsinore used, together
with other funds of Elsinore, to purchase in full all of Elsinore's outstanding
11.5% First Mortgage Notes due 2000 in the original aggregate principal amount
of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage
Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts
50,000,000 shares of Series A Convertible Preferred Stock of the Company in
exchange for the surrender to the Company of $18,000,000 original principal
amount of certain second mortgage notes held by the MWV Accounts. The 50,000,000
shares of Series A Convertible Preferred Stock have (i) the right to receive
cumulative dividends at the rate of 6% per year; (ii) the right to receive the
amount of $.36 per share, plus all accrued or declared but unpaid dividends on
any shares then held, upon any liquidation, dissolution or winding up of the
Company for an aggregate liquidation preference of $18,000,000; (iii) voting
rights equal to the number of shares of the Company's Common Stock into which
the shares of Preferred Stock may be converted, and (iv) the right to convert
the shares of Preferred Stock into 93,000,000 shares of the Company's Common
Stock.
In addition, Elsinore issued to the MWV Accounts new second mortgage
notes ("New Mortgage Notes") in the aggregate principal amount of $11,104,000 in
exchange for all remaining outstanding second mortgage notes held by the MWV
Accounts in the same aggregate principal amount, pursuant to an amended
indenture governing the New Mortgage Notes that reduced the interest rate
payable thereon from the 13.5% payable under the old second mortgage notes to
the 12.83% payable under the New Mortgage Notes. Following the recapitalization
described in this section, Elsinore has notes outstanding in the aggregate
principal amount of $11,104,000. The transactions, as described in this section,
are collectively referred to as the "Recapitalization."
The Four Queens Casino.
Four Queens owns the Four Queens Casino, which has been in operation
since 1966. The Four Queens Casino has consistently concentrated on delivering
high quality, traditional Las Vegas-style gaming and entertainment. The Four
Queens Casino is located on a leased site of approximately two acres adjacent to
the Golden Nugget Hotel & Casino in the heart of Fremont Street in downtown Las
Vegas. The property features approximately 690 hotel rooms, including 45 suites,
30,000 square feet of casino space, two full-service restaurants, two
fast-service restaurants, three cocktail lounges, a gift shop, four retail
concessions, 15,000 square feet of function space and approximately 560 parking
spaces. The casino has approximately 1,068 slot machines, 26 gaming tables, a
keno lounge and a sports book. Riviera Gaming Management Corp. - Elsinore
("RGME"), an indirect subsidiary of Riviera Holdings Corp. ("Riviera"), has been
managing the Four Queens Casino since the Confirmation Date. RGME has focused
primarily on slot play versus previous management's philosophy of marketing to
high limit table players. This plan has changed the customer base at the
property and allows the Four Queens Casino to concentrate on what RGME considers
to be Las Vegas' most profitable revenue source, which is the slot player
market. Also, an aggressive marketing strategy was maintained by the Company
with the objective of attracting into the Four Queens Casino the 20,000-plus
average daily visitors to the downtown area.
Management. The term of RGME's current management agreement for the
Four Queens Casino (the "Management Agreement"), which went into effect on April
1, 1997 in accordance with the terms of the Plan, is approximately 40 months,
subject to earlier termination or extension. Either side may terminate it if the
Four Queens Casino's cumulative earnings before interest, taxes, depreciation
and amortization ("EBIDTA") for the first two fiscal years commencing April 1,
1997 are less than $12.8 million. The term can be extended for an additional 24
months at RGME's option if certain performance standards are met. RGME is paid a
minimum annual management fee of $1 million in equal monthly installments. In
addition, RGME receives a fee of 25% of the amount by which EBITDA in any fiscal
year exceeds $8 million. Also under the Management Agreement, RGME received
warrants to purchase 1,125,000 shares of Common Stock at $1.00 per share (the
"Warrants").
The Four Queens EBITDA for the 24 months ending February 28, 1999 will
approximate $10.7 million. Management and the Board of Directors of Elsinore
have agreed to continue the Management Agreement for its original term provided,
however, that it can be terminated by either party on six month's notice. The
Management Agreement also provides that either party can terminate the
Management Agreement if (i) substantially all the Four Queens' assets are sold,
(ii) the Four Queens is merged with another company, or (iii) a majority of the
Four Queens' or Elsinore's shares are sold. Upon such termination, RGME is to
receive a $2.0 million termination bonus minus any amount realized or realizable
upon exercise of the Warrants. RGME and Elsinore are currently negotiating a
revised termination bonus.
Operations. The following table sets forth the contributions from major
activities to the Company's total revenues from the Four Queens Casino for the
years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Casino(1) $ 39,372 $ 36,506 $ 42,300
Hotel(2) 9,004 9,705 11,202
Food & beverage(2) 9,724 9,686 12,373
Other(3) 3,004 2,115 1,502
-------- -------- --------
61,104 58,012 67,377
Less: Promotional allowances (5,204) (4,224) (6,178)
--------- --------- ---------
$ 55,900 $ 53,788 $ 61,199
======== ======== =========
(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 $103,000 in 1998,
$142,000 in 1997, and $198,000 in 1996 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.
Casino:
Floor area (square feet) 30,000
Slot machines 1,068
Blackjack tables 17
Craps tables 3
Big six 1
Caribbean stud poker tables 1
Roulette wheels 2
Let-it-ride tables 1
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
Cocktail lounges 3
Other:
Gift shops 1
Parking facilities (cars) 560
A marketing strategy is employed for the Four Queens Casino 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 Casino is
distinguished by its friendly atmosphere and the high level of personalized
service provided to its patrons. The Company strives to maintain the level of
service that has allowed the property to attain a high level of customer
loyalty, which has been the backbone of business for this established
hotel/casino.
Employees. At December 31, 1998, the Four Queens Casino employed 951
persons, approximately 50% of whom were covered by collective bargaining
agreements. New union contracts were entered into during 1997 covering five
collective bargaining units.
Competition. The gaming industry is highly competitive. The Four Queens
competes with a multitude of casino hotels in the greater Las Vegas Metropolitan
area. Currently there are approximately 32 major gaming properties located on or
near the Las Vegas Strip, 13 located in the downtown area and several located in
other areas of Las Vegas. Las Vegas gaming square footage and room capacity are
continuing to increase. Most of these facilities attract or may attract
primarily middle income patrons, who are the focus of the Company's marketing
strategy. Although the Company believes that these additional facilities will
draw more visitors to Las Vegas, they may also divert potential gaming activity
from the Company. Future additions, expansions, and enhancements to existing
properties and constructions of new properties by the Company's competitors
could divert additional gaming activity from the Company's facilities. The
Company believes that successful gaming facilities compete based on the
following: location, atmosphere, quality of gaming facilities, entertainment,
quality of food and beverage, and price. Although the Company believes it
competes favorably with respect to these factors, some of its competitors have
significantly greater financial and other resources than the Company. There can
be no assurance that the Company will compete successfully in the Las Vegas
market in the future.
The Las Vegas Market
Las Vegas is one of the fastest growing and largest entertainment
markets in the United States. For fiscal year 1998, gaming revenues in Clark
County reached a new 12 month record of $6.3 billion. The number of visitors
traveling to Las Vegas has increased at a steady and significant rate, from 16.2
million visitors in 1987 to a record 30.6 million in 1998, representing a
compound annual growth rate of 5.95%. Aggregate expenditures by Las Vegas
visitors increased at a compound annual growth rate of 11.2% from $8.6 billion
in 1987 to $24.9 billion in 1997. The number of hotel and motel rooms in Las
Vegas increased by approximately 76.6% from 61,934 in 1988 to 109,365 in 1998,
surpassing 100,000 rooms in January 1997, the first market to reach that level.
Despite this significant increase in the number of rooms, hotel occupancy rates
exceeded on average 87.9% for the five year period from 1994 through 1998.
According to the Las Vegas Convention and Visitors Authority ("LVCVA"), by the
end of the decade it is expected that approximately 18,000 additional hotel
rooms will be opened in Las Vegas, including the Venetian, Paris, which are
currently under construction, Mandalay Bay which opened in March 1999, the
expansion at the MGM Grand and the new developments planned at the current
Aladdin site.
The following table sets forth certain statistical information for the
Las Vegas market for the years 1994 through 1998, as reported by the LVCVA.
Las Vegas Market Statistics
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -------------
Visitor volume (in thousands) 30,605 30,465 29,637 29,002 28,214
Clark County gaming revenues $6,347 $6,152 $5,784 $5,718 $5,431
(in millions)
Hotel/motel rooms 109,365 105,347 99,072 90,046 88,560
Average hotel occupancy rate 90.3% 90.3% 93.4% 91.4% 92.6%
Airport passenger traffic 30,227 30,306 30,460 28,027 26,850
(in thousands)
Convention attendance 3,302 3,519 3,306 2,925 2,684
(in thousands)
The Downtown Market.
General Information. Downtown Las Vegas, with its famous neon lighting
and its 12 major casinos all located within close proximity of each other,
attracts a significant number of loyal customers comprised of both visitors to
Las Vegas and local residents.
Recent results of the downtown Las Vegas casinos 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 more recent openings of the Bellagio, MGM Grand, Luxor, Treasure
Island, Monte Carlo and New York New York casino/hotels have had an adverse
effect on downtown gaming revenue. In addition, the recent opening of Mandalay
Bay and the scheduled openings of the Venetian and Paris, the MGM Grand
expansion and the planned development at the Aladdin site, all on the Las Vegas
Strip, may have a further adverse effect on downtown gaming revenue when those
projects are completed. The new rooms recently completed or under construction
are primarily designed to attract the high-end gaming and convention customers,
and based on construction costs are or will be priced at rates well above those
which have been or can be charged by the Four Queens Casino based on the
Company's investment in that facility.
With the proliferation of mega-casinos on the Las Vegas strip, downtown Las
Vegas has become increasingly appealing to the price-conscious vacationer. Four
Queens offers a competitive package of rooms, restaurants, and the popular
gaming devices demanded by the value-oriented vacationer.
The Fremont Street Experience. Casino operators in downtown Las Vegas
formed the Downtown Progress Association to improve the downtown area. The most
noteworthy improvement 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 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 using reflectors, strobe
lights, and laser image projectors. Nine major entertainment venues, including
the Four Queens Casino, 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, which opened on December 13, 1995. The project also
includes a 1,500-space parking facility. The goal of the Fremont Street
Experience is to create a special attraction for gaming customers and other
visitors to Las Vegas through such activities as street events and entertainment
in this extraordinary setting. A special themed event at the Fremont Street
Experience can draw as many as 80,000 people. Through such attractions, the
Fremont Street Experience draws visitors to the downtown area and provides
competition with the larger and new gaming and entertainment complexes located
on or near the Strip.
The Company and several of the other downtown casino operators
collectively own the Fremont Street Experience through their ownership of the
company which holds title to the project. The Company has a one-sixth ownership
share and is responsible for a proportionate share of the project's operating
costs.
Agreement and Plan of Merger.
In the first half of 1997, Elsinore and Mr. Allen E. Paulson
("Paulson") commenced discussions which culminated in an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of September 15, 1997, between
Elsinore and entities controlled by Paulson, namely R&E Gaming Corp. ("R&E") and
Elsinore Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") the
outstanding Common Stock for $3.16 per share in cash plus an amount of
additional consideration in cash equal to the daily portion of the accrual on
$3.16 at 9.43% compounded annually, from June 1, 1997 to the date immediately
preceding the date such acquisition is consummated. The Merger Agreement
provides for EAS to merge into Elsinore, and Elsinore to become a wholly owned
subsidiary of R&E.
Contemporaneously with the Merger Agreement, R&E executed an Option and
Voting Agreement (the "Option Agreement") with MWV, on behalf of the MWV
Accounts which owned 94.3% of the outstanding Common Stock prior to the
Recapitalization. Under certain conditions and circumstances, the Option
Agreement provides for, among other things, (i) the grant by the MWV Accounts to
R&E of an option to purchase all of their Common Stock; (ii) an obligation by
R&E to purchase all of the MWV Accounts' Common Stock, and (iii) the MWV
Accounts to vote their Common Stock in favor of the Merger Agreement. Elsinore's
shareholders approved the Merger Agreement at a special meeting of shareholders
held on February 4, 1998 (the "Special Meeting").
Paulson also entered into discussions with Riviera to acquire a
controlling interest in that company as well. Riviera owns and operates the
Riviera Hotel and Casino in Las Vegas and is the parent corporation of RGME. On
September 16, 1997, R&E and Riviera Acquisition Sub, Inc. ("RAS") (another
entity controlled by Paulson) entered into an Agreement and Plan of Merger (the
"Riviera Merger Agreement") with Riviera, which provides for the merger of RAS
into Riviera (the "Riviera Merger"), and for Riviera to become a wholly owned
subsidiary of R&E. R&E also entered into an Option and Voting Agreement with
certain Riviera shareholders, including MWV acting on behalf of the MWV
Accounts, containing terms similar to those described above with respect to the
Option Agreement.
The Merger Agreement contains conditions precedent to consummation of
the Merger, including (i) the Option Agreement being in full force and effect
and MWV having complied in all respects with the terms thereof, (ii) all
necessary approvals from gaming authorities and (iii) consummation of the
Riviera Merger.
Copies of the Merger Agreement and Option Agreement are included as
exhibits hereto.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it was
R&E's position that the Merger Agreement was void and unenforceable against R&E
and EAS, or alternatively, R&E and EAS intended to terminate the Merger
Agreement. R&E alleged, among other things, violations by Elsinore of the Merger
Agreement, violations of law and misrepresentations by MWV in connection with
the Option and Voting Agreement and the non-satisfaction of certain conditions
precedent to completing the merger. The Company denied the allegations and asked
that R&E complete the merger. Thereafter, in April 1998, Paulson, R&E, EAS and
certain other entities filed a lawsuit against eleven defendants, including
Elsinore and MWV (Paulson, et al. v Jeffries & Company et al.). Plaintiffs'
allegations include breach of the Merger Agreement by Elsinore, as well as
fraud, various violations of the federal securities laws and violation of the
Nevada anti-racketeering statute in connection with the proposed merger.
Plaintiffs are seeking (i) unspecified actual damages in excess of $20 million,
(ii) $20 million in exemplary damages, (iii) treble damages, and (iv) rescission
of the Merger Agreement and other relief. The lawsuit was filed in the United
States District Court for the Central District of California.
On July 13, 1998, Elsinore filed a motion to dismiss certain of the
claims alleged in the lawsuit, as amended, which was heard by the Court on
December 7, 1998. On December 17, 1998 the Court entered an order granting the
motion, with prejudice, as to the claims alleging violation of the Nevada
anti-racketeering statute, granting the motion with leave to amend as to certain
other allegations, and denying the remainder of the motion. Thereafter, on
January 13, 1999, plaintiffs served a Second Amended Complaint.
Shortly thereafter, plaintiffs announced their intention to file a
motion for reconsideration of the Court's December 17, 1998 order insofar as it
had dismissed the Nevada anti-racketeering claims, on the ground that a December
30, 1998 decision of the Nevada Supreme Court in the action captioned Siragusa
v. Brown constituted a change and/or material difference in the law relied upon
by the Court. Based on the Siragusa decision, the Company stipulated to an order
allowing plaintiffs to serve and file a Third Amended Complaint reinserting
claims under the Nevada anti-racketeering statute which plaintiffs have done.
Discovery is only now beginning, and the Company is currently unable to
form an opinion as to the amount of its exposure, if any. Although the Company
intends to defend the lawsuit vigorously, there can be no assurance that it will
be successful in such defense or that future operating results will not be
materially adversely affected by the final resolution of the lawsuit.
Gaming Regulation and Licensing.
Nevada. Elsinore is registered with the Commission as a publicly traded
company and has been found suitable as the sole shareholder of Four Queens. Four
Queens holds a nonrestricted gaming license to conduct nonrestricted gaming
operations at the Four Queens Casino. Ownership and operation of casino gaming
facilities in Nevada, as well as the manufacture and distribution of gaming
devices, are subject to extensive state and local regulation. Publicly traded
parent corporations and holding companies of Nevada gaming licensees, as well as
the licensed subsidiaries, are subject to the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act") and various
local regulations. A registered company and its gaming operations and companies
are subject to the licensing and regulatory control of the Commission, the
Board, the Clark County Liquor Gaming Licensing Board and possibly other local
agencies throughout the State of Nevada, including the City of Las Vegas
(collectively, the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities have their genesis in various 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 revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) the creation
of a source of state and local revenues through taxation and licensing fees.
Neither gaming licenses nor the registration approvals given to publicly traded
corporations are transferable. Changes in such laws, regulations and procedures
could have an adverse effect on the Company's operation.
Since the Company is registered with the Commission as a publicly
traded corporation and has been found suitable as the sole shareholder of Four
Queens, it is required to submit, upon application and on a periodic basis,
detailed financial and operating reports to the Commission. Additionally, the
Company may be required to furnish any other information requested by the
Commission. No person may become a shareholder of, or receive any percentage of
profits from licensed Nevada operating companies without first obtaining
licenses and approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, any registered company
or its licensed subsidiary 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 the licensed subsidiary 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 registered company who are actively and directly
involved in the gaming activities of the licensed subsidiary 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 deemed
reasonable. A finding of suitability is comparable to licensing, and both
require the submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or a finding of
suitability must pay all of the costs of the investigation. Changes in licensed
positions with the registered company or its licensed subsidiary must be
reported to the Nevada Gaming Authorities. In addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities also 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 having a
relationship with the registered company or its licensed subsidiary, the
companies involved would be required to sever all relationships with such a
person. Additionally, the Commission may require the registered company or its
licensed subsidiary to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or questions
pertaining to licensing are not subject to judicial review in Nevada.
Elsinore and Four Queens are required to submit detailed financial and
operating reports to the Commission. Substantially all loans, leases, sales of
securities and similar financing transactions by Four Queens must be reported
to, or approved by, the Commission.
If it were determined that the Nevada Act was violated by the licensed
subsidiary or the registered company, the gaming licenses or registration held
by the registered company and its licensed subsidiary could be limited,
conditioned, suspended or revoked subject to compliance with certain statutory
and regulatory procedures. Moreover, at the discretion of the Commission, the
registered company and its licensed subsidiary and persons involved could be
subject to substantial fines for each separate violation of the Nevada Act.
A beneficial holder of the registered 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 holder of
the registered company's voting securities determined if the 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 of
the investigation incurred by the Nevada Gaming Authorities in conducting such
an investigation. Also, the Clark County Liquor Gaming Licensing Board and the
City of Las Vegas have taken the position that it has the authority to approve
all persons owning or controlling the stock of any corporation controlling a
gaming license.
The Nevada Act requires any person who acquires more than 5% of the
registered company's voting securities to report the acquisition to the
Commission. The Nevada Act requires that beneficial owners of more than 10% of
the registered company's voting securities apply to the Commission for a finding
of suitability within 30 days after the Chairman of the Board mails written
notice requiring such a 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 registered company's voting securities may apply to the
Commission for a waiver of such a finding of suitability if such institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold the voting securities for
investment purposes only 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 registered company, any change in the
registered company's corporate charter, bylaws, management, policies or
operations of the registered company, or any of its gaming affiliates, or any
other action which the Commission finds to be inconsistent with holding the
registered company's voting securities for investment purposes only. Activities
which are not deemed inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by shareholders; (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
Commission may determine to be consistent with such investment intent. If the
Commission grants a waiver to an "institutional investor" the waiver does not
include a waiver or exemption from the requirement for prior approval to
"acquire control" of a registered corporation. If the beneficial holder 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 Commission or
the Chairman of the Board may be found unsuitable. The same restriction applies
to a record owner if the record owner, after request, fails to identify the
beneficial owners. Any shareholder 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 Commission
may be guilty of a criminal offense. The registered company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a shareholder or to have any other relationship with the registered company
or its subsidiaries, the registered company (i) pays that person any dividend or
interest on voting securities of the registered 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 Commission may, in its sole 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 the registered corporation. If
the 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
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 registered 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 a disclosure may be grounds for
finding the record holder unsuitable. The registered company is also required to
render maximum assistance in determining the identity of the beneficial owner.
The Commission has the power to require the registered company's stock
certificates to bear a legend indicating that the securities are subject to the
Nevada Act.
Elsinore may not make a public offering of its securities without the
prior approval of the 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. Any such
approval, if given, does not constitute a finding, recommendation or approval by
the Commission or the Board as to the accuracy or adequacy of the prospectus or
the investment merits of the securities. Any representation to the contrary is
unlawful.
Application for approval of public offerings and the like may be filed
without complete documentation related thereto so long as the documents and
information are supplied to the Board and Commission as they become available in
accordance with the normal and customary practice of the securities industry.
Additionally, the Commission may, either generally or specifically, exempt any
person, security or transaction from application pursuant to its regulations
regarding publicly traded corporations.
Changes in control of the registered company or its subsidiaries
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 Commission. Entities
seeking to acquire control of a registered corporation must satisfy the Board
and the Commission in a variety of stringent standards prior to assuming control
of such registered corporation. The Commission may also require controlling
shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposed to acquire control, to be
investigated and licensed as part of the approval process related to the
transaction.
License fees and taxes, computed in various ways dependent upon the
type of gaming activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations 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 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, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered, or
required to be registered, or is under common control with such person
(collectively, "Licensees"), and who propose to become involved in a gaming
venture outside the State of Nevada are required to deposit with the Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the discretion
of the 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 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 gaming operations, engage in activities that are
harmful to the State 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 basis of personal unsuitability.
The granting of any registrations, amendment of orders of registration,
findings of suitability, approvals or licenses are discretionary with the Nevada
Gaming Authorities. The burden of demonstrating the suitability or desirability
of certain business transactions is at all times upon the applicants. Any
licensing or approval process requires the submission of detailed financial,
business and possible personal information, and the completion of a thorough
investigation.
New Jersey. Four Queens was granted a Casino Service Industry License
by the State of New Jersey on May 11, 1998. This license is scheduled to expire
on May 31, 2001.
Washington. Elsinore's subsidiary, Olympia Gaming Corporation, has not
renewed its gaming license issued by the State of Washington as it is no longer
performing under, or seeking, a management contract in that state.
Item 2. PROPERTIES.
Except for certain small parcels of land owned in fee, the real
property underlying the Four Queens Casino is leased pursuant to several
long-term leases, none of which expire 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 Casino is subject to security interests under the Company's new
1998 Mortgage Notes. See Note 12 of Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS.
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 (the "WARN Act") and breach of contract.
The plaintiffs filed three proofs of claims in the Company's and Four
Queens' bankruptcy proceedings. Two of the proofs of claims, one for the union
employees and one for the non-union employees, totaled $14 million and allege
liability under the WARN Act for failure to notify employees properly in advance
of cessation of operations of Elsinore Shore Associates. The third proof of
claim in the amount of $800,000 was based upon retroactive wage agreements
executed by Elsinore Shore Associates promising to pay its employees deferred
compensation if the employees remained with Elsinore Shore Associates during its
reorganization. The proofs of claims were filed as priority claims, not general
unsecured claims.
Based upon the Order For Verdict Upon Liability Issues issued by the
presiding judge in New Jersey, as well as the Bankruptcy Code, the Bondholders'
Committee in the bankruptcy proceeding filed an objection to the WARN Act proofs
of claims. The Bankruptcy Court tentatively approved the objection and
disallowed the claims pending entry of the final order from the New Jersey
court. No final appealable order has been entered as of yet by the Bankruptcy
Court.
On October 22, 1997, the New Jersey court entered its Findings of Fact
and Conclusions of Law and Judgment Upon Liability Issues, which affirmed its
prior holding denying WARN Act liability. The plaintiffs have appealed that
decision to the Third Circuit Court of Appeals. The appeal is currently pending.
A second objection was filed on behalf of the Bondholders' Committee to
the $800,000 proof of claim regarding the retroactive wage benefits. Because the
New Jersey court had found the Company to be liable on these obligations
together with Elsinore Shore Associates, the objection filed by the Bondholders'
Committee did not dispute the allowability of the proof of claim to participate
with the other unsecured creditors in the Company's bankruptcy proceedings.
However, the Bondholders' Committee objected to the claim of priority status in
the Company's proceedings. The Bondholders' Committee objected to the claim in
its entirety in the Four Queens' bankruptcy proceeding. The Bankruptcy Court
granted the objections and ruled that the proof of claim for retroactive wage
benefits would be an allowed unsecured claim against the Company to be treated
in Class 10 of the Plan with final determination of the actual amount of the
claim to be made by the New Jersey District Court. The amount was subsequently
determined by stipulation to be $675,000, inclusive of interest. The plaintiffs
thereafter filed a motion for reconsideration regarding the Bankruptcy Court's
order, which motion was ultimately denied. The final order was entered by the
court in July 1997, and the plaintiffs have appealed the order to the Ninth
Circuit Bankruptcy Appellate Panel. The Ninth Circuit Bankruptcy Appellate Panel
subsequently affirmed the Bankruptcy Court's order. The Appellate decision was
not thereafter appealed to the Ninth Circuit Court of Appeals and is now final.
As a result, the retroactive wage benefits claim are now being included in the
Class 10 Unsecured Creditor's pool of the bankruptcy proceedings, which is
capped at $1.4 million and, therefore, will not have a material financial effect
on the Company.
The Company is a party to other claims and lawsuits. (See Item 1.
BUSINESS - Agreement and Plan of Merger). Management believes that such matters
are either covered by insurance or, if not insured, will not have a material
adverse effect on the financial position or results of operations of the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of fiscal 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no organized or established trading market for the Common
Stock. The Common Stock's prices are reported on the NASDAQ Stock Market
"Bulletin Board."
As of the close of business on March 15, 1999, there were approximately
4,009 record owners of Common Stock.
The trading market for the Common Stock is extremely thin. The MWV
Accounts own 94.3% of the outstanding Common Stock, which they acquired pursuant
to the Plan, and would own 99.7% giving effect to the conversion of their
50,000,000 shares of Series A Convertible Preferred Stock into shares of Common
Stock. (see Item 1. Business - Recapitalization). Except pursuant to the
Recapitalization and the Plan, the MWV Accounts have not bought or sold any
Common Stock. The Common Stock held by the MWV Accounts is deemed beneficially
owned by Elsinore's Chairman of the Board, and Elsinore's directors and
executive officers as a group are deemed to own beneficially 99.7% of the
outstanding Common Stock. The remaining .3% of the outstanding shares is widely
dispersed among numerous small shareholders.
On May 14, 1997, the last full day preceding Elsinore's filing with the
SEC of its Form 10-Q which reported, among other things, that Paulson had
expressed an interest in acquiring all of the outstanding Common Stock, both the
high and low sale prices of the Common Stock reported on the NASDAQ "Bulletin
Board" were $0.13 1/2 (13 1/2 cents). On December 31, 1997, both the high and
low sale prices of the Common Stock reported on the NASDAQ "Bulletin Board" were
$2.25. In view of the lack of an organized or established trading market for the
Common Stock, the extreme thinness of whatever trading market exists, the
limited number of shares that are not held by the MWV Accounts, and the
continuing litigation with R&E and EAS regarding the enforceability of the
Merger Agreement (see Item 1. BUSINESS. - Agreement and Plan of Merger), these
reported prices may not be indicative of the price at which any shareholder may
be able to sell his or her shares.
Elsinore has not paid any dividends on the Common Stock in the past two
years and does not currently expect to pay any dividends in the foreseeable
future.
On September 29, 1998, MWV Accounts contributed $4,641,000, net of
$260,000 of expenses, to the capital of Elsinore, which Elsinore used, together
with other funds of Elsinore, to purchase in full all of Elsinore's outstanding
11.5% First Mortgage Notes due 2000 in the original aggregate principal amount
of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage
Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts
50,000,000 shares of Series A Convertible Preferred Stock of the Company in
exchange for the surrender to the Company of $18,000,000 original principal
amount of certain second mortgage notes held by the MWV Accounts.
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, 1998. This data
should be read in conjunction with the consolidated financial statements and
notes thereto set forth elsewhere herein.
Reorganized Predecessor
Company Company
March 1 January 1
December 31, To To December 31,
December 31, February 28,
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in thousands except per share amounts)
Balance sheet data:
Total assets $49,748 $49,823 $42,627 $37,101 $67,315
Current portion
of long-term debt 1,906 1,477 50 54 59
Long-term debt less
Current maturities 15,548 38,141 62,912 62,858 60,330
6% Cumulative Convertible
Preferred Stock 18,270 - - - - -
Shareholders' equity
(deficit) $24,109 $3,086 $(40,710) $(43,441) $(1,664)
======= ====== ========= ========= ========
Operations data:
Revenues (net) $55,900 $43,992 $9,796 $61,199 $56,973 $62,706
======= ======= ====== ======= ======= ========
(Loss) before
Extraordinary items (1,272) (1,914) (190) (1,556) (45,749) (10,716)
Extraordinary items (77)
Gain (loss) on
Extinguishment of
Debt - - 35,977 - - 735
------- ------- ------ ------- -------- -------
Net loss $ (1,349) (1,914) 35,787 (1,556) (45,749) (9,441)
Undeclared dividends on
Cumulative preferred stock 270 - - - - -
------- ------- ------- ------- ------- -------
Net income (loss) applicable to
Common Shares $ (1,619) (1,914) 35,787 (1,556) (45,749) (9,441)
======== ======= ====== ======= ======== =======
Basic per share
Amounts:
Loss before
Extraordinary items $(.31) $(.39) $(.01) $(.10) $(2.95) $(.84)
Extraordinary items (.02) - 2.26 - - .06
Net income (loss) per share $(.33) $(.39) $2.25 $(.10) $(2.95) $(.78)
====== ====== ===== ====== ======= ======
Capital costs:
Depreciation and
Amortization $2,804 $1,774 $529 $3,816 $3,948 $3,990
Interest related to
prior-period tax
Obligation - - - - 590 885
Interest expense 4,372 4,239 772 2,505 8,006 9,086
Capital costs $7,176 $6,013 $1,301 $6,321 $12,544 $13,961
====== ====== ====== ====== ======= =======
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $5.6 million at
December 31, 1998, as compared with $5.9 million at December 31, 1997 a decrease
of $300,000 from December 31, 1997. On September 29, 1998, the MWV Accounts
contributed $4,641,000, net of $260,000, of expenses to the capital of the
Company, which was then used to purchase in full the remaining principal amounts
of the Company's 11.5% First Mortgage Notes due 2000 and 13.5% Second Mortgage
Notes due 2001. Also on September 29, 1998, the Company issued to the MWV
Accounts 50,000,000 shares of Series A Convertible Preferred Stock in exchange
for the surrender to the Company of $18.0 million original principal amount of
second mortgage notes. The Company also issued to the MWV Accounts New Mortgage
Notes in the aggregate principal amount of $11,104,000 in exchange for all
remaining outstanding Second Mortgage Notes in the same aggregate principal
amount. In addition, pursuant to the Subscription Rights Agreement provided for
in the Plan, an additional $5.0 million in cash became available to the Company
following the close of business on February 28, 1997. Of that amount, $4.4
million had been received prior to December 31, 1996 and was considered
restricted cash until the Plan Effective Date, and $600,000 was received in
1997. Significant debt service on the Company's New Mortgage Notes is paid in
February and August and should be considered in evaluating cash increases or
decreases in the second and fourth quarters.
The Company was in compliance with the covenants applicable to the 12.83% New
Mortgage Notes as of December 31, 1998. Management considers it likely that the
Company will be in violation of such covenants during the year ended December
31, 1999. Accordingly, waivers of non-compliance which expire on January 2, 2000
were obtained from the holders of the 12.83% New Mortgage Notes.
For the twelve months of 1998, the Company's net cash provided by operating
activities was $3,275,000 compared to $1,282,000 in 1997. EBITDA for 1998 and
1997 was $6.3 million and $5.5 million, respectively. The repayment of the First
Mortgage Notes and of the Second Mortgage Notes, the surrender of $18,000 of the
original principal amount of second mortgage notes held by the MWV Accounts, and
the issuance of the New Mortgage Notes in exchange for the remaining second
mortgage notes held by the MWV Accounts has significantly lowered the Company's
debt service requirements (see Item 1. BUSINESS - Recapitalization). Scheduled
interest payments on the then outstanding notes and other indebtedness were $4.4
million in 1998 and the currently outstanding notes and other indebtedness will
decline to $2.0 million in 1999 and $1.2 million in 2001. Management believes
that sufficient cash flow will be available to cover the Company's debt service
for the next 12 months and enable investment in budgeted capital expenditures of
approximately $3.5 million for 1999, including an arrangement to finance slot
machine purchases of $1 million in 1999. The Company's ability to service its
debt will be dependent on future performance, which will be affected by, among
other things, prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control.
Principal on the New Mortgage Notes is due on August 20, 2001. The New Mortgage
Notes are redeemable by the Company at any time at 100% of par, without premium.
The Company is required to make an offer to purchase all New Mortgage Notes at
101% upon any "Change of Control" as defined in the indenture governing the New
Mortgage Notes. The New Mortgage Notes are guaranteed by Elsub Management
Corporation, Four Queens, Inc. and Palm Springs East Limited Partnership and are
collateralized by a second deed of trust on and pledge of substantially all the
assets of the Company and the guarantors. Cash flow from operations is not
expected to be sufficient to pay all of the principal of the New Mortgage Notes
at maturity on August 20, 2001 or upon any Change of Control. Accordingly, the
ability of the Company to repay the New Mortgage Notes at maturity, or upon any
Change of Control, will be dependent upon its ability to refinance the New
Mortgage Notes. There can be no assurance that the Company will be able to
refinance the principal amount of the New Mortgage Notes on favorable terms or
at all.
The note agreement executed in connection with issuance of New Mortgage Notes,
among other things, places significant restrictions on the incurrence of
additional indebtedness by the Company, the creation of additional liens on the
collateral securing the New Mortgage Notes, transactions with affiliates and
payment of certain restricted payments. In order for the Company to incur
additional indebtedness or make a restricted payment, the Company must, among
other things, meet a specified consolidated fixed charges coverage ratio and
have earned $1 million in EBITDA. The Company must also maintain a minimum
amount of consolidated net worth.
Payment was due on the 13 1/2% Second Mortgage Notes due 2001 on August 31,
1998. This payment was waived until December 30, 1998. At such time, an
additional waiver was obtained until December 31, 1999. Payment made on January
5, 1999 for $1.0 million. Anticipated payment schedule: $250 thousand in March,
June, and September with final payment of $290 thousand in December 1999.
Management considers it important to the competitive position of the Four Queens
Casino that expenditures be made to upgrade the property. Management budgeted
approximately $3.9 million for capital expenditures in 1998 and $3.5 million in
1999. The Company expects to finance such capital expenditures from cash on
hand, cash flow and slot lease financing. Uses of cash during 1998 included
capital expenditures of $2.1 million. Based upon current operating results and
cash on hand, the Company has sufficient operating capital to fund its operation
and capital expenditures for the next 12 months.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This situation is generally referred to as the "Year 2000 Problem." If
such situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
The Company has conducted a comprehensive review of its computer systems and
other systems (both information technology ("IT") and non-IT systems) for the
purpose of assessing its potential Year 2000 Problem and is in the process of
modifying or replacing those systems which are not Year 2000 compliant. If
modifications are not made or not completed timely or unexpected issues arise,
the Year 2000 Problem could have a significant impact on the Company's
operations.
All costs related to the Year 2000 Problem are expensed as incurred, while the
cost of new hardware and software is capitalized and amortized over its expected
useful life. The costs associated with Year 2000 compliance have not been and
are not anticipated to be material to the Company's financial position or
results of operations and are expected to be funded out of working capital. As
of December 31, 1998, the Company has incurred costs of approximately $200,000
(primarily for acquisition of new systems from third parties) related to the
system applications and anticipates spending an additional $225,000 to become
Year 2000 compliant, which represents substantially all of the Company's IT
budget for 1999. The estimated completion date and remaining costs are based
upon management's best estimates, as well as third party modification plans and
other factors. However, there can be no assurance that such estimates will be
accurate and actual results could differ materially.
In addition, the Company has communicated with its major vendors and suppliers
to determine their state of readiness relative to the Year 2000 problem and the
Company's possible exposure to Year 2000 issues of such third parties. To date,
no material issues have been reported to the Company. However, there can be no
assurance that the systems of other companies, which the Company's systems may
rely upon, will be timely converted or representations made to the Company by
these parties are accurate. The failure of a major vendor or supplier to
adequately address its Year 2000 Problem could have a significant adverse impact
on the Company's operations.
Planning for the Year 2000 Problem, including contingency planning, is
significantly complete and will be revised if necessary.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires companies to classify items of other comprehensive income
by their nature in a financial statement and display the accumulated balance of
other income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. There is no difference between net
income and comprehensive income for the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 established additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company operates in one
Segment of the gaming industry.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Form 10-K and other materials filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Company) contains statements that are forward looking,
such as statements relating to business strategies, plans for future development
and upgrading, the anticipated cost and timing related to remediation of the
Year 2000 Problem, capital spending, financing sources, existing and expected
competition and the effects of regulations. Such forward-looking statements
involve important known and unknown risks and uncertainties that could cause
actual results and liquidity to differ materially from those expressed or
anticipated in any forward-looking statements. Such risks and uncertainties
include, but are not limited to: those related to the effects of competition;
leverage and debt service; financing needs or efforts; actions taken or omitted
to be taken by third parties, including the Company's customers, suppliers,
competitors, and stockholders, as well as legislative, regulatory, judicial, and
other governmental authorities; the loss of any licenses or permits or the
Company's failure to renew gaming or liquor licenses on a timely basis; changes
in business strategy, capital improvements, or development plans; general
economic conditions; changes in gaming laws, regulations (including the
legalization of gaming in various jurisdictions), or taxes; risks related to
development and upgrading activities; risks related to the Year 2000 Problem;
and other factors described from time to time in the Company's reports filed
with the Securities and Exchange Commission. Accordingly, actual results may
differ materially from those expressed in any forward-looking statement made by
or on behalf of the Company. Any forward-looking statements are made pursuant to
the Private Securities Litigation Reform Act of 1995, and, as such, speak only
as of the date made. The Company undertakes no obligation to revise publicly
these forward-looking statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
REVENUES
Net revenues increased by approximately $2,112,000 or 3.9%, from $53,788,000 for
1997 to $55,900,000 for 1998.
Casino revenues increased by approximately $2,866,000, or 7.9%, from $36,506,000
during the 1997 period to $39,372,000 during the 1998 period due primarily to a
$4,608,000, or 18.7% increase in net slot revenue offset by a $643,000, or 8.4%
decrease in net table games revenues and $666,000 or 22.9% decrease in slot
promotion revenue. During 1998, table games drop decreased $1,794,000 or 3.5%,
and slot coin-in increased $54,170,000, or 11.8%, attributable primarily to the
opening of Nickel Palace in March 1998 and the acquisition of new
state-of-the-art slot equipment. The decrease in table game revenue was also
attributable to a .8% decrease in win percent.
Hotel revenues decreased by approximately $701,000, or 7.2%, from $9,705,000
during the 1997 period to $9,004,000 during the 1998 period due primarily to a
decrease in cash room revenue of $1,550,000 resulting from the decrease in the
average room rate as a result of competitive room pricing in the Las Vegas
market. In addition, some cash revenues were displaced by complimentary revenues
as a result of the implementation of new casino and slot marketing promotions as
a part of management's effort to increase casino revenues.
Food and beverage revenues increased approximately $38,000, or .004%, from
$9,686,000 during the 1997 period to $9,724,000 during the 1998 period due to an
increase in complimentary revenues of $595,000 resulting from the implementation
of casino and slot marketing promotions, which was offset by a decrease in cash
revenues as a result of lower average check.
Other revenues increased by approximately $889,000, or 42%, from $2,115,000
during the 1997 period to $3,004,000 during the 1998 period, due primarily to
payments received under the settlement agreement reached with the Twenty-Nine
Palms Band of Mission Indians.
Promotional allowances increased by approximately $980,000, or 23.2%, from
$4,224,000 during the 1997 period to $5,204,000 during the 1998 period due to an
increase in complimentary rooms, food and beverage resulting from the
implementation of casino and slot marketing promotions.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments (including taxes and
licenses) increased by approximately $1,347,000, or 2.8%, from $48,286,000 for
1997 to $49,633,000 for 1998.
Casino expense decreased by approximately $10,000, or .07%, from $14,299,000
during the 1997 period to $14,289,000 during the 1998 period due to a decrease
in payroll expenses offset with an increase in complimentary rooms, food and
beverages as a result of the casino and slot marketing promotions. Casino
expenses as a percentage of revenues decreased from 39.2% to 36.3% due to the
decrease in expenses and increase in slot revenue.
Hotel expense decreased by approximately $832,000, or 9.6%, from $8,651,000
during the 1997 period to $7,819,000 during the 1998 period, and costs as a
percentage of revenues decreased from 89.1% to 86.8%, due to the decrease in
hotel cash revenue as a result of aggressive casino and slot marketing
promotions which resulted in higher promotional allowances.
Food and beverage costs and expenses increased by approximately $579,000, or
9.4%, from $6,177,000 during the 1997 period to $6,756,000 during the 1998
period. Food and beverage expenses as a percentage of revenue increased from
63.8% in 1997 to 69.5% in 1998 primarily as a result of an increase in costs
associated with the increase in marketing promotions, which resulted in an
increase in promotional allowances.
The Company believes that citywide competition for experienced employees may
increase employee turnover and lead to increased payroll costs.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased by approximately
$1,462,000, or 15.4%, from $9,501,000 for 1997 to $10,963,000 for 1998 primarily
due to an increase in complimentary costs. As a percentage of total net
revenues, selling, general and administrative expenses increased from 17.7%
during the 1997 period to 19.6% during the 1998 period due to the increase in
promotional allowance as a result of an increase in casino and slot promotions.
EBITDA AND MORTGAGE NOTE COVENANTS
EBITDA increased by approximately $766,000, or 13.9%, from $5,502,000 during
1997 to $6,267,000 during 1998 due to higher revenues, as discussed above.
Pursuant to covenants applicable to the New First Mortgage Notes and New Second
Mortgage Notes, the Company is required to maintain a minimum consolidated fixed
charges coverage ratio (the "Ratio") of 1.25 to 1.00. The Ratio is defined as
the ratio of aggregate consolidated EBITDA to the aggregate consolidated fixed
charges for the 12-month reference period. For the reference periods ending
December 31, 1998 and March 31, 1999, the Company obtained waivers of those
covenants from the holders of the First Mortgage Notes and Second Mortgage Notes
due to the Ratio being lower than required as of the reference period ended
December 31, 1998 and the expectation that it will be lower than required as of
the reference period ended March 31, 1999. As of year-end 1998, the Ratio was
1.43 to 1.00. The waivers further provided that the noteholders will not take
action prior to January 2, 2000 in respect of a Ratio lower than 1.25 to 1.00
for the reference periods ending June 30 and September 30, 1999.
OTHER EXPENSES
Depreciation and amortization increased by approximately $501,000, or 21.8%,
from $2,303,000 during the 1997 period to $2,804,000 during the 1998 period due
to an increase in property and equipment for the 1998 period.
Interest expense decreased by approximately $639,000, or 12.8%, from $5,011,000
during 1997 to $4,372,000 for 1998, due to the recapitalization transaction
described in Note 12 to the financial statements.
During 1998, the Company incurred approximately $363,000 in merger and
acquisition costs related to a pending Merger that was not completed.
EXTRAORDINARY ITEMS
The Company incurred approximately $77,000 in extraordinary costs associated
with the buyout of the First Mortgage Notes.
NET INCOME (LOSS)
As a result of the factors discussed above, net loss decreased by approximately
$565,000, from a loss of $1,914,000 during 1997 to a loss of $1,349,000 during
1998.
1997 COMPARED TO 1996
REVENUES
Net revenues decreased by approximately $7,411,000 or 12.1%, from $61,199,000
for 1996 to $53,788,000 for 1997.
Casino revenues decreased by approximately $5,794,000, or 13.7%, from
$42,300,000 during the 1996 period to $36,506,000 during the 1997 period due
primarily to a $2,520,000, or 24.8% decrease in net table games revenues and a
$2,789,000, or 9.2% decrease in net slot revenue. Management has eliminated
certain complimentary programs which generated significant volume in 1996.
During 1997, table games drop decreased $26,631,000 or 34%, and slot coin-in
decreased $106,422,000, or 18.9%. The decrease in table game volume was
partially offset by a 1% increase in win percent.
Hotel revenues decreased by approximately $1,497,000, or 13.4%, from $11,202,000
during the 1996 period to $9,705,000 during the 1997 period due primarily to a
decrease in complimentary room revenues of $1,094,000 resulting from the
elimination of certain table games marketing programs. The majority of the
complimentary rooms were replaced with cash paying customers at lower room
rates.
Food and beverage revenues decreased approximately $2,687,000, or 21.7%, from
$12,373,000 during the 1996 period to $9,686,000 during the 1997 period due to a
decrease in complimentary revenues of $1,614,000 resulting from the elimination
of the table games marketing programs and the closure of two unprofitable food
outlets which were replaced by profitable leased fast-food franchises.
Other revenues increased by approximately $613,000, or 40.8%, from $1,502,000
during the 1996 period to $2,115,000 during the 1997 period, due primarily to
payments totaling $711,000 received under the settlement agreement reached with
the Twenty-Nine Palms Band of Mission Indians.
Promotional allowances decreased by approximately $1,954,000, or 31.6%, from
$6,178,000 during the 1996 period to $4,224,000 during the 1997 period due to a
decrease in complimentary rooms, food and beverage resulting from the
elimination of the table games marketing programs.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments (including taxes and
licenses) decreased by approximately $5,956,000, or 11.0%, from $54,242,000 for
1996 to $48,286,000 for 1997.
Casino expense decreased by approximately $3,395,000, or 19.2%, from $17,694,000
during the 1996 period to $14,299,000 during the 1997 period due to a decrease
in payroll and complimentary expenses. Casino expenses as a percentage of
revenues decreased from 41.8% to 39.2% due to management's redirection of the
Company's marketing efforts from table games to slots.
Hotel expense increased by approximately $169,000, or 2%, from $8,482,000 during
the 1996 period to $8,651,000 during the 1997 period, and costs as a percentage
of revenues increased from 75.7% to 89.1%, due to the reduction in cost of comps
transferred to the Casino department.
Food and beverage costs and expenses decreased by approximately $911,000, or
12.9%, from $7,088,000 during the 1996 period to $6,177,000 during the 1997
period resulting from a corresponding decrease in revenues.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased by approximately
$830,000, or 8%, from $10,331,000 for 1996 to $9,501,000 for 1997 primarily due
to reduced energy, maintenance and complimentary costs. As a percentage of total
net revenues, selling, general and administrative expenses increased from 16.9%
during the 1996 period to 17.7% during the 1997 period due to lower revenues
over which fixed costs are incurred.
EBITDA AND MORTGAGE NOTE COVENANTS
EBITDA decreased by approximately $1,455,000, or 20.9%, from $6,957,000 during
1996 to $5,502,000 during 1997 due to lower revenues, as discussed above.
Pursuant to covenants applicable to the New First Mortgage Notes and New Second
Mortgage Notes, the Company is required to maintain a minimum consolidated fixed
charges coverage ratio (the "Ratio") of 1.25 to 1.00. The Ratio is defined as
the ratio of aggregate consolidated EBITDA to the aggregate consolidated fixed
charges for the 12-month reference period. For the reference periods ending
December 31, 1997 and March 31, 1998, the Company obtained waivers of those
covenants from the holders of the First Mortgage Notes and Second Mortgage Notes
due to the Ratio being lower than required as of the reference period ended
December 31, 1997 and the expectation that it will be lower than required as of
the reference period ended March 31, 1998. As of year-end 1997, the Ratio was
1.12 to 1.00. The waivers further provided that the noteholders will not take
action prior to January 2, 1999 in respect of a Ratio lower than 1.25 to 1.00
for the reference periods ending June 30 and September 30, 1998.
OTHER EXPENSES
Depreciation and amortization decreased by approximately $1,513,000, or 39.6%,
from $3,816,000 during the 1996 period to $2,303,000 during the 1997 period due
to revaluation of property and equipment as a result of fresh start accounting.
Interest expense increased by approximately $2,506,000, or 100%, from $2,505,000
during 1996 to $5,011,000 for 1997, due to the restatement of the Company's
mortgage notes as a result of the Plan. These notes began accruing interest as
of August 12, 1996, the Confirmation Date.
Reorganization items totaling $2,192,000 were incurred by the Company during
1996. These consisted primarily of professional fees incurred as a result of the
reorganization under Chapter 11 of the Bankruptcy Code. During 1997, there was
$292,000 incurred for additional reorganization items.
NET INCOME (LOSS)
As a result of the factors discussed above, net loss increased by approximately
$358,000, from a loss of $1,556,000 during 1996 to a loss of $1,914,000 during
1997.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
The company's financial instruments include cash and long-term debt. At January
3, 1999, the carrying values of the Company's financial instruments approximated
their fair values based on current market prices and rates. It is the Company's
policy not to enter into derivative financial instruments. The Company does not
currently have any significant foreign currency exposure since it does not
transact business in foreign currencies. Due to this, the Company does not have
significant overall currency exposure at January 3, 1999.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
For the years ended December 31, 1998, 1997 and 1996
Page
Independent Auditor's Report 31
Consolidated Balance Sheets as of December 31, 1998 and 1997 32
Consolidated Statements of Operations for the Twelve
Months Ended December 31, 1998 (Reorganized Company); Ten Months Ended
December 31, 1997(Reorganized Company),
Two Months Ended February 28, 1997 and Year Ended
December 31, 1996 (Predecessor Company);
Combined Reorganized and Predecessor Company for the
Year Ended December 31, 1997 34
Consolidated Statements of Shareholders' Equity
(Deficiency) for the Years Ended December 31, 1998,
1997 and 1996 36
Consolidated Statements of Cash Flows for the Twelve Months
Ended December 31, 1998 (Reorganized Company); Ten Months ended
December 31,1997(Reorganized Company), Two Months
Ended February 28, 1997 and Year Ended December 31, 1996
(Predecessor Company); Combined Reorganized and
Predecessor Company for the Year Ended December 31, 1997 37
Notes to Consolidated Financial Statements 41
All Financial Statement Schedules are omitted because they are
either not required or not applicable, or the required information is presented
in the Notes to Consolidated Financial Statements.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Elsinore Corporation:
We have audited the consolidated balance sheets of Elsinore Corporation and
subsidiaries (Reorganized Company) as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the year ended December 31,1998 and the ten month period from
March 1,1997 (effective date) through December 31, 1997 and of Elsinore
Corporation and subsidiaries (Predecessor Company) for the period from January
1, 1997 through February 28, 1997 and for the year 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 as of December 31, 1998 and 1997 and the results of their
operations and cash flows for the year ended December 31, 1998 and the ten month
period from March 1, 1997 (effective date) through December 31, 1997 and of
Elsinore Corporation and subsidiaries, (Predecessor Company) for the period from
January 1, 1997 through February 28, 1997 and for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada
February 26, 1999
Elsinore Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
December 31, 1998 December 31,
1997
------------------- --------------------
Assets
Current Assets:
Cash and cash equivalents 5,604 5,908
Accounts receivable, less allowance for
Doubtful accounts of $219 and $165,
respectively 473 623
Inventories 445 382
Prepaid expenses 1,153 1,846
------------------- --------------------
Total current assets 7,675 8,759
Restricted cash - 914
Property and equipment, net 40,218 39,042
Reorganization value in excess of amounts
Allocable to identifiable assets, 350 367
net
Other assets 1,505 741
------------------- --------------------
Total assets 49,748 49,823
=================== ====================
See accompanying notes to consolidated financial statements.
F-2
Elsinore Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
December 31, 1998 and 1997
(Dollars in thousands)
December 31, 1998 December 31,
1997
--------------------- --------------------
Liabilities and shareholders' equity Current liabilities:
Accounts payable 792 1,174
Accrued interest 2,764 1,492
Accrued expenses 4,359 4,453
Current maturities of long-term debt 1,906 1,477
--------------------- --------------------
Total current liabilities 9,821 8,596
Long-term debt, less current maturities 15,548 38,141
--------------------- --------------------
Total liabilities 25,369 46,737
--------------------- --------------------
Commitments and contingencies
Shareholders' equity :
6% cumulative convertible preferred stock, no par
value. Liquidation preference of $18,270,000.
Authorized, issued and outstanding 50,000,000 shares
18,270 -
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
And outstanding 4,929,313 shares 5 5
Additional paid-in capital 9,367 4,995
Accumulated deficit (3,263) (1,914)
--------------------- --------------------
Total shareholders' equity 24,379 3,086
--------------------- --------------------
Total liabilities and shareholders'
Equity 49,748 49,823
===================== ====================
See accompanying notes to consolidated financial statements.
F-3
Elsinore Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Combined
Reorganized
And
Predecessor
Reorganized Company Predecessor Company Company
-------------------------------------------------------------------------------------- ------------------
Period from Period from
Year March 1 January 1 Year Year
Ended To To Ended Ended
December 31, December 31, 1997 February 28, December 31, December 31,
1998 1997 1996 1997
------------------ ------------------ ---------------- ----------------- ------------------
Revenues, net:
Casino 39,372 29,584 6,922 42,300 36,506
Hotel 9,004 7,969 1,736 11,202 9,705
Food and beverage 9,724 7,941 1,745 12,373 9,686
Other 3,004 1,962 153 1,502 2,115
Promotional
Allowances (5,204) (3,464) (760) (6,178) (4,224)
------------------ ------------------ ---------------- ----------------- ----------------
Total revenues,
Net 55,900 43,992 9,796 61,199 53,788
Costs and expenses:
Casino 14,289 11,589 2,710 17,694 14,299
Hotel 7,819 7,241 1,410 8,482 8,651
Food and beverage 6,756 5,072 1,105 7,088 6,177
Taxes and licenses 5,911 4,497 980 6,592 5,477
Selling, general and
Administrative 10,963 7,694 1,807 10,331 9,501
Rents 3,895 3,508 673 4,055 4,181
Depreciation and
Amortization 2,804 1,774 529 3,816 2,303
Interest 4,372 4,239 772 2,505 5,011
Merger costs 363 - - - -
------------------ ------------------ ---------------- --------------- ----------------
Total costs and
expenses 57,172 45,614 9,986 60,563 55,600
------------------ ------------------ ---------------- --------------- ----------------
Income (loss) before
Reorganization
items and
extraordinary
gain on
elimination of
debt (1,272) (1,622) (190) 636 (1,812)
F-4
Elsinore Corporation and
Subsidiaries Consolidated Statements
of Operations (continued) (Dollars in
thousands, except per share amounts)
Combined
Reorganized
And
Reorganized Predecessor
Company Predecessor Company Company
---------------------------------------- -------------------------------------- ----------------
Period from Period from
Year March 1 January 1 Year Year
Ended To to Ended Ended
December 31, December 31, 1997 February 28, December 31, December 31,
1998 1997 1996 1997
----------------- ------------------ ------------------ --------------- ----------------
Reorganization items - 292 - 2,192 292
Extraordinary gain (loss) on
elimination of Debt
(77) - 35,977 - 35,977
----------------- ------------------ ------------------ --------------- ----------------
Net income (loss) (1,349) (1,914) 35,787 (1,556) 34,063
Undeclared dividends on Cumulative
Preferred Stock
270 - - - -
Net income (loss) applicable to
common shares
$(1,619) (1,914) 35,787 (1,556) 34,063
================= ================== ================== ================ ===============
Basic and diluted
income (loss) per share:
Income (loss)
before
Extraordinary item
($.31) ($.39) ($0.01) ($0.10)
Extraordinary item (.02) - $2.26 -
----------------- ------------------ ------------------ --------------- ----------------
Net income (loss) ($.33) ($.39) $2.25 ($0.10)
================= ================== ================== =============== ================
Weighted average
number of common
shares
outstanding 4,929,313 4,929,313 15,891,793 15,891,793
================= ================== ================== =============== ================
See accompanying notes to consolidated financial statements.
F-5
Elsinore Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity (Deficiency)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
Additional
Common Common Prefered Prefered Paid-in Accumulated
Shares Amount Shares Amount Capital Deficiency Total
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)
Proceeds from issuance of
common stock subscription
rights - - - - 713 - 713
Net income
predecessor company
Jan. 1, 1997-Feb.
28, 1997 - - - - - 35,787 35,787
Fresh Start
Adjustments (10,962,480) (11) - - (65,320) 74,541 9,210
Net loss of
reorganized company
Mar. 1, 1997-
Dec. 31, 1997 - - - - - (1,914) (1,914)
-----------------------------------------------------------------------------------
Balance, December 31,
1997 4,929,313 5 - - 4,995 (1,914) 3,086
Capital Contribution net - - - - 4,642 - 4,642
Issuance of Preferred
Stock - - 50,000,000 $18,000 - - 18,000
Net loss - - - - - (1,349) (1,349)
Undeclared Preferred Stock
dividends - - - 270 (270) - -
-----------------------------------------------------------------------------------
Balance, December 31, 1998 4,929,313 5 50,000,000 18,270 9,367 (3,263) 24,379
===================================================================================
See accompanying notes to consolidated financial statements.
F-6
Elsinore Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Combined
Reorganized and
Predecessor
Company
Reorganized Company Predecessor Company
----------------------------------------------------------------------------------------
Period from Period from
Year March 1 January 1 Year Year
Ended To to Ended Ended
December 31, 1998 December 31, 1997 February 28, December 31, December 31,
1997 1996 1997
----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) ($1,349) ($1,914) $35,787 ($1,556) $33,873
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Extraordinary item 77 - (35,977) - (35,977)
Depreciation and
amortization 2,804 1,774 529 3,816 2,303
Loss on sale of equipment - 3 - - 3
Accretion of discount on
long-term debt - - - 98 -
Reorganization items - - - 2,192 -
(Increase) decrease in
accounts receivable 150 (77) 269 (85) 192
(Increase) decrease in
inventories (63) (34) 6 (106) (28)
(Increase) decrease in
prepaid expenses 693 (558) (111) (149) (669)
(Increase) decrease in
restricted cash 914 (561) 4,092 (4,445) 3,531
(Increase) decrease in
other assets (747) - 2 80 2
Increase (decrease) in
Accounts payable (382) 72 (178) (116) (106)
Increase (decrease) in
Accrued expenses (94) (2,314) 591 (1,368) (1,723)
Increase (decrease) in
Accrued interest 1,272 (868) 749 2,037 (119)
----------------------------------------------------------------------------------------
Net cash provided by (used
in) operating activities 3,275 (4,477) 5,759 398 1,282
----------------------------------------------------------------------------------------
F-7
Elsinore Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Combined
Reorganized and
Predecessor
Company
Reorganized Company Predecessor Company
----------------------------------------------------------------------------------------
Period from Period from
Year March 1 January 1 Year Year
Ended to to Ended Ended
December 31, 1998 December 31, 1997 February 28, December 31, December 31,
1997 1996 1997
----------------------------------------------------------------------------------------
Cash flows from investing Activities:
Gross Capital Expenditures (3,980) (4,482) (141) (1,001) (4,623)
Less non-cash financing items
1,863 1,889 - - 1,889
Net Capital expenditures (2,117) (2,593) (141) (1,001) (2,734)
----------------------------------------------------------------------------------------
Net cash used in investing
Activities (2,117) (2,593) (141) (1,001) (2,734)
----------------------------------------------------------------------------------------
Cash flows from financing Activities:
Principal payments on
Long-term debt (6,104) (549) (12) (48) (561)
Proceeds from issuance of
Common stock and
Subscription rights and
contributions 4,642 - 713 4,287 713
Net cash provided by (used
in) financing activities (1,462) (549) 701 4,239 152
----------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (304) (7,619) 6,319 3,636 (1,300)
Cash and cash equivalents at
Beginning of period 5,908 13,527 7,208 3,572 7,208
----------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $5,604 $5,908 $13,527 $7,208 $5,908
========================================================================================
F-8
Elsinore Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Combined
Reorganized and
Predecessor
Company
Reorganized Company Predecessor Company
----------------------------------------------------------------------------------------
Period from Period from
Year March 1 January 1 Year Year
Ended To to Ended Ended
December 31, December 31, February 28, December 31, December 31,
1998 1997 1997 1998 1997
----------------------------------------------------------------------------------------
Supplemental disclosure of
non-cash investing and
financing activities:
Fresh start adjustments
which result in increase
(decrease) to the following:
Property and
equipment, net - - (13,130) - (13,130)
Leasehold acquisitions
Costs, net - - 1,907 - 1,907
Reorganization value in
excess of amounts
Allocable to
identifiable
Assets - - (387) - (387)
Investment in Fremont
Street Experience LLC - - 2,400 - 2,400
Accounts payable - - 344 - 344
Accrued interest - - (525) - (525)
Estimated liabilities
Subject to Chapter 11
Proceedings - - (72,552) - (72,552)
Long-term debt, less
Current maturities - - 36,756 - 36,756
Common stock, predecessor
Company - - (16) - (16)
Common stock, reorganized
Company - - 5 - 5
Additional paid in
capital - - (65,320) - (65,320)
Accumulated deficit - - 110,518 - 110,518
Undeclared preferred
stock dividends 270 - - - -
Conversion of debt to
preferred stock 18,000 - - - -
F-9
Elsinore Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Combined
Reorganized and
Predecessor
Company
Reorganized Company Predecessor Company
----------------------------------------------------------------------------------------
Period from Period from
Year March 1 January 1 Year Year
Ended to to Ended Ended
December 31, December 31, February 28, December 31, December 31,
1998 1997 1997 1996 1997
----------------------------------------------------------------------------------------
Cash paid during the year for:
Interest - 5,129 - 367 5,129
Equipment purchased with
Capital leases 1,863 1,889 - - 1,889
See accompanying notes to consolidated financial statements.
F-10
Elsinore Corporation and Subsidiaries
Notes to Consolidated Financial Statements
On October 31, 1995, Elsinore Corporation, D. I. P. SOP 94-6 (the "Predecessor
Company") filed a voluntary petition to reorganize under Chapter 11 of the
Federal Bankruptcy Code. On August 12, 1996, the Plan of Reorganization filed by
the Predecessor Company (the "Plan") was confirmed and became effective
following the close of business on February 28, 1997 (the "Effective Date").
Upon the effectiveness of the Plan, Elsinore Corporation (the "Reorganized
Company" or the "Company") adopted fresh start reporting in accordance with
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7") of the American Institute of Certified
Public Accountants. Accordingly, the Company's post-reorganization balance sheet
and statement of operations have not been prepared on a consistent basis with
such pre-reorganization financial statements. For accounting purposes, the
inception date of the Reorganized Company is deemed to be March 1, 1997. A
vertical black line is shown in the financial statements to separate the
Reorganized Company from the Predecessor Company since they have not been
prepared on a consistent basis of accounting.
1. Chapter 11 Reorganization
On August 12, 1996 (the "Confirmation Date"), the United States Bankruptcy Court
for the District of Nevada (the "Bankruptcy Court") confirmed the Plan. The Plan
became effective on the Effective Date.
Pursuant to the Plan, the following occurred upon the Effective Date:
The old common stock interests in the Predecessor Company were canceled and the
Reorganized Company issued 4,929,313 shares of new common stock (the "New Common
Stock"). The New Common Stock was distributed to the following classes of
creditors and equity holders:
12.5% First Mortgage noteholders 3,750,000
7.5% Convertible Subordinated noteholders 68,234
Internal Revenue Service 38,373
Old common stockholders 72,706
---------
Total 3,929,313
The Reorganized Company issued the remaining 1 million shares through a rights
offering which raised $5 million to assist in funding the Plan. These shares
were subscribed for by members of the following classes of creditors and equity
holders:
12.5% First Mortgage noteholders 995,280
Old common stockholders 4,720
Total 1,000,000
The Plan also calls for the Reorganized Company to issue the following
additional shares of New Common Stock to the following creditor groups as soon
as disputed claims within those groups are resolved:
Unsecured Creditors of Four Queens, Inc. 50,491
Unsecured Creditors of Elsinore Corporation 20,196
Total 70,687
After giving effect to this issuance of additional shares, the Reorganized
Company has 5 million issued and outstanding shares of New Common Stock.
The proceeds from the rights offering were held in a separate bank account and
use was restricted until the Effective Date.
Riviera Gaming Management Corp. - Elsinore ("RGME") holds a warrant to purchase
1,125,000 shares of New Common Stock for $1 per share.
The old 1994 Mortgage Notes were amended and restated to include the original
principal amount of $3,000,000, accrued interest at 20% through the Confirmation
Date in the amount of $726,000, and attorney's fees and disbursements through
the Effective Date of $130,000 resulting in a new principal amount of
$3,856,000. On the Effective Date, each 1994 Mortgage Note holder received its
prorata share of restated first mortgage notes (the "New First Mortgage Notes").
The New First Mortgage Notes bear interest at 11.5%, payable quarterly
commencing on the fourth month following the Confirmation Date and are due four
years from the Confirmation Date. These noteholders retained their lien
interests as collateral for repayment.
The old 1993 First Mortgage Notes were amended and restated to reduce the
principal amount of $57,000,000 to $30,000,000 which represented the secured
portion of the claim. On the Effective Date, each 1993 First Mortgage Note
holder received its prorata share of restated second mortgage notes (the "New
Second Mortgage Notes"). The New Second Mortgage Notes bear interest at 13.5%,
payable semi-annually and are due five years from the Confirmation Date. The
unsecured portion of their claim, approximately $4,000,000 (representing accrued
interest through the date of filing the Chapter 11 petition at 12.5%), was
exchanged for shares of New Common Stock as described above.
The Convertible Notes with the principal amount of $1,425,000 were exchanged for
63,234 shares of New Common Stock on a prorata basis.
The general unsecured creditors with claims in the amount of approximately
$3,510,000 received a prorata share of $1,400,000 and are entitled to 70,687
shares of New Common Stock. The stock distribution took place once certain
litigation has been settled which will determine the number of shares to which
each individual unsecured creditor is entitled.
The Internal Revenue Service ("IRS") has agreed to a note payable in the amount
of $629,000 in settlement of an unsecured claim to be fixed in the amount of
$1,893,000 which was calculated based on the percentage of the allowed claim
compared to the total general unsecured claims. The note is non-interest bearing
and payable in semi-annual payments beginning August 1997. Additionally, the IRS
received a note payable in the amount of $1,087,000 and 38,373 shares of New
Common Stock in settlement of its secured claim. The note will accrue interest
at 8% per annum and is due four years from the Effective Date. Finally, the IRS
had an unsecured priority claim in the amount of $5,000 which was paid.
The Company's Board of Directors was reconstituted to include five members, of
which four were designated by the Bondholders Committee and one was appointed by
the Equity Committee in the bankruptcy proceedings.
The effects of the Plan and fresh start reporting on the balance sheet at
February 28, 1997 are as follows:
Predecessor (a) (b) (c) Reorganized
Company Debt Issue of Fresh Start Company
February 28, Discharge Stock Adjustments March 1,
1997 1997
----------------------------------- ------------- ----------------- -----------------
Assets
Current assets:
Cash and cash equivalents 13,527 13,527
Accounts receivable, net 546 546
Inventories 348 348
Prepaid expenses 1,288 1,288
------------------- --------------- -------------- ------------------- -----------------
Total current assets 15,709 15,709
Property and equipment, net 23,191 13,130 36,321
Leasehold acquisition costs, net 1,907 (1,907)
Reorganization value in excess of amounts
Allocable to identifiable assets 387 387
Investment in Fremont Street 2,400 (2,400)
Experience LLC
Restricted cash available for
payment on long-term debt 353 353
Other assets 740 740
------------------- --------------- -------------- ------------------- -----------------
Total assets $44,300 $ - $ - $9,210 $53,510
=================== =============== ============== =================== =================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Current maturities of long-term debt 41 873 914
Accounts payable 757 344 1,102
Accrued expenses 6,766 6,766
Accrued interest 2,886 (525) 2,361
------------------- --------------- -------------- ------------------- -----------------
Total current liabilities 10,451 (181) 873 11,143
Estimated liabilities subject to Chapter 11
Proceedings 72,552 (72,552)
Long-term debt, less current 1,484 36,756 (873) 37,367
maturities
------------------- --------------- -------------- ------------------- -----------------
Total Liabilities 84,487 (35,977) 48,510
------------------- --------------- -------------- ------------------- -----------------
Shareholders' equity (deficiency)
Common stock, Predecessor 16 (16)
company
Common stock, Reorganized 4 1 5
company
Additional paid in capital 70,315 (4) (65,316) 4,995
Accumulated deficiency (110,518) 35,977 74,541
------------------- --------------- -------------- ------------------- -----------------
Total shareholders' equity (40,187) 35,977 9,210 5,000
(deficiency)
------------------- --------------- -------------- ------------------- -----------------
Total liabilities and shareholders'
Total liabilities and shareholders' $44,300 $ - $ - $9,210 $53,510
Equity (deficiency)
=================== =============== ============== =================== =================
(a) To record the discharge of prepetition obligations pursuant to the
Plan of Reorganization. (b) To record the issuance of 3,929,313 shares of
New Common Stock.
(c) To record adjustments to reflect assets and liabilities at fair
market values and to record reorganization value in excess of amounts
allocable to identifiable assets.
3. Summary of Significant Accounting Policies
(a) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
Reorganization value in excess of amounts allocable to identifiable assets is
amortized on a straight line basis over 15 years. Accumulated amortization at
December 31, 1998 is approximately $37,000.
(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 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,
1998 1997 1996
(Dollars in thousands)
Hotel $1,257 $703 $1,215
Food & beverage 2,070 2,219 3,908
------ ------ ------
Total $3,327 $2,922 $5,123
====== ====== ======
(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 5 to 40 years. Equipment held under capital leases is recorded
at the net present value of minimum lease payments at the inception of the lease
and amortized over the shorter of the terms of the leases or estimated useful
lives of the related assets.
(g) 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 Company's allocated share of the operating
costs of the Fremont Street Experience ($600,000 in 1998, and 1997 and
$1,000,000 in 1996) are expensed as incurred.
(h) Income Taxes
Under the asset and liability method of accounting for income taxes, 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. 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. 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.
(i) Loss Per Share
Basic and diluted loss per share is computed by dividing net loss applicable to
common shares by the number of weighted average common shares outstanding during
the year. Common stock equivalents were anti-dilutive, therefore basic and
diluted loss per share are equal.
(j) 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 Statement of Financial
Accounting Standards ("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.
The Company has no stock-based plans outstanding at December 31, 1998.
(k) Long-lived Assets
Long-Lived Assets used in operations are evaluated each reporting period for
impairment by comparing the undiscounted cash flows estimated to be generated by
those assets' to the asset carrying amount. There was no write-down of assets
for the years ended December 31, 1998, 1997, and 1996, other than in connection
with the application of fresh start accounting.
(l) Reclassification
Certain prior period reclassifications have been made in the Predecessor
Company's financial statements to conform to the Reorganized Company's
presentation.
(m) 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 at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
4. 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 1998, 1997, and 1996 consisted of the following (in thousands):
1998 1997 1996
---- ---- ----
Administrative expenses $ - $192 $ 1,431
Severance expenses - 100 761
----- --- -----
$ - $292 $2,192
===== === =====
5. Property and Equipment, Net
Property and equipment, net, consists of the following:
December 31,
1998 1997
(Dollars in thousands)
Land $2,800 $2,800
Buildings 27,305 27,088
Equipment 13,252 10,265
Leasehold acquisition costs - -
Construction in progress 1,110 399
------ -------
44,467 40,552
Less accumulated depreciation
and amortization 4,249 1,510
------ ------
$40,218 $39,042
======= =======
6. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1998 1997
(Dollars in thousands)
Salaries and wages $ 164 $1,471
Payroll taxes and employee benefits 1,698 931
Gaming taxes 255 143
Slot club liability 671 616
Outstanding chip & token liability 695 515
Other 876 777
------ ---
$4,359 $4,453
7. Native American Casino Operations
Spotlight 29 Casino
The Company has received a promissory note from the Twenty-Nine Palms Band of
Mission Indians in the principal amount of $9,000,000 resulting from a
settlement which was approved by the Bankruptcy Court and received clearance by
the Bureau of Indian Affairs. 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 (February 15,1999), the note will be automatically extended
for up to an additional two years. If still not 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. 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 $1,431,000 of
interest which has been recorded in interest income in the twelve months ended
December 31, 1998. The receivable is fully reserved.
7 Cedars Casino
Elsinore Corporation, through its wholly-owned subsidiary, Olympia Gaming
Corporation (collectively for purposes of this section of this Note, the
Company"), had 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 loaned $9,000,000 to the Tribe for the construction of 7 Cedars.
During 1995, the contract was terminated by 7 Cedars. As a result, the Company
recorded a reserve on the $9,000,000 note and wrote off unamortized casino
development costs in the amount of $242,000 and all accrued interest. During
1997, the Company wrote off the note receivable and related reserve.
8. Long-Term Debt
Long-term debt consists of the following:
December 31,
1998 1997
11.5% New First Mortgage Notes
("11.5% Notes") - $ 3,856
13.5% New Second Mortgage Notes
("13.5% Notes") - 30,000
12.83% New Mortgage Notes("New Notes")
("12.83% Notes) $11,104 -
Notes payable - IRS 719 1,404
Notes payable - Other 1,100 1,104
Capital leases 4,531 3,254
------ ------
17,454 39,618
Less current maturities (1,906) (1,477)
------- ------
$15,548 $38,141
Interests on the New Notes is payable on February 28 and August 31 of each year.
Principal is due on August 20, 2001. The New Notes are redeemable by the Company
at any time at 100% of par, without premium. The Company is required to make an
offer to purchase all New Notes at 101% upon any "Change of Control" as defined
in the indenture governing the New Notes. The New Notes are guaranteed by Elsub
Management Corporation, Four Queens, Inc. and Palm Springs East Limited
Partnership and are collateralized by a second deed of trust on and pledge of
substantially all the assets of the Company and the guarantors.
The Note Agreement, among other things, places significant restrictions on the
incurrence of additional indebtedness by the Company, the creation of additional
liens on the collateral securing the New Notes, transactions with affiliates and
payment of certain restricted payments (as defined). In order for the Company to
incur additional indebtedness or make a restricted payment, the Company must,
among other things, meet a specified consolidated fixed charges coverage ratio
and have earned $1 million in EBITDA. The Company must also maintain a minimum
amount of consolidated net worth (as defined). At certain times during 1998 the
Company was not in compliance with these requirements, however waives were
obtained from the lender. The Company was in compliance with the covenants
applicable to the New Notes as of December 31, 1998. Management considers it
likely that the Company will be in violation of such covenants during the year
ended December 31, 1999. Accordingly, waivers of non-compliance which expire on
January 2, 2000 were obtained from the holders of the 12.83% New Mortgage Notes.
The Company has various unsecured notes payable to certain vendors as a result
of the bankruptcy. These notes are non-interest-bearing and are payable in
either quarterly installments of $31,000 or semiannual installments of $240,000
through October 2001.
The Company has two unsecured notes payable to the IRS as a result of the
bankruptcy. One note bears interest at 8% and the other is non-interest-bearing.
The notes are payable in semiannual installments of $266,000 through February
2000.
Maturities of the Company's long-term debt are as follows:
Year Ending December 31,
1999 1,906
2000 1,608
2001 12,144
2002 303
2003 52
Thereafter 1,441
------
$ 17,454
9. Leases
All non-cancelable leases have been classified as capital or operating leases.
At December 31, 1998, 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,
1998 1997
(Dollars in thousands)
Building $1,364 $1,364
Equipment 3,735 1,477
------ ------
5,099 2,841
Less accumulated amortization (919) (110)
------ ------
$4,180 $2,731
====== ======
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, 1998:
Capital Operating
Leases Leases
(Dollars in thousands)
Years Ending December 31,
1999 $ 1,344 $ 3,718
2000 1,344 3,695
2001 1,156 3,694
2002 530 3,694
2003 223 3,663
Thereafter 6,688 104,558
----- --------
Total minimum lease payments $11,285 $123,022
Less: amount representing
interest(at imputed rates
ranging from 11.5%
to 15.0% 6,736
Present value of net
minimum capital lease
payments 4,531
Less: current maturities (914)
Capital lease obligations,
excluding current maturities $3,617
Rent paid under operating leases during 1998 was $3,642,000
10. Income Taxes
No income tax benefit related to the 1998, 1997 and 1996 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,
1998 1997
(Dollars in thousands)
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful accounts $ 92 $56
Accrued compensation, principally
due to accrual for financial
reporting purposes 502 635
Progressive slot and slot club accruals 467 414
Merger costs, principally due to amounts
not currently deductible for tax purposes 57 95
Net operating loss carryforwards 9,400 1,397
General business credit carryforward,
principally due to investment
tax credit generated in prior years 137 -
Income recognized for tax purposes
on investment in partnership 1,027 1,542
Contribution deduction carryforward,
principally due to amounts
not deductible in prior periods 66 63
Loan receivable principal due to
allowance for uncollectibility 4,508 4,508
Reorganization items, principally due
to amounts not currently
deductible for tax purposes 23 8
Total gross deferred tax assets 16,279 8,718
Less valuation allowance (10,892) (4,337)
--------- ---------
Net deferred tax assets 5,387 4,381
--------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (3,898) (4,018)
Prepaid expenses, principally due to
deduction for tax purposes (321) (363)
Loses recognized for tax purposes on
partnership investments (1,168) -
-------- ---------
Total gross deferred tax liabilities (5,387) (4,381)
-------- ---------
Net deferred tax liability $ - $ -
======== =========
Prior to emergence from bankruptcy following the close of business on February
28, 1997, the Company had 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") limited the
amount of loss carryforward currently available to offset federal taxable
income. As a result of the bankruptcy and the resulting change in ownership, the
existing net operating loss is limited under Section 382. The loss carryforwards
begin to expire in the year 1999 and will completely expire by 2007.
The Company had 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 had alternative
minimum tax credit carryforwards of approximately $312,000 which are available
to reduce future federal income taxes, if any, over an indefinite period. Both
of these amounts are limited by Section 382 and may not be available for use in
future periods.
11. 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 1998, 1997 and 1996 totaled $317,000, $149,000, and
$87,000, 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 $66,000, $120,000, and $130,488 for 1998, 1997 and
1996, respectively. There were 179, 438, and 469 participants in the savings
plan as of December 31, 1998, 1997 and 1996, respectively.
12. Recapitalization
On September 29, 1998, the MWV Accounts contributed $4,641,000, net of $260,000
of expenses to the capital of Elsinore Corporation which Elsinore used, together
with other funds of Elsinore, to purchase in full all of Elsinore's outstanding
11.5% First Mortgage Notes due 2000 in the original aggregate principal amount
of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage
Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts, 50,000,000
shares of Series A Convertible Preferred Stock of the Company in exchange for
the surrender to the Company of $18,000,000 original principal amount of certain
second mortgage notes held by the MWV accounts. The 50,000,000 shares of Series
A Convertible Preferred Stock have (i) the right to receive cumulative dividends
at the rate of 6% per year; (ii) the right to receive the amount of $.36 per
share, plus all accrued or declared but unpaid dividends on any shares then
held, upon any liquidation, dissolution or winding up of the Company for an
aggregate liquidation preference of $18,000,000; (iii) voting rights equal to
the number of shares of the Company's Common Stock into which the shares of
Preferred Stock may be converted, and (iv) the right to convert the shares of
Preferred Stock into 93,000,000 shares of the Company's Common Stock. The
Company has accrued $270,000 in undeclared preferred stock dividends as of
December 31, 1998. Following the recapitalization, John C. "Bruce" Waterfall
will beneficially own 97,646,440 shares of Common Stock, or approximately 99.7%
of the outstanding Common Stock. The number of shares beneficially owned and the
percentage of shares beneficially owned are determined in accordance with the
rules of the Securities and Exchange Commission and (i) are based on 4,929,313
shares of Common Stock outstanding as of September 29, 1998 and (ii) assumes
that the 50,000,000 shares of Series A Convertible Preferred Stock are converted
into 93,000,000 shares of the Company's Common Stock.
In addition, Elsinore issued to the MWV Accounts New Notes in the aggregate
principal amount of $11,104,000 in exchange for all remaining outstanding second
mortgage notes held by the MWV Accounts in the same aggregate principal amount,
pursuant to an amended indenture governing the New Notes that reduced the
interest rate payable thereon from 13.5% payable under the old second mortgage
notes due to the 12.83% payable under the New Notes. Following the
recapitalization described in this section, Elsinore has notes outstanding in
the aggregate principal amount of $11,104,000.
13. Commitments and Contingencies
RGME manages the Four Queens Hotel & Casino in accordance with the management
agreement effective April 1, 1997. RGME receives a minimum annual fee of $1
million in equal monthly installments plus 25% of the excess of earnings before
interest, taxes, depreciation and amortization ("EBITDA") over $8 million. RGME
also received warrants to purchase 1,125,000 shares of common stock at $1 per
share. The agreement is for approximately 40 months and can be extended for an
additional 24 months at RGME's option if certain performance standards are met.
The Company is liable for one-sixth of the operating expenses incurred by
Fremont Street Experience, LLC.
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 and breach of contract.
The claims listed above, if allowed, would be included in the Class 10 Unsecured
Creditor's pool of the bankruptcy proceedings, which is capped at $1.4 million
and, therefore, will not have a material financial effect on the Company.
The Company is a party to other claims and lawsuits. Management believes that
such 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.
14. Proposed Merger
In the first half of 1997, Elsinore and Mr. Allen E. Paulson ("Paulson")
commenced discussions which culminated in an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of September 15, 1997, between Elsinore and
entities controlled by Paulson, namely R&E Gaming Corp. ("R&E"), Elsinore
Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") the
outstanding Common Stock for $3.16 per share in cash plus an amount of
additional consideration in cash equal to the daily portion of the accrual on
$3.16 at 9.43% compounded annually, from June 1, 1997 to the date immediately
preceding the date such acquisition is consummated. The Merger Agreement
provides for EAS to merge into Elsinore, and Elsinore to become a wholly owned
subsidiary of R&E.
Contemporaneously with the Merger Agreement, R&E executed an Option and
Voting Agreement (the "Option Agreement") with MWV, on behalf of the MWV
Accounts which owned 94.3% of the outstanding Common Stock prior to the
Recapitalization. Under certain conditions and circumstances, the Option
Agreement provides for, among other things, (i) the grant by the MWV Accounts to
R&E of an option to purchase all of their Common Stock; (ii) an obligation by
R&E to purchase all of the MWV Accounts' Common Stock, and (iii) the MWV
Accounts to vote their Common Stock in favor of the Merger Agreement. Elsinore's
shareholders approved the Merger Agreement at a special meeting of shareholders
held on February 4, 1998 (the "Special Meeting").
Paulson also entered into discussions with Riviera to acquire a
controlling interest in that company as well. Riviera owns and operates the
Riviera Hotel and Casino in Las Vegas and is the parent corporation of RGME. On
September 16, 1997, R&E and Riviera Acquisition Sub, Inc. ("RAS") (another
entity controlled by Paulson) entered into an Agreement and Plan of Merger (the
"Riviera Merger Agreement") with Riviera, which provides for the merger of RAS
into Riviera (the "Riviera Merger"), and for Riviera to become a wholly owned
subsidiary of R&E. R&E also entered into an Option and Voting Agreement with
certain Riviera shareholders, including MWV acting on behalf of the MWV
Accounts, containing terms similar to those described above with respect to the
Option Agreement.
The Merger Agreement contains conditions precedent to consummation of
the Merger, including (i) the Option Agreement being in full force and effect
and MWV having complied in all respects with the terms thereof, (ii) all
necessary approvals from gaming authorities and (iii) consummation of the
Riviera Merger.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that
it was R&E's position that the Merger Agreement was void and unenforceable
against R&E and EAS, or alternatively, R&E and EAS intended to terminate the
Merger Agreement. R&E alleged, among other things, violations by Elsinore of the
Merger Agreement, violations of law and misrepresentations by MWV in connection
with an Option and Voting Agreement, and the non-satisfaction of certain
conditions precedent to completing the merger. The Company denied the
allegations and asked that R&E complete the merger.
Thereafter, in April 1998, Paulson, R&E, EAS and certain other entities filed a
lawsuit against eleven defendants, including Elsinore and MWV (Paulson, et al. v
Jeffries & Company et al.). Plaintiffs' allegations include breach of the Merger
Agreement by Elsinore, as well as fraud, various violations of the federal
securities laws and violation of the Nevada anti-racketeering statute in
connection with the proposed merger. Plaintiffs are seeking (i) unspecified
actual damages in excess of $20 million, (ii) $20 million in exemplary damages,
(iii) treble damages, and (iv) rescission of the Merger Agreement and other
relief. The lawsuit was filed in the United States District Court for the
Central District of California.
On July 13, 1998, Elsinore filed a motion to dismiss certain of the
claims alleged in the lawsuit, as amended, which was heard by the Court on
December 7, 1998. On December 17, 1998 the Court entered an order granting the
motion, with prejudice, as to the claims alleging violation of the Nevada
anti-racketeering statute, granting the motion with leave to amend as to certain
other allegations, and denying the remainder of the motion. Thereafter, on
January 13, 1999, plaintiffs served a Second Amended Complaint.
Shortly thereafter, plaintiffs announced their intention to file a
motion for reconsideration of the Court's December 17, 1998 order insofar as it
had dismissed the Nevada anti-racketeering claims, on the ground that a December
30, 1998 decision of the Nevada Supreme Court in the action captioned Siragusa
v. Brown constituted a change and/or material difference in the law relied upon
by the Court. Based on the Siragusa decision, the Company stipulated to an order
allowing plaintiffs to serve and file a Third Amended Complaint reinserting
claims under the Nevada anti-racketeering statute which plaintiffs have done.
Discovery is only now beginning, and the Company is currently unable to
form an opinion as to the amount of its exposure, if any. Although the Company
intends to defend the lawsuit vigorously, there can be no assurance that it will
be successful in such defense or that future operating results will not be
materially adversely affected by the final resolution of the lawsuit.
15. 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
1998 $3,955 $ 411 $ 438 $1,107 $5,911
1997 $3,513 $ 477 $ 413 $1,074 $5,477
1996 $4,496 $ 468 $ 497 $1,132 $6,593
16. Supplemental Financial Information
A summary of additions and deductions to the allowance for doubtful accounts
receivable for the years ended December 31, 1998, 1997 and 1996 follows:
Balance at Balance
Beginning of At End of
Year Additions Deductions Year
Years Ended
1998 $165 $132 $ 78 $219
1997 $347 $ 64 $246 $165
1996 $201 $321 $175 $347
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers.
The following sets forth the names, ages and positions of each person
who is a director or executive officer of the Company. Each person listed below
assumed his position with the Company on the Plan Effective Date and was
re-elected at the Company's 1998 Annual Shareholders' Meeting held on September
22, 1998 to serve until the next Annual Shareholders' Meeting. In 1998, the
Company did not have any executive officer who was not also a Director of the
Company.
Name Age Position
John C. "Bruce" Waterfall 61 Chairman of the Board
Jeffrey T. Leeds 43 President, Chief Executive
Officer and Director
S. Barton Jacka 62 Treasurer, Secretary and Director
John C. "Bruce" Waterfall. Mr. Waterfall has been a professional money
manager and analyst for the past 29 years with MWV, of which he is President and
a co-founder. Certain investment accounts managed by MWV own 94.3% of the
outstanding Common Stock, and Mr. Waterfall exercises sole voting and investment
authority over that Common Stock. Mr. Waterfall also serves as a director of
Darling International, Inc., a publicly reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
Jeffrey T. Leeds. Since 1993, Mr. Leeds has been President of Leeds
Group, Inc., a private investment banking firm which he co-founded. Mr. Leeds is
also a Principal of Advance Capital Management, LLC, a private equity firm which
he formed in 1995. Mr. Leeds also serves as a director of Alarmguard Holdings,
Inc., a publicly reporting company under the Exchange Act.
S. Barton Jacka. Mr. Jacka is a gaming consultant and serves as
chairman of the gaming compliance committees of two other publicly held
companies licensed by the Nevada Gaming Authorities. From 1993 to 1996, Mr.
Jacka was with Bally Gaming, Inc. and Bally Gaming International, Inc., first as
Director of Government Affairs and Gaming Compliance and later as Vice
President. Mr. Jacka retired from the position of Chairman of the Nevada State
Gaming Control Board, a position he held from 1985 to 1987, prior to entering
the private sector.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely upon a review of Forms 3 and 4 furnished to the Company
pursuant to SEC Rule 16a-3(e) during fiscal year 1998, Form 3 was filed later
than the due date by the Endowment Prime L.L.C., relating to its acquisition of
shares of Series A Convertible Preferred Stock on September 29, 1998. Form 4 was
filed later than the due date by each of Endowment Restart L.L.C. (f/k/a Common
Fund for Non-Profit Organizations), Morgens Waterfall Income Partners, MWV Group
Trust, Restart Partners, Restart Partners II, L.P., Restart Partners III, L.P.,
Restart Partners IV, L.P., Restart Partners V, L.P., Betje Partners, Phoenix
Partners, L.P., Prime Group, L.P., Prime, Inc., Prime Group II, L.P., Prime
Group III, L.P., Prime Group IV, L.P., Prime Group V, L.P., MW Management,
L.L.C., MW Capital L.L.C., MWV, and Mr. Waterfall, each of which Form 4 relates
to the acquisition by such reporting person of the Company's Series A
Convertible Preferred Stock on September 29, 1998.
Item 11. EXECUTIVE COMPENSATION.
The following table provides certain summary information concerning
compensation paid by the Company to each person who served as Chief Executive
Officer during any part of the year ended December 31, 1998. No person who held
any other executive officer position during any part of 1998 received a total
annual salary and bonus in excess of $100,000 in such year.
Long Term
Compensation
Annual Compensation Awards
Securities All Other
Name and Principal Position Underlying Compensation
Year Salary ($) Bonus($) Options (#) ($)
---- ---------- -------- ----------- ---
Jeffrey T. Leeds 1998 37,000 -0- -0- -0-
President and Chief Executive 1997 35,000 -0- -0- -0-
Officer 1996 -0- -0- -0- -0-
Mr. Leeds assumed his positions on the Plan Effective Date.
Stock Options and Similar Rights.
The Company granted no stock options or stock appreciation rights
(collectively, "Stock Rights") during 1998 nor were any Stock Rights exercised
in 1998. As of the Plan Effective Date, all previously outstanding Stock Rights
were canceled.
Compensation Committee Interlocks.
The Company did not have a compensation committee in 1998. The full
Board of Directors has made all decisions regarding executive officer
compensation. Messrs. Leeds and Jacka receive compensation as executive officers
and are members of the Board of Directors.
On September 29, 1998, MWV Accounts contributed $14,641,000, net of
$260,000 of expenses, to the capital of Elsinore, which Elsinore used, together
with other funds of Elsinore, to purchase in full all of Elsinore's outstanding
11.5% First Mortgage Notes due 2000 in the original principal amount of
$3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage Notes
of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts
50,000,000 shares of Series A Convertible Preferred Stock of the Company in
exchange for the surrender to the Company of $18,000,000 original principal
amount of certain second mortgage notes held by the MWV Accounts. The 50,000,000
shares of Series A Convertible Preferred Stock have (i) the right to receive
cumulative dividends at the rate of 6% per year; (ii) the right to receive the
amount of $.36 per share, plus all accrued or declared but unpaid dividends on
any shares then held, upon any liquidation, dissolution or winding up of the
Company for an aggregate liquidation preference of $18,000,000; (iii) voting
rights equal to the number of shares of the Company's Common Stock into which
the shares of Preferred Stock may be converted, and (iv) the right to convert
the shares of Preferred Stock into 93,000,000 shares of the Company's Common
Stock.
In addition, Elsinore issued to the MWV Accounts new second mortgage
notes ("New Mortgage Notes") in the aggregate principal amount of $11,104,000 in
exchange for all remaining outstanding second mortgage notes held by the MWV
Accounts in the same aggregate principal amount, pursuant to an amended
indenture governing the New Mortgage Notes that reduced the interest rate
payable thereon from the 13.5% payable under the old second mortgage notes to
the 12.83% payable under the New Mortgage Notes. Chairman of the Board Waterfall
is President and a principal shareholder of MWV, which manages the MWV Accounts.
Compensation of Directors.
Mr. Waterfall receives no compensation from the Company for serving as
Chairman of the Board and attending Board of Directors meetings. Each of the
other directors receives an annual fee of $25,000 in consideration of his
attendance at each quarterly Board of Directors meeting plus $1,000 for each
additional meeting (other than meetings by telephone conference) at which his
attendance is required. All directors receive reimbursement for reasonable
expenses incurred in attending each meeting of the Board of Directors. Jeffrey
T. Leeds and S. Barton Jacka also receive $10,000 per year in consideration of
serving as executive officers of the Company.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners.
As of March 15, 1999, the Company had two classes of equity or voting
securities, Common Stock and Series A Convertible Preferred Stock. Series A
Convertible Preferred Stock votes on an as-converted basis. As of March 15,
1999, the beneficial ownership of Common Stock by each person who is known by
Elsinore to be the beneficial owner of more than 5% of the outstanding Common
Stock and Series A Convertible Preferred Stock, is as follows (1).
Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class
John C. "Bruce" Waterfall, who exercises
voting and investment authority over
the Common Stock owned by the MWV Accounts, as
follows (2)(3)(4)(5):
Endowment Prime, L.L.C (f/k/a)
The common Fund for Non-Profit
Organization 14,836,331 15.2
Morgens Waterfall Income Partners,
L.P. 2,734,381 2.8
MWV Employee Retirement Plan Group
Trust 879,023 0.9
Restart Partners, L.P. 10,786,575 11.0
Restart Partners II, L.P. 20,660,562 21.1
Restart Partners III, L.P. 16,892,860 17.3
Restart Partners IV, L.P. 10,642,389 10.9
Restart Partners V, L.P. 2,831,697 2.9
Betje Partners 4,492,426 4.6
Phoenix Partners, L.P. 12,890,199 13.2
---------- ----
Total 97,646,441 99.7
========== ====
(1) In addition to the persons reported in the table, RGME holds
warrants to purchase 1,125,000 shares of Common Stock. (See Item 1. BUSINESS -
The Four Queens Casino.) If RGME were to exercise the warrants, it would become
the owner of approximately 18.5% of the outstanding Common Stock. The relevant
Exchange Act rules generally provide that a person is deemed the beneficial
owner of a security if that person has the right to acquire beneficial ownership
of such security within 60 days through the exercise of any option, warrant or
right. Although the warrants, by their terms, are exercisable at any time, the
Company understands that as a condition precedent to such exercise, RGME would
have to apply for and obtain the approval of the Nevada Gaming Authorities. The
Company is not aware of any such application having been filed by RGME.
Furthermore, the Company's understanding is that the timing of the Nevada Gaming
Authorities' decisions on any such applications to exercise the warrants would
be subject to substantial uncertainty. Accordingly, RGME is not reported in the
table as beneficially owning more than 5% of the Common Stock.
(2) The number of shares beneficially owned and the percentage of
shares beneficially owned are determined in accordance with the rules of the
Securities and Exchange Commission and (i) are based on 4,929,313 shares of
Common Stock outstanding as of September 29, 1998 and (ii) assumes that the
50,000,000 shares of Series A Convertible Preferred Stock held by the MWV
Accounts are converted into 93,000,000 shares of the Company's Common Stock
based on their common voting and investment direction. (see Item 1.
Business - Recapitalization).
(3) The address for Mr. Waterfall and each of the MWV Accounts is
10 East 50th Street, New York, New York 10022.
(4) Pursuant to agreements and undertakings with the Board and the
Commission which were required in order for the Plan to become effective, Mr.
Waterfall is the only individual who exercises voting and investment power
(including dispositive power) with respect to Common Stock owned by the MWV
Accounts. MWV and its affiliates other than Mr. Waterfall are either investment
advisors to, or trustees or general partners of, the MWV Accounts. Accordingly,
for purposes of the relevant Exchange Act rules, they could also be deemed the
beneficial owners of Common Stock held by the MWV Accounts. The possible
attribution of such beneficial ownership of Common Stock, expressed in number of
shares and percent of the class, to MWV and those affiliates is as follows: MWV
- - 19,328,756 (19.7%); MW Capital, L.L.C. - 2,734,380 (2.8%); Prime Group, L.P. -
10,786,574 (11.0%); Prime Group II, L.P. -- 20,660,561 (21.1%); Prime Group III,
L.P. - 16,892,860 (17.2%); Prime Group IV, L.P. - 10,642,388 (10.9%); Prime
Group V, L.P. - 2,831,696 (2.9%); and MW Management, L.L.C. - 12,890,198
(13.2%). In view of Mr. Waterfall's possession of sole voting and investment
power over the Common Stock on behalf of the MWV Accounts, these entities
disclaim beneficial ownership of Common Stock.
(5) Fractional shares are not counted except in the total of number of
shares owned.
Security Ownership of Management.
As of March 5, 1999, the beneficial ownership of Common Stock by each
of Elsinore's directors and by its directors and executive officers as a group,
as such ownership is known by Elsinore, is as follows:
Title of Class Name of Beneficial Owner Amount and Nature Percent
Of Beneficial Of
Ownership Class
Common Stock John C. "Bruce" Waterfall,
Chairman of the Board (1) 97,646,440 (2) 99.7
Common Stock Directors and executive 97,646,440 (2) 99.7
Officers as a group (3 persons)
Series A John C. "Bruce" Waterfall 50,000,000 100
Convertible Chairman of the Board (1)
Preferred
Series A Directors and executive 50,000,000 100
Convertible Officers as group (3 persons)
Preferred
(1) See note (4) to the table on page 59.
(2) See notes (2) and (5) to the table on page 59 discussing beneficial
owners of more than 5% of the outstanding Common Stock for information regarding
Mr. Waterfall's beneficial ownership.
Changes in Control.
A change in control of the Company will result if the Merger is
consummated or if the Common Stock held by the MWV Accounts is acquired by R&E
pursuant to the Option Agreement. Upon the occurrence of either event, the
Company would be controlled by R&E which, in turn, is controlled by Allen E.
Paulson. (See Item 1. BUSINESS - Agreement and Plan of Merger).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Chairman of the Board Waterfall is President and a principal
shareholder of MWV, which manages the MWV Accounts. Pursuant to the
Recapitalization, the MWV Accounts have beneficially owned 99.7% of the Common
Stock and $11,104,000 principal amount of the New Mortgage Notes. (See Item 11.
Executive Compensation - Compensation Committee Interlocks.)
As discussed in Item 1. BUSINESS - The Four Queens Casino, RGME, a
subsidiary of Riviera, manages the Four Queens Casino under the Management
Agreement. In connection with RGME's management, RGME's principal officer also
serves, at the request of Elsinore, as the sole director and officer of Four
Queens on a non-salaried basis and is excluded from performing policy-making
functions for Elsinore. Also as discussed in Item 1. BUSINESS - Agreement and
Plan of Merger, Riviera is also a party to an agreement with R&E providing for
the Riviera Merger. Effectiveness of the Riviera Merger is a condition precedent
to consummation of the Merger. Upon consummation of the Merger, RGME would be
entitled to certain payments under the Management Agreement as discussed in Item
1. BUSINESS - The Four Queens Casino.
The Management Agreement was negotiated and went into effect before R&E
or any of its affiliates entered into negotiations with Riviera or Elsinore
concerning the Merger, the Riviera Merger, the Option Agreement or the Riviera
Option Agreement.
Under the Merger Agreement Elsinore has agreed to obtain a tail
insurance policy covering Elsinore's directors and officers for acts or failures
to act prior to the effectiveness of the Merger, and having substantially the
same coverage and deductibles as Elsinore's directors' and officers' liability
insurance policy as in effect on July 1, 1997. The Merger Agreement provides
that the cost to Elsinore (net of any amounts paid by third parties) of the tail
insurance policy shall not exceed $150,000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Schedules
The financial statements and schedules filed as part of this
report are listed in the Index to Consolidated Statements
under Item 8.
3. List of exhibits
2.1* First Amended Plan of Reorganization [2.1](5)
2.2* Order Confirming First Amended Plan of Reorganization [2.2](5)
2.3* Bankruptcy Court Order Approving Plan Documentation [2.3](6)
3.1* Amended and Restated Articles of Incorporation of Elsinore Corporation [3.1](7)
3.2* Amended and Restated Bylaws of Elsinore Corporation [3.2](7)
4.1* Certificate of Designations, Preferences and Rights of Elsinore Corporation Series A Preferred Stock [3.3] )14)
10.1* Sublease, dated May 26, 1964, by and between A.W. Ham, Jr. and Four Queens, Inc. [10.1](1)
10.2* Amendment of Sublease, dated June 15, 1964, by and between A.W. Ham, Jr. and Four Queens, Inc. [10.2](1)
10.3* Amendment of Sublease, dated February 25, 1965, by and between A.W. Ham, Jr. and Four Queens, Inc. [10.3](1)
10.4* Amendment of Sublease, dated January 29, 1973, by and between A.W. Ham, Jr. and Four Queens, Inc. [10.4](1)
10.5* Supplemental Lease, dated January 29, 1973, by and between A.W. Ham, Jr. and Four Queens, Inc. [10.5](1)
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](1)
10.7* Lease, dated January 1, 1978, between Finley Company and Elsinore
Corporation [10.7](1)
10.8* Ground Lease, dated October 25, 1983, between Julia E. Albers, Otto J. Westlake, Guardian, and Four Queens, Inc.
[10.8](1)
10.9* Ground Lease, dated October 25, 1983, between Katherine M. Purkiss and Four Queens, Inc. [10.9](1)
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](1)
10.12* Lease Indenture, dated May 1, 1970, by and between Thomas L. Carroll, et al. and Four Queens, Inc. [10.12](1)
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](1)
10.14* Agreement, dated April 29, 1992, by and among Four Queens, Inc., Jeanne Hood, Edward M. Fasulo and Richard A.
LeVasseur [10.28](1)
10.15* Settlement Agreement, dated March 29, 1996, by and between Palm Springs East Limited Partnership and the 29 Palms
Band of Mission Indians [10.19](7)
10.16* Loan Agreement, dated November 12, 1993, by and between The Jamestown S'Klallam Tribe and JKT Gaming, Inc.
[10.31](3)
10.17* First Amendment to Loan Agreement, dated January 28, 1994, by and between The Jamestown S'Klallam Tribe and JKT
Gaming, Inc. [10.32](3)
10.18* Form of 13 1/2% Second Mortgage Note Due 2001 [10.22](7)
10.19* Amended and Restated Indenture, dated as of March 3, 1997, by
and among Elsinore Corporation, the Guarantors named therein
and First Trust National Association, as Trustee (the
"Restated Indenture") [10.23](7)
10.20* Waiver of Compliance, dated February 27 and March 3, 1998, under the Restated Indenture [10.24] (15)
10.21* Pledge Agreement, dated as of October 8, 1993, from Elsinore
Corporation and ELSUB Management Corporation to First Trust
National Association [10.7](2)
10.22* Amendment of 1993 Pledge Agreement, dated March 3, 1997 [10.25](7)
10.23* 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](2)
10.24* Modification of Subordinated Deed of Trust, dated March 3, 1997, by and between Four Queens, Inc. and First Trust
National Association [10.27](7)
10.25* Agreement, dated May 14, 1997, by Elsinore Corporation to file
with the Securities and Exchange Commission copies of
instruments defining the rights of holders of 11.5% First
Mortgage Notes Due 2000 [10.28](7)
10.26* Waiver of Compliance, dated March 17, 1998, under the 11.5% First Mortgage Notes Due 2000 [10.30] (15)
10.27* Assignment of Operating Agreements, dated as of October 8, 1993, by Palm Springs East Limited Partnership to First
Trust National Association [10.9](2)
10.28* Assignment of Operating Agreement, dated as of October 8, 1993, by Olympia Gaming Corporation to First Trust
National Association [10.10](2)
10.29* Common Stock Registration Rights Agreement, dated as of February 28, 1997, among Elsinore Corporation and
the Holders of Registrable Shares referred to therein (incorporated by reference herein and filed as (i) Exhibit
10.31 to Elsinore Corporation's Quarterly Report on Form 10-Q for the three months ended March 31, 1997 and (ii)
Exhibit B to Schedule 13D, dated March 10, 1997, by Morgens Waterfall Income Partners, L.P.; Restart Partners,
L.P.; Restart Partners II, L.P.; Restart Partners III, L.P.; Restart Partners IV, L.P.; Restart Partners V, L.P.;
The Common Fund for Non-Profit Organizations; MWV Employee Retirement Plan Group Trust; Betje Partners; Phoenix
Partners, L.P.; Morgens, Waterfall, Vintiadis & Company, Inc.; MW Capital, L.L.C.; Prime Group, L.P.; Prime
Group II, L.P.; Prime Group III, L.P.; Prime Group IV, L.P.; Prime Group V, L.P.; Prime, Inc.; MW Management,
L.L.C.; John C. "Bruce" Waterfall; and Edwin H. Morgens, with respect to the Common Stock) [10.33] (15)
10.30* Description of Compensation Plan or Arrangement for Elsinore Corporation Directors and Executive Officers (filed
pursuant to Item 14(c) of this report) [10.32](8)
10.31* First Amendment to Lease by and among Finley Company, Elsinore Corporation and Four Queens, Inc. effective May 14,
1997 [10.33] (9)
10.32* Agreement and Plan of Merger by and among R & E Gaming Corp., Elsinore Acquisition Sub, Inc. and Elsinore
Corporation dated September 15, 1997 [10.34] (9)
10.33* Option and Voting Agreement by and between R&E Gaming Corp. and Morgens, Waterfall, Vintiadis & Company, Inc. on
behalf of certain investment accounts, dated September 15, 1997 [10.37] (15)
10.34* Amended Lease Schedule No. 1 to Master Lease Agreement by and between IGT North America, Inc. and Four Queens,
Inc., and PDS Financial Corporation-Nevada, as assignee of Lessor's interest, dated November 28, 1994 [10.35](9)
10.35* Master Lease Agreement by and between PDS Financial Corporation-Nevada and Four Queens, Inc. dated May 1, 1997
[10.36] (9)
10.36* Amendment to Master Lease Agreement by and between PDS Financial Corporation-Nevada and Four Queens, Inc. dated
August 1, 1997 [10.37](9)
10.37* Warrants to Purchase 1,125,000 Shares of Common Stock of Elsinore Corporation Issued to Riviera Gaming Management
Corp.-Elsinore [10.38](9)
10.38* Assignment by Richard A. LeVasseur to Four Queens, Inc. dated July 14, 1992 [10.39](9)
10.39* First Supplemental Amended and Restated Indenture by and among Elsinore Corporation, the guarantors named therein
and First Trust National Association, as trustee, dated as of September 18, 1997 [10.40](9)
10.40* Form of Management Agreement among the Company, Four Queens, Inc. and Riviera Gaming Management Corp.-Elsinore, as
approved by the Bankruptcy Court [10.41](9)
10.41* Waiver of Compliance and Letter Dated August 14, 1998 [10.45] (11)
10.42* Capital Contribution Agreement by and between Elsinore Corporation and certain investment accounts
named therein, dated as of September 29, 1998 [10.46] (13)
10.43* First Mortgage Note Purchase Agreement by and between Elsinore Corporation and the holders (Putnam Diversified
Income Trust, Putnam High Income Convertible and Bond Fund, Putnam Master Intermediate Income Trust, Putnam
Managed High Yield Trust, and Putnam Manager Trust - PCM Diversified Income Fund), dated as of September 29, 1998
[10.46] (13)
10.44* Second Mortgage Note Purchase Agreement by and between Elsinore Corporation and the holders (Paul Voigt, BEA Income
Fund, and BEA Strategic Global Income Fund), dated as of September 29, 1998. 99.1 Press Release dated September
30, 1998 [10.48] (13)
10.45* Exchange Agreement by and between Elsinore Corporation and certain investment accounts named therein, dated
as of September 29, 1998 [10.49] (14)
10.46* Second Supplemental Indenture among Elsinore Corporation, the guarantors (Elsub Management Corporation, Four
Queens, Inc., and Palm Springs East Limited Partnership), and U.S. Bank Trust National Association, dated
as of September 29, 1998 [10.50] (14)
10.47* Series A Preferred Stock Purchase Agreement by and between Elsinore Corporation and certain investment
accounts named therein, dated as of September 29, 1998 [10.51] (14)
10.48* Registration Rights Agreement by and between Elsinore Corporation and certain investment accounts named therein,
dated as of September 29, 1998 [10.52] (14)
10.49* Acknowledgment and Confirmation of Pledge Agreement among Elsinore Corporation, Elsub Management Corporation,
Palm Springs East Limited Partnership, and U.S. Bank Trust National Association, dated as of September 29, 1998
[10.53] (14)
10.50* Acknowledgment and Confirmation of Guaranty among Elsub Management Corporation, Four Queens, Inc., Palm
Springs East Limited Partnership, and U.S. Bank Trust National Association, dated as of September 29, 1998
[10.54] (14)
10.51* Second Modification of Subordinated Deed of Trust by and between Four Queens, Inc. and U.S. Bank Trust National
Association, dated as of September 29, 1998 [10.55] (14)
10.52* Waiver of Compliance and letters dated November 12 and 13, 1998 [10.56] (12)
10.53* Waiver of Compliance, dated November 6, 1998 under the Second Supplemental Indenture dated September 29, 1998
[10.56] (12)
10.54 Waiver of Compliance dated December 1, 1998 under Amended and Restated Indenture dated as of March 3, 1997 [10.57]
10.55 Waiver of Compliance dated November 12, 1998 under the Amended and Restated Indenture dated as of March 3, 1997
[10.58]
21.1 Subsidiaries of Elsinore Corporation
27.1 Financial Data Schedule
99.1* Voluntary Petition for Bankruptcy Pursuant to Chapter 11 of the Bankruptcy Code dated October 31, 1995 [99.2](4)
99.2* Olympia Gaming Corporation Voluntary Petition for Bankruptcy Pursuant to Chapter 11 of the Bankruptcy Code dated
October 31, 1995 [99](4)
*Previously filed with the Securities and Exchange Commission as an exhibit to
the document shown below under the Exhibit Number indicated in brackets and
incorporated herein by reference and made a part hereof: (1) Annual Report on
Form 10-K for the year ended December 31, 1992 (Securities and Exchange
Commission File Number 1-7831) (2) Current Report on Form 8-K dated October 19,
1993 (3) Annual Report on Form 10-K for the year ended December 31, 1993 (4)
Current Report on Form 8-K dated November 7, 1995 (5) Current Report on Form 8-K
dated August 8, 1996 (6) Current Report on Form 8-K dated March 14, 1997 (7)
Quarterly Report on Form 10-Q for the three months ended March 31, 1997 (8)
Quarterly Report on Form 10-Q for the six months ended June 30, 1997 (9)
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 (10)
Current Report on Form 8-K dated March 24, 1998 (11) Quarterly Report on Form
10-Q for the six months ended June 30, 1997 (12) Quarterly Report on Form 10-Q
for the nine months ended September 30, 1997 (13) Current Report on Form 8-K
dated October 13, 1998, as set forth in item 14 (c)(i) below. (14) Current
Report on Form 8-K dated October 13, 1998, as set forth in item 14 (c) (ii)
below. (15) Annual Report on Form 10-K for year end December 31, 1997. (a)
Exhibits required by Item 601 of Regulation S-K. (b) Exhibits, other than those
incorporated by reference as listed in Item 14(a)(3), appear after the signature
page of this
report.
(c) Current Report on Form 8-K
(i) Current report on Form 8-K filed on October 13, 1998, relating to a
contribution made by the MWV Accounts to the capital of the Company and
repayment by the Company's of its First Mortgage Notes and Second Mortgage Notes
from proceeds therefrom.
(ii) Current Report on Form 8-K filed on October 13, 1998, relating to
the issuance of the Series A Convertible Preferred Stock and New Mortgage Notes
by the Company to the MWV Accounts.
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/ Jeffrey T. Leeds
JEFFREY T. LEEDS, President
and Chief Executive Officer
By: /s/ S. Barton Jacka
S. BARTON JACKA, Secretary,
Treasurer and Principal
Accounting Officer
Dated: March 31, 1999
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 March 31, 1999.
/s/ John C. "Bruce Waterfall /s/ Jeffrey T. Leeds
John C. "Bruce" Waterfall Jeffrey T. Leeds
Chairman of the Board of Directors President and Director
(Chief Executive Officer)
/s/ S. Barton Jacka
S. Barton Jacka
Secretary, Treasurer, Principal
Accounting Officer and Director