SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to
Commission File Number 1-7831
ELSINORE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88 0117544
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
202 FREMONT STREET, LAS VEGAS, NEVADA 89101
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (Including Area Code): 702/385-4011
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF STOCK NUMBER OF SHARES
CLASS DATE OUTSTANDING
Common May 15, 1996 15,891,793
<PAGE>
Elsinore Corporation and Subsidiaries (Debtor-in-Possession)
Form 10-Q
For the Quarter Ended March 31, 1996
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Consolidated Financial Statements:
Balance Sheets at March 31, 1996 and
December 31, 1995 3 - 4
Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 5
Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 6
Notes to Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits and Reports of Form 8-K 23
SIGNATURES 24
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
(Dollars in Thousands)
March 31, December 31,
1996 1995
(UNAUDITED)
Assets
Current Assets:
Cash and cash equivalents $ 5,623 $ 3,572
Accounts receivable, less allowance for
doubtful accounts of $208 and $201,
respectively 637 729
Inventories 242 248
Prepaid expenses 1,470 1,029
Total current assets 7,972 5,578
Property and equipment, net 25,033 25,473
Leasehold acquisition costs, net of accumulated
amortization of $4,743 and $4,691,
respectively 2,096 2,148
Investment in Fremont Street Experience LLC, net
of accumulated amortization of $150
and $0, respectively 2,850 3,000
Other assets 836 902
$ 38,787 $ 37,101
See accompanying notes to consolidated financial statements.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
(Dollars in Thousands)
March 31, December 31,
1996 1995
(UNAUDITED)
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 927 $ 676
Accrued interest 250 100
Accrued expenses 6,709 5,352
Current portion of capital
Lease obligations 55 54
Total current liabilities 7,941 6,182
Prepetition liabilities not subject to compromise:
Long-term debt, subject to demand for
acceleration, net of unaccreted discount 2,955 2,902
Capital lease obligations, net of current
portion 1,517 1,531
4,472 4,433
Prepetition liabilities subject to compromise:
Accounts payable 3,606 4,070
Prior period income taxes and related
interest 2,985 2,985
Accrued interest 4,419 4,419
Accrued expenses 28 28
Long-term debt subject to
demand for acceleration 58,425 58,425
69,471 69,927
Total liabilities 81,884 80,542
Shareholders' deficit(note 1):
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
and outstanding 15,891,793 shares 16 16
Additional paid-in capital 65,315 65,315
Accumulated deficit (108,428) (108,772)
Total shareholders' deficit (43,097) (43,441)
Commitments and contingencies(notes 4 and 6).
$ 38,787 $ 37,101
See accompanying notes to consolidated financial statements.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Operations
Three Month Periods Ended March 31, 1996 and 1995
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
1996 1995
Revenues:
Casino $ 11,174 $ 10,758
Hotel 2,996 2,442
Food and beverage 3,501 3,259
Other 171 694
Promotional allowances (1,956) (1,892)
15,886 15,261
Costs and Expenses:
Casino 4,862 5,438
Hotel 1,878 1,881
Food and beverage 1,756 1,592
Taxes and licenses 1,811 1,820
Selling, general and administrative 2,450 2,889
Rents 1,017 966
Casino development costs - 1,037
Depreciation and amortization 970 1,019
Interest (Contractual interest
for 1996 of $2,116) 264 2,293
Interest, prior period income tax
obligation - 458
15,008 19,393
Income (loss) before
Reorganization items 878 (4,132)
Reorganization items 534 -
Income (loss) before income taxes 344 (4,132)
Income taxes - -
Net income (loss) $ 344 $ (4,132)
Income (loss) per common
and common equivalent share
(note 5) $ 0.02 $ (0.28)
Weighted average number of common
shares outstanding 15,891,793 14,801,884
See accompanying notes to consolidated financial statements.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Consolidated Statements of Cash Flows
Three Month Periods Ended March 31, 1996 and 1995
(Dollars in Thousands)
(UNAUDITED)
1996 1995
Cash flows from operating activities:
Net income (loss) $ 344 $ (4,132)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 970 1,019
Accretion of discount on long-term debt 53 308
Write-off of casino development costs - 1,037
Reorganization items 534 -
Accrued expenses 1,365 -
Change in other assets and liabilities,
net (481) (374)
Liabilities subject to compromise:
Accounts payable (464) (95)
Prior period income taxes
and related interest - (1,275)
Accrued interest and other
expenses - 3,732
Total adjustments 1,977 4,352
Cash provided by
operating activities 2,321 220
Cash flows from investing activities:
Notes and loans receivable from Native
American Tribes - (5,729)
Capital expenditures (257) (54)
Cash used in investing
activities (257) (5,783)
Cash flows from financing activities:
Issuance of long-term debt - 1,706
Principal repayments of long-term debt (13) (22)
Proceeds from issuance of common stock,
net of underwriting discounts and
commissions and other direct costs - 3,742
Debt issuance costs - (62)
Modification of capital lease obligation - -
Cash (used in) provided by
financing activities (13) 5,364
Increase (decrease) in cash and
cash equivalents 2,051 (199)
Cash and cash equivalents at beginning of
period (including restricted amounts of
$0 and $3,685 at December 31, 1995
and 1994, respectively) 3,572 7,092
Cash and cash equivalents at end of period $ 5,623 $ 6,893
See accompanying notes to consolidated financial statements.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
1. Reorganization Under Chapter 11, Liquidity and Financial
Condition
On October 31, 1995, Elsinore Corporation and certain subsidiaries filed
voluntary petitions (the "Chapter 11 filing") in the United States Bankruptcy
Court for the District of Nevada (the "Bankruptcy Court") seeking to
reorganize under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). On November 10, 1995, Olympia Gaming Corporation, a
wholly-owned subsidiary, filed a voluntary Chapter 11 petition in the same
court. The Company is operating as a debtor-in-possession under the
supervision of the Bankruptcy Court. As a debtor-in-possession, the Company
is authorized to operate its business but may not engage in transactions
outside its ordinary course of business without the approval of the Bankruptcy
Court.
Subject to certain exceptions under the Bankruptcy Code, the Company's filing
for reorganization automatically enjoined the continuation of any judicial or
administrative proceedings against the Company. Any creditor actions to
obtain possession of property from the Company or to create, perfect or
enforce any lien against the property of the Company are also enjoined. As a
result, the creditors of the Company are precluded from collecting
pre-petition debts without the approval of the Bankruptcy Court.
On February 28, 1996, the last day of the 120 day period within which the
Company had the exclusive right to do so, the Company filed a plan of
reorganization (the "Plan") and accompanying disclosure statements (see
below). The Company has 60 days to obtain necessary acceptances of the Plan.
However, such period may be extended at the discretion of the Bankruptcy
Court, but only on a showing of good cause. On May 13, 1996, the court set
the plan confirmation hearing date for July 16, 1996. The disclosure statement
was approved on May 13, 1996 subject to the insertion of certain language
acceptable to the 1993 bondholders. Subject to certain exceptions set forth in
the Bankruptcy Code, acceptance of the Plan requires approval of the
Bankruptcy Court and affirmative vote (i.e. 50% of the number and 66-2/3% of
the dollar amount) of each class of creditors and equity holders whose claims
are impaired by the Plan. Alternatively, absent the requisite approvals, the
Company may seek Bankruptcy Court approval of the Plan under "cramdown"
provisions of the Bankruptcy Code, assuming certain tests are met. If the
Company fails to achieve acceptance of the Plan within the exclusivity period
prescribed or any extensions thereof, any creditor or equity holder will be
free to file a plan of reorganization with the Court and solicit acceptances
thereof.
There can be no assurance that the plan of reorganization submitted by the
Company will be confirmed. There also can be no assurance that, with or
without a plan of reorganization, the Company can generate sufficient cash to
sustain operations. If at any time the Creditors' or Equity Committees or any
creditor or equity holder of the Company believes that the Company is or will
not be in a position to sustain operations, such party can move the Bankruptcy
Court to compel liquidation of the Company's estate by conversion to Chapter 7
bankruptcy proceedings or otherwise. In the event that liquidation is forced
upon the Company, it is likely that the Company's unsecured creditors and
equity holders will receive nothing from the net proceeds generated by
liquidation.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
Proposed Corporate Reorganization
The Plan provides for the continuation of the Company as a going concern.
Specifically, the old common stock interests in Elsinore Corporation would be
canceled pursuant to the Plan and Elsinore, as reorganized, would issue new
common stock (the "New Common Stock"). On the effective date of the Plan, 80%
of the New Common Stock would be distributed to the following creditors and
equity holders:
Interest Percentage
12.5% First Mortgage noteholders 87.5%
7.5% Convertible Subordinated noteholders 2.5%
Old common stockholders 10.0%
100.0%
The remaining 20% of the New Common Stock would be issued through a rights
offering to raise $5,000,000 to assist in funding the Plan. Initially, the
entire amount of the rights offering would be made available for subscription
to the 12.5% First Mortgage noteholders, 7.5% Convertible Subordinated
noteholders and old common stockholders in the percentages enumerated above as
part of the balloting process for the Plan.
The effective date would occur after all regulatory approvals required by the
State of Nevada, including approvals by the gaming authorities, have been
obtained and Elsinore has sufficient cash to fund all distributions.
Proposed Treatment of Creditors and Equity Interests
The Plan is expected to be funded principally from cash generated from
operations and the $5,000,000 proceeds from the rights offering.
Specifically, the proposed treatment of each of the creditor and equity
interests is as follows:
The 20% Mortgage noteholders will have an allowed secured claim equal to the
$3,000,000 principal amount of the notes plus accrued interest thereon at 20%
through the date on which the confirmation order is entered by the Bankruptcy
Court. On the effective date of the Plan, each noteholder will receive its
prorata share of restated mortgage notes (the "Restated Mortgage Notes"), due
four years from the confirmation date, in exchange for its allowed claim.
Interest on the Restated Mortgage Notes will accrue at an annual rate of 10%
or other appropriate interest rate approved by the Bankruptcy Court and will
be payable quarterly.
The 12.5% First Mortgage noteholders will have an allowed claim equal to the
$57,000,000 principal amount of the notes plus accrued interest thereon
through the date of petition. On the effective date of the Plan, each
noteholder will receive its prorata share of $30,000,000 face amount of
restated first mortgage notes (the "Restated First Mortgage Notes"), due five
years from the confirmation date, and New Common Stock (see above) in exchange
for its allowed claim. Interest on the Restated First Mortgage Notes will
accrue at an annual rate of 13.5% and will be payable semi-annually.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
The 7.5% convertible subordinated noteholders will have an allowed claim equal
to the $1,425,000 principal amount of the notes plus accrued interest thereon
through the date of petition. On the effective date of the Plan, each
noteholder will receive its prorata share of New Common Stock (see above) in
exchange for its allowed claim.
The unsecured creditors, other than the 7.5% convertible subordinated
noteholders, will receive payments which, in the aggregate, amount to
$1,500,000 and will be paid over a two-year period.
The claim of the Internal Revenue Service of approximately $2,985,000 (as and
when it is an allowed claim) will be paid in accordance with the Bankruptcy
Code or in such manner as is otherwise agreed to by the Internal Revenue
Service.
Other Reorganization Matters
Certain pre-petition liabilities have been paid after obtaining the approval
of the Bankruptcy Court, including certain wages and employee benefits, gaming
related liabilities and hotel room and other customer deposits. Subsequent to
filing and with the approval of the Bankruptcy Court, the Company assumed
executory contracts for all real estate and equipment leases.
Parties to executory contracts may, under certain circumstances, file motions
with the bankruptcy Court to require the Company to assume or reject such
contracts. Unless otherwise agreed, the assumption of a contract will require
the Company to cure all prior defaults under the related contract, including
all pre-petition liabilities. Unless otherwise agreed, the rejection of a
contract is deemed to constitute a breach of the agreement as of the moment
immediately preceding Chapter 11 filing, giving the other party to the
contract a right to assert a general unsecured claim for damages arising out
of the breach. The Company is actively engaged in the process of reviewing
its executory contracts and, except for the assumption of executory contracts
for real estate and equipment leases, final decisions with respect to assuming
or rejecting the contracts and the approval of the Bankruptcy Court are still
pending.
May 10, 1996 was set as the last date for the filing of proof of claims under
the Bankruptcy Code and the Company's creditors have/will be submitting claims
for liabilities not paid and for damages incurred. There may be differences
between the amounts at which any such liabilities are recorded in the
financial statements and the amount claimed by the Company's creditors.
Significant litigation may be required to resolve any such disputes.
The Company will incur significant costs associated with the reorganization.
The amount of these expenses, which are being expensed as incurred, is
expected to significantly affect future operating results.
As a result of its filing for protection under Chapter 11 of the Bankruptcy
Code, the Company is in default of substantially all of its debt agreements.
All outstanding unsecured and undersecured debt of the Company has been
presented in these financial statements within the caption "Pre-petition
liabilities subject to compromise: Long-term debt subject to demand for
acceleration."
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
Additional liabilities subject to the proceedings may arise in the future as a
result of the rejection of executory contracts and from the determination by
the Bankruptcy Court (or agreement by parties in interest) of allowed claims
for contingencies and other disputed amounts. Conversely, the assumption of
executory contracts may convert pre-petition liabilities shown as subject to
compromise to not subject to compromise.
2. Reorganization Items
Reorganization expense is comprised of items incurred by the Company as a
result of reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization expenses consisted primarily of accrued professional fees and
totaled $534,000 for the three month period ended March 31, 1996.
3. Summary of Significant Accounting Policies
In the opinion of management, the accompanying financial statements include
all adjustments (of a normal recurring nature) which are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it
is suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Report on Form 10-K for the fiscal year ended
December 31, 1995.
Certain items in the March 31, 1995 financial statements have been
reclassified for comparability with the March 31, 1996 presentation.
(a) Financial Reporting for Bankruptcy Proceedings
The accompanying financial statements have been prepared on a going concern
basis which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the reorganization proceedings, there are significant uncertainties relating
to the ability of the Company to continue as a going concern. The financial
statements do not include any adjustments that might be necessary as a result
of the outcome of the uncertainties discussed herein including the effect of
any plan of reorganization.
The American Institute of Certified Public Accountant's Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7") provides guidance for financial reporting by entities that
have filed petitions with the Bankruptcy Court and expect to reorganize under
Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of
the ongoing business as it evolves. Accordingly, SOP 90-7 requires the
following financial reporting or accounting treatments in respect to each of
the financial statements.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
Balance Sheet
The balance sheet separately classifies pre-petition and post-petition
liabilities. A further distinction is made between pre-petition liabilities
subject to compromise (generally unsecured and undersecured claims) and those
not subject to compromise (fully secured claims). Pre-petition liabilities
are reported on the basis of the expected amount of such allowed claims, as
opposed to the amounts for which those allowed claims may be settled. Under
an approved final plan of reorganization, those claims may be settled at
amounts substantially less than their allowed amounts.
When debt subject to compromise has become an allowed claim and that claim
differs from the net carrying amount of the debt (defined as the face amount
of the debt less unamortized debt issuance costs and unaccreted discount), the
net carrying amount is adjusted to the amount of the allowed claim. The
resulting gain or loss is classified as a reorganization item.
Statement of Operations
Pursuant to SOP 90-7, revenues and expenses, realized gains and losses, and
provisions for losses resulting from the reorganization and restructuring of
the business are reported in the statement of operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense is reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed claim.
Statement of Cash Flows
Reorganization items are reported separately within the operating, investing
and financing categories of the statement of cash flows.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore
Corporation and its wholly and majority-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:
Three Month Periods Ended
March 31,
1996 1995
(Dollars in Thousands)
Hotel $ 390 $ 482
Food & Beverage 1,180 1,324
Total $1,570 $1,806
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
(d) 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 attraction. The Fremont Street
Experience has transformed four blocks of Fremont Street into a covered
pedestrian mall featuring a 10-story celestial vault, sound effects and a high
tech light show which add to the neon signs and marquees for which the
downtown area is already famous. The Company's $3,000,000 capital
contribution for its one-sixth ownership of FSELLC was paid in full by January
1994. The project was completed at the end of November 1995 and the grand
opening ceremonies held on December 13, 1995. As FSELLC is expected to
operate at a loss for the foreseeable future, the $3,000,000 capital
contribution is being amortized over five years using the straight-line
method. The Company's allocated share of the operating costs of the Fremont
Street Experience are expensed as incurred.
(e) Earnings (Loss) Per Share
Earnings (loss) per share has been computed by dividing net income (loss) by
the weighted average common shares outstanding during the period.
(f) Use of Estimates
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
4. Native American Casino Operations
Spotlight 29 Casino
Since March 1995, Elsinore Corporation, its wholly owned subsidiary, Elsub
Management Corporation and Palm Springs East Limited Partnership, of which
Elsub is the general partner (collectively the "Company"), and the Twenty-Nine
Palms Band of Mission Indians (the "Band") have been involved in a dispute
regarding, among other things, the terms of a management contract (the
"contract") under which the Company had the exclusive right to manage and
operate the Spotlight 29 Casino (the "Spotlight 29"), owned by the Band,
located near Palm Springs, California.
On April 17, 1995, the Company was ousted as manager of Spotlight 29 and on
April 19, 1995, the Company issued a demand letter to the Band declaring a
breach of the Contract and a related loan agreement under which the Company
had lent approximately $12,500,000 to the Band for construction of Spotlight
29 and for working capital Contributions. The demand letter claimed damages
in the full amount of the funds which had been advanced to the Band.
In light of the Company's disassociation with the operations of Spotlight 29,
management determined to write off, during the quarter ended March 31, 1995,
the unamortized balance of casino development costs incurred for the project
of $1,037,000 and ceased the accrual of interest on the project note and loans
evidencing working capital advances.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
On May 16, 1995, in response to the Company's demand, the Band delivered to
the Company a "Notice to Terminate Management Agreement." The notice asserted
material breaches of the Contract and requested payment of approximately
$1,500,000 million by June 16, 1995 to cover working capital shortfalls or the
Contract would be terminated.
On October 31, 1995, the Company filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy
Court for the District of Nevada (Las Vegas, Nevada).
The Company has been involved in protracted negotiations with the Band for a
settlement of the respective claims asserted by the parties since the events
described above. Based upon the progress of the aforementioned negotiations
at the time, in September 1995 the Company wrote-down to $9,000,000 the
aggregate amount advanced to the Band and accrued interest thereon.
As of March 29, 1996, the Company has reached a settlement with the Band,
subject to approval by the Bankruptcy court and by the National Indian Gaming
Commission (the "NIGC"). The Company would receive a promissory note from the
Band in the principal amount of $9,000,000. While the note would have a
36-month amortization schedule, monthly payments would be limited to 20% of
Spotlight 29's monthly net income. In the event that net income is
insufficient to fully pay the note at the end of 36 months, the note would be
automatically extended for up to an additional two years. If still not fully
paid at the end of the extension period, it may be extended up to an
additional two years upon the approval of the NIGC. If not paid at the end of
the final extension period, the note will be forgiven. Interest on the note
is at an annual rate equal to the greater of 10% or the maximum rate allowed
under California law, not to exceed 12%. Given that the $9 million recovery
is limited to 20% of the net income generated by Spotlight 29 and because
there can be no assurance that the settlement agreement reached with the Band
will be approved by the Bankruptcy Court and by the NIGC, management
determined not to reduce the allowance for loss in the amount of $9,000,000
against the aggregate receivable, which was provided during the quarter ended
December 31, 1995.
7 Cedars Casino
Elsinore Corporation, through its wholly-owned subsidiary, Olympia Gaming
Corporation (collectively the "Company"), has a Gaming Project Development and
Management Agreement (the "Contract") to operate the 7 Cedars Casino (the "7
Cedars") which is located on the Olympic Peninsula in the state of Washington
and is owned by the Jamestown S'Klallam Tribe (the "Tribe"). In addition,
pursuant to a loan agreement, the Company lent $9,000,000 to the Tribe for the
construction of 7 Cedars.
Under the terms of the Contract, the Company is obligated to establish a
reserve fund for "working capital", which is not defined in the Contract, in
the amount of $500,000 for the operation of 7 Cedars. The Company believes
that in negotiating the contract the parties did not intend to apply a
"working capital" definition based upon generally accepted accounting
principles which, in the Company's view, would be impracticable in the context
of the Contract and which, in practice, has never been followed. Since its
opening on February 3, 1995, the Casino has incurred a substantial cumulative
net loss and an attendant decrease in working capital.
On November 1, 1995, the Tribe asserted that the Company had defaulted on the
June, July, August and September 1995 minimum guaranteed payments to the
Tribe, as defined by the Contract, in the aggregate amount of $100,000 and
requested immediate payment.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
In addition, the Tribe demanded that sufficient monies be paid to enable all
current gaming project expenses to be paid and working capital reserve to be
maintained at the required funding level. The Tribe demanded that a minimum
of $2,540,000 be paid immediately and also contended that the working capital
shortfall could be as high as approximately $5,390,000 according to their
interpretation of the Contract. On November 13, 1995, the Company received a
letter from the Tribe dated November 9, 1995 asserting that the Contract had
been terminated as a result of the Company's failure to make the payments
which has been demanded.
On November 10, Olympia Gaming filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy
Court for the District of Nevada (Las Vegas, Nevada).
Pursuant to the terms of the Contract, the Company receives a management fee
equal to 30% of the net distributable profits of 7 Cedars (subject to the
Tribe receiving a $25,000 per month guaranteed payment) and the Tribe 70%.
The Contract has an initial term of five years (expires February 2, 2000),
subject to renewal for an additional two years in the event that the project
loan is not paid in full by the end of the initial term. The project loan to
finance the development and construction of 7 Cedars is payable solely from
the Tribe's share of the net distributable profits of 7 Cedars, and will
amortize over the five-year term of the contract at an annual interest rate of
10.9%.
As a result of significantly lower than projected gaming revenues, 7 Cedars
has incurred substantial operating losses since its opening. Management
believes the following are the principal factors contributing to the lower
gaming revenues.
A significantly lower than anticipated propensity for the 3,000,000 plus
tourists visiting the Olympic Peninsula in the summer to gamble. This
includes both the numbers of tourist customers and their level of play
in the casino.
A significantly higher than anticipated impact of competition for the
locals market. Native American casino openings in May 1995 (Muckleshoot
near Auburn, Washington) and January 1996 (Suquamish, north of
Bremerton, Washington) have resulted in substantially reduced visitation
from Kitsap County residents. While Kitsap County, approximately 50
miles to the east of 7 Cedars, was originally identified as a secondary
market, its larger, younger, population proved to be a significant
market in the first several months following the opening of 7 Cedars.
A substantially lower than expected average table games wager.
In response to declining revenues following the first several months of
operations, management undertook certain cost-cutting measures in the late
spring and summer 1995 and increased marketing activities in an effort to
achieve profitability. In November 1995 and January 1996, more substantial
expense reductions were effected through reductions in the hours of operation
of 7 Cedars and deeper, "across the board" cost cutting. While management
believes the operation will show a modest profit in March 1996 and gaming
revenues will continue to improve through the spring and summer months, in
light of the existing competition in the Puget Sound area, the demographics of
7 Cedars primary locals' markets and the apparent low propensity for
destination tourists to the Olympic Peninsula to gamble, there exists
substantial uncertainty as to whether, during the remaining term of the
management and loan agreements, 7 Cedars can achieve the level
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
of profitability required to obtain full recovery of the loan principal and
accrued interest thereon. The outlook for 7 Cedars could change dramatically,
however, if an initiative was passed in the State of Washington to allow
electronic gaming machines at Native American casinos. A number of tribes have
recently formed an apparently well-funded coalition for the purpose of a
petition drive to place an initiative on the fall 1996 ballot to allow limited
numbers of electronic gaming machines at Native American casinos. While the
tribes and others are optimistic about the passage of such an initiative, if
and when gaming machines will ultimately be allowed is uncertain at this time.
Based upon the foregoing, management determined during the quarter ended
December 31, 1995 to provide an allowance for loss against the $9,000,000
outstanding balance of the project loan plus accrued interest thereon.
Previously, as of September 1, 1995, as the summer 1995 Olympic Peninsula
tourist season came to a close, the Company ceased accruing interest on the
project loan and wrote-off the remaining unamortized balance of capitalized
casino development costs of approximately $242,000.
5. Earnings (Loss) Per Share
Because of the Chapter 11 proceedings, certain contractual interest
obligations, debt discount and debt issue costs were not expensed during the
quarter ended March 31, 1996. In addition, bankruptcy related reorganization
items of approximately $534,000 were incurred and expensed during the period
ended March 31, 1996. Without the chapter 11 proceedings, the effect on
earnings and earnings per share of such items for the three month periods
ended March 31, 1996 and 1995 follow:
Three Month Periods Ended
March 31,
1996 1995
(Dollars in thousands,
except per share amounts)
Net income (loss) per consolidated
statements of operations $ 344 $(4,132)
Subtract:
Interest (1,883) -
Debt discount and
debt issuance costs (421) -
Add:
Reorganization items 534 -
Net income (loss) as adjusted $(1,570) $(4,132)
Per Share:
Income (loss) per common share reflected
on consolidated statements of operations $ 0.02 $ (0.28)
Per share effect of such items (0.11) -
Loss per common and common equivalent
share, adjusted for such items $ (0.09) $ (0.28)
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
6. Commitments and Contingencies
Chapter 11 Reorganization
On October 31, 1995, the Company and certain of its subsidiaries filed a
voluntary petition in the United States Bankruptcy Court for the District of
Nevada seeking to reorganize under Chapter 11 of the United States Bankruptcy
Code. On November 10, 1995, Olympia Gaming Corporation filed a voluntary
petition in the same Court. Since the Bankruptcy filing, several entities
have filed administrative claims requesting the Bankruptcy Court order the
Company to reimburse or compensate such entities for goods, taxes and services
they allege the Company has received or collected, but for which they claim
the Company has not paid.
The Company currently estimates that the administrative claims will be
approximately $1.5 million; however, there can be no assurance that additional
amounts will not be claimed or the extent to which administrative claims may
be allowed by the Bankruptcy Court. The Bankruptcy Code requires that all
administrative claims be paid on the effective date of a plan of
reorganization unless the respective claimants agree to different treatment.
Depending on the ultimate amount of administrative claims allowed by the
Bankruptcy Court, the ability of the Company to confirm and consummate a plan
of reorganization may be impacted negatively. The Company is actively
negotiating with claimants to achieve mutually acceptable dispositions
of these claims.
Hyland Litigation
Thomas Hyland, a professional card counter and blackjack player, filed a
complaint on August 23, 1995 in Federal District Court in Camden, New Jersey,
No. 95CV2236 (JEI), against the Company and virtually every other casino
company in the United States. The complaint alleges violations of the
antitrust, consumer fraud and fair credit reporting laws by the defendants in
illegally conspiring to prevent Mr. Hyland and other professional card
counters from playing blackjack at their respective casinos. The complaint
alleges that the defendants share information concerning card counters and
then act in concert to implement industry wide policy in banning them at the
blackjack tables.
Management believes that the claims are without merit and does not
believe that the lawsuit will have a material adverse effect on the Company's
operating results.
WARN Act Litigation
The Company is a defendant in two consolidated lawsuits pending in the
federal court for the District of New Jersey, alleging violation by the
Company and certain of its subsidiaries and affiliates of the Worker
Adjustment and Retraining Notification Act ("WARN Act") and breach of
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
contract. The plaintiffs in the two consolidated cases are (i) former
employees of a casino/hotel in New Jersey formerly affiliated with the Company
bringing suit on behalf of a class of all employees laid off as a result of
the casino's closing and (ii) a union local seeking to represent its members
who were laid off at that time. Plaintiffs claim that there are approximately
1,300 such employees within the class who seek damages under the WARN Act
providing for up to 60 days' pay and lost benefits and payments for deferred
compensation allegedly due under a contract with certain employees. Damages
payable, if any, would be calculated on the basis of the number of days'
notice determined by the court to have been required under the WARN Act and
the wages, benefits and deferred compensation applicable to each such
employee.
The Company has vigorously defended the action on the basis that even if the
WARN Act does apply as a matter of law to a regulatory-forced closing, the
closing was due to unforeseeable circumstances and, accordingly, the notice
given was as timely as practicable, among other grounds. The liability phase
of the trial of the two consolidated lawsuits concluded in August 1993.
On June 30, 1995, the presiding judge entered an Order for Verdict Upon
Liability Issues in which he ruled that: (i) the plaintiffs had failed to
prove any liability under the WARN Act; and (ii) that Elsinore and certain of
its subsidiaries are jointly liable for certain retroactive wages due to
former employees of Elsinore Shore Associates under a collective bargaining
agreement, plus prejudgment interest on such wages. The total amount of
judgment the plaintiffs would be entitled to under this ruling has not yet
been determined. The plaintiffs' attorney asserts that the amount due as of
October 1, 1995, taking into account interest on that date, was approximately
$676,000. On March 4, 1996, the plaintiffs' attorney submitted a proof of
claim for retroactive wages in the amount of $800,000 to the Bankruptcy court.
The Order is stayed until the Findings of Fact and Conclusions of Law are
entered by the Court, which could be forthcoming at any time. Until such
Findings of Fact and Conclusions of Law are entered, the Company is not able
to make a determination concerning the extent of its ultimate exposure or
whether an appeal of the decision is appropriate. Because of the filing of
the bankruptcy petitions, the WARN Act litigation has also been stayed by
operation of Bankruptcy Code Section 362(a).
Action Against Twenty-Nine Palms Band
On March 16, 1995, Elsinore Corporation, its wholly owned subsidiary, Elsub
Management Corporation, and Palm Springs East Limited Partnership, of which
Elsub Management is the General Partner, filed a complaint against the Band in
the United States District Court for the Central District of California, case
no. CV 95-1669-RG(MCx). The complaint sought injunctive and declaratory
relief based upon alleged breaches by the Band of the Spotlight 29 Contract
when it installed Class III electronic gaming machines at the casino without
the Company's consent and without any involvement whatsoever by the Company in
the operation of the machines. The suit was dismissed without prejudice on
April 21, 1995. As described in note 4, the Company has reached a settlement
with the Band subject to certain regulatory and court approvals.
Poulos/Ahern Class Actions
In April and May 1993, two class action lawsuits were filed in the United
States District Court, Middle District of Florida, against 41 manufacturers,
distributors and casino operators of video poker and electronic slot machines,
including the Company. The suits allege that the defendants have engaged in a
course of fraudulent and misleading conduct intended to induce persons to play
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Notes to Consolidated Financial Statements
March 31, 1996 and December 31, 1995
(Unaudited)
such games by collectively misrepresenting how the game machines operate, as
well as the extent to which there is an opportunity to win. It also alleges
violations of the Racketeer Influenced and Corrupt Organizations Act, as well
as claims of common law fraud, unjust enrichment and negligent
misrepresentation, and seeks damages in excess of $6 billion. On December 9,
1994, the Florida Court ordered that the consolidated cases be transferred to
the United States District Court for the District of Nevada. That transfer
has occurred and the Nevada Court has assumed control of the cases. The new
case number is CV-S-94-1126-LDG(RJJ). Numerous defendants (including the
Company) have moved to dismiss the complaint for failure to state a claim. No
hearing has been set on this motion. The plaintiffs have filed a motion
seeking to certify the consolidated actions as a class action. The defendants
(including the Company) have opposed certification of the class. During
April, 1996, U.S District Judge Lloyd George approved defense motions to
dismiss such lawsuits saying plaintiffs had failed to state a claim or prove
their case. The plaintiffs have until May 31, 1996 to file an amended
complaint. Management believes the claims are wholly without merit and does
not expect that the lawsuit will have a material adverse effect on the
Company's financial statements taken as a whole.
Other
At March 31, 1996, the Company and its subsidiaries were parties to
various other claims and lawsuits arising in the normal course of business.
Management is of the opinion that all pending legal matters are either covered
by insurance or, if not insured, will not have a material adverse effect on
the financial position or the results of operations of the Company.
<PAGE>
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 2: 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.
OVERVIEW
Chapter 11 Proceedings: On October 31, 1995, the Company and certain of its
subsidiaries filed a voluntary petition in the United States Bankruptcy Court
for the District of Nevada to reorganize under chapter 11 of Title 11 of the
United States Bankruptcy Code. On November 10, 1995 an additional subsidiary
of the Company also filed a voluntary petition to reorganize under Chapter 11
in the same court. The Company is continuing to manage its business affairs as
a debtor-in-possession under the supervision of the Bankruptcy Court.
On February 28, 1996, Elsinore and its subsidiaries filed a plan of
reorganization (the "Plan") with the Bankruptcy Court. The reorganization
process is expected to result in the cancellation and/or restructuring of
substantial debt obligations of the Company. The Company anticipates that the
reorganization process will not result in the elimination of the interests of
its common stockholders; however, it is anticipated that the interest of the
current common stockholders in the Company will be substantially reduced.
There can be no assurance that the plan of reorganization submitted by the
Company will be confirmed. There also can be no assurance that, with or
without a plan of reorganization, the Company can generate sufficient cash to
sustain operations.
Going Concern Basis: The accompanying financial statements have been prepared
on a going concern basis which assumes continuity of operations and
realization of assets and liquidation of liabilities in the ordinary course of
business. The consolidated financial statements do not include all of the
consequences of the proceedings under Chapter 11 nor all adjustments that
might be necessary should the Company be unable to continue as a going
concern. The Company's ability to continue as a going concern is dependent
upon, among other things, its obtaining the required regulatory approvals from
the State of Nevada, including approvals by the gaming authorities, obtaining
sufficient cash to fund all distributions and cash reserves required at the
time the Plan becomes effective and achieving profitable operations and
sufficient cash flows to meet future obligations required by the plan. The
outcome of these matters is not presently determinable.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and cash equivalents
Cash and cash equivalents increased $2,051,000 during the three month period
ended March 31, 1996. Uses of cash during the period included capital
expenditures of $257,000.
Liquidity
Currently, the Company's primary sources of liquidity are cash flows from the
operations of the Four Queens Hotel and Casino. Four Queens revenues,
operating results and cash flows increased during the quarter ended March 31,
1996, primarily because of an increase in Four Queens hotel guests and casino
visitors, which apparently occurred due to an overall increase in the number
of visitors to Las Vegas and related visitor (and local residents) interest in
the Fremont Street Experience attraction in downtown Las Vegas.
During the three month period ended March 31, 1996, the Company experienced
less liquidity pressure because of the protection afforded by the bankruptcy
laws in the payment of obligations incurred prior to the filing and arising
under certain executory contracts entered into prior to the filing of the
bankruptcy petition and because of the increased visitors to Las Vegas and the
opening of the Fremont Street Experience.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 and 1995
Revenues
During the three month period ended March 31, 1996, total revenues, net of
promotional allowances, increased $625,000 (4.1%) primarily because of an
increase in the number of Four Queens hotel guests and casino visitors, which
apparently resulted from an overall increase in the number of visitors to Las
Vegas and related visitor (and local residents) interest in the Fremont Street
Experience attraction in downtown Las Vegas. Other income decreased $523,000,
primarily as a result of the nonaccrual of interest income related to the
Native American loans, which were fully reserved at December 31, 1995. Casino
revenues increased $416,000 (3.9%). Promotional allowances, which are
subtracted from gross revenues, increased $64,000 (3.4%) which was comparable
with the casino revenue increase.
The increase in Casino revenues of $416,000 from the comparable prior period,
consisted of an $880,000 (13.1%) increase in slot revenues, which was
partially offset by a $464,000 (11.5%) decrease in table game revenues. The
decrease in table game revenues was primarily attributable to a lower win
percentage in craps during the 1996 quarter. The increase in slot revenues
resulted both from an
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
increase in volume and an improved win percentage.
Hotel revenue increased $554,000 (22.7%) primarily because of an increase in
room rates and also because of a slight increase in the number of rooms
occupied. Food and beverage revenues increased by $242,000 (7.4%) primarily
due to an increase in the number of visitors.
Costs and Expenses
Total costs and expenses, excluding interest, depreciation, casino development
costs and reorganization items decreased $867,000 (5.9%) during the three
month period ended March 31, 1996.
Casino costs and expenses decreased $576,000 (10.6%) primarily due to (1) a
decrease in French Quarter Lounge entertainment expenses and (2) a decrease in
costs allocated to the casino for promotional allowances (which was lower, as
a result of a reduction in the ratio of complimentary sales to total sales of
rooms, food and beverages during the three month period ended March 31, 1996).
Hotel expenses were comparable to the 1995 quarter. Food and beverage expenses
increased $164,000 (10.3%) primarily due to decreased allocations of the costs
of promotional allowances to the casino, as explained above.
Taxes and licenses, other than gaming and payroll related, were slightly lower
during the quarter. Selling, general and administrative expenses decreased
$439,000 (15.2%) from 1995 primarily due to reductions in payroll costs of
corporate administrative and development staff.
Rent expenses increased $51,000 (5.3%) primarily because of scheduled
increases under existing leases.
Depreciation and amortization decreased $49,000 (4.8%), primarily because of
decreased amortization of debt issue costs (unamortized debt issue costs,
incurred in connection with the 12.5% First Mortgage notes, were charged to
expense as reorganization items at October 31, 1995) and slightly lower
depreciation of property and equipment, which was mostly offset by the
start-up on January 1, 1996 of amortization (over 60-months) of the $3,000,000
Investment in the Fremont Street Experience.
Because of the Chapter 11 proceedings, there has been no accrual of interest
on the $57,000,000, 12.5% First Mortgage notes since October 31, 1995. If
accrued, the quarterly interest expense on the 12.5% notes would have totaled
approximately $1,781,000 for the three month period ended March 31, 1996. (In
addition, the remaining unaccreted discount balance related to the 12.5% first
mortgage notes was charged to expense as a reorganization item at October 31,
1995). There also has been no accrual of interest on the $1,425,000, 7.5%
Convertible Subordinated Notes since October 31, 1995. If accrued, the
quarterly interest expense on the 7.5% notes would have totaled approximately
$27,000 for the three month period ended March 31, 1996. In addition, there
has been no accrual of interest on the $2,950,000 of prior period tax
obligations since October 31, 1995. If accrued, the estimated interest expense
on prior period tax obligations would have totaled approximately $75,000 for
the three month period ended March 31, 1996.
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Reorganization expense is comprised of items incurred by the Company as a
result of reorganization under Chapter 11 of the Bankruptcy Code. Such items
totaled $534,000 and consisted primarily of accrued professional fees, for the
three month period ended March 31, 1996.
<PAGE>
Elsinore Corporation and Subsidiaries (Debtor-In-Possession)
Other Information
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Disclosed in Note 6 of the Condensed Consolidated
Financial Statements in Part 1 and is incorporated by
reference herein.
Item 5. Other Information:
Described in Notes 1 and 6 of the Condensed
Consolidated Financial Statements in Part 1 and is
incorporated by reference herein.
Item 6. Exhibits and Reports of Form 8-K:
Form 8-K - dated February 29, 1996,
announcing filing of plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto authorized.
ELSINORE CORPORATION
(Registrant)
By: /s/ Thomas E. Martin
THOMAS E. MARTIN, President
and Chief Executive Officer
By: /s/ John J. James
JOHN J. JAMES, Treasurer
and Principal Accounting Officer
Dated: May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<S> <C>
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<PERIOD-END> MAR-31-1996
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