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 June 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 August 13, 1999 4,929,313
<PAGE>
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 1999
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at 4-5
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations 6-7
for the Three Months Ended June 30, 1999 and
Three Months Ended June 30, 1998
Condensed Consolidated Statements of Operations 8-9
for the Six Months Ended June 30, 1999 and
Six Months Ended June 30, 1998
Condensed Consolidated Statement of Shareholders 10
Equity for the Six Months Ended June 30, 1999
Condensed Consolidated Statements of Cash Flows for 11
the Six Months Ended June 30, 1999 and
Six Months Ended June 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
June 30, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1999 1998
------------------- --------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $6,449 $5,604
Accounts receivable, less allowance for
doubtful accounts of $233 and $219,
respectively 508 473
Inventories 345 445
Prepaid expenses 1,346 1,153
------------------- --------------------
Total current assets 8,648 7,675
------------------- --------------------
Property and equipment, net 39,441 40,218
Reorganization value in excess of amounts
allocable to identifiable 326 350
assets
Other assets 1,548 1,505
------------------- --------------------
Total assets $49,963 $49,748
=================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1999 1998
-------------------- --------------------
Liabilities and Shareholders' Equity Current liabilities:
<S> <C> <C>
Accounts payable $851 $792
Accrued interest 984 2,764
Accrued expenses 5,446 4,359
Current portion of long-term debt 1,932 1,906
-------------------- --------------------
Total current liabilities 9,213 9,821
-------------------- --------------------
Long-term debt, less current portion 14,634 15,548
-------------------- --------------------
Total liabilities 23,847 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
$18,810,000. 18,810 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 8,827 9,367
Accumulated deficit (1,526) (3,263)
-------------------- --------------------
Total shareholders' equity 26,116 24,379
-------------------- --------------------
Total liabilities and shareholders'
equity $49,963 $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
June 30, June 30,
1999 1998
-------------------- -------------------
Revenues, net:
<S> <C> <C>
Casino $10,139 $9,554
Hotel 2,118 2,138
Food and beverage 2,356 2,538
Other 1,052 934
Promotional allowances (906) (1,387)
-------------------- -------------------
Total revenues, net 14,759 13,777
-------------------- -------------------
Costs and expenses:
Casino 3,634 3,524
Hotel 2,231 1,985
Food and beverage 1,543 1,538
Taxes and licenses 1,508 1,489
Selling, general and
administrative 2,671 2,729
Rents 1,003 948
Depreciation and
amortization 793 563
Interest 498 1,274
Merger costs 296 97
-------------------- -------------------
Total costs and
expenses 14,177 14,147
-------------------- -------------------
Net income (loss) before
provision for income taxes 582 (370)
Provision for income taxes 20 -
-------------------- -------------------
Net income (loss) before
undeclared dividends on
cumulative preferred stock 562 (370)
Undeclared dividends on
cumulative preferred stock 270 -
-------------------- -------------------
Net income (loss) applicable
to common shares $292 $(370)
==================== ===================
</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
(Unaudited) Report)
Three Three
Months Months
Ended Ended
June 30, June 30,
1999 1998
------------------------ ---------------------
Basic and diluted income (loss) per share:
<S> <C> <C>
Basic income (loss) per share $.06 ($.08)
======================== =====================
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 Operations
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited -
Not Covered
By
Accountants'
(Unaudited) Report)
Six Six
Months Months
Ended Ended
June 30, June 30,
1999 1998
-------------------- --------------------
Revenues, net:
<S> <C> <C>
Casino $20,718 $19,789
Hotel 4,518 4,513
Food and beverage 4,943 5,195
Other 1,801 1,499
Promotional allowances (2,036) (2,966)
-------------------- --------------------
Total revenues, net 29,944 28,030
Costs and expenses:
Casino 6,996 7,547
Hotel 4,350 3,801
Food and beverage 3,385 2,984
Taxes and licenses 3,097 3,042
Selling, general and
administrative 5,352 5,396
Rents 1,976 1,912
Depreciation and
amortization 1,614 1,130
Interest 1,004 2,606
Merger costs 393 252
-------------------- --------------------
Total costs and
expenses 28,167 28,670
-------------------- --------------------
Net income (loss) before
provision for income taxes 1,777 (640)
Provision for income taxes 40 -
-------------------- --------------------
Net income (loss) before
undeclared dividends on
cumulative preferred stock 1,737 (640)
Undeclared dividends on
cumulative preferred stock 540 -
-------------------- --------------------
Net income (loss) applicable
to common shares $1,197 $(640)
==================== ====================
</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'
(Unaudited) Report)
Six Six
Months Months
Ended Ended
June 30, June 30,
1999 1998
------------------------ ---------------------
Basic and diluted income (loss) per share:
<S> <C> <C>
Basic income (loss) per share $.24 ($.13)
======================== =====================
Weighted average number of
common shares
outstanding 4,929,313 4,929,313
======================== =====================
Diluted income per share
$.02 -
======================== =====================
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
Six Months Ended June 30, 1999
(Dollars in thousands)
(Unaudited)
Common Stock Preferred Stock
---------------------------------------------------------
Out- Out- Additional Total
Standing Standing Paid-In-Capital Accumulated Shareholders'
Shares Amount Shares Amount 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 1,737 1,737
Undeclared preferred
stock dividends 540 (540) -
--------------------------------------------------------------------------------------------------------------
Balance June 30,
1999 4,929,313 $5 50,000,000 $18,810 $8,827 ($1,526) $26,116
==============================================================================================================
</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'
(Unaudited) Report)
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
----------------------- ----------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $1,737 ($640)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization 1,614 1,130
Changes in assets and
Liabilities:
Accounts receivable (35) 131
Inventories 100 44
Prepaid expenses (193) (42)
Other assets (19) (443)
Accounts payable 59 (402)
Accrued expenses 1,087 (134)
Accrued interest (1,780) 23
----------------------- -----------------------
Net cash provided by (used
in) operating activities $2,570 ($333)
----------------------- -----------------------
Cash flows used in investing activities:
Capital expenditures (750) (1,181)
----------------------- -----------------------
Cash flows from financing activities:
Principal payments on
long-term debt (975) (706)
----------------------- -----------------------
Net cash used in financing
activities (975) (706)
----------------------- -----------------------
Net increase (decrease) in
cash and cash equivalents 845 (2,220)
Cash and cash equivalents at
beginning of period 5,604 6,822
----------------------- -----------------------
Cash and cash equivalents at
end of period $6,449 $4,602
======================= =======================
</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 June 30, 1999, the results of operations for the three months
ended June 30, 1999 and June 30, 1998, the six months ended June 30, 1999 and
June 30, 1998 and the results of operations and cash flows for the six months
ended June 30, 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.
(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 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. It 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. 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 three-month and six-month periods ended June 30, 1999
since the exercise price of such warrants was greater than the average price of
the Company's common stock during these periods. Since the Company incurred a
net loss during the three-month and six-month periods ended June 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 June 30, 1998 was not included in diluted net loss per share
calculations.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
--------------------------------------------------------------
Income Shares Per Share
Amounts
Basic EPS:
Net income available to common
<S> <C> <C> <C>
shareholders $292,000 4,929,313 $0.06
Effect of Dilutive Securities:
Convertible preferred stock 270,000 93,000,000 (0.05)
Common stock required to be issued to creditors - 70,687 -
Diluted EPS:
--------------------------------------------------------------
Net income available to common
shareholders plus assumed conversions $562,000 98,000,000 $0.01
==============================================================
Six Months Ended
June 30, 1999
--------------------------------------------------------------
Income Shares Per Share
Amounts
Basic EPS:
Net income available to common
shareholders $1,197,000 4,929,313 $0.24
Effect of Dilutive Securities:
Convertible preferred stock 540,000 93,000,000 (0.22)
Common stock required to be issued to creditors - 70,687 -
Diluted EPS:
--------------------------------------------------------------
Net income available to common
shareholders plus assumed conversions $1,737,000 98,000,000 $0.02
==============================================================
</TABLE>
2. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
------------------ --------------------
(Dollars in (Dollars in
thousands) thousands)
Non-cash investing and financing activities:
<S> <C> <C>
Equipment purchased with capital lease financing $87 $1,444
Cash activities:
Cash paid for interest $2,783 $2,648
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.
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 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.
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.
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 third quarter of 1999, its current
obligation to issue these shares.
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
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. 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, 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, including
all accrued or declared but unpaid dividends, of $18,810,000 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 June 30, 1999 and 1998 and six months ended June 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
June 30, 1999 June 30, 1998
------------- -------------
(Dollars in (Dollars in
thousands) % thousands) %
------------ -------- ------------ -------
Revenues, net:
<S> <C> <C> <C> <C>
Casino $10,139 68.7% $9,554 69.3%
Hotel 2,118 14.4% 2,138 15.5%
Food and beverage 2,356 16.0% 2,538 18.4%
Other 1,052 7.1% 934 6.8%
------------ -------- ------------ -------
Gross revenue 15,665 106.1% 15,164 110.1%
Less promotional allowances (906) (6.1%) (1,387) (10.1%)
------------ -------- ------------ -------
Revenues, net 14,759 100.0% 13,777 100.0%
------------ -------- ------------ -------
Costs and expenses:
Casino 3,634 35.8% 3,524 36.9%
Hotel 2,231 105.3% 1,985 92.8%
Food and beverage 1,543 65.5% 1,538 60.6%
Taxes and licenses 1,508 10.2% 1,489 10.8%
Selling, general and
administrative 2,671 18.1% 2,729 19.8%
Rents 1,003 6.8% 948 6.9%
Merger costs 296 2.0% 97 .7%
Depreciation and
amortization 793 5.4% 563 4.1%
Interest 496 3.4% 1,274 9.2%
------------ -------- ------------ -------
Total costs and expenses 14,177 96.1% 14,147 102.7%
------------ -------- ------------ -------
Net income (loss) before
provision for income taxes 582 3.9% (370) (2.7%)
Provision for income taxes 20 .1% - -
------------ -------- ------------ -------
Net income (loss) before
undeclared dividends on 562 3.8% (370) (2.7%)
cumulative preferred stock
Undeclared dividends on
cumulative preferred stock 270 1.8% - -
Net income (loss) applicable ------------ -------- ------------ -------
to common shares $292 2.0% ($370) (2.7%)
------------ -------- ------------ -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
---------------------------------- ----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ --------------- ------------------ ---------------
Other Data:
Net income (loss) applicable
<S> <C> <C> <C> <C>
to common shares $292 2.0% ($370) (2.7%)
Interest 498 3.4% 1,274 9.2%
Provision for income taxes 20 .1% - -
Depreciation and amortization 793 5.4% 563 4.1%
Rents 1,003 6.8% 948 6.9%
Merger costs 296 2.0% 97 .7%
Undeclared dividends 270 1.8% - -
------------------ --------------- ------------------ ---------------
Earnings before interest,
taxes, depreciation,
amortization, rents,
merger costs, and undeclared
dividends ("EBITDA") $3,172 21.5% $2,512 18.2%
================= =============== =================== ===============
</TABLE>
EBITDA consists of earnings before interest, taxes, depreciation, amortization,
rents, merger 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>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
(Dollars in (Dollars in
thousands) % thousands) %
----------- -------- ----------- --------
Revenues, net:
<S> <C> <C> <C> <C>
Casino $20,718 69.2% $19,789 70.6%
Hotel 4,518 15.1% 4,513 16.1%
Food and beverage 4,943 16.5% 5,195 18.5%
Other 1,801 6.0% 1,499 5.3%
Gross revenue 31,980 106.8% 30,996 110.6%
Less promotional allowances (2,036) (6.8%) (2,966) (10.6%)
Revenues, net 29,944 100.0% 28,030 100.0%
Costs and expenses:
Casino 6,996 33.8% 7,547 38.1%
Hotel 4,350 96.3% 3,801 84.2%
Food and beverage 3,385 68.5% 2,984 57.4%
Taxes and licenses 3,097 10.3% 3,042 10.9%
Selling, general and
administrative 5,352 17.9% 5,396 19.3%
Rents 1,976 6.6% 1,912 6.8%
Merger costs 393 1.3% 252 .9%
Depreciation and
amortization 1,614 5.4% 1,130 4.0%
Interest 1,004 3.4% 2,606 9.3%
----------- -------- ----------- --------
Total costs and expenses 28,207 94.1% 28,670 102.3%
----------- -------- ----------- --------
Net income (loss) before
provision for income taxes 1,777 5.9% (640) (2.3%)
Provision for income taxes 40 .1% - -
----------- -------- ----------- --------
Net income (loss) before
undeclared dividends on
cumulative preferred stock 1,737 5.8% (640) (2.3%)
Undeclared dividends on
cumulative preferred stock 540 1.8% - -
Net income (loss) applicable
----------- -------- ----------- --------
to common shares $1,197 4.0% ($640) (2.3%)
----------- -------- ----------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------------------------- ----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
------------------ --------------- ------------------ ---------------
Other Data:
Net income (loss) applicable
<S> <C> <C> <C> <C>
to common shares 1,197 4.0% ($640) (2.3%)
Interest 1,004 3.4% 2,606 9.3%
Provision for income taxes 40 .1% - -
Depreciation and amortization 1,614 5.4% 1,130 4.0%
Rents 1,976 6.6% 1,912 6.8%
Merger costs 393 1.3% 252 .9%
Undeclared dividends 540 1.8% - -
------------------ --------------- ------------------ ---------------
Earnings before interest,
taxes, depreciation,
amortization, rents,
merger costs, and undeclared
dividends (EBITDA) $6,764 22.6% $5,260 18.8%
================== ============== ================== ===============
Cash flows provided by (used
in) operating activities $2,570 ($333)
================== ==================
Cash flows used in investing
activities ($750) ($1,181)
================== ==================
Cash flows used in financing
activities ($975) ($706)
================== ==================
</TABLE>
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $982,000, or 7.1%, from $13,777,000 for
the three months ended June 30, 1998, to $14,759,000 for the three months ended
June 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 $585,000, or 6.1%, from $9,554,000
during the 1998 period to $10,139,000 during the 1999 period due primarily to a
$494,000, or 6.8%, increase in slot machine revenue and a $255,000, or 53.8%,
increase in slot promotion revenue, partially offset by a $134,000, or 8.4%,
decrease in table games revenue and a $25,000, or 14.0%, decrease in keno
revenue. The increase in slot machine revenue is attributable primarily to an
increase in hold percentage of .5% offset by a decrease in slot coin-in of
$2,478,000, or 1.9%. Management continues to acquire state-of-the-art slot
equipment. The increase in slot promotion revenue is attributed to an increase
in promotional headcounts of 140 per day, or 53.6%. The decrease in table games
and keno revenue is primarily attributable to a decrease in table games drop of
$1,591,000, or 13.0%, offset partially by the affect of an increase in win
percentage of .7%, and a decrease in keno drop of $64,000, or 11.3%. Management
eliminated certain unprofitable complimentary programs which led to savings in
promotional allowances.
Hotel revenues decreased by approximately $20,000, or .9%, from $2,138,000
during the 1998 period to $2,118,000 during the 1999 period due primarily to a
decrease in room revenue resulting from the reduction in casino and slot
marketing promotions, partially offset by an increase in the cash room
occupancy, resulting in part, from increased marketing to attract walk-in
traffic.
Food and beverage revenues decreased approximately $182,000, or 7.2%, from
$2,538,000 during the 1998 period to $2,356,000 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 increased covers.
Other revenues increased by approximately $118,000, or 12.6%, from $934,000
during the 1998 period to $1,052,000 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 $481,000, or 34.7%, from
$1,387,000 during the 1998 period to $906,000 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 $380,000, or 4.5%, from $8,536,000 for the
1998 period to $8,916,000 for the 1999 period.
Casino expenses increased $110,000, or 3.1%, from $3,524,000 during the 1998
period to $3,634,000 during the 1999 period, due primarily to an increase in
slot promotion expense, as a result of a corresponding increase in slot
promotion revenue, 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. Casino expenses as a percentage of revenue decreased from 36.9% to
35.8% due primarily to a decrease in casino expenses and an increase in casino
revenues.
Hotel expenses increased by approximately $246,000, or 12.4% from $1,985,000
during the 1998 period to $2,231,000 during the 1999 period, and expenses as a
percentage of revenues increased from 92.8% to 105.3%, 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.
Food and beverage costs and expenses increased by approximately $5,000, or .3%,
from $1,538,000 during the 1998 period to $1,543,000 during the 1999 period.
Expenses as a percentage of revenues increased from 60.6% to 65.5%.
Taxes and licenses increased $19,000, or 1.3%, from $1,489,000 in the 1998
period to $1,508,000 in the 1999 period.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $58,000, or 2.1%, from
$2,729,000 during the 1998 period to $2,671,000 during the 1999 period due
primarily to a reduction in promotional expenses, and as a percentage of total
net revenues, expenses decreased from 19.8% to 18.1%.
EBITDA
EBITDA, as defined, increased by approximately $660,000, or 26.3%, from
$2,512,000 during the 1998 period to $3,172,000 during the 1999 period. The
increase was primarily due to an increase in revenues and decrease in costs
associated with promotional allowances as discussed above.
OTHER EXPENSES
Rent expense increased by approximately $55,000, or 5.8%, due to corresponding
annual Consumer Price Index ("CPI") increases for land lease agreements.
During the second quarter of 1999, the Company incurred approximately $296,000
in merger and acquisition costs related to the litigation of the Merger
Agreement.
Depreciation and amortization increased by approximately $230,000, or 40.9% from
$563,000 during the 1998 period to $793,000 during the 1999 period, primarily
due to the acquisition of new slot equipment.
Interest expense decreased by approximately $776,000, or 60.90% from $1,274,000
during the 1998 period to $498,000 for the 1999 period, due to recapitalization
of the Company on September 29, 1998, as discussed below in Liquidity and
Capital Resources.
NET INCOME (LOSS) BEFORE 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 $582,000 compared to a net loss of $370,000 in the 1998
period, an improvement of $952,000 or 257.3%.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
REVENUES
Net revenues increased by approximately $1,914,000, or 6.8%, from $28,030,000
for the six months ended June 30, 1998, to $29,944,000 for the six months ended
June 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 $929,000, or 4.7%, from $19,789,000
during the 1998 period to $20,718,000 during the 1999 period due primarily to a
$958,000, or 6.6%, increase in slot machine revenue and a $510,000, or 54.8%,
increase in slot promotion revenue, partially offset by a $313,000, or 8.4%,
decrease in table games revenue and a $16,000, or 4.4%, decrease in keno
revenue. The increase in slot machine revenue is attributable primarily to an
increase in slot coin-in of $1,020,000, or .4%, and an increase in hold
percentage of .4%, due in part 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. Slot promotion
revenue increase due to an increase in participant headcounts of 141 per day, or
63.4%. Table games drop decreased $3,907,000, or 14.2%, which was partially
offset by the effect of an increase in the win percentage of .9%. Management
eliminated certain unprofitable complimentary programs which led to savings in
promotional allowances.
Hotel revenues increased by approximately $5,000, or .1%, from $4,513,000 during
the 1998 period to $4,518,000 during the 1999 period due primarily to an
increase in the cash occupancy, resulting in part, from increased marketing to
attract walk-in traffic, partially offset by a decrease in complimentary revenue
resulting from the reduction in casino and slot marketing promotions.
Food and beverage revenues decreased approximately $252,000, or 4.9%, from
$5,195,000 during the 1998 period to $4,943,000 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 increase cash covers.
Other revenues increased by approximately $302,000, or 20.1%, from $1,499,000
during the 1998 period to $1,801,000 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 $930,000, or 31.4%, from
$2,966,000 during the 1998 period to $2,036,000 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 $454,000, or 2.6%, from $17,374,000 for the
1998 period to $17,828,000 for the 1999 period.
Casino expenses decreased $551,000, or 7.3%, from $7,547,000 during the 1998
period to $6,996,000 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 38.1% to 33.8% due primarily to a decrease in casino expenses offset by an
increase in casino revenues.
Hotel expenses increased by approximately $549,000, or 14.4% from $3,801,000
during the 1998 period to $4,350,000 during the 1999 period, and expenses as a
percentage of revenues increased from 84.2% to 96.3%, 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.
Food and beverage costs and expenses increased by approximately $401,000, or
13.4%, from $2,984,000 during the 1998 period to $3,385,000 during the 1999
period. Expenses as a percentage of revenues increased from 57.4% to 68.5%
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 $55,000, or 1.8%, from $3,042,000 in the 1998
period to $3,097,000 in the 1999 period due primarily to a corresponding
increase in slot revenue.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased $44,000, or .8%, from
$5,396,000 during the 1998 period to $5,352,000 during the 1999 period, and as a
percentage of total net revenues, expenses decreased from 19.3% to 17.9%.
EBITDA
EBITDA, as defined, increased by approximately $1,504,000, or 28.6%, from
$5,260,000 during the 1998 period to $6,764,000 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 $64,000 due to corresponding annual CPI
increases for land lease agreements.
Depreciation and amortization increased by approximately $484,000, or 42.8% from
$1,130,000 during the 1998 period to $1,614,000 during the 1999 period,
primarily due to the acquisition of new slot equipment.
Interest expense decreased by approximately $1,602,000, or 61.5% from $2,606,000
during the 1998 period to $1,004,000 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 six months of 1999, the Company incurred approximately $393,000
in merger and acquisition costs related to the litigation of the Merger
Agreement.
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 $1,777,000 compared to a net loss of $640,000 in the 1998
period, an improvement of $2,417,000 or 377.7%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $6.4 million at June
30, 1999, as compared with approximately $5.6 million at December 31, 1998, an
increase of $800,000.
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, 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.
For the first six months of 1999, the Company's net cash provided by operating
activities was $2,570,000 compared to $333,000 cash used in the first six months
of 1998. This increase was primarily due to an increase in net income and a
decrease in accrued expenses, offset by a decrease in prepaid expenses and
increases in depreciation and accrued interest. EBITDA for the first six months
of 1999 and 1998 was $5.3 million and $6.8 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 twelve 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. 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 June 30, 1999
the Ratio was 2.78 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, and on June 30, 1999
for $250,000. Payment is scheduled 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 $3.6 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 six-month period ended June 30, 1999 included
capital expenditures of $750,000. 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 nine 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 June 30, 1999, the Company has incurred costs of approximately $320,000
(primarily for acquisition of new systems from third parties and internal labor)
related to the system applications and anticipates spending an additional
$25,000 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 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.
It 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 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 June 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 June 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, 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. 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.
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.
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 third quarter of
1999, its current obligation to issue these shares.
<PAGE>
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 June 30, 1999, relating
to the Company's change in accountants.
<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: August 13, 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 June 30, 1999, and
the related condensed consolidated statements of operations for the three-month
and six-month periods ended June 30, 1999, and condensed consolidated statements
of shareholders' equity and of cash flows for the six-month period ended June
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.
The condensed interim financial statements for the three-month and six-month
periods ended June 30, 1998 were reviewed by other accountants whose report
dated August 12, 1998, stated that they were not aware of any material
modifications that should be made to those statements in order for them to be in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Las Vegas, Nevada
August 5, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,449,000
<SECURITIES> 0
<RECEIVABLES> 741,000
<ALLOWANCES> (233,000)
<INVENTORY> 345,000
<CURRENT-ASSETS> 8,648,000
<PP&E> 45,304,000
<DEPRECIATION> (5,863,000)
<TOTAL-ASSETS> 49,963,000
<CURRENT-LIABILITIES> 9,213,000
<BONDS> 11,104,000
0
18,810,000
<COMMON> 5,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,963,000
<SALES> 15,665,000
<TOTAL-REVENUES> 14,759,000
<CGS> 0
<TOTAL-COSTS> 12,380,000
<OTHER-EXPENSES> 1,299,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 793,000
<INCOME-PRETAX> 582,000
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 582,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 270,000
<NET-INCOME> 292,000
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.01
</TABLE>
