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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to
Commission File Number 1-7831
ELSINORE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88 0117544
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
202 FREMONT STREET, LAS VEGAS, NEVADA 89101
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (Including Area Code): 702/385-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety (90) days.
YES X NO
APPLICABLE ONLY TO ISSUERS, INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
YES X NO
<PAGE>
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 10, 1999 4,929,313
<PAGE>
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended March 31, 1999
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at 4-5
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations 6-7
for the Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998
Condensed Consolidated Statements of Cash Flows for 8-9
the Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998
Notes to Condensed Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of 14-22
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 22
About Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 23-25
Item 2. Exhibits and Reports 26
SIGNATURES 27
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1999 1998
------------------- --------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $5,743 $5,604
Accounts receivable, less allowance for
doubtful accounts of $221 and $219,
respectively 483 473
Inventories 403 445
Prepaid expenses 1,287 1,153
------------------- --------------------
Total current assets 7,916 7,675
------------------- --------------------
Property and equipment, net 39,559 40,218
Reorganization value in excess of amounts
allocable to identifiable 349 350
assets
Other assets 1,391 1,505
------------------- --------------------
Total assets $49,215 $49,748
=================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
March 31, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1999 1998
------------------- --------------------
Liabilities and Shareholders' Equity Current liabilities:
<S> <C> <C>
Accounts payable $1,081 $792
Accrued interest 846 2,764
Accrued expenses 5,025 4,359
Current portion of long-term debt 1,876 1,906
------------------- --------------------
Total current liabilities 8,828 9,821
------------------- --------------------
Long-term debt, less current portion 14,833 15,548
------------------- --------------------
Total Liabilities $23,661 $25,369
------------------- --------------------
Commitments and contingencies
Shareholders' equity:
6% cumulative convertible preferred stock, no
par value. Authorized, issued and
outstanding 50,000,000 shares. Liquidation preference of $18,540,000.
$18,540 $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 9,097 9,367
Accumulated deficit (2,088) (3,263)
------------------- --------------------
Total shareholders' equity 25,554 24,379
------------------- --------------------
Total liabilities and shareholders'
equity $49,215 $49,748
=================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Three
Months Months
Ended Ended
March 31, March 31,
1999 1998
-------------------- ------------------
Revenues, net:
<S> <C> <C>
Casino $10,579 $10,235
Hotel 2,400 2,375
Food and beverage 2,587 2,657
Other 749 565
Promotional allowances (1,130) (1,579)
-------------------- ------------------
Total revenues, net 15,185 14,253
Costs and expenses:
Casino 3,362 4,068
Hotel 2,119 1,771
Food and beverage 1,842 1,446
Taxes and licenses 1,589 1,553
Selling, general and
Administrative 2,701 2,667
Rents 973 964
Depreciation and
Amortization 821 567
Interest 506 1,332
Merger costs 97 155
-------------------- ------------------
Total costs and
Expenses 14,010 14,523
-------------------- ------------------
Net income (loss) 1,175 (270)
-------------------- ------------------
Undeclared dividends on
cumulative Preferred Stock 270 -
-------------------- ------------------
Net income (loss) applicable
to common shares $905 $ (270)
==================== ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Three
Months Months
Ended Ended
March 31, March 31,
1999 1998
------------------------ -----------------
<S> <C> <C>
Basic and diluted income (loss)
per share net income $.18 ($.05)
Weighted average number of
common shares
outstanding 4,929,313 4,929,313
======================== =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited) (Unaudited)
Three Three
Months Months
Ended Ended
March 31, March 31,
1999 1998
---------------------- -------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $1,175 ($270)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization 821 567
Decrease (Increase) in
accounts receivable (10) 122
Decrease (Increase) in
inventories 42 (38)
Increase in
prepaid expenses (134) (118)
Decrease in
other assets 115 22
Increase (decrease) in
accounts payable 289 (331)
Increase in
accrued expenses 666 102
Decrease in
accrued interest (1,918) (1,030)
---------------------- -------------------
Net cash provided by (used
in) operating activities $1,046 ($974)
---------------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
(Unaudited) (Unaudited)
Three Three
Months Months
Ended Ended
March 31, March 31,
1999 1998
--------------------- -------------------
Cash flows from investing
activities - capital
<S> <C> <C>
expenditures (162) (799)
--------------------- -------------------
Cash flows from financing activities:
Principal payments on
long-term debt (745) (520)
--------------------- -------------------
Net cash provided by (used
in) financing activities (745) (520)
--------------------- -------------------
Net increase (decrease) in
cash and cash equivalents 139 (2,293)
Cash and cash equivalents at
beginning of period 5,604 6,822
--------------------- -------------------
Cash and cash equivalents at
end of period $5,743 $4,529
===================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Elsinore Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
1. Basis of Presentation
On October 31, 1995, Elsinore Corporation filed a voluntary petition to
reorganize under Chapter 11 of the Federal Bankruptcy Code and continued to
operate as a debtor in possession (Elsinore Corporation, D.I.P.) ("Predecessor
Company"). 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
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" of the American Institute of Certified Public Accountants. As a
result of fresh start reporting, the material adjustments made by the Company
were the revaluation of property and equipment, write-off of the investment in
Fremont Street Experience, the revaluation of mortgage notes and other
liabilities, including the related gain on forgiveness of indebtedness, and
write-off of the accumulated deficit, additional paid-in-capital and common
stock of the Predecessor. 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.
The Company has prepared the accompanying financial statements without audit,
pursuant to rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 1999, the
results of operations for the three months ended March 31, 1999 and March 31,
1998 and the results of operations and cash flows for the three months ended
March 31, 1999. The operating results and cash flows for these purposes are not
necessarily indicative of the results that will be achieved for the full year or
for future periods.
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
<TABLE>
<CAPTION>
2. Shareholders' Equity
Common Stock Preferred Stock
---------------------------------------------------------
Total
Out- Out- Additional Accumulated Shareholders
Standing Standing Paid-In-Capital Earnings Equity
Shares Amount Shares Amount (Deficiency) (Deficiency)
--------------------------------------------------------------------------------------------------------------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,1997 4,929,313 $5 - - 4,995 (1,914) 3,086
Net loss Jan. 1,
1998 - Mar. 31,
1998 - (270) (270)
--------------------------------------------------------------------------------------------------------------
Balance, Mar. 31,
1998 4,929,313 $5 - - $4,995 ($2,184) $2,816
Capital
Contribution, net 4,642 4,642
Issuance of
Preferred stock 50,000,000 $18,000 18,000
Net loss April 1,
1998 - December
31, 1998 (1,079) (1,079)
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
Net Income Jan. 1,
1999 - Mar, 31,
1999 1,175 1,175
Undeclared Preferred
Stock dividends 270 (270) -
--------------------------------------------------------------------------------------------------------------
Balance Mar. 31,
1999 4,929,313 $5 50,000,000 $18,540 $9,097 ($2,088) $25,554
==============================================================================================================
</TABLE>
<PAGE>
3. Supplemental Disclosure of non-cash
investing and financing activities
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
------------------- --------------------
(Dollars in (Dollars in
thousands) thousands)
<S> <C> <C>
Equipment purchased with capital lease financing - $275
</TABLE>
4. Commitments and Contingencies
Riviera Gaming Management Corp. - Elsinore ("RGME") manages the Four Queens
Hotel & Casino (which is owned by Four Queens, Inc., for which the Company is a
holding company) in accordance with the Management Agreement among the Company,
Four Queens, Inc. and RGME effective April 1, 1997. RGME receives an annual fee
of $1 million in equal monthly installments plus a performance fee payable
annually equal to 25% of any increase in earnings before interest, taxes,
depreciation and amortization ("EBITDA") in any fiscal year over $8 million.
RGME also received warrants to purchase 1,125,000 shares of the Company's Common
Stock at $1 per share. The Management 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 (the "WARN Act") and breach of certain alleged
retroactive wage agreements. The New Jersey court issued a ruling denying WARN
Act liability, and the Third Circuit Court of Appeals subsequently affirmed the
New Jersey Court's decision following plaintiffs' appeal. Plaintiffs have not
filed any further appeal of the decision. The claim for retroactive wages has
been determined by final court order to be included in the Class 10 Unsecured
Creditor's pool of the bankruptcy proceedings, which is capped at $1.4 million.
As such, the retroactive wages claim has been reserved for as part of the Class
10 notes payable and, therefore, will not have a material financial effect on
the Company.
The Company is also a party to litigation involving a proposed merger with R&E
Gaming Corp. as discussed in Note 4 below.
The Company is a party to other claims and lawsuits. Management believes that
such matters are either covered by insurance or, if not insured, will not have a
material adverse effect on the financial statements of the Company taken as a
whole.
5. Proposed Merger
The Company entered into an Agreement and Plan of Merger ("Merger Agreement"),
dated as of September 15, 1997, between R&E Gaming Corp. ("R&E"), Elsinore
Acquisition Sub, Inc. ("EAS") and the Company. Pursuant to the Merger Agreement,
the Company would merge with EAS and would become a wholly-owned subsidiary of
R&E. The Company's shareholders (other than those who exercised dissenter's
rights under Nevada law) would receive in exchange for each share of the
Company's Common Stock held, cash in the amount of $3.16 plus an amount equal to
the daily accrual on $3.16 at 9.43% compounded annually, accruing from June 1,
1997 to the date immediately preceding consummation of the Merger.
On March 20, 1998, the Company was notified by R&E, through Mr. Allen Paulson
("Paulson"), that it was its 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
the Company of the Merger Agreement, violations of law and misrepresentations by
the manager of certain investment accounts that 94.3% of the Company's
outstanding Common Stock in connection with an option and voting agreement
relating to the Company's stock which that manager entered into with R&E in
connection with the merger, 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 the Company and the manager of
certain investment accounts which hold 94.3% of the Company's outstanding Common
Stock (Paulson, et al. v Jeffries & Company et al.). Plaintiffs' allegations
include breach of the Merger Agreement by the Company, 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, the Company 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 certain 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 a proposed
order allowing plaintiffs to serve and file a Third Amended Complaint
reinserting the claims under the Nevada anti-racketeering statute which
plaintiffs have done.
On April 16, 1999, the Company filed another motion to dismiss the Nevada
anti-racketeering claims, as well as to dismiss other claims that are based on a
purported breach of warranty concerning the Company's income and revenues. That
motion is set to be heard by the Court on May 24, 1999.
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.
6. Recapitalization
On September 29, 1998, certain investment accounts controlled by Morgens,
Waterfall, Vintiadis & Company, Inc. ("MWV" and the accounts controlled by MWV,
the "MWV Accounts") contributed $4,641,000, net of $260,000 of expenses, to the
capital of the Company, which the Company used, together with other funds of the
Company, to purchase in full all of the Company'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 the
Company 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 second
mortgage notes held by the MWV Accounts. The 50,000,000 shares of Series A
Convertible Preferred Stock have an aggregate liquidation preference of
$18,000,000 and are convertible into 93,000,000 shares of the Company's Common
Stock.
In addition, the Company issued to the MWV Accounts new second mortgage notes
("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
second mortgage notes that reduced the interest rate payable thereon from 13.5%
to 12.83%.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation
This discussion and analysis should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto set forth elsewhere herein.
The following tables set forth certain operating information for the Company for
the three months ended March 31, 1999 and 1998. Revenues and promotional
allowances are shown as a percentage of net revenues. Departmental costs are
shown as a percentage of departmental revenues. All other percentages are based
on net revenues.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
(Dollars in (Dollars in
thousands) % thousands) %
------------- ------- ------------ --------
Revenues, net:
<S> <C> <C> <C> <C>
Casino $10,579 69.7% $10,235 71.8%
Hotel 2,400 15.8% 2,375 16.7%
Food & beverage 2,587 17.0% 2,657 18.6%
Other 749 4.9% 565 4.0%
------------- ------- ------------ --------
Gross revenue 16,315 107.4% 15,832 111.1%
Less promotional allowances (1,130) (7.4%) (1,579) (11.1%)
------------- ------- ------------ --------
Revenues, net $15,185 100.0% $14,253 100.0%
------------- ------- ------------ --------
Costs and expenses:
Casino $3,362 31.8% $4,068 39.7%
Hotel 2,119 88.3% 1,771 74.6%
Food and beverage 1,842 71.2% 1,446 54.4%
Taxes and licenses 1,589 10.5% 1,553 10.9%
Selling, general and
2,701 17.8% 2,667 18.7%
Administrative
Rents 973 6.4% 964 6.8%
Depreciation and
Amortization 821 5.4% 567 4.0%
Interest 506 3.3% 1,332 9.3%
Merger costs 97 .6% 155 1.1%
------------- ------- ------------ --------
Total costs and expenses $14,010 92.3% $14,523 101.9%
------------- ------- ------------ --------
Net income (loss) before
undeclared dividends on 1,175 7.7% (270) (1.9%)
cumulative Preferred
Stock
Undeclared dividends on
cumulative Preferred Stock 270 1.8% - -
Net income (loss) applicable
------------- ------- ------------ --------
to common shares $905 5.9% ($270) (1.9%)
------------- ------- ------------ --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------------------ --------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
---------------------------------------------------------------------
Other Data:
Net income (loss) applicable
<S> <C> <C> <C> <C>
to common shares 905 5.9% ($270) (1.9%)
Depreciation and amortization 821 5.4% 567 4.0%
Interest 506 3.3% 1,332 9.3%
Merger costs 97 .6% 155 1.1%
Undeclared dividends 270 1.8% - -
------------------ -------------- ------------------- ---------------
Earnings before interest,
taxes, depreciation and
amortization, undeclared
dividends (EBITDA) $2,599 17.1% $1,783 12.5%
================== ============== =================== ==============
Cash flows provided by (used
In) operating activities $1,046 ($974)
================== ===================
Cash flows from investing
activities ($162) ($799)
================== ===================
Cash flows (used in) financing
activities ($745) ($520)
================== ===================
</TABLE>
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED
TO THREE MONTHS ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $932,000, or 6.5%, from $14,253,000 for
the three months ended March 31, 1998, to $15,185,000 for the three months ended
March 31, 1999, due primarily to an increase in casino revenues, resulting from
an increase in net slot revenues and "other" revenues, as discussed below, and
management's significant reduction of promotional allowances for casino and slot
marketing promotions because of the revised policy on complimentary benefits.
Casino revenues increased by approximately $344,000, or 3.4%, from $10,235,000
during the 1998 period to $10,579,000 during the 1999 period due primarily to a
$464,000, or 6.4%, increase in slot machine revenue and a $255,000, or 55.9%,
increase in slot promotion revenue, partially offset by a $178,000, or 8.4%,
decrease in table games revenue. The increase in slot machine revenue and
offsetting decrease in table game revenue are attributable primarily to the
opening of the Nickel Palace in March 1998, which targets "nickel customers"
with an additional 110 nickel machines, and the continued acquisition of
state-of-the-art slot equipment. Management eliminated certain unprofitable
complimentary programs which led to savings in promotional allowances.
Hotel revenues increased by approximately $25,000, or 1.0%, from $2,375,000
during the 1998 period to $2,400,000 during the 1999 period due primarily to an
increase in the cash occupancy and average room rate, resulting in part, from
increased marketing to attract walk-in traffic and a decrease in complimentary
revenue resulting from the reduction in casino and slot marketing promotions.
Food and beverage revenues decreased approximately $70,000, or 2.6%, from
$2,657,000 during the 1998 period to $2,587,000 during the 1999 period primarily
due to a decrease in complimentary revenues resulting from the reduction in
casino and slot marketing promotions, which was partially offset by an increase
in cash revenue as a result of higher average check.
Other revenues increased by approximately $184,000, or 32.6%, from $565,000
during the 1998 period to $749,000 during the 1999 period, due to payments
received under a 1997 settlement agreement with the Twenty-Nine Palms Band of
Mission Indians.
Promotional allowances decreased by approximately $449,000, or 28.4%, from
$1,579,000 during the 1998 period to $1,130,000 during the 1999 period due to a
decrease in complimentary rooms, food, and beverage resulting from management's
reduction of promotional allowances for 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 $118,000, or 0.9%, from $12,469,000 for the
1998 period to $12,587,000 for the 1999 period.
Casino expenses decreased $706,000, or 17.4%, from $4,068,000 during the 1998
period to $3,362,000 during the 1999 period, due primarily to a decrease in the
cost of complimentary rooms, food and beverages reflected as a casino expense,
resulting from management's reduction of promotional allowances for casino and
slot marketing promotions. Casino expenses as a percentage of revenue decreased
from 39.7% to 31.8% due primarily to a decrease in casino expenses and an
increase in casino revenues.
Hotel expenses increased by approximately $348,000, or 19.6% from $1,771,000
during the 1998 period to $2,119,000 during the 1999 period, and expenses as a
percentage of revenues increased from 74.6% to 88.3%, primarily due to increases
in utilities, repairs, and maintenance costs, and a decrease in the cost of
complimentary rooms reflected as a casino expense, resulting from management's
reduction in promotional allowances for casino and slot marketing promotions.
Food and beverage costs and expenses increased by approximately $396,000, or
27.4%, from $1,446,000 during the 1998 period to $1,842,000 during the 1999
period. Expenses as a percentage of revenues increased from 54.4% to 71.2%
primarily as a result of the decrease in the cost of complimentary food and
beverage reflected as a casino expense, resulting from management's reduction in
promotional allowances for casino and slot marketing promotions.
Taxes and licenses increased $36,000, or 2.3%, from $1,553,000 in the 1998
period to $1,589,000 in the 1999 period.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased $35,000, or 1.3%, from
$2,667,000 during the 1998 period to $2,702,000 during the 1999 period, and as a
percentage of total net revenues, expenses decreased from 18.7% to 17.8%.
EBITDA AND MORTGAGE NOTE COVENANTS
EBITDA increased by approximately $815,000, or 45.7%, from $1,784,000 during the
1998 period to $2,599,000 during the 1999 period. The increase was due to an
increase in revenues and decrease in costs associated with promotional
allowances as discussed above.
Pursuant to covenants applicable to the Company's 12.83% New Second Mortgage
Notes and Second Supplemental Indenture dated September 29, 1998, 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 period ended September 30, 1998, the Company
was not in compliance with the Ratio. Accordingly, the Company obtained waivers
from the Noteholders which provide that the Noteholders will not take action
with regard to the Company's non-compliance as of September 30, 1998 with the
Ratio prior to January 2, 2000. As of the reference period ended March 31, 1999
the Ratio was 5.14 to 1.00 and as such the Company was in compliance.
<PAGE>
OTHER EXPENSES
Depreciation and amortization increased by approximately $254,000, or 44.7% from
$567,000 during the 1998 period to $821,000 during the 1999 period, primarily
due to the acquisition of new slot equipment.
Interest expense decreased by approximately $827,000, or 62.0% from $1,332,000
during the 1998 period to $506,000 for the 1999 period, due to recapitalization
of the Company on September 29, 1998, as discussed below in Liquidity and
Capital Resources.
During the first quarter, the Company incurred approximately $97,000 in merger
and acquisition costs related to the Merger Agreement.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company experienced net income
in the 1999 period of $1,175,000 compared to a net loss of $270,000 in the 1998
period, an improvement of $1,445,000 or 535.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $5.7 million at March
31, 1999, as compared with approximately $4.5 million at March 31, 1998, an
increase of $1.2 million from March 31, 1998.
On September 29, 1998, certain investment accounts controlled by Morgens,
Waterfall, Vintiadis & Company, Inc. ("MWV" and the accounts controlled by MWV,
the "MWV Accounts") contributed $4,641,070, net of $260,000 of expenses, to the
capital of the Company, which the Company used, together with other funds of the
Company, to purchase in full all of the Company'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 of the 13.5% Second
Mortgage Notes of the Company 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 Second
Mortgage Notes held by the MWV Accounts. The 50,000,000 shares of Series A
Cumulative Convertible Preferred Stock have an aggregate liquidation preference
of $18,000,000 and are convertible into 93,000,000 shares of the Company's
Common Stock.
In addition, the Company issued to the MWV 12.83% New Second Mortgage Notes
("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
Second Mortgage Notes that reduced the interest rate payable thereon from 13.5%
to 12.83%. Following the recapitalization, the Company has New Notes outstanding
in the aggregate principal amount of $11,104,000. Significant debt service on
the Company's New Notes is paid in August and February which significantly
affects the Company's cash and cash equivalents in the second and fourth
quarters and should be considered in evaluating cash increases or decreases in
the second and fourth quarters.
For the first three months of 1999, the Company's net cash provided by operating
activities was $1,046,000 compared to $974,000 cash used in the first three
months of 1998, primarily due to an increase in net income offset with increases
in depreciation, accounts payable and accrued interest. EBITDA for the first
three months of 1999 and 1998 was $2.6 million and $1.8 million, respectively.
The repayment of the First Mortgage Notes and of the Second Mortgage Notes, the
surrender of $18,000,000 of the original principal amount of Second Mortgage
Notes held by the MWV Accounts, and the issuance of the New Notes in exchange
for the remaining Second Mortgage Notes held by the MWV Accounts has
significantly lowered the Company's debt service requirements.
Scheduled interest payments on the New Notes and other indebtedness are $2.0
million in 1999, declining to $1.3 million in 2001. Management believes that
sufficient cash flow will be available to cover the Company's debt service for
the next nine 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.
The New Notes are due in full 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
indenture also provides for mandatory redemption of the New Notes by the Company
upon order of the Nevada Gaming Authorities. 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. Cash flow from
operations is not expected to be sufficient to pay all of the $11 million of
principal of the New Notes at maturity on August 20, 2001, upon a Change of
Control, or upon a mandatory redemption. Accordingly, the ability of the Company
to repay the New Notes at maturity, upon a Change of Control, or upon a
mandatory redemption will be dependent upon its ability to refinance the New
Notes. There can be no assurance that the Company will be able to refinance the
principal amount of the New Notes on favorable terms or at all.
The note agreement executed in connection with issuance of New 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 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 13.5% Second Mortgage Notes due 2001 on August 31, 1998.
This payment was waived until December 31, 1999. Payment was made on January 5,
1999 for $1.0 million and on February 26, 1999 for $250,000. Payment is
scheduled in the amount of $250,000 in June 1999 and September 1999, and in the
amount of $290,000 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 $3.5 million for capital expenditures in 1999. The Company expects
to finance such capital expenditures from cash on hand, cash flow and slot lease
financing. Uses of cash during the three-month period ended March 31, 1999
included capital expenditures of $162 thousand. 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 nine months.
<PAGE>
COMPUTERIZED OPERATIONS AND 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 March 31, 1999, the Company has incurred costs of approximately $250,000
(primarily for acquisition of new systems from third parties) related to the
system applications and anticipates spending an additional $175,000 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.
The Company has not yet developed a contingency plan to operate in the event
that any non-compliant critical systems are not remedied by January 1, 2000 and
has not yet determined a timetable for developing such a plan.
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-Q 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 and restructuring 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
effects of competition, leverage and debt service, financing and refinancing
needs or efforts, general economic conditions, changes in gaming laws or
regulations (including the legalization of gaming in various jurisdictions),
risks related to development and upgrading activities, uncertainty of casino
customer spending and vacationing in hotel/casinos in Las Vegas, occupancy rates
and average room rates in Las Vegas, risks related to the Year 2000 Problem, the
popularity of Las Vegas as a convention and trade show destination, and other
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission, including the Company's Report on Form 10-K
for the year ended December 31, 1998. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's financial instruments include cash and long-term debt. At March
31, 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 March 31, 1999.
<PAGE>
Elsinore Corporation and Subsidiaries
Other Information
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The Company entered into a Merger Agreement, dated as of
September 15, 1997, between R&E, EAS and the Company. Pursuant
to the Merger Agreement, the Company would merge with EAS and
would become a wholly-owned subsidiary of R&E. The Company's
shareholders (other than those who exercised dissenter's
rights under Nevada law) would receive in exchange for each
share of the Company's Common Stock held, cash in the amount
of $3.16 plus an amount equal to the daily accrual on $3.16 at
9.43% compounded annually, accruing from June 1, 1997 to the
date immediately preceding consummation of the Merger.
On March 20, 1998, the Company was notified by R&E, through
Paulson, 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 the Company of the Merger Agreement,
violations of law and misrepresentations by the manager of
certain investment accounts that hold 94.3% of the Company's
outstanding Common Stock in connection with an option and
voting agreement relating to the Company's stock which that
manager entered into with R&E in connection with the merger,
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
the Company and the manager of certain investment accounts
that hold 94.3% of the Company's outstanding Common Stock
(Paulson, et al. v Jeffries & Company et al.). Plaintiffs'
allegations include breach of the Merger Agreement by the
Company, 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, the Company 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 on by the Court. Based
on the Siragusa decision, the Company stipulated to a proposed
order, subsequently entered by the Court, allowing plaintiffs
to serve and file a Third Amended Complaint reinserting claims
under the Nevada anti-racketeering statute.
On April 16, 1999, the Company filed another motion to dismiss
the Nevada anti-racketeering claims, as well as to dismiss
other claims that are based on a purported breach of warranty
concerning the Company's income and revenues. That motion is
set to be heard by the Court on May 24, 1999.
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.
The Company is also 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 Judgement 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 Third Circuit Court of
Appeals subsequently affirmed the New Jersey Court's decision
and no further appeal was filed. 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 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 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 financial position or results of operations of
the Company.
<PAGE>
Item 2. Exhibits and Reports
(a) Exhibits
15.1 KPMG LLP Independent Auditor's Review Report
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during this period.
<PAGE>
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/ Jeffrey T. Leeds
JEFFREY T. LEEDS, President
and Chief Executive Officer
By: /s/ S. Barton Jacka
S. BARTON JACKA, Secretary
and Treasurer and Principal
Accounting Officer
Dated: May 11, 1999
<PAGE>
INDEX TO EXHIBITS
15.1 KPMG LLP Independent Auditor's Review Report
27.1 Financial Data Schedule
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Elsinore Corporation:
We have reviewed the condensed consolidated balance sheet of Elsinore
Corporation and subsidiaries as of March 31, 1999, and the related condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1999. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Elsinore Corporation and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended; and in
our report dated February 26, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1998,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Las Vegas, Nevada
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,743,000
<SECURITIES> 0
<RECEIVABLES> 483,000
<ALLOWANCES> (479,000)
<INVENTORY> 403,000
<CURRENT-ASSETS> 7,768,000
<PP&E> 39,559,000
<DEPRECIATION> (821,000)
<TOTAL-ASSETS> 49,215,000
<CURRENT-LIABILITIES> 8,775,000
<BONDS> 11,104,000
0
18,540,000
<COMMON> 5,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,215,000
<SALES> 16,315,000
<TOTAL-REVENUES> 15,185,000
<CGS> 0
<TOTAL-COSTS> 14,010,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 506,000
<INCOME-PRETAX> 1,175,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,175,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175,000
<EPS-PRIMARY> 0.18
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