Item 1. BUSINESS.
General.
Elsinore Corporation ("Elsinore" or the "Company") is registered with the Nevada Gaming Commission (the "Commission") as a publicly traded holding company of Four Queens, Inc. ("Four Queens"), the licensed operator of the Four Queens Hotel and Casino in Las Vegas, Nevada (the "Four Queens Casino") and a wholly owned subsidiary of the Company. Four Queens also held a casino service license in New Jersey allowing it to distribute its casino game "multiple action blackjack." Four Queens currently distributes the game to eight casinos in New Jersey. The Four Queens' New Jersey license was renewed on May 11, 1998 and will expire on May 31, 2001. Four Queens must renew this license no later than 120 days prior to expiration. Gaming management activities conducted by Elsinore's other subsidiaries prior to the bankruptcy reorganization, discussed below, have terminated.
The Company's principal executive office is located at 202 Fremont Street, Las Vegas, Nevada 89101 and its telephone number is (702) 385-4011.
Change in Control Pursuant to Elsinore's Bankruptcy Reorganization.
On October 31, 1995, Elsinore and certain of its wholly owned subsidiaries filed for protection pursuant to Chapter 11 of the U.S. Bankruptcy Code. The resulting plan of reorganization of Elsinore and those subsidiaries (the "Plan") was confirmed on August 12, 1996 (the "Confirmation Date") and became effective following the close of business on February 28, 1997 (the "Plan Effective Date"). All motions for rehearing or reconsideration of the Bankruptcy Court's orders confirming the Plan and allowing the Plan to become effective have been denied or withdrawn. The time allowed for appeals of such orders have expired without any appeal having been taken. Pursuant to the Plan, a change in control of the Company occurred as of the Plan Effective Date, as described below.
Under the Plan, the Company's common stock that was outstanding prior to the Plan Effective Date was canceled and 4,929,313 shares of new common stock, par value $.001, of the Company (the "Common Stock") were issued. The Plan also provides for the future issuance of an additional 70,687 shares of Common Stock to certain classes of creditors of the Company and Four Queens, whose claims have not yet been resolved. Of the 4,929,313 shares of Common Stock issued pursuant to the Plan, 4,646,440 shares or 94.3% of the total outstanding were acquired by certain investment accounts (the "MWV Accounts") managed by Morgens, Waterfall, Vintiadis and Company, Inc. ("MWV"). Of the shares which the MWV Accounts acquired, 995,280 shares were purchased at $5.00 per share under a Subscription Rights Agreement dated October 10, 1996 (the "Rights Agreement"), which was called for by the Plan. Under the Rights Agreement, a total of 1,000,000 shares of Common Stock were subscribed for at $5.00 per share and were issued on the Plan Effective Date. The other 4,720 shares were subscribed for by certain holders of the common stock that was canceled on the Plan Effective Date.
The shares of Common Stock acquired by the MWV Accounts, other than the 995,280 shares which they purchased under the Rights Agreement, were issued to the MWV Accounts under the Plan (i) in partial satisfaction of the MWV Accounts' respective allowed claims relating to the Company's 12.5% First Mortgage Notes due 2000 that were issued in October 1993 or (ii) as a premium for the MWV Accounts' purchase of Common Stock under the Rights Agreement which was not subscribed for by other persons entitled to participate under the Rights Agreement.
Holders of the approximately 15.9 million shares of old common stock that were canceled on the Plan Effective Date received, in the aggregate, 77,426 shares of Common Stock (including 4,720 shares purchased under the Rights Agreement). This represents 1.6% of the Common Stock outstanding on the Plan Effective Date.
As a condition to the approvals by the State Gaming Control Board (the "Board") and the Commission which were required for the Plan to become effective, limitations were placed on the persons who could exercise voting and investment power (including dispositive power) with respect to Common Stock owned by any of the MWV Accounts. Under those limitations, John C. "Bruce" Waterfall is the only individual who exercises voting and investment authority over the Common Stock on behalf of any of the MWV Accounts. Mr. Waterfall is also the Company's Chairman of the Board.
Recapitalization.
On September 29, 1998, MWV Accounts contributed $4,641,000, net of $260,000 of expenses, to the capital of Elsinore, which Elsinore used, together with other funds of Elsinore, to purchase in full all of Elsinore's outstanding 11.5% First Mortgage Notes due 2000 in the original aggregate principal amount of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts 50,000,000 shares of Series A Convertible Preferred Stock of the Company in exchange for the surrender to the Company of $18,000,000 original principal amount of certain second mortgage notes held by the MWV Accounts. The 50,000,000 shares of Series A Convertible Preferred Stock have (i) the right to receive cumulative dividends at the rate of 6% per year; (ii) the right to receive the amount of $.36 per share, plus all accrued or declared but unpaid dividends on any shares then held, upon any liquidation, dissolution or winding up of the Company for an aggregate liquidation preference of $18,000,000; (iii) voting rights equal to the number of shares of the Company's Common Stock into which the shares of Preferred Stock may be converted, and (iv) the right to convert the shares of Preferred Stock into 93,000,000 shares of the Company's Common Stock.
In addition, Elsinore issued to the MWV Accounts new second mortgage notes ("New Mortgage Notes") in the aggregate principal amount of $11,104,000 in exchange for all remaining outstanding second mortgage notes held by the MWV Accounts in the same aggregate principal amount, pursuant to an amended indenture governing the New Mortgage Notes that reduced the interest rate payable thereon from the 13.5% payable under the old second mortgage notes to the 12.83% payable under the New Mortgage Notes. Following the recapitalization described in this section, Elsinore has notes outstanding in the aggregate principal amount of $11,104,000. The transactions, as described in this section, are collectively referred to as the "Recapitalization."
The Four Queens Casino.
Four Queens owns the Four Queens Casino, which has been in operation since 1966. The Four Queens Casino has consistently concentrated on delivering high quality, traditional Las Vegas-style gaming and entertainment. The Four Queens Casino is located on a leased site of approximately two acres adjacent to the Golden Nugget Hotel & Casino in the heart of Fremont Street in downtown Las Vegas. The property features approximately 690 hotel rooms, including 45 suites, 30,000 square feet of casino space, two full-service restaurants, two fast-service restaurants, three cocktail lounges, a gift shop, four retail concessions, 15,000 square feet of function space and approximately 560 parking spaces. The casino has approximately 1,068 slot machines, 26 gaming tables, a keno lounge and a sports book. Riviera Gaming Management Corp. - Elsinore ("RGME"), an indirect subsidiary of Riviera Holdings Corp. ("Riviera"), has been managing the Four Queens Casino since the Confirmation Date. RGME has focused primarily on slot play versus previous management's philosophy of marketing to high limit table players. This plan has changed the customer base at the property and allows the Four Queens Casino to concentrate on what RGME considers to be Las Vegas' most profitable revenue source, which is the slot player market. Also, an aggressive marketing strategy was maintained by the Company with the objective of attracting into the Four Queens Casino the 20,000-plus average daily visitors to the downtown area.
Management. The term of RGME's current management agreement for the Four Queens Casino (the "Management Agreement"), which went into effect on April 1, 1997 in accordance with the terms of the Plan, is approximately 40 months, subject to earlier termination or extension. Either side may terminate it if the Four Queens Casino's cumulative earnings before interest, taxes, depreciation and amortization ("EBIDTA") for the first two fiscal years commencing April 1, 1997 are less than $12.8 million. The term can be extended for an additional 24 months at RGME's option if certain performance standards are met. RGME is paid a minimum annual management fee of $1 million in equal monthly installments. In addition, RGME receives a fee of 25% of the amount by which EBITDA in any fiscal year exceeds $8 million. Also under the Management Agreement, RGME received warrants to purchase 1,125,000 shares of Common Stock at $1.00 per share (the "Warrants").
The Four Queens EBITDA for the 24 months ending February 28, 1999 will approximate $10.7 million. Management and the Board of Directors of Elsinore have agreed to continue the Management Agreement for its original term provided, however, that it can be terminated by either party on six month's notice. The Management Agreement also provides that either party can terminate the Management Agreement if (i) substantially all the Four Queens' assets are sold, (ii) the Four Queens is merged with another company, or (iii) a majority of the Four Queens' or Elsinore's shares are sold. Upon such termination, RGME is to receive a $2.0 million termination bonus minus any amount realized or realizable upon exercise of the Warrants. RGME and Elsinore are currently negotiating a revised termination bonus.
Operations. The following table sets forth the contributions from major activities to the Company's total revenues from the Four Queens Casino for the years ended December 31, 1998, 1997 and 1996.
(1) Consists of the net win from gaming activities (i.e., the difference between gaming wins and losses).
(2) Includes revenues from services provided as promotional allowances to casino customers and others on a complimentary basis.
(3) Consists primarily of interest income, commissions from credit card and automatic teller cash advances and miscellaneous other income (including net royalties of $103,000 in 1998, $142,000 in 1997, and $198,000 in 1996 from the licensing of MULTIPLE ACTION "registered trademark" blackjack).
The following table summarizes the primary aspects of the Company's operations at the Four Queens Casino.
Casino: Floor area (square feet) 30,000 Slot machines 1,068 Blackjack tables 17 Craps tables 3 Big six 1 Caribbean stud poker tables 1 Roulette wheels 2 Let-it-ride tables 1 Pai gow poker tables 1 Keno (seats) 46 Sports book 1 Hotel: Rooms 690 Meeting areas (square feet) 14,600 Restaurants and entertainment and cocktail lounges: Restaurants 4 Restaurant seats 454 Cocktail lounges 3 Other: Gift shops 1 Parking facilities (cars) 560
A marketing strategy is employed for the Four Queens Casino that emphasizes a high level of customer service, targeted marketing, value-oriented promotions, club memberships and special events.
Customer Service. The Company believes that the Four Queens Casino is distinguished by its friendly atmosphere and the high level of personalized service provided to its patrons. The Company strives to maintain the level of service that has allowed the property to attain a high level of customer loyalty, which has been the backbone of business for this established hotel/casino.
Employees. At December 31, 1998, the Four Queens Casino employed 951 persons, approximately 50% of whom were covered by collective bargaining agreements. New union contracts were entered into during 1997 covering five collective bargaining units.
Competition. The gaming industry is highly competitive. The Four Queens competes with a multitude of casino hotels in the greater Las Vegas Metropolitan area. Currently there are approximately 32 major gaming properties located on or near the Las Vegas Strip, 13 located in the downtown area and several located in other areas of Las Vegas. Las Vegas gaming square footage and room capacity are continuing to increase. Most of these facilities attract or may attract primarily middle income patrons, who are the focus of the Company's marketing strategy. Although the Company believes that these additional facilities will draw more visitors to Las Vegas, they may also divert potential gaming activity from the Company. Future additions, expansions, and enhancements to existing properties and constructions of new properties by the Company's competitors could divert additional gaming activity from the Company's facilities. The Company believes that successful gaming facilities compete based on the following: location, atmosphere, quality of gaming facilities, entertainment, quality of food and beverage, and price. Although the Company believes it competes favorably with respect to these factors, some of its competitors have significantly greater financial and other resources than the Company. There can be no assurance that the Company will compete successfully in the Las Vegas market in the future.
The Las Vegas Market
Las Vegas is one of the fastest growing and largest entertainment markets in the United States. For fiscal year 1998, gaming revenues in Clark County reached a new 12 month record of $6.3 billion. The number of visitors traveling to Las Vegas has increased at a steady and significant rate, from 16.2 million visitors in 1987 to a record 30.6 million in 1998, representing a compound annual growth rate of 5.95%. Aggregate expenditures by Las Vegas visitors increased at a compound annual growth rate of 11.2% from $8.6 billion in 1987 to $24.9 billion in 1997. The number of hotel and motel rooms in Las Vegas increased by approximately 76.6% from 61,934 in 1988 to 109,365 in 1998, surpassing 100,000 rooms in January 1997, the first market to reach that level. Despite this significant increase in the number of rooms, hotel occupancy rates exceeded on average 87.9% for the five year period from 1994 through 1998. According to the Las Vegas Convention and Visitors Authority ("LVCVA"), by the end of the decade it is expected that approximately 18,000 additional hotel rooms will be opened in Las Vegas, including the Venetian, Paris, which are currently under construction, Mandalay Bay which opened in March 1999, the expansion at the MGM Grand and the new developments planned at the current Aladdin site.
The following table sets forth certain statistical information for the Las Vegas market for the years 1994 through 1998, as reported by the LVCVA.
The Downtown Market.
General Information. Downtown Las Vegas, with its famous neon lighting and its 12 major casinos all located within close proximity of each other, attracts a significant number of loyal customers comprised of both visitors to Las Vegas and local residents.
Recent results of the downtown Las Vegas casinos have been adversely affected by, among other things, the opening of themed mega-casinos on the Las Vegas Strip. In the 1989-1991 period, the opening of the Mirage and Excalibur casino/hotels depressed the growth rate of downtown Las Vegas gaming revenues. Similarly, the more recent openings of the Bellagio, MGM Grand, Luxor, Treasure Island, Monte Carlo and New York New York casino/hotels have had an adverse effect on downtown gaming revenue. In addition, the recent opening of Mandalay Bay and the scheduled openings of the Venetian and Paris, the MGM Grand expansion and the planned development at the Aladdin site, all on the Las Vegas Strip, may have a further adverse effect on downtown gaming revenue when those projects are completed. The new rooms recently completed or under construction are primarily designed to attract the high-end gaming and convention customers, and based on construction costs are or will be priced at rates well above those which have been or can be charged by the Four Queens Casino based on the Company's investment in that facility.
With the proliferation of mega-casinos on the Las Vegas strip, downtown Las Vegas has become increasingly appealing to the price-conscious vacationer. Four Queens offers a competitive package of rooms, restaurants, and the popular gaming devices demanded by the value-oriented vacationer.
The Fremont Street Experience. Casino operators in downtown Las Vegas formed the Downtown Progress Association to improve the downtown area. The most noteworthy improvement is the Fremont Street Experience, which features a celestial vault and light show. The celestial vault is a 100-foot high, 100-foot wide, 1,340-foot long frame spanning Fremont Street, from Main Street to Fourth Street, which is closed to traffic to create a pedestrian mall. The celestial vault is the framework for a high-tech light show using reflectors, strobe lights, and laser image projectors. Nine major entertainment venues, including the Four Queens Casino, that together offer 17,000 slot machines, over 500 blackjack and other table games, 41 restaurants and 8,000 hotel rooms are connected by the project, which opened on December 13, 1995. The project also includes a 1,500-space parking facility. The goal of the Fremont Street Experience is to create a special attraction for gaming customers and other visitors to Las Vegas through such activities as street events and entertainment in this extraordinary setting. A special themed event at the Fremont Street Experience can draw as many as 80,000 people. Through such attractions, the Fremont Street Experience draws visitors to the downtown area and provides competition with the larger and new gaming and entertainment complexes located on or near the Strip.
The Company and several of the other downtown casino operators collectively own the Fremont Street Experience through their ownership of the company which holds title to the project. The Company has a one-sixth ownership share and is responsible for a proportionate share of the project's operating costs.
Agreement and Plan of Merger.
In the first half of 1997, Elsinore and Mr. Allen E. Paulson ("Paulson") commenced discussions which culminated in an Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 15, 1997, between Elsinore and entities controlled by Paulson, namely R&E Gaming Corp. ("R&E") and Elsinore Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") the outstanding Common Stock for $3.16 per share in cash plus an amount of additional consideration in cash equal to the daily portion of the accrual on $3.16 at 9.43% compounded annually, from June 1, 1997 to the date immediately preceding the date such acquisition is consummated. The Merger Agreement provides for EAS to merge into Elsinore, and Elsinore to become a wholly owned subsidiary of R&E.
Contemporaneously with the Merger Agreement, R&E executed an Option and Voting Agreement (the "Option Agreement") with MWV, on behalf of the MWV Accounts which owned 94.3% of the outstanding Common Stock prior to the Recapitalization. Under certain conditions and circumstances, the Option Agreement provides for, among other things, (i) the grant by the MWV Accounts to R&E of an option to purchase all of their Common Stock; (ii) an obligation by R&E to purchase all of the MWV Accounts' Common Stock, and (iii) the MWV Accounts to vote their Common Stock in favor of the Merger Agreement. Elsinore's shareholders approved the Merger Agreement at a special meeting of shareholders held on February 4, 1998 (the "Special Meeting").
Paulson also entered into discussions with Riviera to acquire a controlling interest in that company as well. Riviera owns and operates the Riviera Hotel and Casino in Las Vegas and is the parent corporation of RGME. On September 16, 1997, R&E and Riviera Acquisition Sub, Inc. ("RAS") (another entity controlled by Paulson) entered into an Agreement and Plan of Merger (the "Riviera Merger Agreement") with Riviera, which provides for the merger of RAS into Riviera (the "Riviera Merger"), and for Riviera to become a wholly owned subsidiary of R&E. R&E also entered into an Option and Voting Agreement with certain Riviera shareholders, including MWV acting on behalf of the MWV Accounts, containing terms similar to those described above with respect to the Option Agreement.
The Merger Agreement contains conditions precedent to consummation of the Merger, including (i) the Option Agreement being in full force and effect and MWV having complied in all respects with the terms thereof, (ii) all necessary approvals from gaming authorities and (iii) consummation of the Riviera Merger.
Copies of the Merger Agreement and Option Agreement are included as exhibits hereto.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it was R&E's position that the Merger Agreement was void and unenforceable against R&E and EAS, or alternatively, R&E and EAS intended to terminate the Merger Agreement. R&E alleged, among other things, violations by Elsinore of the Merger Agreement, violations of law and misrepresentations by MWV in connection with the Option and Voting Agreement and the non-satisfaction of certain conditions precedent to completing the merger. The Company denied the allegations and asked that R&E complete the merger. Thereafter, in April 1998, Paulson, R&E, EAS and certain other entities filed a lawsuit against eleven defendants, including Elsinore and MWV (Paulson, et al. v Jeffries & Company et al.). Plaintiffs' allegations include breach of the Merger Agreement by Elsinore, as well as fraud, various violations of the federal securities laws and violation of the Nevada anti-racketeering statute in connection with the proposed merger. Plaintiffs are seeking (i) unspecified actual damages in excess of $20 million, (ii) $20 million in exemplary damages, (iii) treble damages, and (iv) rescission of the Merger Agreement and other relief. The lawsuit was filed in the United States District Court for the Central District of California.
On July 13, 1998, Elsinore filed a motion to dismiss certain of the claims alleged in the lawsuit, as amended, which was heard by the Court on December 7, 1998. On December 17, 1998 the Court entered an order granting the motion, with prejudice, as to the claims alleging violation of the Nevada anti-racketeering statute, granting the motion with leave to amend as to certain other allegations, and denying the remainder of the motion. Thereafter, on January 13, 1999, plaintiffs served a Second Amended Complaint.
Shortly thereafter, plaintiffs announced their intention to file a motion for reconsideration of the Court's December 17, 1998 order insofar as it had dismissed the Nevada anti-racketeering claims, on the ground that a December 30, 1998 decision of the Nevada Supreme Court in the action captioned Siragusa v. Brown constituted a change and/or material difference in the law relied upon by the Court. Based on the Siragusa decision, the Company stipulated to an order allowing plaintiffs to serve and file a Third Amended Complaint reinserting claims under the Nevada anti-racketeering statute which plaintiffs have done.
Discovery is only now beginning, and the Company is currently unable to form an opinion as to the amount of its exposure, if any. Although the Company intends to defend the lawsuit vigorously, there can be no assurance that it will be successful in such defense or that future operating results will not be materially adversely affected by the final resolution of the lawsuit.
Gaming Regulation and Licensing.
Nevada. Elsinore is registered with the Commission as a publicly traded company and has been found suitable as the sole shareholder of Four Queens. Four Queens holds a nonrestricted gaming license to conduct nonrestricted gaming operations at the Four Queens Casino. Ownership and operation of casino gaming facilities in Nevada, as well as the manufacture and distribution of gaming devices, are subject to extensive state and local regulation. Publicly traded parent corporations and holding companies of Nevada gaming licensees, as well as the licensed subsidiaries, are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act") and various local regulations. A registered company and its gaming operations and companies are subject to the licensing and regulatory control of the Commission, the Board, the Clark County Liquor Gaming Licensing Board and possibly other local agencies throughout the State of Nevada, including the City of Las Vegas (collectively, the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities have their genesis in various declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) the creation of a source of state and local revenues through taxation and licensing fees. Neither gaming licenses nor the registration approvals given to publicly traded corporations are transferable. Changes in such laws, regulations and procedures could have an adverse effect on the Company's operation.
Since the Company is registered with the Commission as a publicly traded corporation and has been found suitable as the sole shareholder of Four Queens, it is required to submit, upon application and on a periodic basis, detailed financial and operating reports to the Commission. Additionally, the Company may be required to furnish any other information requested by the Commission. No person may become a shareholder of, or receive any percentage of profits from licensed Nevada operating companies without first obtaining licenses and approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, any registered company or its licensed subsidiary in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the licensed subsidiary must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the registered company who are actively and directly involved in the gaming activities of the licensed subsidiary may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause deemed reasonable. A finding of suitability is comparable to licensing, and both require the submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or a finding of suitability must pay all of the costs of the investigation. Changes in licensed positions with the registered company or its licensed subsidiary must be reported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities also have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the registered company or its licensed subsidiary, the companies involved would be required to sever all relationships with such a person. Additionally, the Commission may require the registered company or its licensed subsidiary to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
Elsinore and Four Queens are required to submit detailed financial and operating reports to the Commission. Substantially all loans, leases, sales of securities and similar financing transactions by Four Queens must be reported to, or approved by, the Commission.
If it were determined that the Nevada Act was violated by the licensed subsidiary or the registered company, the gaming licenses or registration held by the registered company and its licensed subsidiary could be limited, conditioned, suspended or revoked subject to compliance with certain statutory and regulatory procedures. Moreover, at the discretion of the Commission, the registered company and its licensed subsidiary and persons involved could be subject to substantial fines for each separate violation of the Nevada Act.
A beneficial holder of the registered company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the registered company's voting securities determined if the Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting such an investigation. Also, the Clark County Liquor Gaming Licensing Board and the City of Las Vegas have taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.
The Nevada Act requires any person who acquires more than 5% of the registered company's voting securities to report the acquisition to the Commission. The Nevada Act requires that beneficial owners of more than 10% of the registered company's voting securities apply to the Commission for a finding of suitability within 30 days after the Chairman of the Board mails written notice requiring such a filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15% of the registered company's voting securities may apply to the Commission for a waiver of such a finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold the voting securities for investment purposes only unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered company, any change in the registered company's corporate charter, bylaws, management, policies or operations of the registered company, or any of its gaming affiliates, or any other action which the Commission finds to be inconsistent with holding the registered company's voting securities for investment purposes only. Activities which are not deemed inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by shareholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Commission may determine to be consistent with such investment intent. If the Commission grants a waiver to an "institutional investor" the waiver does not include a waiver or exemption from the requirement for prior approval to "acquire control" of a registered corporation. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Commission or the Chairman of the Board may be found unsuitable. The same restriction applies to a record owner if the record owner, after request, fails to identify the beneficial owners. Any shareholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond such period of time as may be prescribed by the Commission may be guilty of a criminal offense. The registered company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a shareholder or to have any other relationship with the registered company or its subsidiaries, the registered company (i) pays that person any dividend or interest on voting securities of the registered company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value.
The Commission may, in its sole discretion, require the holder of any debt security of a registered corporation to file applications, be investigated and be found suitable to own the debt security of the registered corporation. If the Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the registered corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
The registered company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such a disclosure may be grounds for finding the record holder unsuitable. The registered company is also required to render maximum assistance in determining the identity of the beneficial owner. The Commission has the power to require the registered company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act.
Elsinore may not make a public offering of its securities without the prior approval of the Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Any such approval, if given, does not constitute a finding, recommendation or approval by the Commission or the Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.
Application for approval of public offerings and the like may be filed without complete documentation related thereto so long as the documents and information are supplied to the Board and Commission as they become available in accordance with the normal and customary practice of the securities industry. Additionally, the Commission may, either generally or specifically, exempt any person, security or transaction from application pursuant to its regulations regarding publicly traded corporations.
Changes in control of the registered company or its subsidiaries through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Commission. Entities seeking to acquire control of a registered corporation must satisfy the Board and the Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Commission may also require controlling shareholders, officers, directors and other persons having a material relationship or involvement with the entity proposed to acquire control, to be investigated and licensed as part of the approval process related to the transaction.
License fees and taxes, computed in various ways dependent upon the type of gaming activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, or required to be registered, or is under common control with such person (collectively, "Licensees"), and who propose to become involved in a gaming venture outside the State of Nevada are required to deposit with the Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the basis of personal unsuitability.
The granting of any registrations, amendment of orders of registration, findings of suitability, approvals or licenses are discretionary with the Nevada Gaming Authorities. The burden of demonstrating the suitability or desirability of certain business transactions is at all times upon the applicants. Any licensing or approval process requires the submission of detailed financial, business and possible personal information, and the completion of a thorough investigation.
New Jersey. Four Queens was granted a Casino Service Industry License by the State of New Jersey on May 11, 1998. This license is scheduled to expire on May 31, 2001.
Washington. Elsinore's subsidiary, Olympia Gaming Corporation, has not renewed its gaming license issued by the State of Washington as it is no longer performing under, or seeking, a management contract in that state.
Item 2.
Item 2. PROPERTIES.
Except for certain small parcels of land owned in fee, the real property underlying the Four Queens Casino is leased pursuant to several long-term leases, none of which expire before October 31, 2024. The adjoining garage is occupied under a lease that expires in 2034. Such leases generally provide for annual minimum rental and adjustments relating to cost of living. The Four Queens Casino is subject to security interests under the Company's new 1998 Mortgage Notes. See Note 12 of Notes to Consolidated Financial Statements.
Item 3.
Item 3. LEGAL PROCEEDINGS.
The Company is a defendant in two consolidated lawsuits pending in the federal court for the District of New Jersey, alleging violation by the Company and certain of its subsidiaries and affiliates of the Worker Adjustment and Retraining Notification Act (the "WARN Act") and breach of contract.
The plaintiffs filed three proofs of claims in the Company's and Four Queens' bankruptcy proceedings. Two of the proofs of claims, one for the union employees and one for the non-union employees, totaled $14 million and allege liability under the WARN Act for failure to notify employees properly in advance of cessation of operations of Elsinore Shore Associates. The third proof of claim in the amount of $800,000 was based upon retroactive wage agreements executed by Elsinore Shore Associates promising to pay its employees deferred compensation if the employees remained with Elsinore Shore Associates during its reorganization. The proofs of claims were filed as priority claims, not general unsecured claims.
Based upon the Order For Verdict Upon Liability Issues issued by the presiding judge in New Jersey, as well as the Bankruptcy Code, the Bondholders' Committee in the bankruptcy proceeding filed an objection to the WARN Act proofs of claims. The Bankruptcy Court tentatively approved the objection and disallowed the claims pending entry of the final order from the New Jersey court. No final appealable order has been entered as of yet by the Bankruptcy Court.
On October 22, 1997, the New Jersey court entered its Findings of Fact and Conclusions of Law and Judgment Upon Liability Issues, which affirmed its prior holding denying WARN Act liability. The plaintiffs have appealed that decision to the Third Circuit Court of Appeals. The appeal is currently pending.
A second objection was filed on behalf of the Bondholders' Committee to the $800,000 proof of claim regarding the retroactive wage benefits. Because the New Jersey court had found the Company to be liable on these obligations together with Elsinore Shore Associates, the objection filed by the Bondholders' Committee did not dispute the allowability of the proof of claim to participate with the other unsecured creditors in the Company's bankruptcy proceedings. However, the Bondholders' Committee objected to the claim of priority status in the Company's proceedings. The Bondholders' Committee objected to the claim in its entirety in the Four Queens' bankruptcy proceeding. The Bankruptcy Court granted the objections and ruled that the proof of claim for retroactive wage benefits would be an allowed unsecured claim against the Company to be treated in Class 10 of the Plan with final determination of the actual amount of the claim to be made by the New Jersey District Court. The amount was subsequently determined by stipulation to be $675,000, inclusive of interest. The plaintiffs thereafter filed a motion for reconsideration regarding the Bankruptcy Court's order, which motion was ultimately denied. The final order was entered by the court in July 1997, and the plaintiffs have appealed the order to the Ninth Circuit Bankruptcy Appellate Panel. The Ninth Circuit Bankruptcy Appellate Panel subsequently affirmed the Bankruptcy Court's order. The Appellate decision was not thereafter appealed to the Ninth Circuit Court of Appeals and is now final. As a result, the retroactive wage benefits claim are now being included in the Class 10 Unsecured Creditor's pool of the bankruptcy proceedings, which is capped at $1.4 million and, therefore, will not have a material financial effect on the Company.
The Company is a party to other claims and lawsuits. (See Item 1. BUSINESS - Agreement and Plan of Merger). Management believes that such matters are either covered by insurance or, if not insured, will not have a material adverse effect on the financial position or results of operations of the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders during the fourth quarter of fiscal 1998.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no organized or established trading market for the Common Stock. The Common Stock's prices are reported on the NASDAQ Stock Market "Bulletin Board."
As of the close of business on March 15, 1999, there were approximately 4,009 record owners of Common Stock.
The trading market for the Common Stock is extremely thin. The MWV Accounts own 94.3% of the outstanding Common Stock, which they acquired pursuant to the Plan, and would own 99.7% giving effect to the conversion of their 50,000,000 shares of Series A Convertible Preferred Stock into shares of Common Stock. (see Item 1. Business - Recapitalization). Except pursuant to the Recapitalization and the Plan, the MWV Accounts have not bought or sold any Common Stock. The Common Stock held by the MWV Accounts is deemed beneficially owned by Elsinore's Chairman of the Board, and Elsinore's directors and executive officers as a group are deemed to own beneficially 99.7% of the outstanding Common Stock. The remaining .3% of the outstanding shares is widely dispersed among numerous small shareholders.
On May 14, 1997, the last full day preceding Elsinore's filing with the SEC of its Form 10-Q which reported, among other things, that Paulson had expressed an interest in acquiring all of the outstanding Common Stock, both the high and low sale prices of the Common Stock reported on the NASDAQ "Bulletin Board" were $0.13 1/2 (13 1/2 cents). On December 31, 1997, both the high and low sale prices of the Common Stock reported on the NASDAQ "Bulletin Board" were $2.25. In view of the lack of an organized or established trading market for the Common Stock, the extreme thinness of whatever trading market exists, the limited number of shares that are not held by the MWV Accounts, and the continuing litigation with R&E and EAS regarding the enforceability of the Merger Agreement (see Item 1. BUSINESS. - Agreement and Plan of Merger), these reported prices may not be indicative of the price at which any shareholder may be able to sell his or her shares.
Elsinore has not paid any dividends on the Common Stock in the past two years and does not currently expect to pay any dividends in the foreseeable future.
On September 29, 1998, MWV Accounts contributed $4,641,000, net of $260,000 of expenses, to the capital of Elsinore, which Elsinore used, together with other funds of Elsinore, to purchase in full all of Elsinore's outstanding 11.5% First Mortgage Notes due 2000 in the original aggregate principal amount of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts 50,000,000 shares of Series A Convertible Preferred Stock of the Company in exchange for the surrender to the Company of $18,000,000 original principal amount of certain second mortgage notes held by the MWV Accounts.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is selected consolidated historical financial data with respect to the Company for the five years ended December 31, 1998. This data should be read in conjunction with the consolidated financial statements and notes thereto set forth elsewhere herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto set forth elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $5.6 million at December 31, 1998, as compared with $5.9 million at December 31, 1997 a decrease of $300,000 from December 31, 1997. On September 29, 1998, the MWV Accounts contributed $4,641,000, net of $260,000, of expenses to the capital of the Company, which was then used to purchase in full the remaining principal amounts of the Company's 11.5% First Mortgage Notes due 2000 and 13.5% Second Mortgage Notes due 2001. Also on September 29, 1998, the Company issued to the MWV Accounts 50,000,000 shares of Series A Convertible Preferred Stock in exchange for the surrender to the Company of $18.0 million original principal amount of second mortgage notes. The Company also issued to the MWV Accounts New Mortgage Notes in the aggregate principal amount of $11,104,000 in exchange for all remaining outstanding Second Mortgage Notes in the same aggregate principal amount. In addition, pursuant to the Subscription Rights Agreement provided for in the Plan, an additional $5.0 million in cash became available to the Company following the close of business on February 28, 1997. Of that amount, $4.4 million had been received prior to December 31, 1996 and was considered restricted cash until the Plan Effective Date, and $600,000 was received in 1997. Significant debt service on the Company's New Mortgage Notes is paid in February and August and should be considered in evaluating cash increases or decreases in the second and fourth quarters.
The Company was in compliance with the covenants applicable to the 12.83% New Mortgage Notes as of December 31, 1998. Management considers it likely that the Company will be in violation of such covenants during the year ended December 31, 1999. Accordingly, waivers of non-compliance which expire on January 2, 2000 were obtained from the holders of the 12.83% New Mortgage Notes.
For the twelve months of 1998, the Company's net cash provided by operating activities was $3,275,000 compared to $1,282,000 in 1997. EBITDA for 1998 and 1997 was $6.3 million and $5.5 million, respectively. The repayment of the First Mortgage Notes and of the Second Mortgage Notes, the surrender of $18,000 of the original principal amount of second mortgage notes held by the MWV Accounts, and the issuance of the New Mortgage Notes in exchange for the remaining second mortgage notes held by the MWV Accounts has significantly lowered the Company's debt service requirements (see Item 1. BUSINESS - Recapitalization). Scheduled interest payments on the then outstanding notes and other indebtedness were $4.4 million in 1998 and the currently outstanding notes and other indebtedness will decline to $2.0 million in 1999 and $1.2 million in 2001. Management believes that sufficient cash flow will be available to cover the Company's debt service for the next 12 months and enable investment in budgeted capital expenditures of approximately $3.5 million for 1999, including an arrangement to finance slot machine purchases of $1 million in 1999. The Company's ability to service its debt will be dependent on future performance, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control.
Principal on the New Mortgage Notes is due on August 20, 2001. The New Mortgage Notes are redeemable by the Company at any time at 100% of par, without premium. The Company is required to make an offer to purchase all New Mortgage Notes at 101% upon any "Change of Control" as defined in the indenture governing the New Mortgage Notes. The New Mortgage Notes are guaranteed by Elsub Management Corporation, Four Queens, Inc. and Palm Springs East Limited Partnership and are collateralized by a second deed of trust on and pledge of substantially all the assets of the Company and the guarantors. Cash flow from operations is not expected to be sufficient to pay all of the principal of the New Mortgage Notes at maturity on August 20, 2001 or upon any Change of Control. Accordingly, the ability of the Company to repay the New Mortgage Notes at maturity, or upon any Change of Control, will be dependent upon its ability to refinance the New Mortgage Notes. There can be no assurance that the Company will be able to refinance the principal amount of the New Mortgage Notes on favorable terms or at all.
The note agreement executed in connection with issuance of New Mortgage Notes, among other things, places significant restrictions on the incurrence of additional indebtedness by the Company, the creation of additional liens on the collateral securing the New Mortgage Notes, transactions with affiliates and payment of certain restricted payments. In order for the Company to incur additional indebtedness or make a restricted payment, the Company must, among other things, meet a specified consolidated fixed charges coverage ratio and have earned $1 million in EBITDA. The Company must also maintain a minimum amount of consolidated net worth.
Payment was due on the 13 1/2% Second Mortgage Notes due 2001 on August 31, 1998. This payment was waived until December 30, 1998. At such time, an additional waiver was obtained until December 31, 1999. Payment made on January 5, 1999 for $1.0 million. Anticipated payment schedule: $250 thousand in March, June, and September with final payment of $290 thousand in December 1999.
Management considers it important to the competitive position of the Four Queens Casino that expenditures be made to upgrade the property. Management budgeted approximately $3.9 million for capital expenditures in 1998 and $3.5 million in 1999. The Company expects to finance such capital expenditures from cash on hand, cash flow and slot lease financing. Uses of cash during 1998 included capital expenditures of $2.1 million. Based upon current operating results and cash on hand, the Company has sufficient operating capital to fund its operation and capital expenditures for the next 12 months.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation is generally referred to as the "Year 2000 Problem." If such situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations.
The Company has conducted a comprehensive review of its computer systems and other systems (both information technology ("IT") and non-IT systems) for the purpose of assessing its potential Year 2000 Problem and is in the process of modifying or replacing those systems which are not Year 2000 compliant. If modifications are not made or not completed timely or unexpected issues arise, the Year 2000 Problem could have a significant impact on the Company's operations.
All costs related to the Year 2000 Problem are expensed as incurred, while the cost of new hardware and software is capitalized and amortized over its expected useful life. The costs associated with Year 2000 compliance have not been and are not anticipated to be material to the Company's financial position or results of operations and are expected to be funded out of working capital. As of December 31, 1998, the Company has incurred costs of approximately $200,000 (primarily for acquisition of new systems from third parties) related to the system applications and anticipates spending an additional $225,000 to become Year 2000 compliant, which represents substantially all of the Company's IT budget for 1999. The estimated completion date and remaining costs are based upon management's best estimates, as well as third party modification plans and other factors. However, there can be no assurance that such estimates will be accurate and actual results could differ materially.
In addition, the Company has communicated with its major vendors and suppliers to determine their state of readiness relative to the Year 2000 problem and the Company's possible exposure to Year 2000 issues of such third parties. To date, no material issues have been reported to the Company. However, there can be no assurance that the systems of other companies, which the Company's systems may rely upon, will be timely converted or representations made to the Company by these parties are accurate. The failure of a major vendor or supplier to adequately address its Year 2000 Problem could have a significant adverse impact on the Company's operations.
Planning for the Year 2000 Problem, including contingency planning, is significantly complete and will be revised if necessary.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position, and is effective for financial statements issued for fiscal years beginning after December 15, 1997. There is no difference between net income and comprehensive income for the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 131 established additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. The Company operates in one Segment of the gaming industry.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain information included in this Form 10-K and other materials filed with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking, such as statements relating to business strategies, plans for future development and upgrading, the anticipated cost and timing related to remediation of the Year 2000 Problem, capital spending, financing sources, existing and expected competition and the effects of regulations. Such forward-looking statements involve important known and unknown risks and uncertainties that could cause actual results and liquidity to differ materially from those expressed or anticipated in any forward-looking statements. Such risks and uncertainties include, but are not limited to: those related to the effects of competition; leverage and debt service; financing needs or efforts; actions taken or omitted to be taken by third parties, including the Company's customers, suppliers, competitors, and stockholders, as well as legislative, regulatory, judicial, and other governmental authorities; the loss of any licenses or permits or the Company's failure to renew gaming or liquor licenses on a timely basis; changes in business strategy, capital improvements, or development plans; general economic conditions; changes in gaming laws, regulations (including the legalization of gaming in various jurisdictions), or taxes; risks related to development and upgrading activities; risks related to the Year 2000 Problem; and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. Accordingly, actual results may differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and, as such, speak only as of the date made. The Company undertakes no obligation to revise publicly these forward-looking statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
REVENUES
Net revenues increased by approximately $2,112,000 or 3.9%, from $53,788,000 for 1997 to $55,900,000 for 1998.
Casino revenues increased by approximately $2,866,000, or 7.9%, from $36,506,000 during the 1997 period to $39,372,000 during the 1998 period due primarily to a $4,608,000, or 18.7% increase in net slot revenue offset by a $643,000, or 8.4% decrease in net table games revenues and $666,000 or 22.9% decrease in slot promotion revenue. During 1998, table games drop decreased $1,794,000 or 3.5%, and slot coin-in increased $54,170,000, or 11.8%, attributable primarily to the opening of Nickel Palace in March 1998 and the acquisition of new state-of-the-art slot equipment. The decrease in table game revenue was also attributable to a .8% decrease in win percent.
Hotel revenues decreased by approximately $701,000, or 7.2%, from $9,705,000 during the 1997 period to $9,004,000 during the 1998 period due primarily to a decrease in cash room revenue of $1,550,000 resulting from the decrease in the average room rate as a result of competitive room pricing in the Las Vegas market. In addition, some cash revenues were displaced by complimentary revenues as a result of the implementation of new casino and slot marketing promotions as a part of management's effort to increase casino revenues.
Food and beverage revenues increased approximately $38,000, or .004%, from $9,686,000 during the 1997 period to $9,724,000 during the 1998 period due to an increase in complimentary revenues of $595,000 resulting from the implementation of casino and slot marketing promotions, which was offset by a decrease in cash revenues as a result of lower average check.
Other revenues increased by approximately $889,000, or 42%, from $2,115,000 during the 1997 period to $3,004,000 during the 1998 period, due primarily to payments received under the settlement agreement reached with the Twenty-Nine Palms Band of Mission Indians.
Promotional allowances increased by approximately $980,000, or 23.2%, from $4,224,000 during the 1997 period to $5,204,000 during the 1998 period due to an increase in complimentary rooms, food and beverage resulting from the implementation of casino and slot marketing promotions.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments (including taxes and licenses) increased by approximately $1,347,000, or 2.8%, from $48,286,000 for 1997 to $49,633,000 for 1998.
Casino expense decreased by approximately $10,000, or .07%, from $14,299,000 during the 1997 period to $14,289,000 during the 1998 period due to a decrease in payroll expenses offset with an increase in complimentary rooms, food and beverages as a result of the casino and slot marketing promotions. Casino expenses as a percentage of revenues decreased from 39.2% to 36.3% due to the decrease in expenses and increase in slot revenue.
Hotel expense decreased by approximately $832,000, or 9.6%, from $8,651,000 during the 1997 period to $7,819,000 during the 1998 period, and costs as a percentage of revenues decreased from 89.1% to 86.8%, due to the decrease in hotel cash revenue as a result of aggressive casino and slot marketing promotions which resulted in higher promotional allowances.
Food and beverage costs and expenses increased by approximately $579,000, or 9.4%, from $6,177,000 during the 1997 period to $6,756,000 during the 1998 period. Food and beverage expenses as a percentage of revenue increased from 63.8% in 1997 to 69.5% in 1998 primarily as a result of an increase in costs associated with the increase in marketing promotions, which resulted in an increase in promotional allowances.
The Company believes that citywide competition for experienced employees may increase employee turnover and lead to increased payroll costs.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased by approximately $1,462,000, or 15.4%, from $9,501,000 for 1997 to $10,963,000 for 1998 primarily due to an increase in complimentary costs. As a percentage of total net revenues, selling, general and administrative expenses increased from 17.7% during the 1997 period to 19.6% during the 1998 period due to the increase in promotional allowance as a result of an increase in casino and slot promotions.
EBITDA AND MORTGAGE NOTE COVENANTS
EBITDA increased by approximately $766,000, or 13.9%, from $5,502,000 during 1997 to $6,267,000 during 1998 due to higher revenues, as discussed above.
Pursuant to covenants applicable to the New First Mortgage Notes and New Second Mortgage Notes, the Company is required to maintain a minimum consolidated fixed charges coverage ratio (the "Ratio") of 1.25 to 1.00. The Ratio is defined as the ratio of aggregate consolidated EBITDA to the aggregate consolidated fixed charges for the 12-month reference period. For the reference periods ending December 31, 1998 and March 31, 1999, the Company obtained waivers of those covenants from the holders of the First Mortgage Notes and Second Mortgage Notes due to the Ratio being lower than required as of the reference period ended December 31, 1998 and the expectation that it will be lower than required as of the reference period ended March 31, 1999. As of year-end 1998, the Ratio was 1.43 to 1.00. The waivers further provided that the noteholders will not take action prior to January 2, 2000 in respect of a Ratio lower than 1.25 to 1.00 for the reference periods ending June 30 and September 30, 1999.
OTHER EXPENSES
Depreciation and amortization increased by approximately $501,000, or 21.8%, from $2,303,000 during the 1997 period to $2,804,000 during the 1998 period due to an increase in property and equipment for the 1998 period.
Interest expense decreased by approximately $639,000, or 12.8%, from $5,011,000 during 1997 to $4,372,000 for 1998, due to the recapitalization transaction described in Note 12 to the financial statements.
During 1998, the Company incurred approximately $363,000 in merger and acquisition costs related to a pending Merger that was not completed.
EXTRAORDINARY ITEMS
The Company incurred approximately $77,000 in extraordinary costs associated with the buyout of the First Mortgage Notes.
NET INCOME (LOSS)
As a result of the factors discussed above, net loss decreased by approximately $565,000, from a loss of $1,914,000 during 1997 to a loss of $1,349,000 during 1998.
1997 COMPARED TO 1996
REVENUES Net revenues decreased by approximately $7,411,000 or 12.1%, from $61,199,000 for 1996 to $53,788,000 for 1997.
Casino revenues decreased by approximately $5,794,000, or 13.7%, from $42,300,000 during the 1996 period to $36,506,000 during the 1997 period due primarily to a $2,520,000, or 24.8% decrease in net table games revenues and a $2,789,000, or 9.2% decrease in net slot revenue. Management has eliminated certain complimentary programs which generated significant volume in 1996. During 1997, table games drop decreased $26,631,000 or 34%, and slot coin-in decreased $106,422,000, or 18.9%. The decrease in table game volume was partially offset by a 1% increase in win percent.
Hotel revenues decreased by approximately $1,497,000, or 13.4%, from $11,202,000 during the 1996 period to $9,705,000 during the 1997 period due primarily to a decrease in complimentary room revenues of $1,094,000 resulting from the elimination of certain table games marketing programs. The majority of the complimentary rooms were replaced with cash paying customers at lower room rates.
Food and beverage revenues decreased approximately $2,687,000, or 21.7%, from $12,373,000 during the 1996 period to $9,686,000 during the 1997 period due to a decrease in complimentary revenues of $1,614,000 resulting from the elimination of the table games marketing programs and the closure of two unprofitable food outlets which were replaced by profitable leased fast-food franchises.
Other revenues increased by approximately $613,000, or 40.8%, from $1,502,000 during the 1996 period to $2,115,000 during the 1997 period, due primarily to payments totaling $711,000 received under the settlement agreement reached with the Twenty-Nine Palms Band of Mission Indians.
Promotional allowances decreased by approximately $1,954,000, or 31.6%, from $6,178,000 during the 1996 period to $4,224,000 during the 1997 period due to a decrease in complimentary rooms, food and beverage resulting from the elimination of the table games marketing programs.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments (including taxes and licenses) decreased by approximately $5,956,000, or 11.0%, from $54,242,000 for 1996 to $48,286,000 for 1997.
Casino expense decreased by approximately $3,395,000, or 19.2%, from $17,694,000 during the 1996 period to $14,299,000 during the 1997 period due to a decrease in payroll and complimentary expenses. Casino expenses as a percentage of revenues decreased from 41.8% to 39.2% due to management's redirection of the Company's marketing efforts from table games to slots.
Hotel expense increased by approximately $169,000, or 2%, from $8,482,000 during the 1996 period to $8,651,000 during the 1997 period, and costs as a percentage of revenues increased from 75.7% to 89.1%, due to the reduction in cost of comps transferred to the Casino department.
Food and beverage costs and expenses decreased by approximately $911,000, or 12.9%, from $7,088,000 during the 1996 period to $6,177,000 during the 1997 period resulting from a corresponding decrease in revenues.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses decreased by approximately $830,000, or 8%, from $10,331,000 for 1996 to $9,501,000 for 1997 primarily due to reduced energy, maintenance and complimentary costs. As a percentage of total net revenues, selling, general and administrative expenses increased from 16.9% during the 1996 period to 17.7% during the 1997 period due to lower revenues over which fixed costs are incurred.
EBITDA AND MORTGAGE NOTE COVENANTS
EBITDA decreased by approximately $1,455,000, or 20.9%, from $6,957,000 during 1996 to $5,502,000 during 1997 due to lower revenues, as discussed above.
Pursuant to covenants applicable to the New First Mortgage Notes and New Second Mortgage Notes, the Company is required to maintain a minimum consolidated fixed charges coverage ratio (the "Ratio") of 1.25 to 1.00. The Ratio is defined as the ratio of aggregate consolidated EBITDA to the aggregate consolidated fixed charges for the 12-month reference period. For the reference periods ending December 31, 1997 and March 31, 1998, the Company obtained waivers of those covenants from the holders of the First Mortgage Notes and Second Mortgage Notes due to the Ratio being lower than required as of the reference period ended December 31, 1997 and the expectation that it will be lower than required as of the reference period ended March 31, 1998. As of year-end 1997, the Ratio was 1.12 to 1.00. The waivers further provided that the noteholders will not take action prior to January 2, 1999 in respect of a Ratio lower than 1.25 to 1.00 for the reference periods ending June 30 and September 30, 1998.
OTHER EXPENSES
Depreciation and amortization decreased by approximately $1,513,000, or 39.6%, from $3,816,000 during the 1996 period to $2,303,000 during the 1997 period due to revaluation of property and equipment as a result of fresh start accounting.
Interest expense increased by approximately $2,506,000, or 100%, from $2,505,000 during 1996 to $5,011,000 for 1997, due to the restatement of the Company's mortgage notes as a result of the Plan. These notes began accruing interest as of August 12, 1996, the Confirmation Date.
Reorganization items totaling $2,192,000 were incurred by the Company during 1996. These consisted primarily of professional fees incurred as a result of the reorganization under Chapter 11 of the Bankruptcy Code. During 1997, there was $292,000 incurred for additional reorganization items.
NET INCOME (LOSS)
As a result of the factors discussed above, net loss increased by approximately $358,000, from a loss of $1,556,000 during 1996 to a loss of $1,914,000 during 1997.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
The company's financial instruments include cash and long-term debt. At January 3, 1999, the carrying values of the Company's financial instruments approximated their fair values based on current market prices and rates. It is the Company's policy not to enter into derivative financial instruments. The Company does not currently have any significant foreign currency exposure since it does not transact business in foreign currencies. Due to this, the Company does not have significant overall currency exposure at January 3, 1999.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
For the years ended December 31, 1998, 1997 and 1996
Page
Independent Auditor's Report 31
Consolidated Balance Sheets as of December 31, 1998 and 1997 32
Consolidated Statements of Operations for the Twelve Months Ended December 31, 1998 (Reorganized Company); Ten Months Ended December 31, 1997(Reorganized Company), Two Months Ended February 28, 1997 and Year Ended December 31, 1996 (Predecessor Company); Combined Reorganized and Predecessor Company for the Year Ended December 31, 1997 34
Consolidated Statements of Shareholders' Equity (Deficiency) for the Years Ended December 31, 1998, 1997 and 1996 36
Consolidated Statements of Cash Flows for the Twelve Months Ended December 31, 1998 (Reorganized Company); Ten Months ended December 31,1997(Reorganized Company), Two Months Ended February 28, 1997 and Year Ended December 31, 1996 (Predecessor Company); Combined Reorganized and Predecessor Company for the Year Ended December 31, 1997 37
Notes to Consolidated Financial Statements 41
All Financial Statement Schedules are omitted because they are either not required or not applicable, or the required information is presented in the Notes to Consolidated Financial Statements.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders Elsinore Corporation:
We have audited the consolidated balance sheets of Elsinore Corporation and subsidiaries (Reorganized Company) as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for the year ended December 31,1998 and the ten month period from March 1,1997 (effective date) through December 31, 1997 and of Elsinore Corporation and subsidiaries (Predecessor Company) for the period from January 1, 1997 through February 28, 1997 and for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elsinore Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and cash flows for the year ended December 31, 1998 and the ten month period from March 1, 1997 (effective date) through December 31, 1997 and of Elsinore Corporation and subsidiaries, (Predecessor Company) for the period from January 1, 1997 through February 28, 1997 and for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Las Vegas, Nevada February 26, 1999
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Elsinore Corporation and Subsidiaries
Notes to Consolidated Financial Statements
On October 31, 1995, Elsinore Corporation, D. I. P. SOP 94-6 (the "Predecessor Company") filed a voluntary petition to reorganize under Chapter 11 of the Federal Bankruptcy Code. On August 12, 1996, the Plan of Reorganization filed by the Predecessor Company (the "Plan") was confirmed and became effective following the close of business on February 28, 1997 (the "Effective Date"). Upon the effectiveness of the Plan, Elsinore Corporation (the "Reorganized Company" or the "Company") adopted fresh start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") of the American Institute of Certified Public Accountants. Accordingly, the Company's post-reorganization balance sheet and statement of operations have not been prepared on a consistent basis with such pre-reorganization financial statements. For accounting purposes, the inception date of the Reorganized Company is deemed to be March 1, 1997. A vertical black line is shown in the financial statements to separate the Reorganized Company from the Predecessor Company since they have not been prepared on a consistent basis of accounting.
1. Chapter 11 Reorganization
On August 12, 1996 (the "Confirmation Date"), the United States Bankruptcy Court for the District of Nevada (the "Bankruptcy Court") confirmed the Plan. The Plan became effective on the Effective Date.
Pursuant to the Plan, the following occurred upon the Effective Date:
The old common stock interests in the Predecessor Company were canceled and the Reorganized Company issued 4,929,313 shares of new common stock (the "New Common Stock"). The New Common Stock was distributed to the following classes of creditors and equity holders:
12.5% First Mortgage noteholders 3,750,000 7.5% Convertible Subordinated noteholders 68,234 Internal Revenue Service 38,373 Old common stockholders 72,706 --------- Total 3,929,313
The Reorganized Company issued the remaining 1 million shares through a rights offering which raised $5 million to assist in funding the Plan. These shares were subscribed for by members of the following classes of creditors and equity holders:
12.5% First Mortgage noteholders 995,280 Old common stockholders 4,720 Total 1,000,000
The Plan also calls for the Reorganized Company to issue the following additional shares of New Common Stock to the following creditor groups as soon as disputed claims within those groups are resolved:
Unsecured Creditors of Four Queens, Inc. 50,491 Unsecured Creditors of Elsinore Corporation 20,196 Total 70,687
After giving effect to this issuance of additional shares, the Reorganized Company has 5 million issued and outstanding shares of New Common Stock.
The proceeds from the rights offering were held in a separate bank account and use was restricted until the Effective Date.
Riviera Gaming Management Corp. - Elsinore ("RGME") holds a warrant to purchase 1,125,000 shares of New Common Stock for $1 per share.
The old 1994 Mortgage Notes were amended and restated to include the original principal amount of $3,000,000, accrued interest at 20% through the Confirmation Date in the amount of $726,000, and attorney's fees and disbursements through the Effective Date of $130,000 resulting in a new principal amount of $3,856,000. On the Effective Date, each 1994 Mortgage Note holder received its prorata share of restated first mortgage notes (the "New First Mortgage Notes"). The New First Mortgage Notes bear interest at 11.5%, payable quarterly commencing on the fourth month following the Confirmation Date and are due four years from the Confirmation Date. These noteholders retained their lien interests as collateral for repayment.
The old 1993 First Mortgage Notes were amended and restated to reduce the principal amount of $57,000,000 to $30,000,000 which represented the secured portion of the claim. On the Effective Date, each 1993 First Mortgage Note holder received its prorata share of restated second mortgage notes (the "New Second Mortgage Notes"). The New Second Mortgage Notes bear interest at 13.5%, payable semi-annually and are due five years from the Confirmation Date. The unsecured portion of their claim, approximately $4,000,000 (representing accrued interest through the date of filing the Chapter 11 petition at 12.5%), was exchanged for shares of New Common Stock as described above.
The Convertible Notes with the principal amount of $1,425,000 were exchanged for 63,234 shares of New Common Stock on a prorata basis.
The general unsecured creditors with claims in the amount of approximately $3,510,000 received a prorata share of $1,400,000 and are entitled to 70,687 shares of New Common Stock. The stock distribution took place once certain litigation has been settled which will determine the number of shares to which each individual unsecured creditor is entitled.
The Internal Revenue Service ("IRS") has agreed to a note payable in the amount of $629,000 in settlement of an unsecured claim to be fixed in the amount of $1,893,000 which was calculated based on the percentage of the allowed claim compared to the total general unsecured claims. The note is non-interest bearing and payable in semi-annual payments beginning August 1997. Additionally, the IRS received a note payable in the amount of $1,087,000 and 38,373 shares of New Common Stock in settlement of its secured claim. The note will accrue interest at 8% per annum and is due four years from the Effective Date. Finally, the IRS had an unsecured priority claim in the amount of $5,000 which was paid.
The Company's Board of Directors was reconstituted to include five members, of which four were designated by the Bondholders Committee and one was appointed by the Equity Committee in the bankruptcy proceedings.
The effects of the Plan and fresh start reporting on the balance sheet at February 28, 1997 are as follows:
(a) To record the discharge of prepetition obligations pursuant to the Plan of Reorganization. (b) To record the issuance of 3,929,313 shares of New Common Stock. (c) To record adjustments to reflect assets and liabilities at fair market values and to record reorganization value in excess of amounts allocable to identifiable assets.
3. Summary of Significant Accounting Policies
(a) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight line basis over 15 years. Accumulated amortization at December 31, 1998 is approximately $37,000.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore Corporation and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
(c) Accounting for Casino Revenue and Promotional Allowances
In accordance with industry practice, the Company recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of complimentary food, beverages and hotel services furnished to customers is included in the respective revenue classifications and then deducted as promotional allowances. The estimated costs of providing such promotional allowances are included in casino costs and expenses and consist of the following:
Years Ended December 31, 1998 1997 1996 (Dollars in thousands)
Hotel $1,257 $703 $1,215 Food & beverage 2,070 2,219 3,908 ------ ------ ------ Total $3,327 $2,922 $5,123 ====== ====== ======
(d) Cash Equivalents
Cash equivalents include highly liquid investments purchased with an original maturity date of 90 days or less.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Useful lives range from 5 to 40 years. Equipment held under capital leases is recorded at the net present value of minimum lease payments at the inception of the lease and amortized over the shorter of the terms of the leases or estimated useful lives of the related assets.
(g) Investment in Fremont Street Experience
The Company and seven other downtown Las Vegas property owners, who together operate ten casinos, have formed the Fremont Street Experience LLC ("FSELLC"), a limited liability company of which the Company is a one-sixth owner, to develop the Fremont Street Experience. The Company's allocated share of the operating costs of the Fremont Street Experience ($600,000 in 1998, and 1997 and $1,000,000 in 1996) are expensed as incurred.
(h) Income Taxes
Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(i) Loss Per Share
Basic and diluted loss per share is computed by dividing net loss applicable to common shares by the number of weighted average common shares outstanding during the year. Common stock equivalents were anti-dilutive, therefore basic and diluted loss per share are equal.
(j) Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and its related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide proforma net income and proforma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. The Company has no stock-based plans outstanding at December 31, 1998.
(k) Long-lived Assets
Long-Lived Assets used in operations are evaluated each reporting period for impairment by comparing the undiscounted cash flows estimated to be generated by those assets' to the asset carrying amount. There was no write-down of assets for the years ended December 31, 1998, 1997, and 1996, other than in connection with the application of fresh start accounting.
(l) Reclassification
Certain prior period reclassifications have been made in the Predecessor Company's financial statements to conform to the Reorganized Company's presentation.
(m) Use of Estimates
Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
4. Reorganization Items
Reorganization expense is comprised of items incurred by the Company as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. Such items for 1998, 1997, and 1996 consisted of the following (in thousands):
1998 1997 1996 ---- ---- ----
Administrative expenses $ - $192 $ 1,431 Severance expenses - 100 761 ----- --- ----- $ - $292 $2,192 ===== === =====
5. Property and Equipment, Net
Property and equipment, net, consists of the following:
December 31, 1998 1997
(Dollars in thousands)
Land $2,800 $2,800 Buildings 27,305 27,088 Equipment 13,252 10,265 Leasehold acquisition costs - - Construction in progress 1,110 399 ------ ------- 44,467 40,552 Less accumulated depreciation and amortization 4,249 1,510 ------ ------ $40,218 $39,042 ======= =======
6. Accrued Expenses
Accrued expenses consist of the following:
December 31, 1998 1997 (Dollars in thousands)
Salaries and wages $ 164 $1,471 Payroll taxes and employee benefits 1,698 931 Gaming taxes 255 143 Slot club liability 671 616 Outstanding chip & token liability 695 515 Other 876 777 ------ --- $4,359 $4,453
7. Native American Casino Operations
Spotlight 29 Casino
The Company has received a promissory note from the Twenty-Nine Palms Band of Mission Indians in the principal amount of $9,000,000 resulting from a settlement which was approved by the Bankruptcy Court and received clearance by the Bureau of Indian Affairs. While the note has a 36-month amortization schedule, monthly payments are limited to 20% of Spotlight 29's monthly net income. In the event that net income is insufficient to fully pay the note at the end of 36 months (February 15,1999), the note will be automatically extended for up to an additional two years. If still not paid at the end of the extension period, it may be extended up to an additional two years upon the approval of the National Indian Gaming Commission. If not paid at the end of the final extension period, the note will be forgiven. Interest on the note is at an annual rate equal to the greater of 10% or the maximum rate allowed under California law, not to exceed 12%. The Company has received $1,431,000 of interest which has been recorded in interest income in the twelve months ended December 31, 1998. The receivable is fully reserved.
7 Cedars Casino
Elsinore Corporation, through its wholly-owned subsidiary, Olympia Gaming Corporation (collectively for purposes of this section of this Note, the Company"), had a Gaming Project Development and Management Agreement (the "Contract") to operate the 7 Cedars Casino (the "7 Cedars") which is located on the Olympic Peninsula in the state of Washington and is owned by the Jamestown S'Klallam Tribe (the "Tribe"). In addition, pursuant to a loan agreement, the Company loaned $9,000,000 to the Tribe for the construction of 7 Cedars.
During 1995, the contract was terminated by 7 Cedars. As a result, the Company recorded a reserve on the $9,000,000 note and wrote off unamortized casino development costs in the amount of $242,000 and all accrued interest. During 1997, the Company wrote off the note receivable and related reserve.
8. Long-Term Debt
Long-term debt consists of the following:
December 31, 1998 1997 11.5% New First Mortgage Notes ("11.5% Notes") - $ 3,856 13.5% New Second Mortgage Notes ("13.5% Notes") - 30,000 12.83% New Mortgage Notes("New Notes") ("12.83% Notes) $11,104 - Notes payable - IRS 719 1,404 Notes payable - Other 1,100 1,104 Capital leases 4,531 3,254 ------ ------ 17,454 39,618 Less current maturities (1,906) (1,477) ------- ------ $15,548 $38,141
Interests on the New Notes is payable on February 28 and August 31 of each year. Principal is due on August 20, 2001. The New Notes are redeemable by the Company at any time at 100% of par, without premium. The Company is required to make an offer to purchase all New Notes at 101% upon any "Change of Control" as defined in the indenture governing the New Notes. The New Notes are guaranteed by Elsub Management Corporation, Four Queens, Inc. and Palm Springs East Limited Partnership and are collateralized by a second deed of trust on and pledge of substantially all the assets of the Company and the guarantors.
The Note Agreement, among other things, places significant restrictions on the incurrence of additional indebtedness by the Company, the creation of additional liens on the collateral securing the New Notes, transactions with affiliates and payment of certain restricted payments (as defined). In order for the Company to incur additional indebtedness or make a restricted payment, the Company must, among other things, meet a specified consolidated fixed charges coverage ratio and have earned $1 million in EBITDA. The Company must also maintain a minimum amount of consolidated net worth (as defined). At certain times during 1998 the Company was not in compliance with these requirements, however waives were obtained from the lender. The Company was in compliance with the covenants applicable to the New Notes as of December 31, 1998. Management considers it likely that the Company will be in violation of such covenants during the year ended December 31, 1999. Accordingly, waivers of non-compliance which expire on January 2, 2000 were obtained from the holders of the 12.83% New Mortgage Notes.
The Company has various unsecured notes payable to certain vendors as a result of the bankruptcy. These notes are non-interest-bearing and are payable in either quarterly installments of $31,000 or semiannual installments of $240,000 through October 2001.
The Company has two unsecured notes payable to the IRS as a result of the bankruptcy. One note bears interest at 8% and the other is non-interest-bearing. The notes are payable in semiannual installments of $266,000 through February 2000.
Maturities of the Company's long-term debt are as follows:
Year Ending December 31, 1999 1,906 2000 1,608 2001 12,144 2002 303 2003 52 Thereafter 1,441 ------ $ 17,454
9. Leases
All non-cancelable leases have been classified as capital or operating leases. At December 31, 1998, the Company had leases for real and personal property which expire in various years through 2075. Under most leasing arrangements, the Company pays the taxes, insurance, and the operating expenses related to the leased property. Certain leases on real property provide for adjustments of rents based on the cost-of-living index. Buildings and equipment leased under capital leases, included in property and equipment, are as follows:
December 31, 1998 1997 (Dollars in thousands)
Building $1,364 $1,364 Equipment 3,735 1,477 ------ ------ 5,099 2,841 Less accumulated amortization (919) (110) ------ ------ $4,180 $2,731 ====== ======
Amortization of assets held under capital leases is included with depreciation and amortization expense in the Consolidated Statements of Operations.
The following is a schedule of future minimum lease payments for capital and operating leases (with initial or remaining terms in excess of one year) as of December 31, 1998:
Capital Operating Leases Leases (Dollars in thousands) Years Ending December 31,
1999 $ 1,344 $ 3,718 2000 1,344 3,695 2001 1,156 3,694 2002 530 3,694 2003 223 3,663 Thereafter 6,688 104,558 ----- -------- Total minimum lease payments $11,285 $123,022 Less: amount representing interest(at imputed rates ranging from 11.5% to 15.0% 6,736 Present value of net minimum capital lease payments 4,531 Less: current maturities (914) Capital lease obligations, excluding current maturities $3,617
Rent paid under operating leases during 1998 was $3,642,000
10. Income Taxes
No income tax benefit related to the 1998, 1997 and 1996 losses has been recorded due to the uncertain ability of the Company to utilize its net operating loss carryforwards.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, 1998 1997 (Dollars in thousands)
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts $ 92 $56 Accrued compensation, principally due to accrual for financial reporting purposes 502 635 Progressive slot and slot club accruals 467 414 Merger costs, principally due to amounts not currently deductible for tax purposes 57 95 Net operating loss carryforwards 9,400 1,397 General business credit carryforward, principally due to investment tax credit generated in prior years 137 - Income recognized for tax purposes on investment in partnership 1,027 1,542 Contribution deduction carryforward, principally due to amounts not deductible in prior periods 66 63 Loan receivable principal due to allowance for uncollectibility 4,508 4,508 Reorganization items, principally due to amounts not currently deductible for tax purposes 23 8 Total gross deferred tax assets 16,279 8,718 Less valuation allowance (10,892) (4,337) --------- --------- Net deferred tax assets 5,387 4,381 --------- --------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation (3,898) (4,018) Prepaid expenses, principally due to deduction for tax purposes (321) (363) Loses recognized for tax purposes on partnership investments (1,168) - -------- --------- Total gross deferred tax liabilities (5,387) (4,381) -------- ---------
Net deferred tax liability $ - $ - ======== =========
Prior to emergence from bankruptcy following the close of business on February 28, 1997, the Company had a net operating loss carryforward for federal income tax purposes of approximately $102,600,000. As a result of ownership changes in prior years, Internal Revenue Code Section 382 ("Section 382") limited the amount of loss carryforward currently available to offset federal taxable income. As a result of the bankruptcy and the resulting change in ownership, the existing net operating loss is limited under Section 382. The loss carryforwards begin to expire in the year 1999 and will completely expire by 2007.
The Company had general business tax credit carryforwards for federal income tax purposes of approximately $640,000 which are available to reduce future federal income taxes, if any, through 1999. In addition, the Company had alternative minimum tax credit carryforwards of approximately $312,000 which are available to reduce future federal income taxes, if any, over an indefinite period. Both of these amounts are limited by Section 382 and may not be available for use in future periods.
11. Benefit Plans
Four Queens, Inc. makes contributions to several multi-employer pension and welfare benefit plans covering its union employees. The plans provide defined benefits to covered employees. Amounts charged to pension cost and contributed to the plans for the years 1998, 1997 and 1996 totaled $317,000, $149,000, and $87,000, respectively. While the Company is liable for its share of unfunded vested benefits, the Company believes the amount, if any, would not be material to the consolidated financial statements.
On October 1, 1990, the Company instituted a savings plan qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended. The savings plan covers substantially all employees who are not covered by a collective bargaining agreement. Employee contributions to the savings plan are discretionary. The Company matches and contributes to each employee's account an amount equal to 25% of the employee's contributions to the savings plan up to a maximum employee contribution of 8% of each employee's gross compensation. The Company's contribution was $66,000, $120,000, and $130,488 for 1998, 1997 and 1996, respectively. There were 179, 438, and 469 participants in the savings plan as of December 31, 1998, 1997 and 1996, respectively.
12. Recapitalization
On September 29, 1998, the MWV Accounts contributed $4,641,000, net of $260,000 of expenses to the capital of Elsinore Corporation which Elsinore used, together with other funds of Elsinore, to purchase in full all of Elsinore's outstanding 11.5% First Mortgage Notes due 2000 in the original aggregate principal amount of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts, 50,000,000 shares of Series A Convertible Preferred Stock of the Company in exchange for the surrender to the Company of $18,000,000 original principal amount of certain second mortgage notes held by the MWV accounts. The 50,000,000 shares of Series A Convertible Preferred Stock have (i) the right to receive cumulative dividends at the rate of 6% per year; (ii) the right to receive the amount of $.36 per share, plus all accrued or declared but unpaid dividends on any shares then held, upon any liquidation, dissolution or winding up of the Company for an aggregate liquidation preference of $18,000,000; (iii) voting rights equal to the number of shares of the Company's Common Stock into which the shares of Preferred Stock may be converted, and (iv) the right to convert the shares of Preferred Stock into 93,000,000 shares of the Company's Common Stock. The Company has accrued $270,000 in undeclared preferred stock dividends as of December 31, 1998. Following the recapitalization, John C. "Bruce" Waterfall will beneficially own 97,646,440 shares of Common Stock, or approximately 99.7% of the outstanding Common Stock. The number of shares beneficially owned and the percentage of shares beneficially owned are determined in accordance with the rules of the Securities and Exchange Commission and (i) are based on 4,929,313 shares of Common Stock outstanding as of September 29, 1998 and (ii) assumes that the 50,000,000 shares of Series A Convertible Preferred Stock are converted into 93,000,000 shares of the Company's Common Stock.
In addition, Elsinore issued to the MWV Accounts New Notes in the aggregate principal amount of $11,104,000 in exchange for all remaining outstanding second mortgage notes held by the MWV Accounts in the same aggregate principal amount, pursuant to an amended indenture governing the New Notes that reduced the interest rate payable thereon from 13.5% payable under the old second mortgage notes due to the 12.83% payable under the New Notes. Following the recapitalization described in this section, Elsinore has notes outstanding in the aggregate principal amount of $11,104,000.
13. Commitments and Contingencies
RGME manages the Four Queens Hotel & Casino in accordance with the management agreement effective April 1, 1997. RGME receives a minimum annual fee of $1 million in equal monthly installments plus 25% of the excess of earnings before interest, taxes, depreciation and amortization ("EBITDA") over $8 million. RGME also received warrants to purchase 1,125,000 shares of common stock at $1 per share. The agreement is for approximately 40 months and can be extended for an additional 24 months at RGME's option if certain performance standards are met.
The Company is liable for one-sixth of the operating expenses incurred by Fremont Street Experience, LLC.
The Company is a defendant in two consolidated lawsuits pending in the federal court for the District of New Jersey, alleging violation by the Company and certain of its subsidiaries and affiliates of the Worker Adjustment and Retraining Notification Act and breach of contract.
The claims listed above, if allowed, would be included in the Class 10 Unsecured Creditor's pool of the bankruptcy proceedings, which is capped at $1.4 million and, therefore, will not have a material financial effect on the Company.
The Company is a party to other claims and lawsuits. Management believes that such matters are either covered by insurance or, if not insured, will not have a material adverse effect on the Company's financial statements taken as a whole.
14. Proposed Merger
In the first half of 1997, Elsinore and Mr. Allen E. Paulson ("Paulson") commenced discussions which culminated in an Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 15, 1997, between Elsinore and entities controlled by Paulson, namely R&E Gaming Corp. ("R&E"), Elsinore Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") the outstanding Common Stock for $3.16 per share in cash plus an amount of additional consideration in cash equal to the daily portion of the accrual on $3.16 at 9.43% compounded annually, from June 1, 1997 to the date immediately preceding the date such acquisition is consummated. The Merger Agreement provides for EAS to merge into Elsinore, and Elsinore to become a wholly owned subsidiary of R&E.
Contemporaneously with the Merger Agreement, R&E executed an Option and Voting Agreement (the "Option Agreement") with MWV, on behalf of the MWV Accounts which owned 94.3% of the outstanding Common Stock prior to the Recapitalization. Under certain conditions and circumstances, the Option Agreement provides for, among other things, (i) the grant by the MWV Accounts to R&E of an option to purchase all of their Common Stock; (ii) an obligation by R&E to purchase all of the MWV Accounts' Common Stock, and (iii) the MWV Accounts to vote their Common Stock in favor of the Merger Agreement. Elsinore's shareholders approved the Merger Agreement at a special meeting of shareholders held on February 4, 1998 (the "Special Meeting").
Paulson also entered into discussions with Riviera to acquire a controlling interest in that company as well. Riviera owns and operates the Riviera Hotel and Casino in Las Vegas and is the parent corporation of RGME. On September 16, 1997, R&E and Riviera Acquisition Sub, Inc. ("RAS") (another entity controlled by Paulson) entered into an Agreement and Plan of Merger (the "Riviera Merger Agreement") with Riviera, which provides for the merger of RAS into Riviera (the "Riviera Merger"), and for Riviera to become a wholly owned subsidiary of R&E. R&E also entered into an Option and Voting Agreement with certain Riviera shareholders, including MWV acting on behalf of the MWV Accounts, containing terms similar to those described above with respect to the Option Agreement.
The Merger Agreement contains conditions precedent to consummation of the Merger, including (i) the Option Agreement being in full force and effect and MWV having complied in all respects with the terms thereof, (ii) all necessary approvals from gaming authorities and (iii) consummation of the Riviera Merger.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it was R&E's position that the Merger Agreement was void and unenforceable against R&E and EAS, or alternatively, R&E and EAS intended to terminate the Merger Agreement. R&E alleged, among other things, violations by Elsinore of the Merger Agreement, violations of law and misrepresentations by MWV in connection with an Option and Voting Agreement, and the non-satisfaction of certain conditions precedent to completing the merger. The Company denied the allegations and asked that R&E complete the merger.
Thereafter, in April 1998, Paulson, R&E, EAS and certain other entities filed a lawsuit against eleven defendants, including Elsinore and MWV (Paulson, et al. v Jeffries & Company et al.). Plaintiffs' allegations include breach of the Merger Agreement by Elsinore, as well as fraud, various violations of the federal securities laws and violation of the Nevada anti-racketeering statute in connection with the proposed merger. Plaintiffs are seeking (i) unspecified actual damages in excess of $20 million, (ii) $20 million in exemplary damages, (iii) treble damages, and (iv) rescission of the Merger Agreement and other relief. The lawsuit was filed in the United States District Court for the Central District of California.
On July 13, 1998, Elsinore filed a motion to dismiss certain of the claims alleged in the lawsuit, as amended, which was heard by the Court on December 7, 1998. On December 17, 1998 the Court entered an order granting the motion, with prejudice, as to the claims alleging violation of the Nevada anti-racketeering statute, granting the motion with leave to amend as to certain other allegations, and denying the remainder of the motion. Thereafter, on January 13, 1999, plaintiffs served a Second Amended Complaint.
Shortly thereafter, plaintiffs announced their intention to file a motion for reconsideration of the Court's December 17, 1998 order insofar as it had dismissed the Nevada anti-racketeering claims, on the ground that a December 30, 1998 decision of the Nevada Supreme Court in the action captioned Siragusa v. Brown constituted a change and/or material difference in the law relied upon by the Court. Based on the Siragusa decision, the Company stipulated to an order allowing plaintiffs to serve and file a Third Amended Complaint reinserting claims under the Nevada anti-racketeering statute which plaintiffs have done.
Discovery is only now beginning, and the Company is currently unable to form an opinion as to the amount of its exposure, if any. Although the Company intends to defend the lawsuit vigorously, there can be no assurance that it will be successful in such defense or that future operating results will not be materially adversely affected by the final resolution of the lawsuit.
15. Taxes and Licenses, Other Than Income Taxes
Taxes and licenses, other than income taxes, principally include payroll taxes, gaming licenses and gross revenue taxes, and are summarized as follows:
Operating Departments (Dollars in thousands)
Food and Casino Hotel Beverage Other Total
1998 $3,955 $ 411 $ 438 $1,107 $5,911 1997 $3,513 $ 477 $ 413 $1,074 $5,477 1996 $4,496 $ 468 $ 497 $1,132 $6,593
16. Supplemental Financial Information
A summary of additions and deductions to the allowance for doubtful accounts receivable for the years ended December 31, 1998, 1997 and 1996 follows:
Balance at Balance Beginning of At End of Year Additions Deductions Year Years Ended 1998 $165 $132 $ 78 $219 1997 $347 $ 64 $246 $165 1996 $201 $321 $175 $347
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers.
The following sets forth the names, ages and positions of each person who is a director or executive officer of the Company. Each person listed below assumed his position with the Company on the Plan Effective Date and was re-elected at the Company's 1998 Annual Shareholders' Meeting held on September 22, 1998 to serve until the next Annual Shareholders' Meeting. In 1998, the Company did not have any executive officer who was not also a Director of the Company.
Name Age Position
John C. "Bruce" Waterfall 61 Chairman of the Board
Jeffrey T. Leeds 43 President, Chief Executive Officer and Director
S. Barton Jacka 62 Treasurer, Secretary and Director
John C. "Bruce" Waterfall. Mr. Waterfall has been a professional money manager and analyst for the past 29 years with MWV, of which he is President and a co-founder. Certain investment accounts managed by MWV own 94.3% of the outstanding Common Stock, and Mr. Waterfall exercises sole voting and investment authority over that Common Stock. Mr. Waterfall also serves as a director of Darling International, Inc., a publicly reporting company under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Jeffrey T. Leeds. Since 1993, Mr. Leeds has been President of Leeds Group, Inc., a private investment banking firm which he co-founded. Mr. Leeds is also a Principal of Advance Capital Management, LLC, a private equity firm which he formed in 1995. Mr. Leeds also serves as a director of Alarmguard Holdings, Inc., a publicly reporting company under the Exchange Act.
S. Barton Jacka. Mr. Jacka is a gaming consultant and serves as chairman of the gaming compliance committees of two other publicly held companies licensed by the Nevada Gaming Authorities. From 1993 to 1996, Mr. Jacka was with Bally Gaming, Inc. and Bally Gaming International, Inc., first as Director of Government Affairs and Gaming Compliance and later as Vice President. Mr. Jacka retired from the position of Chairman of the Nevada State Gaming Control Board, a position he held from 1985 to 1987, prior to entering the private sector.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely upon a review of Forms 3 and 4 furnished to the Company pursuant to SEC Rule 16a-3(e) during fiscal year 1998, Form 3 was filed later than the due date by the Endowment Prime L.L.C., relating to its acquisition of shares of Series A Convertible Preferred Stock on September 29, 1998. Form 4 was filed later than the due date by each of Endowment Restart L.L.C. (f/k/a Common Fund for Non-Profit Organizations), Morgens Waterfall Income Partners, MWV Group Trust, Restart Partners, Restart Partners II, L.P., Restart Partners III, L.P., Restart Partners IV, L.P., Restart Partners V, L.P., Betje Partners, Phoenix Partners, L.P., Prime Group, L.P., Prime, Inc., Prime Group II, L.P., Prime Group III, L.P., Prime Group IV, L.P., Prime Group V, L.P., MW Management, L.L.C., MW Capital L.L.C., MWV, and Mr. Waterfall, each of which Form 4 relates to the acquisition by such reporting person of the Company's Series A Convertible Preferred Stock on September 29, 1998.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The following table provides certain summary information concerning compensation paid by the Company to each person who served as Chief Executive Officer during any part of the year ended December 31, 1998. No person who held any other executive officer position during any part of 1998 received a total annual salary and bonus in excess of $100,000 in such year.
Mr. Leeds assumed his positions on the Plan Effective Date.
Stock Options and Similar Rights.
The Company granted no stock options or stock appreciation rights (collectively, "Stock Rights") during 1998 nor were any Stock Rights exercised in 1998. As of the Plan Effective Date, all previously outstanding Stock Rights were canceled.
Compensation Committee Interlocks.
The Company did not have a compensation committee in 1998. The full Board of Directors has made all decisions regarding executive officer compensation. Messrs. Leeds and Jacka receive compensation as executive officers and are members of the Board of Directors.
On September 29, 1998, MWV Accounts contributed $14,641,000, net of $260,000 of expenses, to the capital of Elsinore, which Elsinore used, together with other funds of Elsinore, to purchase in full all of Elsinore's outstanding 11.5% First Mortgage Notes due 2000 in the original principal amount of $3,856,000 and $896,000 of original principal amount 13.5% Second Mortgage Notes of Elsinore due 2001.
Also on September 29, 1998, the Company issued to the MWV Accounts 50,000,000 shares of Series A Convertible Preferred Stock of the Company in exchange for the surrender to the Company of $18,000,000 original principal amount of certain second mortgage notes held by the MWV Accounts. The 50,000,000 shares of Series A Convertible Preferred Stock have (i) the right to receive cumulative dividends at the rate of 6% per year; (ii) the right to receive the amount of $.36 per share, plus all accrued or declared but unpaid dividends on any shares then held, upon any liquidation, dissolution or winding up of the Company for an aggregate liquidation preference of $18,000,000; (iii) voting rights equal to the number of shares of the Company's Common Stock into which the shares of Preferred Stock may be converted, and (iv) the right to convert the shares of Preferred Stock into 93,000,000 shares of the Company's Common Stock.
In addition, Elsinore issued to the MWV Accounts new second mortgage notes ("New Mortgage Notes") in the aggregate principal amount of $11,104,000 in exchange for all remaining outstanding second mortgage notes held by the MWV Accounts in the same aggregate principal amount, pursuant to an amended indenture governing the New Mortgage Notes that reduced the interest rate payable thereon from the 13.5% payable under the old second mortgage notes to the 12.83% payable under the New Mortgage Notes. Chairman of the Board Waterfall is President and a principal shareholder of MWV, which manages the MWV Accounts.
Compensation of Directors.
Mr. Waterfall receives no compensation from the Company for serving as Chairman of the Board and attending Board of Directors meetings. Each of the other directors receives an annual fee of $25,000 in consideration of his attendance at each quarterly Board of Directors meeting plus $1,000 for each additional meeting (other than meetings by telephone conference) at which his attendance is required. All directors receive reimbursement for reasonable expenses incurred in attending each meeting of the Board of Directors. Jeffrey T. Leeds and S. Barton Jacka also receive $10,000 per year in consideration of serving as executive officers of the Company.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners.
As of March 15, 1999, the Company had two classes of equity or voting securities, Common Stock and Series A Convertible Preferred Stock. Series A Convertible Preferred Stock votes on an as-converted basis. As of March 15, 1999, the beneficial ownership of Common Stock by each person who is known by Elsinore to be the beneficial owner of more than 5% of the outstanding Common Stock and Series A Convertible Preferred Stock, is as follows (1).
(1) In addition to the persons reported in the table, RGME holds warrants to purchase 1,125,000 shares of Common Stock. (See Item 1. BUSINESS - The Four Queens Casino.) If RGME were to exercise the warrants, it would become the owner of approximately 18.5% of the outstanding Common Stock. The relevant Exchange Act rules generally provide that a person is deemed the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days through the exercise of any option, warrant or right. Although the warrants, by their terms, are exercisable at any time, the Company understands that as a condition precedent to such exercise, RGME would have to apply for and obtain the approval of the Nevada Gaming Authorities. The Company is not aware of any such application having been filed by RGME. Furthermore, the Company's understanding is that the timing of the Nevada Gaming Authorities' decisions on any such applications to exercise the warrants would be subject to substantial uncertainty. Accordingly, RGME is not reported in the table as beneficially owning more than 5% of the Common Stock.
(2) The number of shares beneficially owned and the percentage of shares beneficially owned are determined in accordance with the rules of the Securities and Exchange Commission and (i) are based on 4,929,313 shares of Common Stock outstanding as of September 29, 1998 and (ii) assumes that the 50,000,000 shares of Series A Convertible Preferred Stock held by the MWV Accounts are converted into 93,000,000 shares of the Company's Common Stock based on their common voting and investment direction. (see Item 1. Business - Recapitalization).
(3) The address for Mr. Waterfall and each of the MWV Accounts is 10 East 50th Street, New York, New York 10022.
(4) Pursuant to agreements and undertakings with the Board and the Commission which were required in order for the Plan to become effective, Mr. Waterfall is the only individual who exercises voting and investment power (including dispositive power) with respect to Common Stock owned by the MWV Accounts. MWV and its affiliates other than Mr. Waterfall are either investment advisors to, or trustees or general partners of, the MWV Accounts. Accordingly, for purposes of the relevant Exchange Act rules, they could also be deemed the beneficial owners of Common Stock held by the MWV Accounts. The possible attribution of such beneficial ownership of Common Stock, expressed in number of shares and percent of the class, to MWV and those affiliates is as follows: MWV - - 19,328,756 (19.7%); MW Capital, L.L.C. - 2,734,380 (2.8%); Prime Group, L.P. - 10,786,574 (11.0%); Prime Group II, L.P. -- 20,660,561 (21.1%); Prime Group III, L.P. - 16,892,860 (17.2%); Prime Group IV, L.P. - 10,642,388 (10.9%); Prime Group V, L.P. - 2,831,696 (2.9%); and MW Management, L.L.C. - 12,890,198 (13.2%). In view of Mr. Waterfall's possession of sole voting and investment power over the Common Stock on behalf of the MWV Accounts, these entities disclaim beneficial ownership of Common Stock.
(5) Fractional shares are not counted except in the total of number of shares owned.
Security Ownership of Management.
As of March 5, 1999, the beneficial ownership of Common Stock by each of Elsinore's directors and by its directors and executive officers as a group, as such ownership is known by Elsinore, is as follows:
(1) See note (4) to the table on page 59.
(2) See notes (2) and (5) to the table on page 59 discussing beneficial owners of more than 5% of the outstanding Common Stock for information regarding Mr. Waterfall's beneficial ownership.
Changes in Control.
A change in control of the Company will result if the Merger is consummated or if the Common Stock held by the MWV Accounts is acquired by R&E pursuant to the Option Agreement. Upon the occurrence of either event, the Company would be controlled by R&E which, in turn, is controlled by Allen E. Paulson. (See Item 1. BUSINESS - Agreement and Plan of Merger).
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Chairman of the Board Waterfall is President and a principal shareholder of MWV, which manages the MWV Accounts. Pursuant to the Recapitalization, the MWV Accounts have beneficially owned 99.7% of the Common Stock and $11,104,000 principal amount of the New Mortgage Notes. (See Item 11. Executive Compensation - Compensation Committee Interlocks.)
As discussed in Item 1. BUSINESS - The Four Queens Casino, RGME, a subsidiary of Riviera, manages the Four Queens Casino under the Management Agreement. In connection with RGME's management, RGME's principal officer also serves, at the request of Elsinore, as the sole director and officer of Four Queens on a non-salaried basis and is excluded from performing policy-making functions for Elsinore. Also as discussed in Item 1. BUSINESS - Agreement and Plan of Merger, Riviera is also a party to an agreement with R&E providing for the Riviera Merger. Effectiveness of the Riviera Merger is a condition precedent to consummation of the Merger. Upon consummation of the Merger, RGME would be entitled to certain payments under the Management Agreement as discussed in Item 1. BUSINESS - The Four Queens Casino.
The Management Agreement was negotiated and went into effect before R&E or any of its affiliates entered into negotiations with Riviera or Elsinore concerning the Merger, the Riviera Merger, the Option Agreement or the Riviera Option Agreement.
Under the Merger Agreement Elsinore has agreed to obtain a tail insurance policy covering Elsinore's directors and officers for acts or failures to act prior to the effectiveness of the Merger, and having substantially the same coverage and deductibles as Elsinore's directors' and officers' liability insurance policy as in effect on July 1, 1997. The Merger Agreement provides that the cost to Elsinore (net of any amounts paid by third parties) of the tail insurance policy shall not exceed $150,000.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
*Previously filed with the Securities and Exchange Commission as an exhibit to the document shown below under the Exhibit Number indicated in brackets and incorporated herein by reference and made a part hereof: (1) Annual Report on Form 10-K for the year ended December 31, 1992 (Securities and Exchange Commission File Number 1-7831) (2) Current Report on Form 8-K dated October 19, 1993 (3) Annual Report on Form 10-K for the year ended December 31, 1993 (4) Current Report on Form 8-K dated November 7, 1995 (5) Current Report on Form 8-K dated August 8, 1996 (6) Current Report on Form 8-K dated March 14, 1997 (7) Quarterly Report on Form 10-Q for the three months ended March 31, 1997 (8) Quarterly Report on Form 10-Q for the six months ended June 30, 1997 (9) Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 (10) Current Report on Form 8-K dated March 24, 1998 (11) Quarterly Report on Form 10-Q for the six months ended June 30, 1997 (12) Quarterly Report on Form 10-Q for the nine months ended September 30, 1997 (13) Current Report on Form 8-K dated October 13, 1998, as set forth in item 14 (c)(i) below. (14) Current Report on Form 8-K dated October 13, 1998, as set forth in item 14 (c) (ii) below. (15) Annual Report on Form 10-K for year end December 31, 1997. (a) Exhibits required by Item 601 of Regulation S-K. (b) Exhibits, other than those incorporated by reference as listed in Item 14(a)(3), appear after the signature page of this report. (c) Current Report on Form 8-K
(i) Current report on Form 8-K filed on October 13, 1998, relating to a contribution made by the MWV Accounts to the capital of the Company and repayment by the Company's of its First Mortgage Notes and Second Mortgage Notes from proceeds therefrom.
(ii) Current Report on Form 8-K filed on October 13, 1998, relating to the issuance of the Series A Convertible Preferred Stock and New Mortgage Notes by the Company to the MWV Accounts.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ELSINORE CORPORATION (Registrant)
By: /s/ Jeffrey T. Leeds JEFFREY T. LEEDS, President and Chief Executive Officer
By: /s/ S. Barton Jacka S. BARTON JACKA, Secretary, Treasurer and Principal Accounting Officer
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities as indicated on March 31, 1999.
/s/ John C. "Bruce Waterfall /s/ Jeffrey T. Leeds John C. "Bruce" Waterfall Jeffrey T. Leeds Chairman of the Board of Directors President and Director (Chief Executive Officer)
/s/ S. Barton Jacka S. Barton Jacka Secretary, Treasurer, Principal Accounting Officer and Director