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 September 30, 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 November 12, 1999 4,929,313
<PAGE>
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 1999
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at 4-5
September 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations 6-7
for the Three Months Ended September 30, 1999 and
Three Months Ended September 30, 1998
Condensed Consolidated Statements of Operations 8-9
for the Nine Months Ended September 30, 1999 and
Nine Months Ended September 30, 1998
Condensed Consolidated Statement of Shareholders' 10
Equity for the Nine Months Ended September 30, 1999
Condensed Consolidated Statements of Cash Flows for 11
the Nine Months Ended September 30, 1999 and
Nine Months Ended September 30, 1998
Notes to Condensed Consolidated Financial Statements 12-17
Item 2. Management's Discussion and Analysis of 17-31
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 31
About Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 32-33
Item 6. Exhibits and Reports 34
SIGNATURES 35
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------------ ------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $4,144 $5,604
Accounts receivable, less allowance for
doubtful accounts of $225 and $219,
respectively 473 473
Inventories 337 445
Prepaid expenses 1,319 1,153
------------------ ------------------
Total current assets 6,273 7,675
------------------ ------------------
Property and equipment, net 40,009 40,218
Reorganization value in excess of amounts
allocable to identifiable assets 320 350
Other assets 1,610 1,505
------------------ ------------------
Total assets $48,212 $49,748
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------------- ------------------
Liabilities and Shareholders' Equity
<S> <C> <C>
Current liabilities:
Accounts payable $913 $792
Accrued interest 322 2,764
Accrued expenses 5,179 4,359
Current portion of long-term debt 1,926 1,906
------------------- ------------------
Total current liabilities 8,340 9,821
------------------- ------------------
Long-term debt, less current portion 14,470 15,548
------------------- ------------------
Total liabilities 22,810 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 and accrued dividends of $19,080
and $18,270 at September 30, 1999 and 1998,
respectively. 19,080 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 8,557 9,367
Accumulated deficit (2,240) (3,263)
------------------- ------------------
Total shareholders' equity 25,402 24,379
------------------- ------------------
Total liabilities and shareholders'
equity $48,212 $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 -
Not Covered By
Accountants'
(Unaudited) Report)
Three Three
Months Months
Ended Ended
September 30, September 30,
1999 1998
------------------- --------------------
Revenues, net:
<S> <C> <C>
Casino $9,672 $10,020
Hotel 1,789 1,996
Food and beverage 2,204 2,202
Other 475 611
Promotional allowances (628) (1,203)
------------------- --------------------
Total revenues, net 13,512 13,626
------------------- --------------------
Costs and expenses:
Casino 3,608 3,536
Hotel 2,250 2,026
Food and beverage 1,755 1,486
Taxes and licenses 1,338 1,450
Selling, general and
administrative 2,578 3,177
Rents 994 998
Depreciation and
amortization 804 837
Interest 470 1,260
Merger and litigation costs 382 11
------------------- --------------------
Total costs and
expenses 14,179 14,831
------------------- --------------------
Net loss before
extraordinary item and
provision for income taxes (667) (1,205)
Extraordinary item - 77
Benefit for income taxes (18) -
------------------- --------------------
Net loss before
undeclared dividends on
cumulative preferred stock (649) (1,282)
Undeclared dividends on
cumulative preferred stock 270 -
------------------- --------------------
Net loss applicable
to common shares $(919) $(1,282)
=================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited -
Not Covered By
Accountant's Report)
(Unaudited)
Three Three
Months Months
Ended Ended
September 30, September 30,
1999 1998
--------------------- --------------------
Basic and diluted loss per share:
<S> <C> <C>
Basic loss per share $(.19) ($.26)
===================== ====================
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 Operations
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited -
Not Covered By
Accountants' Report)
(Unaudited)
Nine Nine
Months Months
Ended Ended
September 30, September 30,
1999 1998
------------------- --------------------
Revenues, net:
<S> <C> <C>
Casino $30,390 $29,809
Hotel 6,307 6,509
Food and beverage 7,147 7,397
Other 2,276 2,110
Promotional allowances (2,664) (4,169)
------------------- --------------------
Total revenues, net 43,456 41,656
Costs and expenses:
Casino 10,604 11,228
Hotel 6,600 5,732
Food and beverage 5,140 4,470
Taxes and licenses 4,435 4,492
Selling, general an
administrative 7,930 8,573
Rents 2,970 2,910
Depreciation and
amortization 2,418 1,967
Interest 1,474 3,866
Merger and litigation costs 775 263
------------------- --------------------
Total costs and
expenses 42,346 43,501
------------------- --------------------
Net income (loss) before
extraordinary item and
provision for income taxes 1,110 (1,845)
Extraordinary item - 77
Provision for income taxes 22 -
------------------- --------------------
Net income (loss) before
undeclared dividends on
cumulative preferred stock 1,088 (1,922)
Undeclared dividends on
cumulative preferred stock 810 -
------------------- --------------------
Net income (loss) applicable
to common shares $278 $(1,922)
=================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited -
Not Covered By
Accountants' Report)
(Unaudited)
Nine Nine
Months Months
Ended Ended
September 30, September 30,
1999 1998
------------------ -------------------
Basic and diluted income
(loss) per share:
<S> <C> <C>
Basic income (loss) per share $.06 ($.39)
=================== ==================
Weighted average number of
common shares
outstanding 4,929,313 4,929,313
==================== ==================
Diluted income per share $.01 -
==================== ==================
Weighted average number of
common and common
equivalent shares
outstanding 98,000,000 -
==================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
Nine Months Ended September 30, 1999
(Dollars in thousands)
(Unaudited)
Common Stock Preferred Stock
------------------------------------
Out- Out- Additional Total
Standing Standing Paid-In- Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
-------------------------------------------------------------------
Balance, January 1,
<S> <C> <C> <C> <C> <C> <C> <C>
1999 4,929,313 $5 50,000,000 $18,270 $9,367 ($3,263) $24,379
Net income 1,088 1,088
Undeclared preferred
stock dividends 810 (810) -
-------------------------------------------------------------------
Balance, September 30,
1999 4,929,313 $5 50,000,000 $19,080 $8,557 ($2,175) $25,467
===================================================================
</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 - Not
Covered By Accountants'
Report)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998
-------------------- ----------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $1,088 ($1,922)
Adjustments to reconcile
net income (loss) to net cash
provided by operating activities:
Depreciation and
amortization 2,418 1,967
Changes in assets and
liabilities:
Accounts receivable - 306
Inventories 108 2
Prepaid expenses (166) 235
Other assets (111) (454)
Accounts payable 121 (268)
Accrued expenses 791 140
Accrued interest (2,442) 837
--------------------- ----------------------
Net cash provided by
operating activities 1,807 843
--------------------- ----------------------
Cash flows used in investing
activities:
Capital expenditures (1,624) (1,439)
--------------------- ----------------------
Cash flows from financing
activities:
Principal payments on
long-term debt (1,643) (6,128)
Capital contribution - 4,641
--------------------- ----------------------
Net cash used in financing
activities (1,643) (1,487)
--------------------- ----------------------
Net decrease in cash and
Cash equivalents (1,460) (2,083)
Cash and cash equivalents at
Beginning of period 5,604 6,822
--------------------- ---------------------
Cash and cash equivalents at
End of period $4,144 $4,739
===================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Elsinore Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore
Corporation and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
(b) 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. It is
suggested that this report be read in conjunction with the Company's audited
consolidated financial statements included in the annual report for the year
ended December 31, 1998. 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 September 30, 1999, the results of operations for the three
months ended September 30, 1999 and September 30, 1998, the nine months ended
September 30, 1999 and September 30, 1998, and the results of operations and
<PAGE>
cash flows for the nine months ended September 30, 1999 and September 30, 1998.
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.
(c) Reclassifications
Certain 1998 amounts have been reclassified to conform with the 1999
presentation. These reclassifications had no effect on the Company's net income
(loss).
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used by the Company include the
estimated useful lives for depreciable and amortizable assets, the estimated
allowance for doubtful accounts receivable, the estimated valuation allowance
for deferred tax assets, and estimated cash flows used in assessing the
recoverability of long-lived assets. Actual results may differ from those
estimates.
(e) Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "derivatives") and for hedging
activities. This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management of the Company has not yet
determined the impact that this Statement could have on the consolidated
financial statements.
(f) Net Income (Loss) Per Common Share
Basic per share amounts are computed by dividing net income (loss) by average
shares outstanding during the period. Diluted per share amounts are computed by
dividing net income (loss) by average shares outstanding plus the dilutive
effect of common shares equivalents. Since the Company incurred a net loss
during the three-month period ended September 30, 1999, the effect of common
share equivalents was anti-dilutive. The effect of the warrants outstanding to
purchase 1,125,000 shares of common stock were not included in diluted per share
calculations during the nine-month period ended September 30, 1999 since the
exercise price of such warrants was greater than the average price of the
<PAGE>
Company's common stock during these periods. Since the Company incurred a net
loss during the three-month and nine-month periods ended September 30, 1998,
diluted per share calculations are based on the average shares outstanding
during these periods. Accordingly, the effect of the warrants outstanding of
1,125,000 shares at September 30, 1998 was not included in diluted net loss per
share calculations.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
--------------------------------------------------
Income Shares Per Share
Amounts
Basic EPS:
Net income available to common
<S> <C> <C> <C>
shareholders $278,000 4,929,313 $0.06
Effect of dilutive securities:
Convertible preferred stock 810,000 93,000,000 (0.03)
Common stock required to be issued
to shareholders - 70,687 -
Diluted EPS:
================= =================== ===========
Net income available to common
shareholders plus assumed
conversions $1,088,000 98,000,000 $0.03
================= =================== ===========
</TABLE>
2. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998
------------------- ---------------
(Dollars in (Dollars in
thousands) thousands)
Non-cash investing and financing activities:
<S> <C> <C>
Equipment purchased with capital lease financing $585 $2,038
Cash activities:
Cash paid for interest $3,915 $3,012
Cash paid for income taxes 54 -
</TABLE>
3. 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.
<PAGE>
RGME also received warrants to purchase 1,125,000 shares of the Company"s Common
Stock at $1 per share. The arrangement under which RGME manages the Four Queens
Hotel and Casino will terminate on December 31, 1999.
The Company has a one-sixth ownership share of Fremont Street Experience, LLC.
The Company is liable for a proportionate share of the project's operating
expenses.
The Company is also a party to litigation involving a proposed merger with R&E
Gaming Corp. as discussed in Note 4 below.
On March 25, 1999, a Final Decree and Order was entered closing the Chapter
11 cases for Elsinore Corporation, Elsub Management Corporation, Palm
Springs East, LP, and Four Queens, Inc.
Pursuant to the Plan of Reorganization that became effective following the
close of business on February 28, 1997, the Company is presently required
to issue additional shares of New Common Stock to the following creditor
groups or to a disbursing agent on behalf of such creditor groups:
Unsecured Creditors of Four Queens, Inc. 50,491
Unsecured Creditors of Elsinore Corporation 20,196
------
Total 70,687
The Company expects to satisfy, during the fourth quarter of 1999, its
current obligation to issue these shares.
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.
4. 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 the Company's position that the Merger
Agreement was void and unenforceable against R&E and EAS, or alternatively, R&E
and EAS intended to terminate the Merger Agreement. R&E alleged, among other
things, violations by the Company of the Merger Agreement, violations of law and
<PAGE>
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 which hold 94.3% of the Company's outstanding
Common Stock (Paulson, et al. v Jeffries & Company et al.). The lawsuit was
filed in the United States District Court for the Central District of
California. The complaint has been amended several times, partially as a result
of various motion proceedings. The allegations against the Company include
breach of the Merger Agreement, as well as fraud and various violations of the
federal securities laws. The Court has dismissed without prejudice all claims
alleging 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. Discovery
is now proceeding. One defendant, Riviera Holdings Corporation, has now settled
with plaintiffs. No trial date has been set.
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.
5. 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. The Company used this capital, 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, including all accrued or declared but unpaid dividends, of
$19,080,000 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%.
<PAGE>
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
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 September 30, 1999 and 1998 and nine months
ended September 30, 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
September 30, 1999 September 30, 1998
------------------ -----------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ -----------------
Revenues, net:
<S> <C> <C> <C> <C>
Casino $9,672 71.6% $10,020 73.5%
Hotel 1,789 13.2% 1,996 14.6%
Food and beverage 2,204 16.3% 2,202 16.2%
Other 475 3.5% 611 4.5%
Gross revenue 14,140 104.6% 14,829 108.8%
Less promotional allowances (628) (4.6%) (1,203) (8.8%)
Revenues, net 13,512 100.0% 13,626 100.0%
Costs and expenses:
Casino 3,608 37.3% 3,536 35.3%
Hotel 2,250 125.8% 2,076 104.0%
Food and beverage 1,755 79.6% 1,486 67.5%
Taxes and licenses 1,338 9.9% 1,450 10.6%
Selling, general and 2,578 19.1% 3,177 23.3%
administrative
Rents 994 7.4% 998 7.3%
Merger and litigation costs 382 2.8% 11 .1%
Depreciation and
amortization 804 6.0% 837 6.1%
Interest 470 3.5% 1,260 9.2%
Total costs and expenses 14,179 104.9% 14,831 108.8%
Net loss before
extraordinary item and (667) (4.9%) (1,205) (8.8%)
provision for income taxes
Extraordinary item - - 77 .6%
Benefit for income taxes (18) (.1%) - -
Net loss before
undeclared dividends on (649) (4.8%) (1,282) (9.4%)
cumulative preferred stock
Undeclared dividends on
cumulative preferred stock 270 2.0% - -
Net loss applicable
to common shares ($919) (6.8%) ($1,282) (9.4%)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ ------------------
Other data:
Net loss applicable
<S> <C> <C> <C> <C>
to common shares ($919) (6.8%) ($1,282) (9.4%)
Interest 470 3.5% 1,260 9.2%
Benefit for income taxes (18) (.1%) - -
Depreciation and amortization 804 6.0% 837 6.1%
Rents 994 7.4% 998 7.3%
Extraordinary item - - 77 .6%
Merger and litigation costs 382 2.8% 11 .1%
Undeclared dividends 270 2.0% - -
--------- ------ --------- ------
Earnings before interest,
taxes, depreciation,
amortization, rents,
extraordinary item,
merger and litigation costs,
and undeclared dividends
("EBITDA") $1,983 14.7% $1,901 14.0%
========= ====== ======== =====
</TABLE>
EBITDA consists of earnings before interest, taxes, depreciation,
amortization, rents, extraordinary item, merger and litigation costs, and
undeclared dividends. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally accepted
accounting principles ("GAAP"), it is included herein to provide additional
information with respect to the ability of the Company to meet its future debt
service, capital expenditure and working capital requirements. Although EBITDA
is not necessarily a measure of the Company's ability to fund its cash needs,
management believes that certain investors find EBITDA to be a useful tool for
measuring the ability of the Company to service its debt. EBITDA margin is
EBITDA as a percent of net revenues. The Company's definition of EBITDA may not
be comparable to other companies' definitions.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(Dollars in (Dollars in
thousands) % thousands) %
------------------- ------------------
Revenues, net:
<S> <C> <C> <C> <C>
Casino $30,390 69.9% $29,809 71.6%
Hotel 6,307 14.5% 6,509 15.6%
Food and beverage 7,147 16.4% 7,397 17.8%
Other 2,276 5.2% 2,110 5.1%
Gross revenue 46,120 106.1% 45,825 110.0%
Less promotional allowances (2,664) (6.1%) (4,169) (10.0%)
Revenues, net 43,456 100.0% 41,656 100.0%
Costs and expenses:
Casino 10,604 34.9% 11,228 37.7%
Hotel 6,600 104.6% 5,732 88.1%
Food and beverage 5,140 71.9% 4,470 60.4%
Taxes and licenses 4,435 10.2% 4,492 10.8%
Selling, general and
administrative 7,930 18.2% 8,573 20.6%
Rents 2,970 6.8% 2,910 7.0%
Merger and litigation costs 775 1.8% 263 .6%
Depreciation and
amortization 2,418 5.6% 1,967 4.7%
Interest 1,474 3.4% 3,866 9.3%
Total costs and expenses 42,346 97.4% 43,501 104.4%
Net income (loss) before
extraordinary item and
provision for income taxes 1,110 2.6% (1,845) (4.4%)
Extraordinary item - - 77 .2%
Provision for income taxes 22 .1% - -
Net income (loss) before
undeclared dividends on
cumulative preferred stock 1,088 2.5% (1,922) (4.6%)
Undeclared dividends on
cumulative preferred stock 810 1.9% - -
Net income (loss) applicable
to common shares $278 .6% ($1,922) (4.6%)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
(Dollars in (Dollars in
thousands) % thousands) %
------------------- ------------------
Other data:
Net income (loss) applicable
<S> <C> <C> <C> <C>
to common shares $278 .6% ($1,922) (4.6%)
Interest 1,474 3.4% 3,866 9.3%
Provision for income taxes 22 .1% - -
Depreciation and amortization 2,418 5.6% 1,967 4.7%
Rents 2,970 6.8% 2,910 7.0%
Extraordinary item - - 77 .2%
Merger and litigation costs 775 1.8% 263 .6%
Undeclared dividends 810 1.9% - -
--------- ------ --------- ------
- -
Earnings before interest,
taxes, depreciation,
amortization, rents,
extraordinary item,
merger and litigation costs,
and undeclared dividends
(EBITDA) $8,747 20.1% $7,161 17.2%
========= ======= ========= ======
Cash flows provided by
operating activities $1,807 $843
========= =========
Cash flows used in investing
activities ($1,624) ($1,439)
========= =========
Cash flows used in financing
activities ($1,643) ($1,487)
========= =========
</TABLE>
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
REVENUES
Net revenues decreased by approximately $114,000, or 0.8%, from $13,626,000
for the three months ended September 30, 1998, to $13,512,000 for the three
months ended September 30, 1999, resulting from a decrease in revenues, as
discussed below, offset by management's significant reduction of promotional
allowances for casino and slot marketing promotions pursuant to a revised policy
on complimentary benefits.
Casino revenues decreased by approximately $348,000, or 3.5%, from
$10,020,000 during the 1998 period to $9,672,000 during the 1999 period due
primarily to a $88,000, or 13.4%, decrease in slot promotion revenue, a
$367,000, or 20.7%, decrease in table games revenue and a $41,000, or 21.4%,
decrease in keno revenue partially offset by a $145,000, or 2.0%, increase in
slot machine revenue. The increase in slot machine revenue is attributable
primarily to an increase in hold percentage of .4% offset by a decrease in slot
coin-in of $5,938,000, or 4.6%. Management continues to acquire state-of-the-art
slot equipment. The decrease in slot promotion revenue is primarily attributable
to a decrease in promotional headcounts of 48 per day, or 13.4%. The decrease in
table games and keno revenue is primarily attributable to a decrease in table
games drop of $1,679,000, or 14.9%, and by the effect of a decrease in win
percentage of 1.1%, and a decrease in keno drop of $110,000, or 18.2%.
Management eliminated certain unprofitable complimentary programs which led to
savings in promotional allowances.
Hotel revenues decreased by approximately $207,000, or 10.4%, from
$1,996,000 during the 1998 period to $1,789,000 during the 1999 period due
primarily to a decrease in complimentary room revenue resulting primarily from
the reduction in casino and slot marketing promotions. Room occupancy, as a
percentage of total rooms, increased from 87.5%, for the 1998 period, to 94.5%,
for the 1999 period, while the average daily room rate decreased from $32.31 to
$26.70, respectively. Out of order rooms increased 2,245, from the 1998 period,
due to the renovation and remodeling of south tower rooms.
Other revenues decreased by approximately $136,000, or 22.3%, from $611,000
during the 1998 period to $475,000 during the 1999 period, due to payments
received in 1998 under a settlement agreement with the Twenty-Nine Palms Band of
Mission Indians.
Promotional allowances decreased by approximately $575,000, or 47.8%, from
$1,203,000 during the 1998 period to $628,000 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.
<PAGE>
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $403,000, or 4.7%, from $8,548,000 for
the 1998 period to $8,951,000 for the 1999 period.
Casino expenses increased $72,000, or 2.0%, from $3,536,000 during the 1998
period to $3,608,000 during the 1999 period, and expenses as a percentage of
revenue increased from 35.3% to 37.3%, due primarily to an increase in slot
promotion expense, partially offset by 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.
Hotel expenses increased by approximately $174,000, or 8.4% from $2,076,000
during the 1998 period to $2,250,000 during the 1999 period, and expenses as a
percentage of revenues increased from 104.0% to 125.8%, primarily due to an
increase in utilities 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 $269,000,
or 18.1%, from $1,486,000 during the 1998 period to $1,755,000 during the 1999
period, and expenses as a percentage of revenues increased from 67.5% to 79.6%,
primarily due to a 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 decreased $112,000, or 7.7%, from $1,450,000 in the 1998
period to $1,338,000 in the 1999 period, due to corresponding decreases in
casino revenue.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $599,000, or 18.9%,
from $3,177,000 during the 1998 period to $2,578,000 during the 1999 period due
primarily to a reduction in promotional expenses, and as a percentage of total
net revenues, expenses decreased from 23.3% to 19.1%.
EBITDA
EBITDA, as defined, increased by approximately $82,000, or 4.3%, from
$1,901,000 during the 1998 period to $1,983,000 during the 1999 period. The
increase was primarily due to a reduction in costs associated with promotional
allowances as discussed above partially offset by an increase in direct costs
and expenses.
<PAGE>
OTHER EXPENSES
During the third quarter of 1999, the Company incurred approximately
$382,000 in merger and litigation costs related to the litigation of the Merger
Agreement.
Interest expense decreased by approximately $790,000, or 62.7% from
$1,260,000 during the 1998 period to $470,000 for the 1999 period, due to
recapitalization of the Company on September 29, 1998, as discussed below in
Liquidity and Capital Resources.
NET LOSS BEFORE INCOME TAXES AND UNDECLARED DIVIDENDS ON CUMULATIVE
PREFERRED STOCK
As a result of the factors discussed above, the Company experienced a net
loss in the 1999 period of $667,000 compared to a net loss of $1,205,000 in the
1998 period, an improvement of $538,000 or 44.6%.
INCOME TAXES
The Company realized an income tax benefit of $18,000 during the 1999
period due to a loss incurred during the period.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $1,800,000, or 4.3%, from
$41,656,000 for the nine months ended September 30, 1998, to $43,456,000 for the
nine months ended September 30, 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 pursuant to the revised
policy on complimentary benefits.
Casino revenues increased by approximately $581,000, or 1.9%, from
$29,809,000 during the 1998 period to $30,390,000 during the 1999 period due
primarily to a $1,103,000, or 5.0%, increase in slot machine revenue and a
$422,000, or 26.5%, increase in slot promotion revenue, partially offset by a
$679,000, or 12.4%, decrease in table games revenue and a $57,000, or 10.2%,
decrease in keno revenue. The increase in slot machine revenue is attributable
primarily to an increase in hold percentage of .4% partially offset by a
decrease in slot coin-in of $4,918,000, or 1.3%. Slot promotion revenue
increased due to an increase in participant headcounts of 77 per day, or 26.5%.
Table games drop decreased $5,589,000, or 14.4%, which was partially offset by
the effect of an increase in the win percentage of .3%. Management eliminated
certain unprofitable complimentary programs which led to savings in promotional
allowances.
<PAGE>
Hotel revenues decreased by approximately $202,000, or 3.1%, from
$6,509,000 during the 1998 period to $6,307,000 during the 1999 period due
primarily to a decrease in complimentary revenue resulting from the reduction in
casino and slot marketing promotions, partially offset by an increase in cash
occupancy. Room occupancy, as a percentage of total rooms, increased from 90.3%,
for the 1998 period, to 95.13%, for the 1999 period, while the average daily
room rate decreased from $34.33 to $31.17, respectively. Out of order rooms
increased 2,312, from the 1998 period, due to the renovation and remodeling of
south tower rooms.
Food and beverage revenues decreased approximately $250,000, or 3.4%, from
$7,397,000 during the 1998 period to $7,147,000 during the 1999 period primarily
due to a decrease in complimentary revenues resulting from the reduction in
casino and slot marketing promotions.
Other revenues increased by approximately $166,000, or 7.9%, from
$2,110,000 during the 1998 period to $2,276,000 during the 1999 period, due to
payments received under a settlement agreement with the Twenty-Nine Palms Band
of Mission Indians. Pursuant to the terms of the settlement agreement, the Band
elected to defer payments due during June, July and August of 1999 until
January, February and March of 2000.
Promotional allowances decreased by approximately $1,505,000, or 36.1%,
from $4,169,000 during the 1998 period to $2,664,000 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 $857,000, or 3.3%, from $25,922,000 for
the 1998 period to $26,779,000 for the 1999 period.
Casino expenses decreased $624,000, or 5.6%, from $11,228,000 during the
1998 period to $10,604,000 during the 1999 period, and expenses as a percentage
of revenue decreased from 37.7% to 34.9%, 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.
Hotel expenses increased by approximately $868,000, or 15.1% from
$5,732,000 during the 1998 period to $6,600,000 during the 1999 period, and
expenses as a percentage of revenues increased from 88.1% to 104.6%, primarily
due to an increase 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.
<PAGE>
Food and beverage costs and expenses increased by approximately $670,000,
or 15.0%, from $4,470,000 during the 1998 period to $5,140,000 during the 1999
period, and expenses as a percentage of revenues increased from 60.4% to 71.9%,
primarily due to a 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 decreased $57,000, or 1.3%, from $4,492,000 in the 1998
period to $4,435,000 in the 1999.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $643,000, or 7.5%,
from $8,573,000 during the 1998 period to $7,930,000 during the 1999 period, and
as a percentage of total net revenues, expenses decreased from 20.6% to 18.2%.
EBITDA
EBITDA, as defined, increased by approximately $1,586,000, or 22.1%, from
$7,161,000 during the 1998 period to $8,747,000 during the 1999 period. The
increase was due to an increase in revenues and decrease in costs associated
with promotional allowances as discussed above.
OTHER EXPENSES
Rent expense increased by approximately $60,000 due to corresponding annual
CPI increases for land lease agreements.
Depreciation and amortization increased by approximately $451,000, or 22.9%
from $1,967,000 during the 1998 period to $2,418,000 during the 1999 period,
primarily due to the acquisition of new slot equipment.
Interest expense decreased by approximately $2,392,000, or 61.9% from
$3,866,000 during the 1998 period to $1,474,000 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 nine months of 1999, the Company incurred approximately
$775,000 in merger and acquisition costs related to the litigation of the Merger
Agreement.
<PAGE>
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND UNDECLARED
DIVIDENDS ON CUMULATIVE PREFERRED STOCK
As a result of the factors discussed above, the Company experienced net
income in the 1999 period of $1,110,000 compared to a net loss of $1,845,000 in
the 1998 period, an improvement of $2,955,000 or 160.2%.
INCOME TAXES
The Company recognized a provision for income taxes of $22,000, during the
1999 period, due to net income earned during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $4.1 million at
September 30, 1999, as compared to approximately $5.6 million at December 31,
1998, a decrease of $1.5 million.
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. The Company used this capital, 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, at the option of the holder at
any time, 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.
<PAGE>
For the first nine months of 1999, the Company's net cash provided by
operating activities was $1,807,000 compared to $843,000 in the first nine
months of 1998. This increase was primarily due to an increase in net income,
accrued expenses, and depreciation, offset by a decrease in accrued interest.
EBITDA, as defined, for the first nine months of 1999 and 1998 was $8.7 million
and $7.2 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 twelve months and enable investment in remaining budgeted capital
expenditures of approximately $1.2 million for 1999, which includes an
arrangement to finance slot machine purchases of $470,000 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%
of face value 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 a 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 $1.0 million
in EBITDA. The Company must also maintain a minimum amount of consolidated net
<PAGE>
worth. 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. As of the reference period ended September 30,
1999 the Ratio was 2.68 to 1.00 and as such, the Company was in compliance.
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, on February 26, 1999 for $250,000, on June 30,
1999 for $250,000 and on September 30, 1999 for $250,000. Payment is scheduled
in the amount of $214,000 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 $3.9 million 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 nine-month period ended September
30, 1999 included capital expenditures of $1,624,000. 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 twelve months.
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 September 30, 1999, the Company has incurred costs of approximately
$373,000 (primarily for acquisition of new systems from third parties and
internal labor) related to the system applications and anticipates spending an
<PAGE>
additional $58,000 to become Year 2000 compliant, which represents substantially
all of the Company's IT budget for 1999. The estimated completion date and
remaining costs are based upon management's best estimates, as well as third
party modification plans and other factors. However, there can be no assurance
that such estimates will be accurate and actual results could differ materially.
In addition, the Company has communicated with its major vendors and
suppliers to determine their state of readiness relative to the Year 2000
problem and the Company's possible exposure to Year 2000 issues of such third
parties. To date, no material issues have been reported to the Company. However,
there can be no assurance that the systems of other companies, which the
Company's systems may rely upon, will be timely converted or representations
made to the Company by these parties are accurate. The failure of a major vendor
or supplier to adequately address its Year 2000 Problem could have a significant
adverse impact on the Company's operations.
Planning for the Year 2000 Problem, including contingency planning, is
significantly complete and will be revised, if necessary.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. The Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management of the Company has not yet
determined the impact that this Statement could have on the consolidated
financial statements.
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
<PAGE>
statements. Such risks and uncertainties include, but are not limited to, those
statements 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
September 30, 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 September 30, 1999. The
Company is not exposed to market risk from a change in interest rates as the
Company's debt is financed at fixed interest rates.
<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 which hold
94.3% of the Company's outstanding Common Stock (Paulson, et al.
v Jeffries & Company et al.). The lawsuit was filed in the United
States District Court for the Central District of California. The
complaint has been amended several times, partially as a result
of various motion proceedings. The allegations against the
Company include breach of the Merger Agreement, as well as fraud
and various violations of the federal securities laws. The Court
has dismissed without prejudice all claims alleging 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. Discovery is now proceeding. One
defendant, Riviera Holdings Corporation, has now settled with
plaintiffs. No trial date has been set.
<PAGE>
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.
On March 25, 1999, a Final Decree and Order was entered closing
the Chapter 11 cases for Elsinore Corporation, Elsub Management
Corporation, Palm Springs East, LP, and Four Queens, Inc.
Pursuant to the Plan of Reorganization, that became effective
following the close of business on February 28, 1997, the Company
is presently required to issue additional shares of New Common
Stock to the following creditor groups or to a disbursing agent
on behalf of such creditor groups:
Unsecured Creditors of Four Queens, Inc. 50,491
Unsecured Creditors of Elsinore Corporation 20,196
Total 70,687
The Company expects to satisfy, during the fourth quarter of
1999, its current obligation to issue these shares.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Deloitte & Touche LLP Independent Accountants' Review Report
27.1 Financial Data Schedule
(b) Form 8-K's filed during this quarter
(1) Current report on Form 8-K filed September 14, 1999, relating
to the termination of the Company's management arrangement.
<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: November 15, 1999
<PAGE>
INDEX TO EXHIBITS
15.1 Deloitte & Touche LLP Independent Accountants' Review Report
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 15.1
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Elsinore Corporation
Las Vegas, Nevada
We have reviewed the accompanying condensed consolidated balance sheet of
Elsinore Corporation and subsidiaries (the "Company") as of September 30, 1999,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1999, and condensed
consolidated statements of shareholders' equity and of cash flows for the
nine-month period ended September 30, 1999. These 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 of 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 such
condensed consolidated financial statements for them to be in conformity with
generally accepted accounting principles.
Deloitte & Touche llp
Las Vegas, Nevada
November 11, 1999
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,144,000
<SECURITIES> 0
<RECEIVABLES> 698,000
<ALLOWANCES> (225,000)
<INVENTORY> 337,000
<CURRENT-ASSETS> 6,273,000
<PP&E> 46,676,000
<DEPRECIATION> (6,667,000)
<TOTAL-ASSETS> 48,212,000
<CURRENT-LIABILITIES> 8,340,000
<BONDS> 11,104,000
0
19,080,000
<COMMON> 5,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,212,000
<SALES> 14,146,000
<TOTAL-REVENUES> 13,512,000
<CGS> 0
<TOTAL-COSTS> 12,523,000
<OTHER-EXPENSES> 1,186,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 470,000
<INCOME-PRETAX> (667,000)
<INCOME-TAX> (18,000)
<INCOME-CONTINUING> 582,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 270,000
<NET-INCOME> (919,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
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