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Elsinore Corp – ‘10-K’ for 12/31/96

As of:  Friday, 2/21/97   ·   For:  12/31/96   ·   Accession #:  311049-97-2   ·   File #:  1-07831

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  As Of                Filer                Filing    For·On·As Docs:Size

 2/21/97  Elsinore Corp                     10-K       12/31/96    4:300K

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         96±   407K 
 2: EX-10       Material Contract                                     21±    83K 
 3: EX-23       Consent of Experts or Counsel                          1      7K 
 4: EX-27       Financial Data Schedule (Pre-XBRL)                     1      8K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Business
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
3Chapter 11 Proceedings
"Spotlight 29 Casino
"7 Cedars Casino
"Plan of Reorganization
"The Four Queens Hotel and Casino
"Native American Gaming Projects
"Regulations
"Nevada Gaming Operations
"Native American Gaming Operations
"Item 2. Properties
"Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
"Item 6. Selected Financial Data
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of Registrant
"Item 11 . Executive Compensation
"Compensation Committee
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
"Elsinore
"Item 14. Exhibits, Financial Statement Schedules and Reports On
5First Mortgage Notes
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-7831 ELSINORE CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0117544 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 202 FREMONT STREET, LAS VEGAS, NEVADA 89101 (Address of principal executive offices) (Zip Code) (702) 385-4011 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Stock Exchange on Which Registered COMMON STOCK AMERICAN STOCK EXCHANGE Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] On February 10, 1997 there were 15,891,793 shares of common stock issued and outstanding. Total number of sequentially numbered pages _______ Exhibit Index begins at sequential page number ________
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TABLE OF CONTENTS PART 1 Page Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security-Holders Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES
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PART I ITEM 1. BUSINESS SUMMARY AND RECENT DEVELOPMENTS Elsinore Corporation ("Elsinore" or the "Company") owns, operates and develops casinos and casino/hotels in the United States. The Company owns and operates its principal property, the Four Queens Hotel and Casino (the "Four Queens") in downtown Las Vegas, Nevada. The Company has also assisted in the development and management of two casinos on Native American land; the Spotlight 29 Casino, located near Palm Springs, California, which opened on January 14, 1995, and the 7 Cedars Casino, located on the Olympic Peninsula in Washington State, which opened February 3, 1995. However, the Company's primary business now is concentrated on the operation of the Four Queens. To assist in management's expansion strategy which began in 1993, the Company borrowed $60 million through the issuance of its 12.5% First Mortgage Notes due 2000 ("1993 First Mortgage Notes") in October 1993 and an additional $3 million through the issuance of its 20% Mortgage Notes due 1996 ("1994 Mortgage Notes") in October 1994. In January 1995, the Company completed an underwritten public offering of 2.5 million shares of its common stock (the "Equity Offering"). At that time, the Company believed the net proceeds of the Equity Offering (approximately $4 million before deducting the Company's offering expenses), together with cash on hand and cash generated from operations, would be sufficient to satisfy the Company's working capital requirements through the first quarter of 1995. However, principally as a result of the unanticipated poor initial performance of the Spotlight 29 Casino following its opening, the Company was required to obtain additional financing through the sale of $1,706,250 aggregate principal amount of its 7.5% Convertible Subordinated Notes due December 31, 1995 (the "Convertible Notes"). The private placement of Convertible Notes was completed on March 31, 1996. Chapter 11 Proceedings. On October 31, 1995, Elsinore and certain of its subsidiaries filed a voluntary petition in the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada) (the "Bankruptcy Court") to reorganize under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). The file number in the case is 95-24685 RCJ with Judge Robert C. Jones presiding. On November 10, 1995, Olympia Gaming Corporation, a wholly-owned subsidiary of the Company, also filed a voluntary petition in the same Court. The Company is currently operating as a debtor-in-possession under the supervision of the Bankruptcy Court. As a debtor in possession, the Company may operate its business but may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court. On February 28, 1996, the Company filed a plan of reorganization and accompanying disclosure statement. On July 16, 1996 and July 18, 1996, the Bankruptcy Court conducted hearings regarding the confirmation of the plan submitted by the Company. At that time, due to objections by certain creditors and equity holders, the Bankruptcy Court indicated that certain modifications to the plan would be required for confirmation, including making no distributions to the Company's equity holders. However, prior to entry of an order confirming the modified plan, the objections of creditors were withdrawn in return for a reallocation of the equity interests in the reorganized Elsinore. See "Item 1. Business--Chapter 11 Proceedings." On August 8, 1996, the Bankruptcy Court entered an order confirming the plan of reorganization submitted by the Company as modified by the terms of that order (the "Plan") consistent with the reallocation of equity interests. This order included an accelerated confirmation date for the Plan of August 12, 1996. Final effectiveness of the Plan is dependent upon a number of conditions. The Company believes that the only condition remaining to be satisfied is the receipt of approval from the Nevada Gaming Authorities with respect to the post-effectiveness significant Board Members. See "Item 1. Business--Chapter 11 Proceedings" and "Item 1. Business--Regulations -- Nevada Gaming Operations." The Company expects the Plan to be fully effective by March 1997. Under the Plan, 80% of the equity interest in the reorganized Elsinore will be distributed in specified percentages to certain classes of the Company's creditors and equity holders. The remaining 20% of the equity interests in the reorganized Elsinore will be distributed pursuant to a rights offering which will raise $5 million in additional capital for the reorganized Elsinore. The unofficial committee of the 1993 First Mortgage Note Holders (The "Bondholder Committee") has guaranteed a 100% subscription for the $5 million rights offering. On or about October 10, 1996, the rights offering commenced. As of December 31, 1996, the Company had received $4,287,000 (including interest of $19,000 on subscription amounts paid into the account by members of the Bondholders committee) in rights offering proceeds of which over 99% was paid by the Bondholders Committee members. As of February 10, 1997 , the Company had received an additional $130,000 from the Bondholders Committee. The remaining amount of approximately $583,000 must be paid by the Bondholders Committee prior to the Plan's effective date. All rights proceeds are being held in a restricted account until the Plan's effectiveness. Management Change. The Company's confirmed Plan calls for a change in the management of the reorganized Elsinore. Effective August 12, 1996, the Company entered an Interim Management Agreement with Riviera Gaming Corp. - Elsinore, Inc. to manage the business operations of the Company subject to the direction of the boards of directors of Elsinore and its subsidiaries. Also, on August 12, 1996, pursuant to a Stipulation between the Company and the unofficial committee of the First Mortgage noteholders (the "Bondholder Committee"), senior management (Thomas E. Martin, President and Chief Executive Officer and Frank L. Burrell, Jr., Chairman of the Board) ceased to be compensated employees of the Company, although they will continue to serve both as directors and authorized officers until replaced. When the Plan is fully effective, the existing board of the Company will be reconstituted with new directors, four of whom will be chosen by the Bondholders Committee, and one will be chosen by the Equity Committee appointed in the bankruptcy case (with input from other creditor constituencies). As of February 17, 1997, the new directors had been nominated and the Plan's effectiveness is awaiting final Nevada Gaming Authorities approval of those nominees. The Plan contemplated that management of the Company from the date of the Plan's confirmation until the Plan's Effective Date would be undertaken by a nominee of the Bondholders Committee. The Company and Riviera Gaming Management Corp - Elsinore ("Riviera"), the nominee of the Bondholders Committee, have entered an Interim Management Agreement (the "Interim Agreement") pursuant to which Riviera has assumed exclusive managerial responsibility over the Four Queens Hotel and Casino, and ancillary facilities (together the "Four Queens Hotel"), subject to supervision of the Boards of Directors of Elsinore and FQI. Under the Interim Agreement, Riviera is responsible for providing training to Four Queens Hotel personnel, marketing and sales at the Four Queens Hotel, internal accounting and other managerial tasks. In return, the Riviera receives a management fee of $83,333 per month. All personnel employed at the Four Queens Hotel, other than those hired by the Riviera for purposes of fulfilling its responsibilities, remain the employees of the Company. In addition, during the Interim Agreement, the Company retains full responsibility for payment of all expenses related to operation of the Four Queens Hotel. Riviera has no obligation to pay any expenses or to make any capital expenditure with respect to the Four Queens Hotel which are not funded by the Company. The Interim Agreement by its terms will terminate upon the commencement of the first calendar quarter following the Plan's Effective Date. The bankruptcy process has provided an opportunity for Elsinore to respond to changes in the industry and redirect its strategy to become more competitive. In addition, the bankruptcy process has afforded the Company an opportunity to eliminate or renegotiate certain pre-petition debt to a more manageable level resulting in greater financial flexibility. The Four Queens; The Fremont Street Experience. Based principally on results at the Four Queens, the Company's earnings before interest, income taxes, depreciation and amortization, (and before the provision for losses recognized on loans receivable from Native American Tribes, the write-off of casino development costs and expenses recognized as a result of the reorganization proceedings in 1995) increased in 1996 to $7.0 million, from $1.4 million in 1995. The Company believes this improvement was at least partially attributable to increased visitors to downtown because of (1) the Fremont Street Experience attraction and (2) the related improvement of vehicular traffic flow to the downtown Fremont Street Experience area following completion of its construction in November, 1995. However, competition continues to intensify in the Las Vegas market as new resorts are developed and existing resorts expand. The Company believes that customers of the downtown casino/hotels who would normally spend substantially all of their gaming and entertainment budget at downtown casinos are being drawn to and spent a portion of their budgets at these new Strip properties, resulting in a loss of revenue to downtown casinos. The Fremont Street Experience is a cooperative undertaking among the downtown casinos to create a feature attraction along Fremont Street in downtown Las Vegas. The Fremont Street Experience has transformed four blocks of Fremont Street into a covered pedestrian mall, connecting the Four Queens and nine other major entertainment venues that together offer 17,000 slot machines, over 500 blackjack and other table games, 41 restaurants and 8,000 hotel rooms. The Fremont Street Experience features a 10-story celestial vault, sound effects and a high tech light show which add to the neon signs and marquees for which the downtown area is already famous. As part of the Fremont Street Experience, a new 1,500-space parking garage has been constructed. The Company believes that the Fremont Street Experience will assist the downtown area in its effort to draw increased patronage to the downtown market. Based on the observation of downtown gaming revenue patterns in 1989-1991, the period during which two other themed mega-resort casinos, the Mirage and Excalibur, opened on the Las Vegas Strip, and on the opening of the Fremont Street Experience in December 1995, the Company believes that gaming revenues at the Four Queens and at downtown casinos generally will increase, driven principally by a greater number of gaming and hotel patrons in the downtown market. However, there is no assurance that patronage or gaming revenues at downtown casinos or the Four Queens will increase. Spotlight 29 Casino. Since March 1995, Elsinore, its wholly owned subsidiary, Elsub Management Corporation ("Elsub") and Palm Springs East Limited Partnership ("Palm Springs East"), of which Elsub is the general partner, and the Twenty-Nine Palms Band of Mission Indians (the "Band") have been involved in a dispute regarding, among other things, the terms of a management contract (the "Spotlight 29 Contract") under which Palm Springs East had the exclusive right to manage and operate the Spotlight 29 Casino, owned by the Band, located near Palm Springs, California. As a result of this dispute, on April 17, 1995, the Company was ousted as manager of the Spotlight 29 Casino. The Company then declared a breach of the Spotlight 29 Contract and a related loan agreement under which Palm Springs East had lent approximately $12.5 million to the Band for construction of the Spotlight 29 Casino and for working capital contributions. In light of the Company's disassociation with the operations of the Spotlight 29 Casino, the Company's management determined to write-off, in the quarter ended March 31, 1995, the unamortized balance of casino development costs incurred on the project of $1,037,000 and ceased accrual of interest on the project note and loans evidencing working capital advances. On May 16, 1995, the Band delivered to the Company "Notice to Terminate Management Agreement" which asserted material breaches of the Spotlight 29 Contract and requested payment of approximately $1.5 million by June 16, 1995 to cover working capital shortfalls. On October 31, 1995, Elsinore, Palm Springs East and Elsub filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. In December 1995 the Company reserved the $9,000,000 amount due from the Band. As of March 29, 1996, the Company reached a settlement with the Band, which has been approved by the Bankruptcy Court and the Bureau of Indian Affairs. Pursuant to the settlement, the Company has received a promissory note from the Band in the principal amount of $9 million with a 36 month amortization schedule. However, because of limitations on the funds from which the note is to be paid, there is a possibility it will not be paid in full. Given these limitations on the recovery of principal and interest due on the note, management has not reduced the allowance for loss in an amount of $9 million against the aggregate receivables provided in the quarter ended December 31, 1995. The first payment was made by the Band on October 29, 1996. See "Item 1. Business -- Native American Gaming Projects -- Spotlight 29 Casino" for further detail. 7 Cedars Casino. Elsinore, through its wholly-owned subsidiary, Olympia Gaming Corporation ("Olympia"), entered a Gaming Project Development and Management Agreement (the "7 Cedars Contract") to operate the 7 Cedars Casino located on the Olympic Peninsula in the state of Washington and owned by the Jamestown S'Klallam Tribe (the "S'Klallam Tribe"). In addition, the Company lent, in the aggregate, $9 million to the S'Klallam Tribe for construction of the casino pursuant to the 7 Cedars Contract. Under the terms of the 7 Cedars Contract, the Company was obligated to establish a reserve fund for "working capital," a term which is not defined in the 7 Cedars Contract. The Company believes the parties did not intend to apply a "working capital" definition based on generally accepted accounting principles which, in the Company's view, would be impracticable in the context of the 7 Cedars Contract and which, in practice, has never been followed. Since its opening on February 3, 1995, the 7 Cedars Casino incurred a cumulative net loss and an attendant decrease in working capital which has been substantial. On November 1, 1995, the S'Klallam Tribe asserted that the Company had defaulted on the June, July, August and September 1995 minimum guaranteed payments to the S'Klallam Tribe as defined by the 7 Cedars Contract in the aggregate amount of $100,000 and requested immediate payment. In addition, the S'Klallam Tribe demanded that a minimum of $2,540,000 be paid immediately to cover current expenses and up to $5,390,000 for working capital shortfalls according to its interpretation of the 7 Cedars Contract. On November 13, 1995 the Company received a letter from the S'Klallam Tribe asserting that the 7 Cedars Contract had been terminated. On November 10, 1995, Olympia filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada). The Company maintains that the 7 Cedars Contract has not been terminated. As a result of significantly lower than projected gaming revenues, 7 Cedars has incurred substantial operating losses since its opening. Based upon the cumulative net loss incurred for the 7 Cedars Casino and because the Company's $9 million loan to the S'Klallam Tribe is payable solely from the 7 Cedars earnings, management determined to write-off the remaining unamortized balance of capitalized casino development costs of approximately $242,000 in September 1995 and in December 1995 provided an allowance for loss against the $9,000,000 outstanding balance of the project loan and accrued interest thereon. Changes in Management. Effective April 1, 1996, Gary R. Acord, Chief Financial Officer, resigned his position with the Company. Brent E. Duncan was named Treasurer and Secretary of the Company on June 4, 1996. The Company's confirmed Plan calls for a change in the management of the reorganized Elsinore. Effective August 12, 1996, the Company entered an Interim Management Agreement with Riviera Gaming Corp. - Elsinore, Inc. to manage the business operations of the Company subject to the direction of the boards of directors of Elsinore and its subsidiaries. Also, on August 12, 1996, pursuant to a Stipulation between the Company and the unofficial committee of the First Mortgage noteholders (the "Bondholder Committee"), senior management (Thomas E. Martin, President and Chief Executive Officer and Frank L. Burrell, Jr., Chairman of the Board) ceased to be compensated employees of the Company, although they will continue to serve both as directors and authorized officers until replaced. When the Plan is fully effective, the existing board of the Company will be reconstituted with new directors, four of whom will be chosen by the Bondholders Committee, and one will be chosen by the Equity Committee appointed in the bankruptcy case (with input from other creditor constituencies). As of February 10, 1997, the new directors had been nominated and the Plan's effectiveness is awaiting final Nevada Gaming Authorities approval of those nominees. Trading Halt/Potential Delisting. Trading in the Company's common stock continues to be halted by the American Stock Exchange ("AMEX") and the Pacific Stock Exchange ("PSE"). Elsinore intends to pursue reactivation of its listings with AMEX and PSE so that the New Common Stock in the reorganized Elsinore can be traded publicly following the effective date of the Plan. However, by letter dated January 27, 1997, Elsinore was informed of AMEX's intention to pursue the delisting of Elsinore's Common Stock. By letter dated February 3, 1997, the Company requested that AMEX defer a final decision on delisting until mid-March 1997 so that the reconstituted board of directors has an opportunity to decide on a course of action. By letter dated February 5,1997 AMEX agreed to extend the Company's time to request an appeal to March 14, 1997. CHAPTER 11 PROCEEDINGS Initiation of Chapter 11 Proceedings. On October 31, 1995, Elsinore and certain of its subsidiaries (Four Queens, Inc., Four Queens Experience Corporation, Elsub Management Corporation, and Palm Springs East Limited Partnership) filed voluntary petitions in the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada) (the "Bankruptcy Court") to reorganize under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). On November 10, 1995, Elsinore's subsidiary, Olympia Gaming Corporation, also filed a voluntary petition in the Bankruptcy Court seeking reorganization under Chapter 11. The Company is continuing to manage its business affairs as a debtor-in-possession under the supervision of the Bankruptcy Court. The reorganization of Elsinore and its subsidiaries is being jointly administered. The file number in the case is 95-24685 RCJ with Judge Robert C. Jones presiding. The Company believes that no single factor led directly to the filing of the Elsinore related bankruptcy cases; but rather, that a combination of several factors led to the need to seek Chapter 11 relief. Initially in October 1994, the IRS delivered to Elsinore a final assessment relating to certain adjustments to taxable income taken by Elsinore for fiscal years ending January 31, 1980 through December 31, 1983. The Company was advised and believed that there would be no liability for taxes in these years above the $3.5 million payment which was deposited with the IRS in 1991. However, the IRS assessment called for Elsinore to pay approximately $5.7 million, in addition to $3.5 million deposited in 1991. A tax lien was recorded by the IRS in November 1994. In December of 1994, Elsinore and the IRS entered into an agreement whereby the assessment was to be paid in monthly installments over the course of a year. In the nine months prior to the filing of its bankruptcy petition, Elsinore paid approximately $3.5 million to the IRS. The Company believes that these payments contributed greatly to the liquidity problems faced by Elsinore prior to commencing its bankruptcy case. Second, as discussed more thoroughly below, Elsinore developed and managed the Spotlight 29 Casino, a Class II gaming facility, on the tribal land owned by the Twenty-Nine Palms Band. In March of 1995, in order to compete with other casinos in the area, the Twenty-Nine Palms Band installed Class III electronic gaming machines at the Spotlight 29 Casino. In March of 1995, as well as today, there is no express state or federal authorization for the use of Class III gaming devices at the Spotlight 29 Casino. The installation of these Class III devices was brought to the attention of the Nevada Gaming Authorities and Elsinore was informed that the Nevada Gaming Authorities viewed the installation of the devices as a violation of California and Federal gaming law and expressed concerns regarding Elsinore's continued association with the Twenty-Nine Palms Band. The Company attempted to persuade the Twenty-Nine Palms Band to discontinue use of the Class III devices at the Spotlight 29 Casino, but they refused. In view of the position taken by the Nevada Gaming Authorities, the Company withdrew as manager of the Spotlight 29 Casino and commenced action against the Twenty-Nine Palms Band. See "Item 1. Business--Native American Gaming Projects--Spotlight 29 Casino." The Company believes that the resulting non-payment of principal and interest on the project loan and management fees in 1995 together with the approximately $1.2 million in working capital deficiencies funded by the Company prior to its disassociation with the Spotlight 29 Casino contributed to the Company's financial difficulties leading up to the bankruptcy filings. Third, revenues at the 7 Cedars Casino was much lower than projected during 1995. See "Item 1. Business--Native American Gaming Projects--7 Cedars Casino." The Company believes that the resulting operating losses and consequent inability of 7 Cedars to payback project loan interest and principal and management fees contributed to the Company's financial difficulties leading up to the bankruptcy filings. Fourth, construction of the Fremont Street Experience and related infrastructure improvements significantly disrupted traffic flow into and around the Four Queens. As a result, patronage and business at the Four Queens was down while the Fremont Street Experience was under construction. Originally, the Fremont Street experience was scheduled to open by September, 1995. However, a decision to significantly upgrade the quality of the light show delayed the opening of the Fremont Street Experience to December 1995. The Company believes that this delay prolonged the drag on business at the Four Queens. See "Item 1. Business--The Four Queens Hotel and Casino." Fifth, the loan agreements between Elsinore and the holders of the 1993 First Mortgage Notes and the 1994 Mortgage Notes contain a number of financial and restrictive covenants. The dispute between the Company and the Twenty-Nine Palms Band, and the IRS assessment and tax lien, violated certain covenants in these loan agreements. In the summer of 1995, Elsinore obtained one time waivers of these loan covenant defaults from the holders of the 1993 First Mortgage Notes and the 1994 Mortgage Notes. Finally, after satisfying its debt service obligations on the 1993 First Mortgage Notes and the 1994 Mortgage Notes in the spring of 1995, the Company became aware of its inability to pay the next installment due at the beginning of October to both the holders of the 1993 First Mortgage Notes and the 1994 Mortgage Notes without some form of additional financing. The Company sought a consensual, out-of-court restructuring of its obligation to the holders of the 1993 First Mortgage Notes. Although good faith negotiations occurred, the Company and the 1993 First Mortgage Noteholders were unable to reach an agreement. In October 1995, the Company defaulted on its payments owing on the 1993 First Mortgage Notes and the 1994 Mortgage Notes and a voluntary petition was filed on October 31, 1995 to permit Elsinore (and its subsidiaries) to obtain financial relief. The reorganization process is expected to result in the cancellation and/or restructuring of substantial debt obligations of the Company. However, it is anticipated that the interests of the current common stockholders will be substantially reduced. Plan of Reorganization. General. Under the Bankruptcy Code, the Company's pre-petition liabilities are subject to settlement under a plan of reorganization. The Bankruptcy Code also requires that all administrative claims be paid on the effective date of the plan of reorganization unless the respective claimants agree to different treatment. During the course of the bankruptcy proceedings, an unofficial committee of a majority of the holders of the 1993 First Mortgage notes was formed (the "Bondholders Committee"). Beginning in approximately December 1995, the Company and the Bondholders Committee participated in settlement negotiations in an effort to consensually resolve their concerns in the case. The result of these negotiations was an agreed upon conceptual framework for a plan of reorganization, which was thereafter embodied in a stipulation (the "Stipulation"). On February 28, 1996, the Company filed a plan of reorganization, which was consistent with the terms of the Stipulation, together with an accompanying disclosure statement. The disclosure statement was approved on May 13, 1996 subject to the insertion of certain language acceptable to the 1993 First Mortgage Noteholders. On July 16, 1996, the Bankruptcy Court conducted a hearing regarding confirmation of the plan as submitted by the Company. At that time, the Bankruptcy Court considered the various objections to the plan raised by certain creditors and equity holders. On July 18, 1996, the Bankruptcy Court conducted further proceedings with respect to the plan of reorganization submitted by the Company. At the July 18 hearing, the Bankruptcy Court concluded that certain modifications to the plan would be necessary for its confirmation. These modifications included, among others, making no distribution to the Company's existing equity holders. Following the July 18 confirmation hearing , but before the entry of an order incorporating the Bankruptcy Court's ruling on the plan submitted by the Company, certain of the Company's creditors filed a motion for reconsideration based upon their withdrawal of objections to the plan. These creditors agreed to withdraw their objections in return for a reallocation of equity interests in the reorganized Elsinore. On August 5, 1996, the Bankruptcy Court conducted a hearing on the reconsideration motion. After that hearing, the Bankruptcy Court determined that the relief sought by that motion should be granted. Accordingly, on August 8, 1996, the Bankruptcy Court entered an order confirming the plan of reorganization submitted by the Company as modified by that order (the "Plan") with a confirmation date of August 12, 1996. The effective date of the Plan will be after all regulatory approvals required by the State of Nevada, including approvals by the gaming authorities, have been obtained and Elsinore has sufficient cash to fund all distributions. Management believes the only remaining condition to effectiveness to be satisfied is the Nevada Gaming Authorities granting its approval of the members of the Company's reconstituted Board of Directors. Currently, it is expected that the Plan will be fully effective by March 1997. Terms of Plan of Reorganization The Plan provides for the continuation of Elsinore and at least three of its subsidiaries (Four Queens, Inc., ElSub Management Corporation and Palm Springs East Limited Partnership) as going concerns. Under the Plan, the old common stock interests in Elsinore will be canceled and Elsinore, as reorganized, will issue new common stock (the "New Common Stock"). On the effective date of the Plan, 80% of the New Common Stock will be distributed to the following classes of creditors and equity holders in the following proportions: Interest Percentage 12.5% First Mortgage noteholders 87.5% 7.5% Convertible Subordinated noteholders 3.5% Unsecured creditors of Four Queens, Inc 2.5% Unsecured creditors of Elsinore Corporation 1.0% Internal Revenue Service 1.9% Old common stockholders 3.6% 100.0% The remaining 20% of the New Common Stock will be issued through a rights offering to raise $5,000,000 to assist in funding the Plan. Initially, the entire amount of the rights offering will be made available for subscription to the following classes of creditors and equity holders in the percentages enumerated below: Interest Percentage 12.5% First Mortgage noteholders 87.5% 7.5% Convertible Subordinated noteholders 3.5% Unsecured creditors of Four Queens, Inc 2.5% Old common stockholders 6.5% 100.0% Each member of the above classes of creditors and equity holders will be required to elect whether to exercise the right to purchase the New Common Stock allocated and whether to purchase additional shares of New Common Stock if one or more holders of that class do not fully exercise their right to purchase New Common Stock. The subscription rights of non-exercising members of the above classes will be reallocated automatically among the other members of the class electing to exercise their rights to purchase additional shares of New Common Stock. If any of the members of any class do not elect to exercise all of the rights allocated to that class, the unexercised rights will be automatically distributed to the members of the Bondholder Committee. The Bondholder Committee has guaranteed a 100% subscription for the $5 million rights offering, in the event the percentages enumerated above are not otherwise fully subscribed.On or about October 10, 1996 the rights offering process commenced with the distribution of subscription rights materials to the class members. As defined in the Subscription Rights Agreement dated October 10, 1996, pursuant to the Plan of Reorganization, as confirmed by the Bankruptcy court, the Company agreed to issue to the Rightholders stock subscription rights ("Rights")to purchase up to an aggregate of one million (1,000,000) shares of Common Stock, par value $0.001 per share, of the Company, at an exercise price of $5.00 per share. In the event such Rights were not exercised by 5 P.M. Pacific time on December 13, 1996, such non-exercised Rights were transferred automatically to the members of the Bondholder Committee in the proportions specified in a Standby Commitment. As the Rights proceeds are received, they are deposited in a separate Company bank account and are reflected in the accompanying 1996 balance sheet classification "Cash and Cash Equivalents Restricted". As of December 31, 1996 Rights proceeds of $4,287,000 (including interest of $19,000) had been received by the Company, representing exercise of Rights to approximately 854,000 shares. The Company will issue the related shares, including shares applicable to the bondholders Standby Commitment, upon the Plan of Reorganization Effective Date, which is expected to occur in March, 1997. As a result of the rights offering, members of the Bondholders Committee will receive 995,280 shares of the New Common stock and members of the creditor and equity holder constituencies will receive an aggregate, 4,720 shares of New Common Stock. Therefore, upon effectiveness of the Plan, it is expected that members of the Bondholder Committee will hold, in the aggregate 4,495,280 shares of the 5,000,000 issued and outstanding shares of New Common Stock. Proposed Treatment of Creditors and Equity Interests The Plan is expected to be funded principally from cash generated from operations and the $5,000,000 proceeds from the rights offering. Specifically, the proposed treatment of each of the creditor and equity interests is as follows: The 1994 Mortgage Note holders have an allowed secured claim equal to the $3,000,000 principal amount of the notes plus accrued interest thereon at 20% through the date on which the confirmation order was entered by the Bankruptcy Court(approximately $675,000) and certain fees and disbursements related thereto (approximately $125,000). On the effective date of the Plan, each 1994 Mortgage Note holder will receive its prorata share of restated mortgage notes (the "Restated Mortgage Notes"), due four years from the confirmation date, in exchange for its allowed claim. Interest on the Restated Mortgage Notes will accrue at an annual rate of 11.5% or other appropriate interest rate approved by the Bankruptcy Court and will be payable quarterly commencing on the fourth month following the confirmation date. These noteholders will retain their lien interests as collateral for repayment of the restated mortgage notes. The 1993 First Mortgage Note holders have an allowed claim equal to approximately $61,000,000. Under the Plan, the secured portion of the claim is allowed in the amount of $30,000,000. The balance of the claim is unsecured. On the effective date of the Plan, each 1993 First Mortgage Note holder will receive (i) in exchange for the secured portion of its claim, its prorata share of $30,000,000 face amount of restated first mortgage notes (the "Restated First Mortgage Notes") which will accrue interest at an annual rate of 13.5% per annum payable semi-annually and will be due five years from the confirmation date, and (ii) in exchange for the unsecured portion of its claim, prorata portion of the New Common Stock (see above). The Convertible Note holders have an allowed claim equal to approximately $1,500,000. On the effective date of the Plan, each Convertible Note holder will receive its prorata share of New Common Stock (see above) in exchange for its allowed claim. The Company's larger unsecured creditors, other than the Convertible Note holders, will receive payments from a fund of approximately $1,400,000 over a three-year period and their prorata share, if any, of New Common Stock (see above). The Internal Revenue Service ("IRS"), which has both secured and unsecured claims aggregating approximately $3,000,000 will receive full payment of its secured claim with interest at 8% per annum over four years (commencing on the effective date) and will receive, with respect to its unsecured claim, proportionately the same type of recovery which is provided for the Company's larger unsecured creditors. In addition, the IRS will receive its prorata share of the New Common Stock (see above). Management Agreements The Plan also calls for a change in the management of the reorganized Elsinore. Effective at noon on August 12, 1996, Elsinore entered into an Interim Management Agreement with Riviera Gaming Management Corp - Elsinore, Inc. to manage the business operations of the Company subject to the direction of the existing boards of directors of Elsinore and its subsidiaries. Under the stipulation between the Company and the Bondholders Committee, senior management (Thomas E. Martin, President and Chief Executive Officer, and Frank L. Burrell, Jr., Chairman of the Board) ceased to be compensated employees of the Company on Monday, August 12, 1996, although they will continue to serve as directors and authorized officers until replaced. Board of Directors The Plan also calls for the Company's Board of Directors to be reconstituted upon effectiveness of the Plan. Four of the new directors are to be chosen by the Bondholders Committee and one will be appointed by the Equity Committee appointed in the Bankruptcy Case. Both the Bondholders Committee and the Equity Committee have selected their proposed representatives to the Company's Board. Those proposed directors have been submitted to the Nevada Gaming Authority for approval. Upon such approval, the Company believes all conditions to the Plan's effectiveness will be satisfied. Other Reorganization Matters Certain pre-petition liabilities have been paid after obtaining the approval of the Bankruptcy Court, including certain wages and employee benefits, gaming related liabilities and hotel room and other customer deposits. Subsequent to filing and with the approval of the Bankruptcy Court, the Company assumed executory contracts for all real estate and equipment leases. In accordance with the Stipulation between the Company and the Bondholders Committee, the Company (with the participation of the Bondholders Committee) prior to confirmation of the Plan decided which executory contracts would be assumed. All executory contracts which were not expressly assumed by the Company were deemed rejected at the confirmation date. All creditors claims resulting from the rejection of an executory contract must have been filed with the Bankruptcy Court no later than September 11, 1996. All such claims which are timely filed will be treated in a manner identical to the treatment received by other members of the appropriate class of creditors under the Plan. All such claims which are not timely filed will be barred and discharged and the creditor holding such claim will not receive or be entitled to any distribution under the Plan on account of such claim. Trading in the Company's common stock continues to be halted by the American Stock Exchange ("AMEX") and the Pacific Stock Exchange ("PSE"). Elsinore intends to pursue reactivation of its listings with AMEX and PSE so that the New Common Stock in the reorganized Elsinore can be traded publicly following the effective date of the Plan. However, by letter dated January 27, 1997, Elsinore was informed of AMEX's intention to pursue the delisting of Elsinore's Common Stock. By letter dated February 3, 1997, the Company requested that AMEX defer a final decision on delisting until mid-March 1997 so that the reconstituted board of directors has an opportunity to decide on a course of action. By letter dated February 5,1997 AMEX agreed to extend the Company's time to request an appeal to March 14, 1997. THE FOUR QUEENS HOTEL AND CASINO The Four Queens Elsinore, through its wholly owned subsidiary, Four Queens, Inc., owns and operates the Four Queens Hotel and Casino (the "Four Queens"), located on the corner of Fremont Street and Casino Center Boulevard in downtown Las Vegas. The property has been in operation since 1966. The property is accessible via Interstate 15 and Interstate 515 and markets to a local population of approximately one million residents and over 29 million visitors a year to Las Vegas. In 1994, the Company completed a $5 million refurbishment of the Four Queens, which has gaming space of 32,000 square feet. The casino is currently equipped with approximately 988 slot machines, 20 blackjack tables, four craps tables, one pai gow poker table, one Caribbean Stud Poker table, two Let-It-Ride tables, two roulette wheels, a keno game and a sports book. The hotel has 690 guest rooms and suites in two towers. The Four Queens features four full-service restaurants, three cocktail lounges and one entertainment lounge. As part of the refurbishment, meeting space in the Four Queens was doubled to almost 15,000 square feet in 1993. The Four Queens also has parking facilities which can accommodate 560 cars. Based principally on results at the Four Queens, the Company's earnings before interest, income taxes, depreciation and amortization, (and before the provision for losses recognized on loans receivable from Native American Tribes, the write-off of casino development costs and expenses recognized as a result of the reorganization proceedings in 1995) increased in 1996 to $7.0 million, from $1.4 million in 1995. The Company believes this improvement was at least partially attributable to increased visitors to downtown because of (1) the Fremont Street Experience attraction and (2) the related improvement of vehicular traffic flow to downtown Fremont Street following completion of its construction in November, 1995. However, competition continues to intensify in the Las Vegas market as new resorts are developed and existing resorts expand. The Company believes that customers of the downtown casino/hotels who would normally spend substantially all of their gaming and entertainment budget at downtown casinos are being drawn to and spent a portion of their budgets at these new Strip properties, resulting in a loss of revenue to downtown casinos. Operations The following table sets forth the contributions from major activities to the Company's total revenues from the Four Queens for the years ended December 31, 1996, 1995 and 1994. 1996 1995 1994 (Dollars in Thousands) Casino(1) $42,300 $39,964 $46,270 Hotel(2) 11,202 9,564 9,234 Food & Beverage(2) 12,373 12,136 12,693 Other(3) 1,502 1,983 2,020 67,377 63,647 69,935 Less: Promotional Allowances (6,178) (6,674) (7,511) $61,199 $56,973 $62,706 (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 $198,000 in 1996, $185,000 in 1995, and $243,000 in 1994 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: Floor area (square foot) 32,296 Slot machines 988 Blackjack tables 20 Craps tables 4 Caribbean Stud Poker tables 1 Roulette wheels 2 Let-It-Ride tables 2 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 Entertainment lounges 1 Entertainment lounge seats 147 Cocktail lounges 3 Other: Gift Shops 1 Parking facilities (cars) 560 Elsinore has developed a marketing strategy employed for the Four Queens 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 is distinguished by its friendly "at home" atmosphere and the high level of personalized service provided to its patrons. The Company strives to maintain the level of service by actively seeking customer feedback on suggestion cards, by senior floor personnel asking patrons if their wants are being met, and by employees engaging in friendly dialogue with the customers in order to reinforce the "at home" feeling. In this respect, customer service contributes to significantly reduced marketing costs, since it is less costly to maintain and cultivate existing customer relationships than it is to develop new ones. Additionally, the Company believes that good service results in word-of-mouth endorsement of the Four Queens by satisfied customers to others. Targeted Marketing. The Company maintains a database of patrons that includes over 350,000 names of customers and prospects. The Company has assembled this database from its players clubs, reservation systems and tournaments and special events. Using this database, the Company has identified a segment of loyal core customers; management estimates that a significant portion of this group has returned to the Four Queens at least three times each year and spends an average of two to four days per visit. The Company believes that an additional benefit of the database is the ability to analyze the effectiveness of each marketing event in terms of profitability. This analysis aids management in developing future promotions for which there is a high probability of success. Finally, the Company publishes a periodic newsletter which announces upcoming tournaments and special events. Promotions. The Company believes that customers in the downtown Las Vegas market are attracted to perceived "value" in a gaming vacation. Accordingly, the Company promotes the value theme in a number of ways, from a 99-cent shrimp cocktail appetizer and $4.95 prime rib dinner to an assortment of value-oriented vacation packages. Club Memberships. REEL Winners Club The largest component of the customer database is the REEL Winners Club, a slot club with over 300,000 members. The objective of this club is to provide loyal and valuable slot players the opportunity to accumulate points that may be redeemed for cash. Special parties and priority room reservations are also benefits for REEL Winners Club members. Maintaining and operating the slot club enables the Company to market continuously to a proven customer segment which is attracted to casino gaming and the Four Queens. VIP Database Through the visual observation of table game activity on the casino floor, the Company has developed a database of VIP players based on their average bet and length of play. The Company continuously builds on this database in order to target market to a segment of "high limit" players who enjoy the Four Queens atmosphere. In order to maintain the loyalty and level of play provided by this customer segment, management has instituted a very aggressive and generous "comp" plan designed to make the player's stay as comfortable and as long as possible. Management utilizes a database to track the player's length of stay, average bet, time played, estimated amount won or lost, comping limit and comps used during the trip. This information affords the Company the opportunity to provide the appropriate level of privileges in order to maintain the loyalty and satisfaction of this customer segment. Special Events. The Four Queens hosts a variety of high and low stakes table game and other gaming tournaments, including the well known annual Queens Poker Classic, and caters to its VIP players and core customers by purchasing and supplying them with complimentary tickets to Las Vegas special events. The Las Vegas Market The Las Vegas gaming and entertainment market has generally expanded in recent years. The number of visitors traveling to Las Vegas increased from 11.6 million visitors in 1982 to over 30 million visitors in 1996. McCarran International Airport passenger volume is estimated to have increased 4.4% during 1995. Expansive themed properties such as Excalibur, The Mirage, The MGM Grand Hotel and Theme Park, Treasure Island and Luxor have become destination resorts. In addition, two additional themed resorts, New York, New York (January 3, 1997) and Monte Carlo have recently opened. New hotels and construction scheduled to debut in 1997 include the 1,025-suite tower in the Rio Suite Hotel and Casino: 1,694-room expansion of Harrah's on the Las vegas Strip and completion of the 527-room Sunset Station in nearby Henderson, Nevada. Las Vegas is one of the fastest growing cities in the United States and the population has increased from approximately 507,000 in 1982 to over one million in 1996. This population increase has been driven by growth in the gaming industry, relocation of companies to Las Vegas because of favorable tax conditions and increases in the number of retirement age residents drawn to Las Vegas primarily by the warm climate, relatively low cost of living, entertainment options and absence of state income tax. Despite the significant increase in the supply of rooms and a series of competitive developments, including the expansion of gaming in many jurisdictions nationwide and the introduction of the California lottery, Las Vegas's hotel occupancy rate exceeded 85% in each of the last eight years and was 90.0% in 1996 (preliminary figure). Gaming revenues increased from $1.7 billion in 1984 to $4.6 billion in 1996 in the Las Vegas Metropolitan Area. The Company believes that several factors, including the three new destination resorts and the expansion of McCarran International Airport, will enable Las Vegas to continue to grow. Each of the three principal segments of the Las Vegas market--the Las Vegas Strip, the Boulder Strip and Downtown--has exhibited generally steady growth during the past decade. Set forth below is information concerning revenues and growth of each of Las Vegas's three principal gaming markets: Gaming Revenue ($000's)* Fiscal Year Ended Las Vegas Strip Downtown BoulderStrip June 30 Revenues Growth Revenues Growth Revenues Growth 1986 $1,371,208 4.0% $486,828 10.4% $80,328 % 1987 1,597,414 16.5 524,156 7.7 94,203 17.3 1988 1,739,265 8.9 592,616 13.1 104,161 10.6 1989 2,023,619 16.3 638,506 7.7 121,726 16.9 1990 2,278,666 12.6 641,990 0.5 137,265 12.8 1991 2,626,868 14.8 669,248 4.2 143,307 4.4 1992 2,530,932 (3.3) 646,577 (3.4) 150,854 5.3 1993 2,680,866 5.9 677,702 4.8 161,810 7.3 1994 3,188,994 19.0 657,173 (3.0) 179,042 10.6 1995 3,516,054 10.3 655,972 (0.2) 270,704 51.2 1996 3,629,745 3.2 654,362 (0.3) 333,852 23.3 Compound Annual Growth Rate 10.2% 3.0% 15.3% * For casinos with gaming revenue of $1 million and over. The Las Vegas Strip has demonstrated strong growth, and revenues have increased at a 10.2% compound annual growth rate to approximately $3.6 billion in 1996 from $1.3 billion in 1985. Based on 1996 statistics, the 5,000-room MGM Grand Hotel and Theme Park, the 2,500-room Luxor Hotel and Casino,the 3,000-room Treasure Island Hotel and Casino and other newly opened Las Vegas resorts appear to be drawing more visitors to Las Vegas. The downtown market has grown from approximately $441 million in 1985 to approximately $654 million in 1996 at a compound annual growth rate of 3.0%. Downtown Las Vegas, with its world famous neon lighting and its 12 major casinos all located within close proximity of each other, is where Las Vegas started, and the area continues to attract a significant number of loyal customers comprised of both visitors to Las Vegas and local residents. The Company believes many gaming patrons choose to play downtown because the casinos traditionally offer more liberal slot payouts and better odds on table games than casinos located on the Las Vegas Strip and provide a more comfortable and less intimidating environment. In addition, it is much easier to stroll from one casino to another in the downtown market than on the Strip. Recent results of the downtown Las Vegas casino operators 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 openings of the MGM Grand, Luxor and Treasure Island casino/hotels have had an adverse effect on downtown gaming revenue, which decreased 0.3% for the 12-month period ended June 30, 1996. In addition, two new themed casino resorts opened on the Strip in 1996, Monte Carlo (June 1996) and New York, New York (December 1996). In addition, another major casino resort, Stratosphere, opened just north of the Strip in April 1996. The Fremont Street Experience The casino operators in downtown Las Vegas formed the Downtown Progress Association to improve the downtown area. A product of the Downtown Progress Association's efforts 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 space 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 involving 2.1 million reflectors, 600 strobe lights, and laser image projectors. Nine major entertainment venues, including the Four Queens, 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. The project also includes a 1,500 space parking facility. The goal of Fremont Street Experience is to create an attraction for gaming customers and other visitors to Las Vegas, drawing visitors to the historic downtown area and providing competition for the larger and newer gaming and entertainment complexes located on or near the Strip. The total cost of the Fremont Street Experience was approximately $67 million, $6.7 million of which was financed by the Las Vegas Convention and Visitor Association, $28.7 million (consisting of an $18 million equity investment plus additional room taxes) was provided by six downtown casino operators (including the Company) and the remainder was provided by a local bond issuance and matching federal funds. The Company's share of the project costs was approximately $3 million. Construction on the project began in Spring 1994 and was completed in November of 1995. The grand opening of the project was on December 13, 1995. The Company and several of the other downtown casino operators collectively own the Fremont Street Experience. Elsinore has a one-sixth ownership share and will be responsible for a proportionate share of the project's operating costs. Since the opening of the Fremont Street Experience, the Company's business has been improving and operating profits appear to be returning. The Company believes this improvement was at least partially attributable to increased visitors to downtown because of (1) the Fremont Street Experience attraction and (2) the related improvement of vehicular traffic flow to the downtown Fremont Street Experience area following completion of its construction in November, 1995. However, competition continues to intensify in the Las Vegas market as new resorts are developed and existing resorts expand. The Company believes that customers of the downtown casino/hotels who would normally spend substantially all of their gaming and entertainment budget at downtown casinos are being drawn to and spent a portion of their budgets at these new Strip properties, resulting in a loss of revenue to downtown casinos. Competition The gaming industry in Nevada and elsewhere in the United States is highly competitive and this competition is increasing as new gaming facilities are built and additional jurisdictions license gaming establishments. Although the industry generally has recently been able to absorb additional capacity without significant loss of revenues to existing establishments, there is no assurance that gaming in the United States will increase at a rate sufficient to absorb the additional facilities expected to be constructed. Many of the Company's actual and potential competitors have greater financial resources, more diversified operations, and a longer history of successful operation than does the Company; each of these factors could afford a competitive advantage. Two themed resorts, the Monte Carlo and New York New York, opened on the Strip in June 1996 and December 1996, respectively. These two resorts added approximately 5,200 rooms. A themed mega-resort casino, the Stratosphere Tower Casino and Hotel, featuring an 1,149 foot observation tower, 1,500 rooms, a 97,000 square foot casino and other amenities and attractions, opened north of the Las Vegas Strip in April 1996. Although the occupancy levels increased slightly in 1996, as compared to 1995, there can be no assurances that the addition of such a large number of rooms will not have negative impact on average hotel occupancy levels in Las Vegas and at the Four Queens, unless visitor volume and other sources of room demand increase proportionately. The Company believes that the Four Queens primary competitors are other downtown Las Vegas properties, casino hotels located on the Las Vegas Strip and the Boulder Highway, local neighborhood casinos, Laughlin casinos and casino properties located near the Nevada/California state line. In addition, but to a lesser extent, the Four Queens also competes with state-sponsored lotteries, on- and off-track betting and other gaming operations located in other jurisdictions in the U.S. The Company believes that the legalization of gaming in other states, as well as on various Native American lands including Native American lands in Arizona and California, has not yet had an adverse impact on its operations. However, there is no assurance that such gaming in other jurisdictions will not have an adverse impact on the Company's Las Vegas operations in the future. In particular, the expansion of casino gaming, in or near any geographic area from which the Company attracts or expects to attract a significant number of its customers, such as Hawaii or California, could have a material adverse affect on the Company's operations. Casino hotels in Las Vegas generally compete on the basis of promotional allowances, entertainment, advertising, service provided to patrons, caliber of personnel, attractiveness of the hotel and the casino areas and related amenities. The Company has faced greater competition from new and existing Las Vegas casino/hotels seeking to attract middle market slot machine players, tour and travel agents, and Las Vegas area residents, each of which is a market the Company actively seeks to attract to the Four Queens. Many operators in the downtown Las Vegas market have observed that the new Las Vegas Strip properties have been drawing gaming revenues away from downtown Las Vegas. However, the Company believes that, like the 1989-1991 period when The Mirage and Excalibur casino/hotels opened, following an initial period of dilution of downtown Las Vegas patronage, the entire Las Vegas market could benefit from an overall increase in tourism, with those benefits being shared downtown. Further, as the Las Vegas Strip becomes more congested, certain patrons may prefer the ease and relative friendliness of the downtown market. Additionally, the Company expects that the Four Queens, along with other downtown operators, will benefit from the increased tourism that the Company expects will result from the addition of the Fremont Street Experience. NATIVE AMERICAN GAMING PROJECTS Background on Native American Gaming. In 1988, Congress passed the federal Indian Gaming Regulatory Act ("IGRA") providing a legal and regulatory framework for Native American tribes to offer for profit any games allowed by states. During the six-year period through 1994, approximately 200 Native American casino facilities, ranging from small bingo halls to full-fledged gambling houses, were initiated in more than 20 states. As of February 1995, approximately 100 of these facilities offered Class III gaming (as defined below) pursuant to tribal-state compacts. Casinos on Native American lands are subject to the regulatory authority of the federal National Indian Gaming Commission ("NIGC"), tribal regulatory authorities and, where applicable, state agencies. See "Regulations--Native American Gaming Operations" below. Spotlight 29 Casino Background. On January 14, 1995, Elsinore and the Twenty-Nine Palms Band of Mission Indians ("Band") opened the Spotlight 29 Casino (the "Spotlight 29"), a 74,000 square foot Class II gaming facility on tribal lands located near Palm Springs, California. The Spotlight 29 cost approximately $10 million to develop. Pursuant to the terms of the management contract (the "Spotlight 29 Contract") between the Band and Palm Springs East L.P., of which ElSub is the general partner and of which the Company owns 90%, the Company was to receive management fee revenues equal to approximately 27% of Spotlight 29's earnings from gaming operations, after deducting certain expenses. In addition, the Band was to repay from its share of casino earnings a $10 million loan and certain other advances from the Company to finance the development and construction of the Spotlight 29. During its first six weeks of operations, Spotlight 29's gaming revenues were significantly lower than anticipated, resulting in a net operating loss through February 1995 of approximately $1.1 million. This lower revenue is believed by the Company to be attributable in part to the marketing plan of the Spotlight 29 taking longer to implement than expected, and from competition from other Native American gaming facilities in Southern California that continue to operate electronic gaming machines without an approved compact with the State of California. Pursuant to its obligations under the Spotlight 29 Contract, the Company through April 3, 1995 advanced $1.26 million to the casino to cover working capital shortfalls. The Company also loaned $10 million to the Band to finance the development and construction of the Spotlight 29. This loan was to bear interest at the rate of 10% per year, which was to be payable solely from the Band's share of the Spotlight 29's earnings and was to amortize over four years from the date the Spotlight 29 opened. Pursuant to the Spotlight 29 Contract, payments of principal on the loan and repayments of any operating advances made by the Company (subject to a minimum payment to the Band of $35,000) was to be deducted by Palm Springs East L.P. from the Band's share of the Spotlight 29's earnings. As a Class II gaming facility, the Spotlight 29 is permitted under the IGRA to offer Class II games including bingo, pull-tabs and non-house banked games. Class III games, which include slot machines and house-banked games, are permitted under the IGRA on Native American land if conditions applicable to Class II gaming are met and, in addition, the gaming is in compliance with the terms of a written agreement ("compact") between the tribal government and the applicable state government. All compacts between tribal governments and states require approval by the Secretary of the United States Department of the Interior. To date, the State of California has not entered into any tribal-state compacts permitting Class III gaming (other than off-track betting and authorized state lottery facilities). 1995 Developments In February 1995, the Company learned from discussions with tribal representatives that the Twenty-Nine Palms Band was contemplating the installation of Class III gaming devices at the Spotlight 29. In late February, in response to the Company's written objection to the placement of any Class III gaming devices on the Spotlight 29 premises, the Twenty-Nine Palms Band advised the Company that, as the owner of the Spotlight 29, the Band would install such devices if doing so was in the Band's best interest and that the Band believed this position did not conflict with the terms of the Spotlight 29 Contract. In early March 1995, the Band caused approximately 70 Class III gaming devices to be installed at Spotlight 29 and such devices currently are in operation. The Company opposed these activities by the Band and in early March 1995 notified the Nevada State Gaming Control Board ("Nevada Board") and the NIGC that it will not participate in conduct that contravenes the IGRA. On March 6, 1995, the Company served on the Band a notice and demand that the operation of the Class III devices without the Company's consent and compliance with applicable federal law violated the management contract and that such activity must immediately cease. Following the Band's failure to remove the gaming devices, the Company on March 16, 1995 filed suit in the United States District Court for the Central District of California to enjoin their operation. See "Item 3. Legal Proceeding." On April 17, 1995, the Company was ousted as manager of Spotlight 29 and on April 19, 1995, the Company issued a demand letter to the Band declaring a breach of the Contract and a related loan agreement under which the Company had lent approximately $12,500,000 to the Band for construction of Spotlight 29 and for working capital contributions. The demand letter claimed damages in the full amount of the funds which had been advanced to the Band. In light of the Company's disassociation with the operations of Spotlight 29, management determined to write off, during the quarter ended March 31, 1995, the unamortized balance of casino development costs incurred for the project of $1,037,000 and ceased the accrual of interest on the project note and loans evidencing working capital advances. On May 16, 1995, in response to the Company's demand, the Band delivered to the Company a "Notice to Terminate Management Agreement." The notice asserted material breaches of the Contract and requested payment of approximately $1,500,000 by June 16, 1995 to cover working capital shortfalls or the Contract would be terminated. On October 31, 1995, the Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada). The Company was involved in protracted negotiations during 1995 with the Band for a settlement of the respective claims. Based upon the progress of those negotiations at the time, in December 1995 the Company reserved the $9,000,000 amount advanced to the Band. 1996 Developments On March 29, 1996, the Company reached a settlement with the Band, which has been approved by the Bankruptcy Court and which has received final clearance by the Bureau of Indian Affairs. The Company has received a promissory note from the Band in the principal amount of $9,000,000. While the note has an initial 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 pay the note in full at the end of 36 months, the note will be extended automatically for up to an additional two years. If still not fully paid at the end of the extension period, it may be extended up to an additional two years upon the approval of the NIGC. If not paid at the end of the final extension period, the note will be forgiven. Interest on the note is at an annual rate equal to the greater of 10% or the maximum rate allowed under California law, not to exceed 12%. The first payment under the settlement was made by the band on October 29, 1996. Including the first and subsequent payments, a total of $353,000 has been received through February 19, 1996 (all such amounts were applied to, and recorded in, the year ended December 31, 1996). Given that the $9 million recovery is limited to 20% of the net income generated by Spotlight 29, management determined not to reduce the allowance for loss in the amount of $9,000,000 against the receivable, which was provided during the quarter ended December 31, 1995. 7 CEDARS CASINO On February 3, 1995, Elsinore, through its wholly owned subsidiary Olympia Gaming Corporation ("Olympia") and the Jamestown S'Klallam Tribe (the "Tribe") opened the 7 Cedars Casino ("7 Cedars"), on the Olympic Peninsula in Washington State, approximately 70 miles northwest of Seattle. The 7 Cedars was conceived as a Native American gaming operation that would cater primarily to approximately 80,000 local citizens in Clallam and Jefferson Counties in Washington state. Kitsap County, with a population of approximately 180,000 people, was targeted as a secondary market for the 7 Cedars. To finance the development costs for the 7 Cedars, Elsinore loaned the $9 million to the Tribe. This loan bears interest at a rate of 10.9% per annum, is payable solely from casino earnings and will amortize over five years from the date the casino opened. Under the terms of the Olympia Contract, the Company is obligated to establish a reserve fund for "working capital", which is not defined in the Olympia Contract. The Company believes the parties did not intend to apply a "working capital" definition in the Olympia Contract based upon generally accepted accounting principles which, in the Company's view, would be impracticable in the context of the Olympia Contract and which, in practice, has never been followed. Since its opening on February 3, 1995, the 7 Cedars has incurred a substantial cumulative net loss and an attendant decrease in working capital. On November 1, 1995, the Tribe asserted that the Company had defaulted on the June, July, August and September 1995 minimum guaranteed payments to the Tribe, as defined by the Olympia Contract, in the aggregate amount of $100,000 and requested immediate payment. In addition, the Tribe demanded that sufficient monies be paid to enable all current gaming project expenses to be paid and working capital reserve to be maintained at the required funding level. The Tribe demanded that a minimum of $2,540,000 be paid immediately and also contended that the working capital shortfall could be as high as approximately $5,390,000 according to its interpretation of the Olympia Contract. On November 13, 1995, the Company received a letter from the Tribe dated November 9, 1995 asserting that the Olympia Contract had been terminated as a result of the Company's failure to make the payments which has been demanded. On November 10, 1995, Olympia Gaming filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada). Based on the November 10, 1995 bankruptcy filing, the Company maintains that the Olympia Contract has not been terminated. Pursuant to the terms of the Olympia Contract, the Company is to receive a management fee equal to 30% of the net distributable profits of 7 Cedars (subject to the Tribe receiving a $25,000 per month guaranteed payment). The Tribe is to receive the balance of the net distributable profits. The Contract's initial term expires February 2, 2000, subject to renewal for an additional two years in the event that the project loan is not paid in full by the end of the initial term. The project loan to finance the development and construction of 7 Cedars is payable solely from the Tribe's share of the net distributable profits of 7 Cedars, and will amortize over the five-year term of the contract at an annual interest rate of 10.9%. As a result of significantly lower than projected gaming revenues, 7 Cedars has incurred substantial operating losses since its opening. Management believes the following are the principal factors contributing to the lower gaming revenues. A significantly lower than anticipated propensity for the 3,000,000 plus tourists visiting the Olympic Peninsula in the summer to gamble. This includes both the numbers of tourist customers and their level of play in the casino. A significantly higher than anticipated impact of competition for the locals market. Native American casino openings in May 1995 (Muckleshoot near Auburn, Washington) and January 1996 (Suquamish, north of Bremerton, Washington) have resulted in substantially reduced visitation to 7 Cedars from Kitsap County residents. While Kitsap County, approximately 50 miles to the east of 7 Cedars, was originally identified as a secondary market, its larger, younger, population proved to be a significant market in the first several months following the opening of 7 Cedars. A substantially lower than expected average table games wager. In response to declining revenues following the first several months of operations, management undertook certain cost-cutting measures in the late spring and summer 1995 and increased marketing activities in an effort to achieve profitability. In November 1995 and January 1996, more substantial expense reductions were effected through reductions in the hours of operation of 7 Cedars and deeper, "across the board" cost cutting. In light of the existing competition in the Puget Sound area, the demographics of 7 Cedars primary local markets and the apparent low propensity for destination tourists to the Olympic Peninsula to gamble, there exists substantial uncertainty as to whether, during the remaining term of the management and loan agreements, 7 Cedars can achieve the level of profitability required to obtain full recovery of the loan principal and accrued interest thereon. Based upon the foregoing, management determined in the quarter ended December 31, 1995 to provide an allowance for loss against the $9,000,000 outstanding balance of the project loan plus accrued interest thereon. Previously, on September 1, 1995, the Company ceased accruing interest on the project loan and wrote off the remaining unamortized balance of capitalized casino development costs of approximately $242,000. Facilities The 7 Cedars is a 54,000 square foot Class II and limited Class III gaming facility on tribal lands fronting U.S. Interstate Highway 101 on the Olympic Peninsula. An estimated 4 million tourists visit the Olympic Peninsula annually. 7 Cedars' 12,500 square foot gaming area features Las Vegas-style table games, including craps, blackjack and roulette, as well as bingo, poker, and pull-tabs. The casino's Class III games are authorized pursuant to a compact between the Tribe and the State of Washington, which has been approved by the Secretary of the Interior. In addition to the gaming operation, the Company also operates a gift shop, a video arcade and dining facilities at the site. The Tribe also operates a Native American arts and crafts shop at the facility. Marketing The Company believes that the physical beauty of the site and casino building differentiates 7 Cedars from competing properties. In addition, the Company believes that its implementation of an active marketing plan similar to the techniques used at the Four Queens (e.g., player clubs, frequent visitor drawings, special events and tournaments) will draw traffic to the 7 Cedars. The Company will also emphasize a high level of customer satisfaction to encourage repeat visits. These programs will supplement standard brochure distributions and comprehensive customer tracking systems. The Washington Market 7 Cedars is located in Clallam County, Washington, which is located at the northeastern corner of the Olympic Peninsula approximately 70 miles northwest of Seattle. The state has identified Clallam and Jefferson Counties as a rapid growth county, designating it as a "growth management county." Populations within a 50- and 100-mile radius of the site are approximately 236,000 and 3 million, respectively. In addition to targeting the local population in Clallam County, 7 Cedars expects to derive visitors from the tourist traffic which flows through the Olympic Peninsula, one of the most popular vacation destinations for Washington State residents. Popular attractions include the Olympic National Park, with over 3.7 million visitors annually and Sequim Bay State Park, which attracts between 800,000 and 900,000 visitors annually. The primary target market of 7 Cedars is Clallam and Jefferson Counties which have a combined population of approximately 80,000 (of which 24% are of retirement age). 7 Cedars' secondary target markets include Victoria, British Columbia with a population of approximately 280,000, Kitsap County with a population of approximately 180,000, and the Seattle/Tacoma area with a population of approximately 2 million. REGULATIONS Nevada Gaming Operations The ownership and operation of casino gaming facilities in Nevada are governed by: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Commission, the Nevada Board and Liquor and Gaming Licensing Board of the City of Las Vegas (the "City Board"). The Nevada Commission, the Nevada Board and City Board are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon 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 reports to the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) the provision of a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information that the Nevada Commission may require. Pinnacle Gaming Corporation ("Pinnacle"), a wholly owned subsidiary, is licensed by the Nevada Gaming Authorities as a manufacturer and distributor of gaming devices. Four Queens, Inc. ("FQI"), which operates the Four Queens, is licensed by the Nevada Gaming Authorities. The gaming licenses require the periodic payment of fees and taxes and is not transferable. No person may become a stockholder of, or receive any percentage of profits from, FQI or Pinnacle without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, Pinnacle and FQI have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or FQI 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 FQI and Pinnacle 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 Company who are actively and directly involved in gaming activities of FQI and Pinnacle 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 that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities 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 to have a relationship with the Company, Pinnacle or FQI the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company, Pinnacle or FQI to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and FQI are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by FQI must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by FQI or Pinnacle, the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, FQI, Pinnacle, the Company and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming property in Nevada and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming property in Nevada) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial owner of the 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 owner of the Company's voting securities determined if the Nevada 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 incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails written notice requiring such 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 Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes 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 Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (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 Nevada Commission may determine to be consistent with such investment intent. If the beneficial owner 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 Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder 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 Nevada Commission, may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or FQI, the Company (i) pays that person any dividend or interest upon voting securities of the 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 Nevada Commission may, in its 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 a Registered Corporation. If the Nevada 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 Nevada 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 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 disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. The Nevada Commission has imposed such a requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada 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. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company 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 Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operation 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 the 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, must also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada 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 Nevada 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 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 ground of personal unsuitability. Proceedings Before Nevada Gaming Authorities In connection with its Mortgage Note Registration Application in 1995, the Company appeared at a public hearing before the Nevada Board. During this hearing, the Board inquired at length concerning the decision of the Twenty-Nine Palms Band to install Class III gaming devices at the Spotlight 29 Casino and concerns about the Company's continued "association" with the Twenty-Nine Palms Band because of the alleged illegal conduct of that Band, which the Nevada Board apparently view as a violation by the Company of the foreign gaming provisions of the Nevada Act. See "Business--Native American Gaming Projects --Spotlight 29 Casino" above. Nevada Gaming Authority approval was also required in connection with the terms of the Plan. All approvals, other than approval of the proposed post-effective Plan board members, have been obtained. The Company currently expects that approval of the post-effective board will be received by March 1997. Native American Gaming Operations Gaming on Native American lands, including the Spotlight 29 Casino and the 7 Cedars Casino, is extensively regulated under federal law, tribal law and/or tribal-state compacts. Under IGRA, management contracts for Native American gaming facilities may provide for a management fee for up to 40% of net revenues and a term of up to seven years if the Chairman of the NIGC determines that capital investment required and the income projections for the facility merit such terms. The NIGC has approved the management contracts for both Spotlight 29 Casino and the 7 Cedars Casino. In connection with obtaining NIGC approval for these management contracts, the Company, its directors, persons with management responsibilities, certain owners of the Company and certain persons with a financial interest in the management agreements as determined by the NIGC and tribal regulatory authorities must provide background information and be investigated by the NIGC and tribal regulatory authorities, and be approved in order for a management contract to be approved by the NIGC and for the Company to be issued a license to operate a gaming facility by tribal regulatory authorities. Persons who acquire beneficial ownership of the Company's securities may be subject to certain reporting and qualification procedures established by the NIGC and tribal regulatory authorities. The operations and management of the Company's Native American casino projects are and will be subject to the regulating authority of the NIGC, tribal regulatory authorities and, where applicable, state agencies. Such regulatory authorities have jurisdiction to inspect, supervise and audit gaming operations on Native American lands and where warranted may restrict, suspend or revoke licenses and approvals granted by the issuing agency. The NIGC and tribal governments may impose taxes and licensing fees on gaming operations located on Native American lands. Should a management contract be suspended or revoked by the NIGC, tribal officials or state regulatory agencies, the effect could have an adverse impact on the business of the Company. Similarly, changes in the IGRA, the governing tribal ordinance, or applicable state law, or the termination of any existing tribal- state compact for Class III gaming, could have an adverse effect on the Company's gaming operations on Indian lands. The Company has obtained NIGC approval of its settlement with the Twenty-Nine Palms Board. However, further NIGC approvals will be required for certain extensions of the term of the note issued to the Company in connection with that settlement. See "Item 1. Business -- Spotlight 29 Casino." Internal Revenue Service and Treasury Regulations The IRS requires operators of casinos located in the United States to file information returns for United States citizens (including names and addresses of winners) for Keno and slot machine winnings in excess of stipulated amounts. The IRS also requires casino operators to withhold taxes on certain Keno, bingo and slot machine winnings of certain non-resident aliens. The regulations of the Treasury Department and the Nevada Gaming Authorities require the reporting of currency transactions in excess of $10,000 occurring within a gaming day, including, in certain circumstances, identification of the customer by name and social security number. This practice commenced in May 1985, and may have resulted in the loss of gaming revenue to other jurisdictions where such reporting is not required. Other Laws And Regulations The Four Queens, Spotlight 29 and 7 Cedars each is subject to extensive state and local regulations and must obtain various licenses and permits, including those required to sell alcoholic beverages, on a periodic basis. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the casino. Management believes that FQI has obtained all required licenses and permits and that the business is conducted in substantial compliance with applicable laws. Pursuant to federal law, sales of beer, wine and other intoxicating beverages ("Liquor") must be in conformance with tribal and state laws. Under the Nevada law, the sale of Liquor by the drink at gaming facilities is subject to state regulation and licensing. The Company is licensed to sell Liquor by the drink at the Four Queens. OTHER BUSINESS INFORMATION Patents The Company's only significant patent covers MULTIPLE ACTION blackjack, a faster version of traditional blackjack that was developed by an officer of the Company. The patent was issued in 1992 and expires in 2017. MULTIPLE ACTION blackjack permits a player to make three separate bets on his hand, and the dealer uses a single up-card against the three-player bets. This results in a higher volume of play. The Company has licensed MULTIPLE ACTION blackjack to other casinos in Las Vegas and throughout the United States and at December 31, 1996 had licensed 82 locations for 128 tables. Revenues from licensing MULTIPLE ACTION blackjack through December 31, 1996 represented an immaterial part of the Company's overall revenues. Employees and Labor Relations At December 31, 1996, the Four Queens employed 1,089 persons, of which less than 5% were covered by collective bargaining agreements which expired in April 1987. The union employees have continued to work under the terms of an expired agreement. The Company believes that its relationship with the employees of the Four Queens is good. Control Procedures The Company employs stringent controls, checks and record keeping of all receipts and disbursements in connection with its gaming operations and believes that its internal controls are in compliance with the laws and regulations established by the Nevada Gaming Authorities, the Washington State Gambling Commission, NIGC, and the respective tribal gaming commissions. The audit and cash controls employed by the Company include locked cash boxes, independent counters and observers to perform daily cash and coin counts, floor observations of the gaming area, closed circuit television monitoring of critical activities and rapid analysis and resolution of discrepancies or deviations from normal performance. Credit Policies The Four Queens gaming operations are conducted on a credit as well as cash basis. The Company believes that it is necessary to extend credit to selected customers in order to compete effectively with other casino/hotels. Credit play at the Four Queens accounts for a relatively minor portion of total gaming activities. Allowances for doubtful accounts are made on the basis of a subjective analysis of the receivables involved and are charged as an expense in the period in which such determination are made. Credit is not issued at the Native American Casinos. Certain Income Tax Matters Management has reevaluated transactions which occurred in prior years and as a result believes the Company possesses a total net operating loss carryforward which was approximately $103,500,000 at December 31, 19965. As a result of ownership changes in prior years, Internal Revenue Code Section 382 limits the amount of loss carryforward currently available to offset federal taxable income. At December 31, 1995, the amount of loss carryforward not limited by Section 382 and therefore available to offset current federal taxable income was approximately $64,600,000. These loss carryforwards begin to expire in the year 1999 and will be completely expired by 2007. Because of the reorganization proceedings, the Company's net operating loss carryforwards may, however, be eligible for special treatment under Section 382. (See Note 9 of Notes to Consolidated Financial Statements.) ITEM 2. PROPERTIES. Except for certain small parcels of land owned in fee and one lease for approximately 7,000 square feet of casino space that expires on December 31, 1997, the real property underlying the Four Queens is leased pursuant to several long-term leases, none of which expires 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 is subject to the mortgage security interest of the Company's 1993 First Mortgage Notes and 1994 Mortgage Notes. These mortgage security interests will survive effectiveness of the Plan and will secure the Restated Mortgage Notes and the Restated First Mortgage Notes. See Note 8 of Notes to Consolidated Financial Statements. The Four Queens is more fully described under Item 1. The Company does not own any fee or leasehold interests in the real property underlying the Spotlight 29 Casino or the 7 Cedars Casino. ITEM 3. LEGAL PROCEEDINGS Chapter 11 Reorganization On October 31, 1995, the Company and certain of its subsidiaries filed a voluntary petition in the United States Bankruptcy Court for the District of Nevada seeking to reorganize under Chapter 11 of the United States Bankruptcy Code. See "Item 1. Business-Chapter 11 Proceedings." On November 10, 1995, Olympia Gaming Corporation filed a voluntary petition in the same Court. Since the Bankruptcy filing, several entities have filed administrative claims requesting the Bankruptcy Court order the Company to reimburse or compensate such entities for goods, taxes and services they allege the Company has received or collected, but for which they claim the Company has not paid. The Company currently estimates that the administrative claims will be approximately $1.5 million; however, there can be no assurance that additional amounts will not be claimed or the extent to which administrative claims may be allowed by the Bankruptcy Court. The Bankruptcy Code requires that all administrative claims be paid on the effective date of a plan of reorganization unless the respective claimants agree to different treatment. Most of the administrative claims in the bankruptcy case have been paid. The Company does not expect that the balance of any outstanding administrative claims will affect its ability to consummate the Plan of reorganization. Hyland Litigation Thomas Hyland, a professional card counter and blackjack player, filed a complaint on August 23, 1995 in Federal District Court in Camden, New Jersey, No. 95CV2236 (JEI), against the Company and virtually every other casino company in the United States. The complaint alleges violations of the antitrust, consumer fraud and fair credit reporting laws by the defendants in illegally conspiring to prevent Mr. Hyland and other professional card counters from playing blackjack at their respective casinos. The complaint alleges that the defendants share information concerning card counters and then act in concert to implement industry wide policy in banning them at the blackjack tables. Management believes that the claims are without merit and does not believe that the lawsuit will have a material adverse effect on the Company's financial statements taken as a whole. WARN Act Litigation The Company is a defendant in two consolidated lawsuits pending in the federal court for the District of New Jersey, alleging violation by the Company and certain of its subsidiaries and affiliates of the Worker Adjustment and Retraining Notification Act ("WARN Act") and breach of contract. The plaintiffs in the two consolidated cases are (i) former employees of a casino/hotel in New Jersey formerly affiliated with the Company bringing suit on behalf of a class of all employees laid off as a result of the casino's closing and (ii) a union local seeking to represent its members who were laid off at that time. Plaintiffs claim that there are approximately 1,300 such employees within the class who seek damages under the WARN Act providing for up to 60 days' pay and lost benefits and payments for deferred compensation allegedly due under a contract with certain employees. Damages payable, if any, would be based on the basis of the number of days' notice determined by the court to have been required under the WARN Act and the wages, benefits and deferred compensation applicable to each such employee. The Company has vigorously defended the action on the basis that even if the WARN Act does apply as a matter of law to a regulatory-forced closing, the closing was due to unforeseeable circumstances and, accordingly, the notice given was as timely as practicable, among other grounds. The liability phase of the trial of the two consolidated lawsuits concluded in August 1993. On June 30, 1995, the presiding judge entered an Order for Verdict Upon Liability Issues in which he ruled that: (i) the plaintiffs had failed to prove any liability under the WARN Act; but (ii) that Elsinore and certain of its subsidiaries are jointly liable for certain retroactive wages due to former employees of Elsinore Shore Associates under a collective bargaining agreement, plus prejudgment interest on such wages. The total amount of judgment the plaintiffs would be entitled to under this ruling has not yet been determined. The plaintiffs' attorney asserts that the amount due as of October 1, 1995, taking into account interest on that date, was approximately $676,000. On March 4, 1996, the plaintiffs' attorney submitted a proof of claim for retroactive wages in the amount of $800,000 to the Bankruptcy Court. Because of the filing of the bankruptcy petitions, the WARN Act litigation in the New Jersey Court has been stayed by operation of Bankruptcy Code Section 362(a). However, the plaintiff's $800,000 claim is currently the subject of claims litigation in the Bankruptcy Court. It is the Company's position that the claim submitted by the plaintiffs should be reduced to zero. However there can be no assurance as to the success of the Company's attempt to reduce the claim. Action Against Twenty-Nine Palms Band On March 16, 1995, Elsinore Corporation, its wholly owned subsidiary, ElSub Management Corporation, and Palm Springs East Limited Partnership, of which ElSub Management is the General Partner, filed a complaint against the 29 Palms Band in the United States District Court for the Central District of California, case no. CV 95-1669-RG(MCx). The suit was dismissed without prejudice by the Company on April 21, 1995. As noted previously, the Company has reached settlement of its dispute with the Band. Poulos/Ahern Class Actions In April and May 1993, two class action lawsuits were filed in the United States District Court, Middle District of Florida, against 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company. The suits allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce persons to play such games by collectively misrepresenting how the game machines operate, as well as the extent to which there is an opportunity to win. It also alleges violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On December 9, 1994, the Florida Court ordered that the consolidated cases be transferred to the United States District Court for the District of Nevada. That transfer has occurred and the Nevada Court has assumed control of the cases. The new case number is CV-S-94-1126-LDG(RJJ). Numerous defendants (including the Company) have moved to dismiss the complaint for failure to state a claim. No hearing has been set on this motion. The plaintiffs have filed a motion seeking to certify the consolidated actions as a class action. The defendants (including the Company) have opposed certification of the class. During April, 1996, U.S. District Judge Lloyd George approved defense motions to dismiss such lawsuits holding that the plaintiffs had failed to state a claim or prove their case. However, the plaintiffs were given additional time to file an amended complaint. Management believes the claims are wholly without merit and does not expect that the lawsuit will have a material adverse effect on the Company's financial statements taken as a whole. Other At December 31, 1996, the Company and its subsidiaries were parties to various other claims and lawsuits arising in the normal course of business. Management is of the opinion that all such legal matters are either covered by insurance or, if not insured, will not have a material adverse effect on the financial position or the results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of the last fiscal year. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $.001 per share (the "Common Stock"), was traded on the American Stock Exchange ("AMEX") and the Pacific Stock Exchange ("PSE") under the symbol "ELS." Trading in the Company's Common Stock continues to be halted by the American Stock Exchange ("AMEX") and the Pacific Stock Exchange ("PSE"). Elsinore has been in contact with both AMEX and PSE to pursue reactivation of its listings so that the Common Stock in the reorganized Elsinore can be traded following the effective date of the Plan. However, by letter dated January 27, 1997, Elsinore was informed of AMEX's intention to pursue the delisting of Elsinore's Common Stock. By letter dated February 3, 1997, Elsinore requested that AMEX defer a final decision on delisting until mid-March 1997 so that the reconstituted board of directors has an opportunity to decide on a course of action. By letter dated February 5, 1997, AMEX agreed to extend the Company's time to request an appeal to March 14, 1997. On February 19, 1997, the number of holders of record of Common Stock was approximately 4,179. The Company has never declared or paid, nor does it have any present intention to declare or pay, cash dividends on its Common Stock. Any determination by the Board of Directors to pay cash dividends in the future would depend upon numerous factors such as the Company's earnings, financial condition and capital requirements. In addition, certain covenants of the First Mortgage Notes and Mortgage Notes restrict the payment of cash dividends under certain circumstances. 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, 1996. This data should be read in conjunction with the consolidated financial statements and notes thereto set forth elsewhere herein. December 31, 1996 1995 1994 1993 1992 (Dollars in thousands except per share amounts) Balance Sheet Data: Total Assets $42,627 $37,101 $67,315 $71,923 $41,961 Current Portion of Long-Term Debt 50 54 59 204 3,051 Long-Term Debt Net of Current Portion: Notes Payable 61,425 61,327 59,040 53,018 28,513 Capital Leases 1,487 1,531 1,290 1,350 1,555 Stockholder's Equity (Deficit) (40,710) (43,441) (1,664) 4,567 (182) Operations Data: Revenues (Net) $61,199 $56,973 $62,706 $66,852 $63,998 (Loss) Before Extraordinary Items $(1,556) $(45,749) $(10,176) $(2,252) $(1,780) Extraordinary Items: Gain (Loss) on Extinguishment of Debt - - 735 (285) - Net Loss $(1,556) $(45,749) $( 9,441) $(2,537) $(1,780) Per Share Amounts: Loss Before Extraordinary Items $ (.10) $ (2.95) $ (.84) $ (.19) $ (.15) Extraordinary Items - - .06 (.02) - Net Loss $ (.10) $ (2.95) $ (.78) $ (.21) $ (.15) Capital Costs: Depreciation and Amortization $ 3,816 $ 3,948 $ 3,990 $ 3,206 $ 3,302 Interest Related to Prior Period Tax Obligation - 590 885 4,256 213 Interest Expense 2,505 8,006 9,086 1,385 3,124 $ 6,321 $ 12,544 $ 13,961 $ 8,847 $ 6,639 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. OVERVIEW Chapter 11 Proceedings: On October 31, 1995, the Company and certain of its subsidiaries filed a voluntary petition in the United States Bankruptcy Court for the District of Nevada to reorganize under chapter 11 of Title 11 of the United States Bankruptcy Code. On November 10, 1995 an additional subsidiary of the Company also filed a voluntary petition to reorganize under Chapter 11 in the same court. The Company is continuing to manage its business affairs as a debtor-in-possession under the supervision of the Bankruptcy Court. On February 28, 1996, Elsinore and its subsidiaries filed a plan of reorganization with the Bankruptcy Court. On August 8, 1996, an order modifying and confirming, as modified, the plan of reorganization was entered (the "Plan"). The Plan is expected to be fully effective in March, 1997. See "Item 1. Business -- Chapter 11 Proceedings." There can be no assurance that, with or without a plan of reorganization, the Company can generate sufficient cash to sustain operations. Going Concern Basis: The accompanying financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. The consolidated financial statements do not include all of the consequences of the proceedings under Chapter 11 nor all adjustments that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon, among other things, its obtaining the required regulatory approvals from the State of Nevada, including approvals by the gaming authorities, obtaining sufficient cash to fund all distributions and cash reserves required at the time the Plan becomes effective and achieving profitable operations and sufficient cash flows to meet future obligations required by the plan. The outcome of these matters is not presently determinable. LIQUIDITY AND CAPITAL RESOURCES Capital Resources: On January 25, 1995 through an underwritten public offering of its common stock, the Company raised approximately $3,747,000 net of underwriting discounts and commissions, and other direct offering costs in consideration for the issuance of 2,500,000 shares of Common Stock. The net proceeds have been used for debt service and other working capital purposes. On March 31, 1995, the Company sold, through a private placement to six purchasers, an aggregate of $1,706,250 principal amount of its 7.5% Convertible Subordinated Notes. The net proceeds of $1,566,000 have been used for debt service and other working capital purposes. As defined in the Subcription Rights Agreement dated October 10, 1996, pursuant to the Plan of Reorganization, as confirmed by the Bankruptcy court, the Company agreed to issue to the Rightholders stock subscription rights ("Rights")to purchase up to an aggregate of one million (1,000,000) shares of Common Stock, par value $0.001 per share, of the Company, at an exercise price of $5.00 per share. In the event such Rights were not exercised by 5 P.M. Pacific time on December 13, 1996, such non-exercised Rights were transferred automatically to the members of the Bondholder Committee in the proportions specified in a Standby Commitment. As the Rights proceeds are received, they are deposited in a separate Company bank account and are reflected in the accompanying 1996 balance sheet classification "Cash and Cash Equivalents Restricted". As of December 31, 1996 Rights proceeds of $4,287,000 had been received by the Company, representing exercise of Rights to approximately 854,000 shares. The Company will issue the related shares, including shares applicable to the bondholders Standby Commitment, upon the Plan's Effective Date, which is expected to occur in March, 1997. Cash and cash equivalents, (including restricted amounts of $4,445,000 at December 31, 1996) increased $8,081,000 to $11,653,000 at December 31, 1996. Net cash provided by operating activities for the year ended December 31, 1996 was approximately $4,852,000. Major uses of cash during 1996 included payments of $1,431,000 of reorganization administrative costs, $578,000 of reorganization severance costs, $139,000 of interest on the 1994 Mortgage notes and $1,001,000 of capital expenditures. Liquidity: Currently, the Company's primary sources of liquidity are cash flows from the operations of the Four Queens Hotel and Casino. Four Queens revenues, operating results and cash flows increased during the year ended December 31, 1996, primarily because of an increase in Four Queens hotel guests and casino visitors, because of an overall increase in the number of visitors to Las Vegas and related visitor (and local residents) interest in the Fremont Street Experience attraction in downtown Las Vegas. During 1996, the Company experienced less liquidity pressure because of the protection afforded by the bankruptcy laws in the payment of obligations incurred prior to the filing and arising under certain executory contracts entered into prior to the filing of the bankruptcy petition and because of the increased visitors to Las Vegas and the opening of the Fremont Street Experience. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 Total revenues, net of promotional allowances, increased $4,226,000 (7.4%). Casino revenues, increased $2,336,000 (5.8%), as compared to 1995. Promotional allowances, which are subtracted from gross revenues, decreased $496,000 (7.4%) in 1996 compared to 1995. Overall, management believes that the increase in 1996 revenues over 1995 was at least partially attributable to increased visitors to downtown because of (1) the Fremont Street Experience attraction and (2) the related improvement of vehicular traffic flow to downtown Las Vegas following completion of its construction in November, 1995. The increase in casino revenues in 1996, as compared to 1995, included a $2,971,000 (10.9%) increase in slot revenues and a $635,000 (5.0%) decrease in table games revenues. The increase in slot revenues was in both the volume of play and win percentage. The decrease in table games revenues resulted primarily from a decrease in the volume of play. Hotel revenues increased $1,638,000 (17.1%)during 1996 due to an increase in average room rate and slightly higher room occupancy. Food and Beverage revenues increased $237,000 (2.0%) where an increase in beverage revenues reflecting increased customer traffic was partially offset by decreased food complimentary sales during the year. Interest and other income decreased $481,000 primarily because of decreases in interest income accrued on Native American loans, which were fully reserved at December 31, 1995. However, in 1996, the Company received its first payment under the settlement agreement reached with the Twenty-nine Palms Band of Mission Indians - For additional information see "Native American Gaming Projects", elsewhere herein. Total costs and expenses, excluding interest, depreciation and amortization and provisions for losses on loans receivable from Native American Tribes, casino development costs and reorganization items decreased $1,337,000 (2.4%) in 1996 as compared to 1995. Casino costs and expenses decreased $2,011,000 (10.2%) primarily due to a decrease in costs allocated to the casino for promotional allowances (which was lower, as a result of a reduction in the ratio of complimentary sales to total sales of rooms, food and beverages) and to a lesser extent by cost containment. Correspondingly hotel expenses increased $585,000 (7.4%) because of lower promotional costs allocation to the casino and because of slightly higher payroll costs. Food and beverage expenses increased $1,078,000 (17.9%) over 1995 almost entirely because of a lesser allocation of promotional costs to the casino. Taxes and licenses were comparable with 1995 consisting of increased payroll and slot taxes which were mostly offset by lower table games and property taxes. Selling, general and administrative expenses decreased $1,057,000 (9.3%) from 1995 primarily as a result of reduced payroll costs of corporate administrative and development staff. Rent expenses were comparable with 1995. Depreciation and amortization decreased $132,000 (3.3%) in 1996 primarily because the remaining unamortized balance of debt issue costs related to the 1993 First Mortgage Notes was charged to reorganization items at October 31, 1995 (See notes 1 and 8 of Notes to Consolidated Financial Statements) and slightly lower depreciation of property and equipment, which was mostly offset by the start-up (January 1, 1996) of amortization (over 60-months) of the $3,000,000 investment in the Fremont Street Experience. Interest expense for 1996 decreased $5,501,000 from 1995 as reorganization proceedings continued. Interest expense of approximately $1,575,000 has been accrued from the August 12, 1996 plan confirmation date on the face amount of the new restated First Mortgage notes payable ($30 million at 13.5% per annum) which are to be issued when the plan becomes fully effective, which is expected to occur by the end of March 1997. In addition, interest of approximately $170,000 has been accrued from the confirmation date on the new restated 11.5% First Mortgage notes payable (approximately $3.8 million face) which are to be issued when the plan becomes fully effective. Because of the Chapter 11 proceedings, there has been no accrual of interest on the $57,000,000, 12.5% First Mortgage notes since October 31, 1995. If accrued to the plan confirmation date, the interest expense on the 12.5% notes would have been approximately $4,394,000 in 1996. (In addition, the remaining unaccreted discount balance related to the 12.5% first mortgage notes was charged to expense as a reorganization item at October 31, 1995). There also has been no accrual of interest on the $1,425,000, 7.5% Convertible Subordinated Notes since October 31, 1995. If accrued to the confirmation date, the interest expense on the 7.5% notes would have been approximately $67,000 in 1996. In addition, there has been no accrual of interest on the $2,950,000 of prior period tax obligations since October 31, 1995. If accrued, the interest expense to the confirmation date on prior period tax obligations would have been approximately $185,000 for 1996. Reorganization expense is comprised of items incurred by the Company as a result of reorganization under Chapter 11 of the Bankruptcy Code. At the Plan confirmation date in August, 1996, the Company expensed approximately $761,000 of executive severance costs, of which approximately $318,000 was immediately due, with the remainder payable in monthly installments which continue into 1997. Reorganization expenses for 1996 follow: December 31, 1996 ($in thousands) Officer severance expenses $ 761 Administrative expenses, net 1,431 Total reorganization items $2,192 1995 COMPARED TO 1994 Total revenues, net of promotional allowances, decreased $5,733,000 (9.1%). Casino revenues, decreased $6,306,000 (13.6%), as compared to 1994. Promotional allowances, which are subtracted from gross revenues, decreased $837,000 (11.1%) in 1995 compared to 1994 for the same reasons. The decrease in casino revenues in 1995, as compared to 1994, consisted primarily of a $3,178,000 (20.1%)decrease in table game revenues and a $3,078,000 (10.1%) decrease in slot revenues. The decreases in table games revenues resulted from decreases in both volumes of play and win percentages. The decrease in slot revenues resulted from decreases in volumes of play. Overall, management believes that these decreases were primarily due to the disruption of traffic flow to downtown Las Vegas caused by construction of the Fremont Street Experience attraction and related infrastructure improvements and lower than expected hold percentages in table games. Hotel revenues increased slightly during 1995 due to a small increase in average room rate which was partially offset by a small decrease in occupancy. Food and Beverage revenues decreased $557,000 (4.4% in 1995) reflecting the lower volume of customer traffic during the period. Interest and other income was comparable with 1994. Casino costs and expenses decreased $3,161,000 (13.8%) primarily as a result of reduced casino payroll expenses resulting from cost containment programs and the decrease in casino volume. Hotel expenses increased $252,000 (3.3%). In 1995, food and beverage expenses decreased $240,000 (3.8%), as compared to 1994 due to cost containment programs. Costs incurred as a result of taxes and license fees decreased $328,000 (4.7%) in 1995 with higher payroll taxes offset by lower gaming taxes expenses. Selling, general and administrative expenses decreased $507,000 (4.3%) from 1994 primarily as a result of reduced payroll expenses resulting from cost containment programs. In 1995, rent expenses increased $642,000 (19.4%) primarily because of an increase in gaming equipment leased under operating leases. Depreciation and amortization decreased 42,000 (1.1%) in 1995 primarily because the remaining unamortized balance of debt issue costs related to the 1993 First Mortgage Notes was charged to reorganization items at October 31, 1995 (See notes 1 and 8 of Notes to Consolidated Financial Statements). Interest on prior period income tax obligations decreased $295,000 primarily because of adjustment of accruals to lower effective rates for the year. Interest expense, excluding interest on prior period income taxes, decreased $1,080,000 (11.9%) because, in connection with the reorganization proceedings, interest subsequent to October 31, 1995 was only accrued on the $3,000,000 principal, 20% first mortgage notes. In addition, the unaccreted debt discount balance related to the 1993 First Mortgage Notes was charged to reorganization expense at October 31, 1995. During the year ended December 31, 1995, the Company charged-off $23,598,000 of loans receivable from Native American Tribes and wrote-off $2,323,000 of casino development costs related to Native American Casino projects (for additional information, see Note 4 of Notes to Consolidated Financial Statements.) For 1995, reorganization items consisted of the following: (in thousands) Debt issue costs charge-off $ 293 Debt discount charge-off 2,695 Administrative expenses, net 5,690 Total reorganization items $8,678 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements are listed and included under Item 14 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Name, Position with Company, Year Principal Occupation First and Other Directorships Age Elected Frank L. Burrell, Jr. 69 1991 Chairman of the Company since January 1993; Managing General Partner since 1977 of Burrell & Co., a securities broker-dealer. Howard R. Carlson 75 1993 Retired business and banking executive. Thomas E. Martin 54 1990 President and Chief Executive Officer of the Company since January 1993 and May 1995, respectively; President and Chief Executive Officer of Four Queens, Inc. since March 1993. Robert A. McKerroll 67 1993 Retired. President and Chief Executive Officer of Foothill Bank, Mountain View, California from 1987 to 1995. In addition to the executive officers of the Company who are also directors, the executive officers of the Company are as follows: Brent E. Duncan was named Treasurer and Secretary of the Company on June 4, 1996. Mr. Duncan joined the Company in January 1993 and prior to being named Treasurer and Secretary of the Company, held various financial positions in which he reported to the Company's Chief Financial Officer. Mr. Duncan has over 10 years of Nevada gaming industry experience, including positions as Controller of a gaming device distributor and of Vice President, Treasurer and Director of Del E. Webb Hotels Corporation (where his responsibilities included reporting financial results for eight hotels, including four Nevada gaming properties). Formerly an audit manager with the Los Angeles office of KPMG Peat Marwick LLP, for six years, Mr. Duncan's assignments included audits of various public and private companies and included two years as resident manager of the firm's Las Vegas, Nevada office. A certified public accountant in Nevada, Mr. Duncan also holds a bachelor's degree in accounting from San Jose State University, where he was a member of the Accountants Honorary Society. Effective April 1, 1996, Gary R. Acord, Chief Financial Officer, resigned his position with the Company. Committees and Meetings The Board of Directors has established an Audit Committee, an Executive Committee, a Finance Committee, a Personnel and Compensation Committee (the "Compensation Committee") and a Nominating Committee. The membership of such committees is determined from time to time by the Board of Directors. Currently, the Audit Committee consists of Messrs. Carlson and McKerroll. The Executive Committee consists of Frank L. Burrell, Jr. (Chairman) and Messrs. Martin and Carlson. The Finance Committee consists of Robert A. McKerroll (Chairman) and Thomas E. Martin and Frank L. Burrell, Jr. and Brent E. Duncan. The Compensation Committee consists of Howard R. Carlson (Chairman) and Messrs. Burrell and McKerroll. The Nominating Committee consists of Messrs. Burrell and Martin. The functions of the Audit Committee include reviewing the independence of the independent auditors, recommending to the Board of Directors the engagement and discharge of independent auditors, reviewing with the independent auditors the plan and results of auditing engagements, approving or ratifying each material professional service provided by independent auditors, considering the range of audit and non-audit fees, reviewing the scope and results of the Company's procedures for internal auditing and the adequacy of internal accounting controls and directing and supervising special investigations. The function of the Executive Committee is to meet periodically between regular meetings of the full Board of Directors and to take any and all required action at such meetings so as to carry out and perform the duties of the Board to the fullest extent permitted by the By-Laws of the Corporation and by law. The primary function of the Finance Committee is to provide an oversight discipline to the Company's operating performance with particular emphasis on cash needs and availability through monitoring such cash availability and needs on unconsolidated and consolidated bases in time horizons of (a) 1-30 days, (b) 31-180 days, and (c)beyond 180 days up to one year. In addition, the Committee monitors the Company's operating performance through monthly reports against approved operating plan and budgets. The functions of the Compensation Committee include reviewing and establishing the general employment and compensation practices and policies of the Company and approving procedures for the administration thereof. The Compensation Committee also establishes the awards under and administers the Incentive Plan for Senior Executives. The Compensation Committee also makes recommendations to the Board of Directors respecting the grant of options under the Company's 1991 Stock Option Plan, the 1993 Long-Term Stock Incentive Plan and administers such plans. The functions of the Nominating Committee including advising the Board of Directors on matters concerning the selection of candidates as nominees for election as director. Stockholders who wish to recommend qualified candidates to the Board of Directors should write to the Secretary of the Company, stating in detail the candidate's qualifications. All such recommendations will be brought to the attention of the Nominating Committee. In 1996, the Board of Directors held 9 meetings and took action by written consent 6 times, the Audit Committee held 1 meeting, the Executive Committee held 10 meetings, the Finance Committee held 9 meetings, and the Compensation Committee and Nominating Committee did not meet in 1996. Each director attended more than 75% of the aggregate number of meetings of the Board and the committees, if any, on which he served in 1996. Director's Fees Each non-employee director of the Company receives an annual fee of $25,000. The Executive Committee is paid $12,000 per year for up to 12 meetings. Over 12 meetings, the fee is $1,000 per meeting. The Finance Committee is paid $6,000 per year for up to 12 meetings. Over 12 meetings, the fee is $500 per meeting. Audit, Compensation and Nominating Committee chairs and members are paid an additional fee of $5,000 and $2,500, respectively, for service as such. All fees are payable monthly. In addition, directors are reimbursed for out-of-pocket expenses incurred in connection with attendance at board and committee meetings. ITEM 11 . EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation paid to Frank L. Burrell, Jr., the Company's Chairman during the three years ended December 31, 1996, and the one executive officer whose total annual salary and bonus exceeded $100,000 in such year. Annual Compensation Long Term Compensation Awards Securities All Other Name and Principal Underlying Compensation Position Year Salary ($) Bonus($) Options (#) ($) Frank L. Burrell, Jr. 1996 361,678(1)(a) -0- -0- 524(1) Chairman 1995 228,235 -0- -0- 2,310(1) 1994 227,991 -0- 100,000 2,310(1) Thomas E. Martin 1996 540,683(2)(a) -0- -0- 672(2) President and 1995 343,344 -0- -0- 2,310(2) Chief Executive 1994 346,606 -0- 200,000 2,310(2) Officer (1) Mr. Burrell received compensation for matching contributions under the Company's 401-k Plan. (1)(a)Pursuant to the Plan of Reorganization, Mr. Burrell was given a severance of one (1) year's annual salary of $240,000. As of December 31, 1996, Mr. Burrell had received $200,000 in severance payments. (2) Mr. Martin received compensation for matching contributions under the Company's 401-k Plan. (2)(a) Pursuant to the Plan of Reorganization, Mr. Martin was given a severance of one (1) year's annual salary of $360,000. As of December 31, 1996, Mr. Martin had received $300,000 in severance payments. Table No options were granted in 1996. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values During 1996, no stock options were exercised by executive officers of the Company. In addition, as of December 31, 1996, Messers. Martin and Burrell do not hold any unexercised stock options. Employment Contracts and Termination of Employment and Change-of-Control Arrangements In March 1993, the Company adopted an Amended and Restated Senior Executive Severance Plan (the "Severance Plan"). Pursuant thereto, the Company has entered into severance agreements with Messrs. Burrell and Martin as of same date. Under such agreements, all such officers were to receive an amount equal to two times their respective annual salaries, in each case, thirty days after termination (subject to certain limitations) if such termination occurs within two years after a change of control of the Company. The Severance Plan also provides that a covered officer may "put" to the Company any stock options theretofore granted to him under the Company's option plans in return for cash payments equal to the difference (if greater than zero) between the "fair market value" (as defined in the relevant option plan) and the exercise price per share of such options. Pursuant to the Company's Plan of Reorganization, Messrs. Burrell and Martin's severance agreements were assumed, as modified, by the U.S. Bankruptcy Court to provide for a severance payment of $240,000 and $360,000, respectively, to be paid in equal installments over six-months commencing on the Confirmation Date with a single lump sum of one-half of their total severance to be paid on the Confirmation Date. See "Item 1. Business--Chaper 11 Proceedings--Plan of Reorganization." Compensation Committee Report on Executive Compensation The duties of the Compensation Committee are to establish the salaries of the company's executive officers; to exercise the authority of the Board of Directors concerning the Company's benefit plan; to administer the Company's stock option plans; to make recommendations to the Board of Directors concerning salary increases and bonus awards for the Company's executives, including the Chairman and the President/Chief Executive Officer; and to advise the Board of Directors on other compensation and benefit matters. The members of the Compensation Committee are Messrs. Carlson (Chairman), Burrell and McKerroll. The Company's fundamental philosophy and policy is to provide a total compensation program which will enable the Company to attract, retain and motivate the high-caliber management team needed to achieve the Company's longer-term objectives. Accordingly, each executive's compensation package is comprised of four elements: (i) base salary, which represents competitive pay within the gaming and hospitality industry for a comparable level of responsibility and reflects individual performance; (ii) annual variable performance awards payable in cash, which are tied to the Company's achievement of financial goals and individual performance; (iii) stock-based incentive awards which strengthen the mutual interests of the executive officers and the shareholders; and (iv) a cost effective and tax efficient benefits package to provide security for officers and their families. It is the Company's objective to pay "market rate" base salaries (i.e. at the 50th percentile) and to pay above the market rate through variable compensation vehicles (incentives and stock), contingent upon the Company's performance and results attained. Base Salary. The base salary of each officer is set on the basis of the salary level in effect for comparable positions within the Company's peer group (i.e. market or 50% percentile) and personal performance. The factors considered when measuring personal performance of an executive officer include, but are not limited to, the Company's performance, the executive's departments and personal performance. The executive's departments are evaluated by reviewing performance to budget and goals, including such factors as profit. Other factors may include development and retention of staff as well as the review of all audit reports. Due to the Company's financial performance, base salaries were reduced by 5% and a salary freeze was instituted effective October 5, 1994. On or about April 1, 1996, all employees, excluding the Chairman of the Board and Chief Executive Officer, were given a 2.5% increase in their base salary. Annual Incentive Compensation. Due to the financial condition of the company and the filing of Chapter 11 Bankruptcy on October 31, 1995, there was no incentive compensation paid in 1996. Long-Term Incentive Compensation. The 1993 Long-Term Stock Incentive Plan provides for grants of Company securities to executives and other key individuals in the form of stock options, SARs, stock units or restricted shares. The Compensation Committee grants stock options to attract new executives to the Company and to retain current officers. The grants are designed to align the interests of the executive officers with those of shareholders and ensure long-term commitment to the Company. Each stock option grant allows the executive to acquire the Company's common stock at a fixed price per share (the market price on the date of grant) over a specified period of time (up to 10 years). Accordingly, the option will provide a return to the executive officer only if the market price of the Company's common stock appreciates over the option term. The number of options historically awarded was compared to the option grants of the Company's industry. The Company's practices with regard to stock option awards and holdings were found to be below market when compared with practices within the industry peer group. No SARs, stock units, stock options, restricted stock or long term incentive plan payouts were made during 1996. Chief Executive Officer's Compensation During 1996, Mr. Martin was paid a base salary of $342,000. In setting Mr. Martin's salary, the Compensation Committee considered the market survey and personal performance. The Committee believes that Mr. Martin's salary is fair and appropriate in light of the obligations and responsibilities of the Chief Executive Officer. Mr. Martin was not awarded any cash bonuses during 1996. Mr. Martin received no grants of options in 1996. COMPENSATION COMMITTEE Howard R. Carlson, Chairman Frank L. Burrell, Jr. Robert A. McKerroll ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the names and addresses of all persons who beneficially owned, to the knowledge of the Company, more than 5% of the outstanding shares of Common Stock on December 31, 1996, and the number of shares beneficially owned by each director, each executive officer named in the Summary Compensation Table and all directors and executive officers as a group. Shares are beneficially owned by a person if he or she currently owns such shares or has or will have the right to acquire such shares within 60 days of December 31, 1996. Unless otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Beneficial Ownership of Common Stock Number of Name and Address of Owner Shares Percent of Class Goldsmith Financial Corporation 1,204,030(1) 7.6% 11350 McCormick Road, Suite 200 Hunt Valley, Maryland 21031 Mojave Partners, L.P. 1,053,417(2) 6.6% 181 Maple Street Stowe, Vermont 05672 Howard R. Carlson 10,000(3) * Thomas E. Martin 56,000 * Robert A. McKerroll 2,000 * All directors and executive officers as a group(4)68,000 * * Less than one percent. (1) Based solely on information set forth in Schedule 13D and amendments thereto filed with the Securities and Exchange Commission by Goldsmith Financial Corporation through December 31, 1996. (2) Based solely on information set forth in Schedule 13D and amendments thereto filed with the Securities and Exchange commission by Mojave Partners, L.P. through December 31, 1996. Includes 122,382 shares of Common Stock subject to immediately exercisable warrants at an exercise price of $5.50 per share. (3) Consists of 10,000 shares held by the Howard R. and Jeanne M. Carlson Trust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. Performance Graph The Commission requires that the Company include in this Form 10K a graphical comparison of the Company's cumulative five-year shareholder returns on an indexed basis with (i) a broad equity market index and (ii) and industry index or peer group. Set forth below is a line graph (table) comparing the percentage change in the cumulative total shareholder return on the Company's Common Stock against the cumulative total return of the Dow Jones Equity Market Index and the Entertainment & Leisure Index for the five years ended December 31, 1996. "Total return," for the purpose of the graph, assumes reinvestment of all dividends. Comparison of Five Year Cumulative Total Return for Elsinore Corporation, the Dow Jones Equity Market Index and the Entertainment and Leisure Index. Elsinore Corporation Equity Table December 31, 1996 No.of No.of shares Market value Total Market shares o/s at 12/31 at 12/31 Value per $100 1991 12,017,164 0.7500 9,012,873 133 1992 12,017,164 0.9375 11,266,091 107 1993 12,062,164 4.6250 55,787,509 22 1994 13,135,214 1.9375 25,449,477 52 1995 15,891,793 0.6875 10,925,608 145 1996 15,891,793 0.5625 8,939,134 178 Elsinore Index Dow Jones Dow Jones Dow Jones Dow Jones Value of Equity Equity E&L E&L YE Invest Index Base Index Base 1991 100 392 100 327 100 1992 125 413 105 402 123 1993 617 442 113 501 153 1994 258 433 111 450 137 1995 83 581 148 590 180 1996 13 702 179 641 196 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page Number A. Documents filed as part of this report on behalf of Elsinore Corporation and Subsidiaries: (i) Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets, December 31, 1996 and 1995F-2 Consolidated Statements of Operations, Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Shareholders' Equity, (Deficit) Years Ended December 31, 1996, 1995 and 1994F-7 Notes to Consolidated Financial StatementsF-8 (ii) Financial Statement Schedules: All Schedules are omitted because they are either not required or not applicable, or the required information is presented in the Notes to the Consolidated Financial Statements. (iii) Exhibits: 2.1* First Amended Plan of Reorganization [2.1] (16) 2.2* Order Confirming First Amended Plan of Reorganization [2.2] (16) 3.1* Amended and Restated Articles of Incorporation of Elsinore Corporation [3.1](1) 3.2* Amended and Restated Bylaws of Elsinore Corporation (4) 10.1* Sublease, dated May 26, 1964, by and between A. W. Ham, Jr. and Four Queens, Inc. [10.1](2) 10.2* Amendment of Sublease, dated June, 15, 1964, by and between A. W. Ham, Jr. and Four Queens, Inc. [10.2] (2) 10.3* Amendment of Sublease, dated February 25, 1965, by and between A. W. Ham, Jr. and Four Queens, Inc. [10.3](2) 10.4* Amendment of Sublease, dated January 29, 1973, by and between A. W. Ham, Jr. and Four Queens, Inc. [10.4](2) 10.5* Supplemental Lease, dated January 29, 1973, by and between A. W. Ham, Jr. and Four Queens, Inc. [10.5](2) 10.6* Lease Agreement, dated April 25,1972, by and between Bank of Nevada and Leon H. Rockwell, Jr., as Trustees of Four Queens, Inc. [10.6](2) 10.7* Lease, dated January 1, 1978, between Finley Company and the Company [10.7](2) 10.8* Ground Lease, dated October 25, 1983, between Julia E. Albers, Otto J, Westlake, Guardian, and Four Queens, Inc. [10.8](2) 10.9* Ground Lease, dated October 25, 1983 between Katherine M. Purkiss and Four Queens, Inc. [10.9](2) 10.10* Ground Lease, dated October 25, 1983 between Otto J. Westlake and Four Queens, Inc. [10.10](2) 10.11* Indenture of Lease, dated March 28, 1984, by and between the City of Las Vegas and Four Queens, Inc. [10.11](2) 10.12* Lease Indenture, dated May 1, 1970, by and between Thomas L. Carroll, et al. and Four Queens, Inc. [10.12](2) 10.13* Memorandum of Lease, dated January 26, 1973, between President and Board of Trustees of Santa Clara College and Four Queens, Inc. [10.13](2) 10.14* Elsinore Corporation 1991 Stock Option Plan (the "1991 Plan") [10.11](1) 10.15* Form of Option Agreement pursuant to the 1991 Plan. [10.21](2) 10.16* Form of Director and Officer Indemnity Agreement. [10.16](11) 10.17* Elsinore Corporation 1993 Long-Term Stock Incentive Plan (the "1993 Plan"). [10.23](2) 10.18* Form of Option Agreement pursuant to the 1993 Plan. [10.24](2) 10.19* Agreement, dated January 14, 1993, between Jeanne Hood, the Company and Four Queens, Inc. [10.25](2) 10.20* Amended and Restated Elsinore Corporation Senior Executive Severance Plan, dated March 15, 1993. [10.26] (2) 10.21* Form of Amended and Restated Senior Executive Severance Agreement. [10.27](2) 10.22* Agreement, dated April 28, 1992, by and between Four Queens, Inc., Jeanne Hood, Edward M. Fasulo and Richard A. LeVasseur. [10.28](2) 10.23* 1995 Short Term Incentive Plan for Senior Executive, adopted December 16, 1994 [10.23](11) 10.24* Agreement of Limited Partnership, dated January 28, 1993, by and between ELSUB Management Corporation and Native American Casino Corporation. [10.30](2) 10.25* Incentive Consulting Agreement, dated January 28, 1993, by and among Palm Springs East, L.P. (the "Partnership"), James G. Brewer, Donald Wright and Sparkesh Enterprises, Ltd. [10.31](2) 10.26* Revised Management Agreement for Gaming Activities, dated November 11, 1993 by and between Twenty-Nine Palms Band of Mission Indians and the Partnership [10.26](5) 10.27* Addendum to Revised Management Agreement for Gaming Activities, dated January 25, 1994, between Twenty-Nine Palms Band of Mission Indians and the Partnership [10.27](5) 10.28* Loan Agreement dated November 11, 1993, by and between Twenty-Nine Palms Band of Mission Indians and the Partnership [10.28](5) 10.29* Gaming Project Development and Management Agreement, dated September 28, 1993, by and among Olympia Gaming Corporation, The Jamestown S'Klallam Tribe and JKT Gaming, Inc., a Tribal Corporation organized and chartered by the Jamestown S'Klallam Tribe ("JKT Gaming"). [10.29](5) 10.30* Addendum to Gaming Project and Development Management Agreement, dated January 28, 1994 by and among Olympia Gaming Corporation, The Jamestown S'Klallam Tribe and JKT Gaming [10.30](5) 10.31* Loan Agreement, dated November 12, 1993 by and among The Jamestown S'Klallam Tribe and JKT Gaming [10.31](5) 10.32* First Amendment to Loan Agreement, dated January 28, 1994 by and among The Jamestown S'Klallam Tribe and JKT Gaming [10.32](5) 10.33* Purchase Agreement, dated October 8, 1993, among the Company, the Guarantors named therein and the Purchasers named therein. [10.1](3) 10.34* Warrant Agreement, dated as of October 8, 1993, between the Company and First Trust National Association, as warrant agent. [10.3](3) 10.35* First Mortgage Notes Registration Rights Agreement, dated as of October 8, 1993, among the Company, the Guarantors named therein and the Purchasers named therein. [10.4](3) 10.36* Warrant Shares Registration Rights Agreement, dated as of October 8, 1993, among the Company and the Purchasers named herein. [10.5](3) 10.37* Amendment No. 1, dated as of April 21, 1994, to Warrant Agreement, dated as of October 8, 1993, among the Company and First Trust National Association, as warrant agent [10.2](6) 10.38* Indenture, dated as of October 8, 1993, by and among Elsinore Corporation, the Guarantors named therein and First Trust National Association, as trustee, including the form of Series B Note registered on Form S-4 dated January 6, 1994. [10.2](3) 10.39* Escrow and Disbursement Agreement, dated as of October 8, 1993, among the Company, First Trust National Association and First Interstate Bank of Nevada, N.A., as escrow agent. [10.6](3) 10.40* Pledge Agreement, as of dated October 8, 1993, from the Company and ELSUB Management Corporation to First Trust National Association [10.7](3) 10.41* Deed of Trust, Assignment of Rents and Security Agreement, dated as of October 8, 1993, by and among Four Queens, Inc., Land Title of Nevada, Inc. and First Trust National Association [10.8](3) 10.42* Assignment of Operating Agreements, dated as of October 8, 1993 by Palm Springs East Limited Partnership to First Trust National Association. [10.9](3) 10.43* Assignment of Operating Agreements, dated as of October 8, 1993 by Olympia Gaming Corporation to First Trust National Association. [10.10](3) 10.44* Supplemental Indenture No. 1, dated as of April 21, 1994, to the Indenture dated as of October 8, 1993, among the Company, the Guarantors named therein and First Trust National Association, as trustee. [10.1](6) 10.45* Operating Agreement of Nashville Nevada LLC. [10.52](9) 10.46* Amendment No. 1 to Operating Agreement of Nashville Nevada LLC. [10.53](9) 10.47* Hotel/Casino Sublease for Owner-Operator between Mojave Valley Resort, Inc. and Mojave Valley Resort Casino Company. [10.54](9) 10.48* Installment Agreement (on Form 433-D) dated December 6, 1994 by and between the Company and the Internal Revenue Service. [10.55](10) 10.49* Supplemental Indenture No. 2, dated December 14, 1994, to the Indenture dated as of October 8, 1993 by and among the Company, the Guarantors named therein and First Trust National Association, as Trustee. [10.56](10) 10.50* Amendment no. 1 to Note and Stock Purchase Agreement, dated December 14, 1994 by and among the Company, the Guarantors named therein and the Purchasers named therein. [10.57](10) 10.51* First Mortgage Note and Common Stock Exchange Agreement, dated as of December 29, 1994, by and among the Company, Mojave Partners, L.P., a Delaware limited partnership, and Edward Herrick, an individual. [10.51](11) 10.52* Amendment to Agreement, dated January 4, 1994, between Jeanne Hood, the Company and Four Queens, Inc. [10.52](11) 10.53* Employment Agreement, dated December 5, 1994, between Rudy Prieto and the Company. [10.53] (11) 10.54* Employment Agreement, dated July 1994, between John Cook and the Company. [10.54.](11) 10.55* 1993 Long Term Stock Incentive Plan, as amended and restated on July 1, 1994. [10.55] (11) 10.56* Restated and Amended Elsinore Corporation Senior Executive Severance Plan, dated as of March 15, 1993 [10.56] (12) 10.57* Form of Senior Executive Severance Agreement by and between the Company and certain senior executives. [10.57] (12) 10.58* Amendment No. 2 to Operating Agreement of Nashville Nevada L.L.C., effective as of September 30, 1994, by and among the Company, Mojave Gaming, Inc., Mojave Valley Resort Casino Company, and Nashville Nevada, L.L.C. [10.58] (12) 10.59* Note Purchase Agreement, dated as of March 30, 1995, between the Company and Magnolia Partners, L.P., a Delaware limited partnership. [10.59] (12) 10.60* Common Stock Registration rights Agreement, dated as of March 31, 1995, between the Company and Magnolia Partners, L.P. [10.60] (12) 10.61* Note Purchase Agreement, dated as of March 30, 1995, between the Company and Mojave Partners, L.P., a Delaware limited partnership. [10.61] (12) 10.62* Common Stock Registration Rights Agreement, dated as of March 31, 1995, between the Company and Mojave Partners, L.P. [10.62] (12) 10.63* Note Purchase Agreement, dated as of March 30, 1995, between the Company and G & O Partners, L.P., a Delaware limited partnership. [10.63] (12) 10.64* Note Purchase Agreement, dated as of March 30, 1995, between the Company and GroRan LLC1, a Delaware limited liability company. [10.64] (12) 10.65* Note Purchase Agreement, dated as of March 30, 1995, between the Company and Paul Orwicz. [10.65] (12) 10.66* Note Purchase Agreement, dated as of March 30, 1995, between the Company and David Ganek. [10.66] (12) 10.67* Common Stock Registration Rights Agreement, dated as of March 31, 1995, between the Company and G & O Partners, L.P., GroRan LLC1, Paul Orwicz and David Ganek. [10.67] (12) 10.68* Stock Pledge Agreement, dated March 31, 1995, by and among the Company, Magnolia Partners, L.P., Mojave Partners, L.P., G & O Partners, L.P., GroRan LLC1, Paul Orwicz and David Ganek. [10.68] (12) 10.69* Information Statement of Elsinore Corporation dated June 16, 1995, regarding the Consent to Waiver of Compliance and Amendment of the Indenture governing its 12.5% First Mortgage Notes due 2000, as amended by the Supplemental Information Statement dated June 23, 1995. [10.1] (13) 10.70* Supplemental Indenture No. 3 dated as of June 30, 1995, by and among the Company, the Guarantors named therein, and First Trust National Association, as Trustee on behalf of the First Mortgage Noteholders. [10.2] (13) 10.71* Amendment No. 2 dated as of June 23, 1995, to the Note and Stock Purchase Agreement by and among the Company, each Guarantor named therein and each Mortgage Noteholder. [10.3] (13) 10.72* Waiver of Compliance and Agreement to Amend Promissory Notes, each dated as of June 30, 1995, by and among the Company and each Convertible Noteholder. [10.4] (13) 10.73* Subscription Rights Agreement, dated October 10, 1996 [10] (17) 10.74 Interim Management Agreement 21.1 List of Subsidiaries 23.1 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedules 99.1* Voluntary Petition for Bankruptcy Pursuant to Chapter 11 of the Bankruptcy Code dated October 31, 1995.[99.2](14) 99.2* Olympia Gaming Corporation Voluntary Petition for Bankruptcy Pursuant to Chapter 11 of the bankruptcy Code dated October 31, 1995. [99] * Previously filed with the Securities and Exchange Commission as exhibits to the document shown below under the Exhibit Number indicated in brackets and incorporated herein by reference and made a part of hereof: (1) Annual Report on Form 10-K for the year ended December 31, 1991 (2) Annual Report on Form 10-K for the year ended December 31, 1992 (3) Current Report on Form 8-K dated October 19, 1993 (4) Current Report on Form 8-K dated November 12, 1993 (5) Annual Report on Form 10-K for the year ended December 31, 1993 (6) Current Report on Form 8-K dated April 28, 1994 (7) Registration Statement on Form S-4 filed January 6, 1994 (8) Current Report on Form 8-K dated October 24, 1994 (9) Registration Statement on Form S-2 filed October 24, 1994 (10) Amendment No. 2 to Registration Statement on Form S-2 filed December 23, 1994 (11) Registration Statement on Form S-4 filed January 23, 1995 (12) Annual Report on Form 10-K for the year ended December 31, 1994 (13) Current Report on Form 8-K dated July 7, 1995 (14) Current Report on Form 8-K dated November 7, 1995 (15) Annual Report on Form 10-K for the year ended December 31, 1995. (16) Current Report on Form 8-K dated August 8, 1996 (17) Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 B. Reports on Form 8-K During the fourth quarter of 1996, the Company filed the following Current Report on Form 8-K: Form 8-K dated December 9, 1996 (regarding extension of Plan effective date.)
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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/ Thomas E. Martin THOMAS E. MARTIN, President Dated: February 19, 1997 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 February 19, 1997. /s/ Frank L. Burrell, Jr. /s/ Howard Carlson Frank L. Burrell, Jr. Howard Carlson Chairman of the Board of Directors Director /s/ Robert A. McKerroll /s/ Thomas E. Martin Robert A. McKerroll Thomas E. Martin Director Director /s/ Brent E. Duncan Brent E. Duncan Treasurer Independent Auditors' Report The Board of Directors and Shareholders Elsinore Corporation, Debtor-In-Possession We have audited the consolidated balance sheets of Elsinore Corporation and subsidiaries, Debtor-In-Possession, as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period 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, Debtor-In-Possession, as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on October 31, 1995 the Company filed a voluntary petition seeking to reorganize under Chapter 11 of the United States Bankruptcy Code. The Company is currently operating as a Debtor-In-Possession under the jurisdiction of the Bankruptcy Court and this event and circumstances relating to this event raise substantial doubt about the Company's ability to continue as a going concern. On August 8, 1996, the Bankruptcy Court entered an order confirming the Company's plan of reorganization, as modified, with a confirmation date of August 12, 1996. The Company's ability to continue as a going concern is dependent upon, among other things, its obtaining the required regulatory approvals from the State of Nevada, including approvals by the gaming authorities, obtaining sufficient cash to fund all distributions and cash reserves required at the time the plan becomes effective and achieving profitable operations and sufficient cash flows to meet future obligations required by the plan. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. KPMG Peat Marwick LLP Las Vegas, Nevada February 19, 1997 F-1 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Balance Sheets December 31, 1996 and 1995 (Dollars in Thousands) 1996 1995 Assets Current Assets: Cash and cash equivalents $ 7,208 $ 3,572 Accounts receivable, less allowance for doubtful accounts of $347 and $201, respectively 815 729 Inventories 354 248 Prepaid expenses 1,177 1,029 Total current assets 9,554 5,578 Cash and cash equivalents - restricted(note 1) 4,445 - Property and equipment, net(notes 5 and 8) 23,544 25,473 Leasehold acquisition costs, net of accumulated amortization of $4,898 and $4,691, respectively 1,941 2,148 Investment in Fremont Street Experience, LLC 2,400 3,000 Other assets(note 6) 743 902 $ 42,627 $ 37,101 See accompanying notes to consolidated financial statements. F-2 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Balance Sheets (continued) December 31, 1996 and 1995 (Dollars in Thousands) 1996 1995 Liabilities and Shareholders' Deficit Current liabilities: Accounts payable $ 1,065 $ 676 Accrued interest 2,137 100 Accrued expenses(note 7) 6,176 5,352 Current portion of capital lease obligations (note 12) 50 54 Total current liabilities 9,428 6,182 Prepetition liabilities not subject to compromise: Long-term debt, subject to demand for acceleration(note 8) 3,000 2,902 Capital lease obligations, net of current portion(note 12) 1,487 1,531 4,487 4,433 Prepetition liabilities subject to compromise: Accounts payable 3,565 4,070 Prior period income taxes and related interest (note 9) 2,985 2,985 Accrued interest 4,419 4,419 Accrued expenses 28 28 Long-term debt subject to demand for acceleration(note 8) 58,425 58,425 69,422 69,927 Total liabilities 83,337 80,542 Shareholders' deficit(note 10): Common stock, $.001 par value per share. Authorized 100,000,000 shares. Issued and outstanding 15,891,793 shares 16 16 Additional paid-in capital 69,602 65,315 Accumulated deficit (110,328) (108,772) Total shareholders' deficit (40,710) (43,441) Commitments and contingencies (notes 4, 11 and 12) $ 42,627 $ 37,101 See accompanying notes to consolidated financial statements. F-3
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Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Operations Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands, Except Per Share Amounts) 1996 1995 1994 Revenues, net: Casino $ 42,300 $ 39,964 $ 46,270 Hotel 11,202 9,564 9,234 Food and beverage 12,373 12,136 12,693 Interest and other 1,502 1,983 2,020 Promotional allowances (6,178) (6,674) (7,511) 61,199 56,973 62,706 Costs and Expenses: Casino 17,694 19,705 22,866 Hotel 8,482 7,897 7,645 Food and beverage 7,088 6,010 6,250 Taxes and licenses(note 14) 6,592 6,627 6,955 Selling, general and administrative 10,328 11,385 11,892 Rents 4,055 3,955 3,313 Provision for losses on loans receivable from Native American Tribes (note 4) - 23,598 - Casino development costs (note 4) - 2,323 - Depreciation and amortization 3,816 3,948 3,990 Interest (contractual interest for 1996 and 1995 of $7,661 and $9,212) respectively (note 8) 2,505 8,006 9,086 Interest, prior period income tax obligation(note 9) - 590 885 60,563 94,044 72,882 Income (loss) before reorganization items 636 (37,071) (10,176) Reorganization items(note 2) (2,192) (8,678) - Loss before income taxes and (1,556) (45,749) (10,176) extraordinary item Income taxes(note 9) - - - Loss before extraordinary item (1,556) (45,749) (10,176) Extraordinary item(note 15) - - 735 Net loss $ (1,556) $(45,749) $(9,441) Loss per common share: Loss before extraordinary item $ (0.10) $ (2.95) $ (0.84) Extraordinary item - - (0.06) $ (0.10) $ (2.95) $ (0.78) Weighted average number of common shares outstanding 15,891,793 15,511,983 12,106,778 See accompanying notes to consolidated financial statements. F-4 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) 1996 1995 1994 Cash flows from operating activities: Net loss $ (1,556) $(45,749) $ (9,441) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 3,816 3,948 3,990 Accretion of discount on long-term debt 98 1,170 1 171 Provision for loss on loans receivable from Native American Tribes - 23,598 - Write-off of casino development costs - 2,323 - Write-off of Fremont Street Experience operating costs - 525 - Extraordinary loss on extinguishment of debt - - (735) Reorganization items 2,192 8,678 - Accrued expenses (1,368) 5,352 - Change in other assets and liabilities, net 2,166 3,111 (227) Liabilities subject to compromise: Accounts payable (505) 1,982 (204) Prior period income taxes and related interest - (3,475) (50) Accrued interest and other expenses - (2,119) 2,059 Total adjustments 6,399 45,093 6,004 Cash provided by (used in) operating activities 4,843 (656) (3,437) Cash flows from investing activities: Notes and loans receivable from Native American Tribes - (6,646) (15,908) Casino development costs - (1,073) (302) Investment in Fremont St. Experience LLC - (525) (1,122) Capital expenditures (1,001) (148) (4,364) Cash used in investing activities (1,001) (8,392) (21,696) See accompanying notes to consolidated financial statements. F-5 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) 1996 1995 1994 Cash flows from financing activities: Issuance of long-term debt - 1,706 3,000 Principal repayments of long-term debt (48) (62) (204) Proceeds from issuance of common stock, net of underwriting discounts and commissions and other direct costs - 3,747 15 Proceeds from issuance of common stock subscription rights(note 1) 4,287 - - Debt issuance costs - (140) (1,416) Modification of capital lease obligation - 277 - Cash provided by financing activities 4,239 5,528 1,395 Increase (decrease) in cash and cash equivalents 8,081 (3,520) (23,738) Cash and cash equivalents at beginning of year 3,572 7,092 30,830 Cash and cash equivalents at end of year (Including restricted amounts of $4,445 and $3,685 at December 31, 1996 and 1994, respectively) $ 11,653 $ 3,572 $ 7,092 Supplemental Disclosures of Cash Flow Information: The Company paid $367,000, $3,998,000 and $7,750,000 for interest in 1996, 1995 and 1994, respectively, and $0, $3,475,000 and $50,000 for income taxes in 1996, 1995 and 1994, respectively. Supplemental Schedule of Non-Cash Financing and Investing Activities: The Company reduced equipment and related accumulated depreciation by $1,909,000 in 1994, to reflect the write-off of fully depreciated assets taken out of service. In connection with the supplemental issuance in 1994 of 750,000 stock purchase warrants, the Company recorded a discount on the First Mortgage Notes and increased additional paid-in capital by $1,125,000, the fair market value of the stock purchase warrants. In connection with the Private Placement in 1994 of the Company's 20.0% Mortgage Notes due 1996, the Company recorded a discount on the Notes and increased additional paid-in capital by $268,000, the fair value of the 126,050 shares of common stock issued with the notes. In 1995, the holders of Convertible Notes with a face amount of $281,250 effected conversion of the notes into 256,579 shares of the Company's common stock. See accompanying Notes to Consolidated Financial Statements. F-6 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Consolidated Statements of Shareholders' Equity (Deficit) Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) [Enlarge/Download Table] Additional Common Common Paid-in Accumulated Treasury Shares Stock Capital Deficit Stock Total Balance, December 31, 1993 12,070,017 12 58,149 (53,582) (12) 4,567 Issuance of stock purchase warrants to First mortgage noteholders (note 8) - - 1,125 - - 1,125 Issuance of 17,000 shares, including 7,853 shares held in treasury, upon exercise of stock options 9,147 - 3 - 12 15 Issuance of shares as partial consideration for debt (note 8) 126,050 - 268 - - 268 Issuance of shares in exchange for First mortgage notes (notes 8 and 15) 930,000 1 1,801 - - 1,802 Net loss - - - (9,441) - (9,441) Balance, December 31, 1994 13,135,214 13 61,346 (63,023) - (1,664) Issuance of shares(note 10) 2,500,000 3 3,744 - - 3,747 Issuance of shares upon partial conversion of 7.5% convertible notes 256,579 - 225 - - 225 Net loss - - - (45,749) - (45,749) Balance, December 31, 1995 15,891,793 16 65,315 (108,772) - (43,441) Issuance of common stock subscription rights - - 4,287 - - 4,287 Net loss - - - (1,556) - (1,556) Balance, December 31, 1996 15,891,793 16 69,602 (110,328) - (40,710) See accompanying notes to consolidated financial statements. F-7 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements Years Ended December 31, 1996, 1995 and 1994 1. Reorganization Under Chapter 11, Liquidity and Financial Condition Chapter 11 Proceedings. On October 31, 1995, Elsinore and certain of its subsidiaries filed a voluntary petition in the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada) (the "Bankruptcy Court") to reorganize under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). The file number in the case is 95-24685 RCJ with Judge Robert C. Jones presiding. On November 10, 1995, Olympia Gaming Corporation, a wholly-owned subsidiary of the Company, also filed a voluntary petition in the same Court. The Company is currently operating as a debtor-in-possession under the supervision of the Bankruptcy Court. As a debtor in possession, the Company may operate its business but may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court. Plan of Reorganization. General. Under the Bankruptcy Code, the Company's pre-petition liabilities are subject to settlement under a plan of reorganization. The Bankruptcy Code also requires that all administrative claims be paid on the effective date of the plan of reorganization unless the respective claimants agree to different treatment. During the course of the bankruptcy proceedings, an unofficial committee of a majority of the holders of the 1993 First Mortgage notes was formed (the "Bondholders Committee"). Beginning in approximately December 1995, the Company and the Bondholders Committee participated in settlement negotiations in an effort to consensually resolve their concerns in the case. The result of these negotiations was an agreed upon conceptual framework for a plan of reorganization, which was thereafter embodied in a stipulation (the "Stipulation"). On February 28, 1996, the Company filed a plan of reorganization, which was consistent with the terms of the Stipulation, together with an accompanying disclosure statement. The disclosure statement was approved on May 13, 1996 subject to the insertion of certain language acceptable to the 1993 First Mortgage Noteholders. On July 16, 1996, the Bankruptcy Court conducted a hearing regarding confirmation of the plan as submitted by the Company. At that time, the Bankruptcy Court considered the various objections to the plan raised by certain creditors and equity holders. On July 18, 1996, the Bankruptcy Court conducted further proceedings with respect to the plan of reorganization submitted by the Company. At the July 18 hearing, the Bankruptcy Court concluded that certain modifications to the plan would be necessary for its confirmation. These modifications included, among others, making no distribution to the Company's existing equity holders. Following the July 18 confirmation hearing , but before the entry of an order incorporating the Bankruptcy Court's ruling on the plan submitted by the Company, certain of the Company's creditors filed a motion for reconsideration based upon their withdrawal of objections to the plan. These creditors agreed to withdraw their objections in return for a reallocation of equity interests in the reorganized Elsinore. On August 5, 1996, the Bankruptcy Court conducted a hearing on the reconsideration motion. After that hearing, the Bankruptcy Court determined that the relief sought by that motion should be granted. Accordingly, on August 8, 1996, the Bankruptcy Court entered an order confirming the plan of reorganization submitted by the Company as modified by that order (the "Plan") with a confirmation date of August 12, 1996. The effective date of the Plan will be after all regulatory approvals required by the State of Nevada, including approvals by the gaming authorities, have been obtained and Elsinore has sufficient cash to fund all distributions. Management believes the only remaining condition to effectiveness to be satisfied is the Nevada Gaming Authorities granting its approval of the members of the Company's reconstituted Board of Directors. Currently, it is expected that the Plan will be fully effective by March 1997. Terms of Plan of Reorganization The Plan provides for the continuation of Elsinore and at least three of its subsidiaries (Four Queens, Inc., ElSub Management Corporation and Palm Springs East Limited Partnership) as going concerns. Under the Plan, the old common stock interests in Elsinore will be canceled and Elsinore, as reorganized, will issue new common stock (the "New Common Stock"). On the effective date of the Plan, 80% of the New Common Stock will be distributed to the following classes of creditors and equity holders in the following proportions: Interest Percentage 12.5% First Mortgage noteholders 87.5% 7.5% Convertible Subordinated noteholders 3.5% Unsecured creditors of Four Queens, Inc 2.5% Unsecured creditors of Elsinore Corporation 1.0% Internal Revenue Service 1.9% Old common stockholders 3.6% 100.0% The remaining 20% of the New Common Stock will be issued through a rights offering to raise $5,000,000 to assist in funding the Plan. Initially, the entire amount of the rights offering will be made available for subscription to the following classes of creditors and equity holders in the percentages enumerated below: Interest Percentage 12.5% First Mortgage noteholders 87.5% 7.5% Convertible Subordinated noteholders 3.5% Unsecured creditors of Four Queens, Inc 2.5% Old common stockholders 6.5% 100.0% Each member of the above classes of creditors and equity holders will be required to elect whether to exercise the right to purchase the New Common Stock allocated and whether to purchase additional shares of New Common Stock if one or more holders of that class do not fully exercise their right to purchase New Common Stock. The subscription rights of non-exercising members of the above classes will be reallocated automatically among the other members of the class electing to exercise their rights to purchase additional shares of New Common Stock. If any of the members of any class do not elect to exercise all of the rights allocated to that class, the unexercised rights will be automatically distributed to the members of the Bondholder Committee. The Bondholder Committee has guaranteed a 100% subscription for the $5 million rights offering, in the event the percentages enumerated above are not otherwise fully subscribed. On or about October 10, 1996 the rights offering process commenced with the distribution of subscription rights materials to the class members. As defined in the Subsription Rights Agreement dated October 10, 1996, pursuant to the Plan of Reorganization, as confirmed by the Bankruptcy court, the Company agreed to issue to the Rightholders stock subscription rights ("Rights")to purchase up to an aggregate of one million (1,000,000) shares of Common Stock, par value $0.001 per share, of the Company, at an exercise price of $5.00 per share. In the event such Rights were not exercised by 5 P.M. Pacific time on December 13, 1996, such non-exercised Rights were transferred automatically to the members of the Bondholder Committee in the proportions specified in a Standby Commitment. As the Rights proceeds are received, they are deposited in a separate Company bank account and are reflected in the accompanying 1996 balance sheet classification "Cash and Cash Equivalents Restricted". As of December 31, 1996, Rights proceeds of $4,287,000 (including interest of $19,000) had been received by the Company, representing the exercise of Rights to approximately 854,000 New Common Shares. The Company will issue the related shares, including shares applicable to the bondholders Standby Commitment, when the Plan becomes Effective, which is expected to occur in March, 1997. As a result of the rights offering, members of the Bondholders Committee will receive 995,280 shares of the New Common stock and members of the creditor and equity holder constituencies will receive an aggregate, 4,720 shares of New Common stock. Therefore, upon effectiveness of the plan, it is expected that members of the bondholders committee will hold, in the aggregate 4,495,280 shares of the 5,000,000 issued and outstanding shares of New Common stock. Proposed Treatment of Creditors and Equity Interests The Plan is expected to be funded principally from cash generated from operations and the $5,000,000 proceeds from the rights offering. Specifically, the proposed treatment of each of the creditor and equity interests is as follows: The 1994 Mortgage Note holders have an allowed secured claim equal to the $3,000,000 principal amount of the notes plus accrued interest thereon at 20% through the date on which the confirmation order was entered by the Bankruptcy Court(approximately $675,000) and certain fees and disbursements related thereto (approximately $125,000). On the effective date of the Plan, each 1994 Mortgage Note holder will receive its prorata share of restated mortgage notes (the "Restated Mortgage Notes"), due four years from the confirmation date, in exchange for its allowed claim. Interest on the Restated Mortgage Notes will accrue at an annual rate of 11.5% or other appropriate interest rate approved by the Bankruptcy Court and will be payable quarterly commencing on the fourth month following the confirmation date. These noteholders will retain their lien interests as collateral for repayment of the restated mortgage notes. The 1993 First Mortgage Note holders have an allowed claim equal to approximately $61,000,000. Under the Plan, the secured portion of the claim is allowed in the amount of $30,000,000. The balance of the claim is unsecured. On the effective date of the Plan, each 1993 First Mortgage Note holder will receive (i) in exchange for the secured portion of its claim, its prorata share of $30,000,000 face amount of restated first mortgage notes (the "Restated First Mortgage Notes") which will accrue interest at an annual rate of 13.5% per annum payable semi-annually and will be due five years from the confirmation date, and (ii) in exchange for the unsecured portion of its claim, prorata portion of the New Common Stock (see above). The Convertible Note holders have an allowed claim equal to approximately $1,500,000. On the effective date of the Plan, each Convertible Note holder will receive its prorata share of New Common Stock (see above) in exchange for its allowed claim. The Company's larger unsecured creditors, other than the Convertible Note holders, will receive payments from a fund of approximately $1,400,000 over a three-year period and their prorata share, if any, of New Common Stock (see above). The Internal Revenue Service ("IRS"), which has both secured and unsecured claims aggregating approximately $3,000,000 will receive full payment of its secured claim with interest at 8% per annum (commencing on the effective date) over four years and will receive, with respect to its unsecured claim, proportionately the same type of recovery which is provided for the Company's larger unsecured creditors. In addition, the IRS will receive its prorata share of the New Common Stock (see above). Management Agreements The Plan also calls for a change in the management of the reorganized Elsinore. Effective at noon on August 12, 1996, Elsinore entered into an Interim Management Agreement with Riviera Gaming Management Corp - Elsinore, Inc. to manage the business operations of the Company subject to the direction of the existing boards of directors of Elsinore and its subsidiaries. Under the stipulation between the Company and the Bondholders Committee, senior management (Thomas E. Martin, President and Chief Executive Officer, and Frank L. Burrell, Jr., Chairman of the Board) ceased to be compensated employees of the Company on Monday, August 12, 1996, although they will continue to serve as directors and authorized officers until replaced. The Plan contemplated that management of the Company from the date of the Plan's confirmation until the Plan's Effective Date would be undertaken by a nominee of the Bondholders Committee. The Company and Riviera Gaming Management Corp. - Elsinore ("Riviera"), the nominee of the Bondholders Committee, have entered an Interim Management Agreement (the "Interim Agreement") pursuant to which Riviera has assumed exclusive managerial responsibility over the Four Queens Hotel and Casino and ancillary facilities (together the "Four Queens Hotel"), subject to supervision of the Boards of Directors of Elsinore and FQI. Under the Interim Agreement, Riviera is responsible for providing training to Four Queens Hotel personnel, marketing and sales at the Four Queens Hotel , internal accounting and other managerial tasks. In return, Riviera receives a management fee of $83,333 per month. All personnel employed at the Four Queens Hotel, other than those hired by Riviera for purposes of fulfilling its responsibilities, remain the employees of the Company. In addition, during the interim agreement, the Company retains full responsibility for payment of all expenses related to the operation of the Four Queens Hotel. Riviera has no obligation to pay any expenses or to make any capital expenditure with respect to the Four Queens hotel which are not funded by the Company. The interim agreement by its terms will terminate upon the commencement of the first calendar quarter following the Plan's Effective Date. Board of Directors The Plan also calls for the Company's Board of Directors to be reconstituted upon effectiveness of the Plan. Four of the new directors are to be chosen by the Bondholders Committee and one will be appointed by the Equity Committee appointed in the Bankruptcy Case. Both the Bondholders Committee and the Equity Committee have selected their proposed representatives to the Company's Board. Those proposed directors have been submitted to the Nevada Gaming Authority for approval. Upon such approval, the Company believes all conditions to the Plan's effectiveness will be satisfied. Other Reorganization Matters Certain pre-petition liabilities have been paid after obtaining the approval of the Bankruptcy Court, including certain wages and employee benefits, gaming related liabilities and hotel room and other customer deposits. Subsequent to filing and with the approval of the Bankruptcy Court, the Company assumed executory contracts for all real estate and equipment leases. In accordance with the Stipulation between the Company and the Bondholders Committee, the Company (with the participation of the Bondholders Committee) prior to confirmation of the Plan decided which executory contracts would be assumed. All executory contracts which were not expressly assumed by the Company were deemed rejected at the confirmation date. All creditors claims resulting from the rejection of an executory contract must have been filed with the Bankruptcy Court no later than September 11, 1996. All such claims which are timely filed will be treated in a manner identical to the treatment received by other members of the appropriate class of creditors under the Plan. All such claims which are not timely filed will be barred and discharged and the creditor holding such claim will not receive or be entitled to any distribution under the Plan on account of such claim. Trading in the Company's common stock continues to be halted by the American Stock Exchange ("AMEX") and the Pacific Stock Exchange ("PSE"). Elsinore intends to pursue reactivation of its listings with AMEX and PSE so that the New Common Stock in the reorganized Elsinore can be traded publicly following the effective date of the Plan. However, by letter dated January 27, 1997, Elsinore was informed of AMEX's intention to pursue the delisting of Elsinore's Common Stock. By letter dated February 3, 1997, the Company requested that AMEX defer a final decision on delisting until mid-March 1997 so that the reconstituted board of directors has an opportunity to decide on a course of action. By letter dated February 5,1997 AMEX agreed to extend the Company's time to request an appeal to March 14, 1997. 2. 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 1996 and 1995 (none in 1994) consisted of the following (in thousands): 1996 1995 Administrative expenses $1,431 $ 293 Severance expenses 761 - Write-off of debt issuance costs - 2,695 Write-off of original issue discount on debt - 5,690 $2,192 $8,678 3. Summary of Significant Accounting Policies (a) Financial Reporting for Bankruptcy Proceedings The accompanying financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the reorganization proceedings, there are significant uncertainties relating to the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might be necessary as a result of the outcome of the uncertainties discussed herein including the effect of the plan of reorganization. The American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") provides guidance for financial reporting by entities that have filed petitions with the Bankruptcy Court and expect to reorganize under Chapter 11 of the Bankruptcy Code. Under SOP 90-7, the financial statements of an entity in a Chapter 11 reorganization proceeding should distinguish transactions and events that are directly associated with the reorganization from those of the operations of the ongoing business as it evolves. Accordingly, SOP 90-7 requires the following financial reporting/accounting treatments in respect to each of the financial statements. The Company will the adopt fresh-start reporting provisions of SOP 90-7 upon the effective date of the Plan and anticipates reporting the results for the quarter ending March 31, 1997 under those provisions. Balance Sheet The balance sheet separately classifies pre-petition and post-petition liabilities. A further distinction is made between pre-petition liabilities subject to compromise (generally unsecured and undersecured claims) and those not subject to compromise (fully secured claims). Pre-petition liabilities are reported on the basis of the expected amount of such allowed claims, as opposed to the amounts for which those allowed claims will be settled. Under the approved final plan of reorganization, those claims will be settled at amounts substantially less than their allowed amounts. When debt subject to compromise has become an allowed claim and that claim differs from the net carrying amount of the debt (defined as the face amount of the debt less unamortized debt issuance costs and unaccreted discount), the net carrying amount is adjusted to the amount of the allowed claim. The resulting gain or loss is classified as a reorganization item. Statement of Operations Pursuant to SOP 90-7, revenues and expenses, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported in the statement of operations separately as reorganization items. Professional fees are expensed as incurred. Interest expense is reported only to the extent that it will be paid during the proceeding or that it is probable that it will be an allowed claim. Statement of Cash Flows Reorganization items are reported separately within the operating, investing and financing categories of the statement of cash flows. (b) Principles of Consolidation The consolidated financial statements include the accounts of Elsinore Corporation and its wholly-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 Elsinore Corporation and Subsidiaries (Debtor-In-Possession) Notes to Consolidated Financial Statements Years Ended December 31, 1996, 1995 and 1994 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, 1996 1995 1994 (Dollars in Thousands) Hotel $1,215 $1,608 $2,179 Food & Beverage 3,908 4,869 5,022 Total $5,123 $6,477 $7,201 (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 8 to 40 years. Equipment held under capital lease are recorded at the net present value of minimum lease payments at the inception of the lease and are amortized over the shorter of the terms of the leases or estimated useful lives of the related assets. (g) Leasehold Acquisition Costs The costs of acquiring leasehold interests are deferred and amortized using the straight-line method over the shorter of the term of the lease or the useful life of the property which is 33 years. (h) Amortization of Original Issue Discount and Debt Issuance Costs Original issue discount is accreted over the life of the related indebtedness using the effective interest method. Costs associated with the issuance of the debt are deferred and amortized over the life of the related indebtedness using the straight-line method. See discussion in notes 2 and 8 regarding the write-off of unamortized amounts as of December 31, 1995 in connection with the reorganization proceedings. (i) Casino Development Costs Casino development costs consist of costs incurred by the Company in connection with the development of the Palm Springs and Washington Casinos and legal and other costs incurred to enter into management contracts with the respective Indian Tribes and to obtain necessary federal and state regulatory approvals. Pursuant to the respective management contracts, costs incurred by the Tribes (as defined in the contracts) to construct and develop the casinos were loaned to the Tribal enterprises in the form of promissory notes. Other casino development costs were deferred to be amortized over the five-year terms of the related management contracts. See note 4 for discussion of the write-off of previously deferred amounts as of December 31, 1995. (j) 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 Fremont Street Experience has transformed four blocks of Fremont Street into a covered pedestrian mall featuring a 10-story celestial vault, sound effects and a high tech light show which add to the neon signs and marquees for which the downtown area is already famous. The Company's $3,000,000 capital contribution for its one-sixth ownership of FSELLC was paid in full by January 1994. The project was completed at the end of November 1995 and the grand opening ceremonies held on December 13, 1995. During 1995, the Company paid approximately $525,000 to FSELLC, representing its allocated share of the 1995 operating costs of the Fremont Street Experience. These costs were capitalized and expensed upon the opening of the project. As FSELLC is expected to operate at a loss for the foreseeable future, the $3,000,000 capital contribution will be amortized over five years using the straight line method. The Company's allocated share of the operating costs of the Fremont Street Experience ($1,000,000 in 1996) are expensed as incurred. (k) Income Taxes Income taxes have been provided for using the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method, 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 and operating loss and tax credit carryforwards. 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. Under Statement 109, 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. (l) Loss Per Share Loss per share has been computed by dividing net loss by the weighted average common shares outstanding during the year. (m) 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 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. (n) Long-lived Assets In March, 1995, the FASB issued Statement Of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996 and there was no write-down of assets. (O) Reclassification Certain items in the 1995 and 1994 financial statements have been reclassified for comparability with the 1996 presentation. (p) Use of Estimates Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (q) Fair Value of Financial Instruments The carrying amounts of cash equivalents, receivables and accounts payable approximates fair value because of the short term maturity of these instruments. It is not practical to estimate the fair market value of prepetition liabilities subject to compromise due to the bankruptcy and the fact that there has been no active trading of long-term debt subject to compromise. The carrying amount of the long-term debt which is not subject to compromise approximates fair value because it is deemed to be fully secured and bears interest at an appropriate rate. 4. Native American Casino Operations Spotlight 29 Casino Since March 1995, Elsinore Corporation, its wholly owned subsidiary, Elsub Management Corporation and Palm Springs East Limited Partnership, of which Elsub is the general partner (collectively the "Company"), and the Twenty-Nine Palms Band of Mission Indians (the "Band") have been involved in a dispute regarding, among other things, the terms of a management contract (the "contract") under which the Company had the exclusive right to manage and operate the Spotlight 29 Casino (the "Spotlight 29"), owned by the Band, located near Palm Springs, California. On April 17, 1995, the Company was ousted as manager of Spotlight 29 and on April 19, 1995, the Company issued a demand letter to the Band declaring a breach of the Contract and a related loan agreement under which the Company had lent approximately $12,500,000 to the Band for construction of Spotlight 29 and for working capital Contributions. The demand letter claimed damages in the full amount of the funds which had been advanced to the Band. In light of the Company's disassociation with the operations of the Spotlight 29, management determined to write off, during the quarter ended March 31, 1995, the unamortized balance of casino development costs incurred for the project of $1,037,000 and ceased the accrual of interest on the project note and loans evidencing working capital advances. On May 16, 1995, in response to the Company's demand, the Band delivered to the Company a "Notice to Terminate Management Agreement." The notice asserted material breaches of the Contract and requested payment of approximately $1,500,000 million by June 16, 1995 to cover working capital shortfalls or the Contract would be terminated. On October 31, 1995, the Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada). The Company has been involved in protracted negotiations with the Band for a settlement of the respective claims asserted by the parties since the events described above. Based upon the progress of the aforementioned negotiations at the time, as of December 31, 1995 the Company wrote off the accrued interest and fully reserved the $9,000,000 principal balance. On March 29, 1996, the Company reached a settlement with the Band which has been approved by the Bankruptcy Court and which has received final clearance by the Bureau of Indian Affairs. The Company has received a promissory note from the Band in the principal amount of $9,000,000. 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, the note will be automatically extended for up to an additional two years. If still not fully paid at the end of the extension period, it may be extended up to an additional two years upon the approval of the National Indian Gaming Commission (the "NIGC"). If not paid at the end of the final extension period, the note will be forgiven. Interest on the note is at an annual rate equal to the greater of 10% or the maximum rate allowed under California law, not to exceed 12%. The Company has received a total of $353,000 of interest which was recorded in the year ended December 31, 1996 Given that the $9 million recovery is limited to 20% of the net income generated by Spotlight 29 management determined not to reduce the allowance for loss in the amount of $9,000,000 against the receivable which was provided during the quarter ended December 31, 1995. 7 Cedars Casino Elsinore Corporation, through its wholly-owned subsidiary, Olympia Gaming Corporation (collectively the "Company"), has a Gaming Project Development and Management Agreement (the "Contract") to operate the 7 Cedars Casino (the "7 Cedars") which is located on the Olympic Peninsula in the state of Washington and is owned by the Jamestown S'Klallam Tribe (the "Tribe"). In addition, pursuant to a loan agreement, the Company lent $9,000,000 to the Tribe for the construction of 7 Cedars. Under the terms of the Contract, the Company is obligated to establish a reserve fund for "working capital", which is not defined in the Contract, in the amount of $500,000 for the operation of 7 Cedars. The Company believes that in negotiating the contract the parties did not intend to apply a "working capital" definition based upon generally accepted accounting principles which, in the Company's view, would be impracticable in the context of the Contract and which, in practice, has never been followed. Since its opening on February 3, 1995, the Casino has incurred a substantial cumulative net loss and an attendant decrease in working capital. On November 1, 1995, the Tribe asserted that the Company had defaulted on the June, July, August and September 1995 minimum guaranteed payments to the Tribe, as defined by the Contract, in the aggregate amount of $100,000 and requested immediate payment. In addition, the Tribe demanded that sufficient monies be paid to enable all current gaming project expenses to be paid and working capital reserve to be maintained at the required funding level. The Tribe demanded that a minimum of $2,540,000 be paid immediately and also contended that the working capital shortfall could be as high as approximately $5,390,000 according to their interpretation of the Contract. On November 13, 1995, the Company received a letter from the Tribe dated November 9, 1995 asserting that the Contract had been terminated as a result of the Company's failure to make the payments which has been demanded. On November 10, Olympia Gaming filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Nevada (Las Vegas, Nevada). Pursuant to the terms of the Contract, the Company is to receive a management fee equal to 30% of the net distributable profits of 7 Cedars (subject to the Tribe receiving a $25,000 per month guaranteed payment) and the Tribe 70%. The Contract has an initial term of five years (expires February 2, 2000), subject to renewal for an additional two years in the event that the project loan is not paid in full by the end of the initial term. The project loan to finance the development and construction of 7 Cedars is payable solely from the Tribe's share of the net distributable profits of 7 Cedars, and will amortize over the five-year term of the contract at an annual interest rate of 10.9%. In response to declining revenues following the first several months of operations, management undertook certain cost-cutting measures in the late spring and summer 1995 and increased marketing activities in an effort to achieve profitability. In November 1995 and January 1996, more substantial expense reductions were effected through reductions in the hours of operation of 7 Cedars and deeper, "across the board" cost cutting. In light of the existing competition in the Puget Sound area, the demographics of 7 Cedars primary locals' markets and the apparent low propensity for destination tourists to the Olympic Peninsula to gamble, there exists substantial uncertainty as to whether, during the remaining term of the management and loan agreements, 7 Cedars can achieve the level of profitability required to obtain full recovery of the loan principal and accrued interest thereon. Based upon the foregoing, management determined during the quarter ended December 31, 1995 to provide an allowance for loss against the $9,000,000 outstanding balance of the project loan plus accrued interest thereon. On September 1, 1995, the Company ceased accruing interest on the project loan and wrote-off the remaining unamortized balance of capitalized casino development costs of approximately $242,000. Mojave Valley Resort Project As a condition to its participation in the Mojave Valley Resort Project, a joint venture between Mojave Gaming, Inc. ("Mojave Gaming"), a wholly owned subsidiary of Elsinore Corporation and Mojave Valley Resort Casino Company, an affiliate of Temple Development Company, to develop a master planned casino resort on land leased from the Fort Mojave Indian Tribe, Mojave Gaming was required to make a capital contribution to the venture by September 30, 1995. The contribution was not made and therefore, the contract terminated. Based upon the foregoing, in September 1995 management wrote-off as casino development costs approximately $807,000, representing all capitalized costs incurred for the project. 5. Property and Equipment, Net Property and equipment, net, consists of the following: December 31, 1996 1995 (Dollars in Thousands) Land $ 1,275 $ 1,275 Buildings 39,240 39,207 Equipment 24,488 23,564 Construction in Progress 53 - 65,056 64,046 Less Accumulated Depreciation and Amortization 41,512 38,573 $23,544 $25,473 6. Other Assets Other assets consist of the following: December 31, 1996 1995 (Dollars in Thousands) Debt Issuance Costs, Net $ - $ 79 Deposits and Other 743 823 $ 743 $ 902 7. Accrued Expenses: Accrued expenses consist of the following: December 31, 1996 1995 (Dollars in Thousands) Salaries and Wages $1,584 $1,559 Payroll Taxes and Employee Benefits 883 617 Gaming Taxes 107 625 Slot Club Liability 546 396 Outstanding chip & token liability 692 843 Other 2,364 1,312 $6,176 $5,352 8. Long-Term Debt: Long-term debt subject to demand for acceleration consists of the following: December 31, 1996 1995 (Dollars in Thousands) 12.5% First Mortgage Notes Payable $57,000 $57,000 20% Mortgage Notes Payable, Net of unaccreted Discount of $0 and $ 98, at December 31, 1996 and 1995, respectively 3,000 2,902 7.5% Convertible Subordinated Notes Payable 1,425 1,425 Total long-term debt 61,425 61,327 Long-term debt subject to demand for acceleration-not subject to compromise 3,000 2,902 Long-term debt subject to demand for acceleration-subject to compromise $ 58,425 $58,425 First Mortgage Notes On October 8, 1993, the Company completed a private placement of $60,000,000 aggregate principal amount of the Company's 12.5% First Mortgage Notes due 2000 (the "First Mortgage Notes") and warrants (the "Warrants") to purchase 3,100,340 shares of the Company's common stock at an exercise price of $5.50 per share, subject to certain anti-dilution provisions. The net proceeds of the offering were approximately $57.4 million. In December 1994, $3,000,000 aggregate principal amount of the First Mortgage Notes were redeemed and retired, in consideration for which the Company issued to the noteholder 930,000 shares of common stock. Convertible Subordinated Notes On March 31, 1995, the Company completed the private placement of $1,706,250 of the Company's 7.5% Convertible Subordinated Notes due December 31, 1996 (Convertible Notes). The convertible notes are convertible into the Company's common stock at $1.125 per share subject to certain antidilution provisions.On September 6, 1995, the holders of Convertible Notes with a face amount of $281,250, effected the conversion of the notes and accrued interest thereon into 256,579 shares of the Company's common stock. Adjustments To Long-Term Debt Pursuant to Reorganization Proceedings The First Mortgage Notes and Convertible Notes are classified as pre-petition liabilities subject to compromise (the First Mortgage Notes on the basis that the claim is undersecured considering the rorganization value for the Company) and the outstanding principal and accrued interest thereon through the date of filing have become allowed claims, SOP 90-7 requires that the recorded amount of the debt be adjusted to the amount of the allowed claim. Accordingly, unamortized debt issuance costs of $2,695,000 and unaccreted original issue discount of $5,690,000 were written off to adjust the carrying amounts of these notes to the allowed amounts. Further, interest expense on the First Mortgage Notes and Convertible Notes was not recognized since the date of petition through August 12, 1996, the confirmation date of the Plan. The first Mortgage Notes, Mortgage notes and Convertible Subordinated notes are expected to be treated under the Plan as described in note 1. The 1993 first Mortgage Note holders have an allowed claim equal to approximately $61,000,000. Under the Plan, the secured portion of the claim is allowed in the amount of $30,000,000. The balance of the claim is unsecured. On the effective date of the Plan, each 1993 First Mortgage Note holder will receive (i) in exchange for the secured portion of its claim, its prorata share of $30,000,000 face amount of restated first mortgage notes (the "Restated First Mortgage Notes") which will accrue interest at an annual rate of 13.5% per annum payable semi-annually and will be due five years from the confirmation date, and (ii) in exchange for the unsecured portion of its claim, a prorata portion of the New Common Stock. The 1994 mortgage note holders have an allowed secured claim equal to the $3,000,000 principal amount of the notes plus accrued interest thereon at 20% through the date on which the confirmation order was entered by the Bankruptcy Court (approximately $675,000) and certain fees and disbursements related thereto (approximately $125,000). On the effective date of the Plan, each 1994 Mortgage Note Holder will receive its prorata share of restated mortgage notes (the "Restated Mortgage Notes"), due four years from the confirmation date, in exchange for its allowed claim. Interest on the Restated Mortgage Notes will accrue at an annual rate of 11.5% and is payable quarterly commencing in the fourth month following the confirmation date. These noteholders will retain their lien interests as collateral for repayment of the restated mortgage notes. The Convertible Note holders have an allowed claim of approximately $1,500,000. On the effective date of the Plan, each Convertible Note holder will receive its prorata share of New Common stock in exchange for its allowed claim. 9. Income Taxes: No income tax benefit related to the 1996, 1995 and 1994 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, 1996 1995 (Dollars in Thousands) Deferred Tax Assets: Accounts Receivable Principally Due to Allowance for Doubtful Accounts $ 135 $ 68 Accrued Compensation, Principally Due to Accrual for Financial Reporting Purposes 738 500 Progressive Slot Accrual 143 74 Net Operating Loss Carryforwards 34,887 36,210 General Business Credit Carryforward, Principally Due to Investment Tax Credit Generated in Prior Years 640 640 Alternative Minimum Tax (AMT) Credit Carry-forward from AMT Paid in Prior Years 312 253 Contribution Deduction Carryforward, Principally Due to Amounts Not Deductible in Prior Periods 63 58 Tax Loss Due to Sale of New Jersey Subsidiaries in Prior Periods 714 702 Loan Receivable Principal Due to Allowance For Uncollectibility 8,023 8,023 Reorganization items, principally due to amounts not currently Deductible for tax purposes 3,723 2,951 Total Gross Deferred Tax Assets 49,378 49,479 Less Valuation Allowance (45,099) (44,965) Net Deferred Tax Assets 4,279 4,514 Deferred Tax Liabilities: Plant and Equipment, Principally Due to Differences in Depreciation (3,966) (4,219) Prepaid Expenses, Principally Due to Deduction for Tax Purposes ( 313) (295) Total Gross Deferred Tax Liabilities (4,279) (4,514) Net Deferred Tax Liability $ - $ - As of December 31, 1996, the Company has 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)limits the amount of loss carryforward currently available to offset federal taxable income. As of December 31, 1996, the amount of loss carryforward not limited by Section 382 and therefore available to offset current federal taxable income is approximately $64,000,000. The amount of the loss carryforward which is not limited by Section 382 increases annually by $4,653,000. The loss carryforwards begin to expire in the year 1999 and will be completely expired by 2007. The Company has 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 has alternative minimum tax credit carryforwards of approximately $312,000 which are available to reduce future federal income taxes, if any, over an indefinite period. Special Provisions of IRS Section 382 Available to Corporations in Bankruptcy. A corporation in Bankruptcy may be eligible for treatment under Section 382(1)(5) whereby the corporation's existing net operating losses will not be subject to the Section 382 limitation even though the magnitude of the ownership changes effected by the plan of reorganization would otherwise cause the corporation to exceed Section 382's 50% change threshold. The key difference in the 50% ownership change calculation applied in Section 382(1)(5) is that creditors who will be converting all or a portion of their debt to equity are, in effect, not counted as part of the ownership change if they have held their debt more than 18 months (the "Qualified Debt"). Even if Section 382(1)(5) applies, the existing net operating losses are reduced by cancellation of debt income and interest on the Qualified debt during a specific period. Section 382(1)(5), if available to the Company based upon the provisions of the final plan of reorganization approved by the Bankruptcy Court, would severely limit further ownership changes for the three-year period following plan effectiveness. As the applicability of Section 382(1)(5) is dependent upon the ownership changes provided in the final plan of reorganization by the Bankruptcy Court and changes in the ownership of the First Mortgage Notes that may occur prior to the effective date of the plan, it is not possible to determine with any degree of certainty, such section's ultimate applicability. In the event that the Company elects out of Section 382(1)(5), or fails to qualify under its terms, existing net operating losses will be subject to the Section 382 limitation. However, in this case, the stock value used for purposes of computing the limitation is the market value immediately after the ownership change,(rather than immediately preceding the change, as is the case in the general Section 382 calculation) thereby taking into account the increase in stock value attributable to the conversion of debt pursuant to the reorganization. Prior Period Tax Obligation In August 1984, the IRS commenced an examination of the Company's consolidated income tax returns for the fiscal years ended January 31, 1980, 1981 and 1982, and in October 1988 commenced examinations of the fiscal year ended January 31, 1983 and the eleven months ended December 31, 1983. As a result of its examination, the IRS proposed certain adjustments for the fiscal years ended January 31, 1980, 1981 and 1982 regarding the deductibility of pre-opening costs associated with the Atlantis facility (a former Atlantic City New Jersey hotel casino operated by the Company) and utilization of certain investment tax credits regarding the Four Queens and Atlantis facilities. In October 1994, the IRS completed and delivered to the Company a final assessment (the "IRS Assessment") relating to such adjustments and in November 1994, the IRS filed and recorded a Notice of Tax Lien against the Company and its subsidiaries in the amount of the IRS Assessment. The IRS Assessment called for the Company to pay aggregate tax and interest of approximately $5.7 million (exclusive of interest accruing during any period of repayment), in addition to $3.5 million the Company deposited with the IRS in March 1991. On December 6, 1994, the Company and the IRS entered into an installment payment agreement (the "Installment Agreement"). As of December 31, 1995, the Company had a remaining obligation to the IRS in the amount of approximately $2,985,000. The Company believes that it has available sufficient net operating loss ("NOL") carryforwards to satisfy any tax liabilities with respect to periods subsequent to 1983. The Internal Revenue Service ("IRS"), which has both secured and unsecured claims aggregating approximately $3,000,000 will receive full payment of its secured claim with interest at 8% per annum over four years (commencing on the effective date) and will receive with respect to its unsecured claim, proportionately the same type of recovery which is provided to the Company's larger unsecured creditors. In addition, the IRS will receive its prorata share of the New Common Stock. 10. Common Stock Offering On January 25, 1995, the Company completed a public offering of 2,500,000 shares of the Company's common stock for $1.75 per share. Net proceeds to the Company after payment of underwriting discounts and commissions and other direct costs of the offering was approximately $3,747,000. 11. Commitments and Contingencies Chapter 11 Reorganization On October 31, 1995, the Company and certain of its subsidiaries filed a voluntary petition in the United States Bankruptcy Court for the District of Nevada seeking to reorganize under Chapter 11 of the United States Bankruptcy Code. See "Item 1. Business-Chapter 11 Proceedings." On November 10, 1995, Olympia Gaming Corporation filed a voluntary petition in the same Court. Since the Bankruptcy filing, several entities have filed administrative claims requesting the Bankruptcy Court order the Company to reimburse or compensate such entities for goods, taxes and services they allege the Company has received or collected, but for which they claim the Company has not paid. The Company currently estimates that the administrative claims will be approximately $2.1 million; however, there can be no assurance that additional amounts will not be claimed or the extent to which administrative claims may be allowed by the Bankruptcy Court. The Bankruptcy Code requires that all administrative claims be paid on the effective date of a plan of reorganization unless the respective claimants agree to different treatment. Most of the administrative claims in the bankruptcy case have been paid. The Company does not expect that the balance of any outstanding administrative claims will affect its ability to consummate the Plan of reorganization. Hyland Litigation Thomas Hyland, a professional card counter and blackjack player, filed a complaint on August 23, 1995 in Federal District Court in Camden, New Jersey, No. 95CV2236 (JEI), against the Company and virtually every other casino company in the United States. The complaint alleges violations of the antitrust, consumer fraud and fair credit reporting laws by the defendants in illegally conspiring to prevent Mr. Hyland and other professional card counters from playing blackjack at their respective casinos. The complaint alleges that the defendants share information concerning card counters and then act in concert to implement industry wide policy in banning them at the blackjack tables. Management believes that the claims are without merit and does not believe that the lawsuit will have a material adverse effect on the Company's financial statements taken as a whole. WARN Act Litigation The Company is a defendant in two consolidated lawsuits pending in the federal court for the District of New Jersey, alleging violation by the Company and certain of its subsidiaries and affiliates of the Worker Adjustment and Retraining Notification Act ("WARN Act") and breach of contract. The plaintiffs in the two consolidated cases are (i) former employees of a casino/hotel in New Jersey formerly affiliated with the Company bringing suit on behalf of a class of all employees laid off as a result of the casino's closing and (ii) a union local seeking to represent its members who were laid off at that time. Plaintiffs claim that there are approximately 1,300 such employees within the class who seek damages under the WARN Act providing for up to 60 days' pay and lost benefits and payments for deferred compensation allegedly due under a contract with certain employees. Damages payable, if any, would be based on the basis of the number of days' notice determined by the court to have been required under the WARN Act and the wages, benefits and deferred compensation applicable to each such employee. The Company has vigorously defended the action on the basis that even if the WARN Act does apply as a matter of law to a regulatory-forced closing, the closing was due to unforeseeable circumstances and, accordingly, the notice given was as timely as practicable, among other grounds. The liability phase of the trial of the two consolidated lawsuits concluded in August 1993. On June 30, 1995, the presiding judge entered an Order for Verdict Upon Liability Issues in which he ruled that: (i) the plaintiffs had failed to prove any liability under the WARN Act; but (ii) that Elsinore and certain of its subsidiaries are jointly liable for certain retroactive wages due to former employees of Elsinore Shore Associates under a collective bargaining agreement, plus prejudgment interest on such wages. The total amount of judgment the plaintiffs would be entitled to under this ruling has not yet been determined. The plaintiffs' attorney asserts that the amount due as of October 1, 1995, taking into account interest on that date, was approximately $676,000. On March 4, 1996, the plaintiffs' attorney submitted a proof of claim for retroactive wages in the amount of $800,000 to the Bankruptcy Court. Because of the filing of the bankruptcy petitions, the WARN Act litigation in the New Jersey Court has been stayed by operation of Bankruptcy Code Section 362(a). However, the plaintiff's $800,000 claim is currently the subject of claims litigation in the Bankruptcy Court. It is the Company's position that the claim submitted by the plaintiffs should be reduced to zero. However there can be no assurance as to the success of the Company's attempt to reduce the claim. Poulos/Ahern Class Actions In April and May 1993, two class action lawsuits were filed in the United States District Court, Middle District of Florida, against 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company. The suits allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce persons to play such games by collectively misrepresenting how the game machines operate, as well as the extent to which there is an opportunity to win. It also alleges violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On December 9, 1994, the Florida Court ordered that the consolidated cases be transferred to the United States District Court for the District of Nevada. That transfer has occurred and the Nevada Court has assumed control of the cases. The new case number is CV-S-94-1126-LDG(RJJ). Numerous defendants (including the Company) have moved to dismiss the complaint for failure to state a claim. No hearing has been set on this motion. The plaintiffs have filed a motion seeking to certify the consolidated actions as a class action. The defendants (including the Company) have opposed certification of the class. During April, 1996, U.S. District Judge Lloyd George approved defense motions to dismiss such lawsuits holding that the plaintiffs had failed to state a claim or prove their case. However, the plaintiffs were given additional time to file an amended complaint. Management believes the claims are wholly without merit and does not expect that the lawsuit will have a material adverse effect on the Company's financial statements taken as a whole. Other At December 31, 1996, the Company and its subsidiaries were parties to various other claims and lawsuits arising in the normal course of business. Management is of the opinion that all such legal 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. 12. Leases: All non-cancelable leases have been classified as capital or operating leases. At December 31, 1996, 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, 1996 1995 (Dollars in Thousands) Building $2,062 $2,062 Equipment 324 316 2,386 2,378 Less Accumulated Amortization ( 817) (663) $1,569 $1,715 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, 1995: Capital Operating Leases Leases (Dollars in Thousands) Years Ending December 31, 1997 $280 $3,810 1998 223 2,979 1999 223 2,967 2000 223 2,945 2001 223 2,945 Thereafter 7,134 94,709 Total Minimum Lease Payments 8,306 $110,355 Less: Amount Representing Interest(at imputed rates ranging from 11.5% to 15.0% 6,769 Present Value of Net Minimum Capital Lease Payments 1,537 Less: Current Portion 50 Capital lease obligations, excluding current portion $1,487 13. 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 1996, 1995 and 1994 totaled $87,000, $97,000 and $103,000, 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 $130,488, $138,000 and $147,000 for 1996, 1995 and 1994, respectively. There were 469, 496 and 465 participants in the savings plan as of December 31, 1996, 1995 and 1994, respectively. In 1991, the Board of Directors adopted, and the stockholders approved, the Elsinore Corporation 1991 Stock Option Plan (the "1991 Plan"). The Board reserved 600,000 shares of common stock for issuance thereunder. The 1991 Plan provides for the grant of non-statutory options to purchase common stock to salaried officers and key employees of the Company and its corporate subsidiaries. The exercise price for options granted under the 1991 Plan may not be less than the fair market value of the stock on the date of grant. On March 15, 1993, the Board of Directors adopted and the stockholders approved, the Elsinore Corporation 1993 Long-Term Stock Incentive Plan (the "1993 Plan") and reserved 600,000 shares of common stock for issuance thereunder. On April 8, 1994, the Board of Directors adopted and the shareholders approved an increase of the number of shares reserved under the 1993 Plan to 1,200,000 shares. On May 11, 1995, the Board of Directors approved an additional increase in the number of shares reserved to 1,980,000 shares. The 1993 Plan provides for awards of restricted shares, stock units, options or stock appreciation rights to all employees of the Company and its subsidiaries. Non-statutory stock options granted under the 1993 Plan are granted at fair market value at date of grant and generally vest in equal annual increments over a three-year period. At December 31, 1996, there were 509,500 and 1,702,300 additional shares available for grant under the 1991 and 1993 Plans, respectively. There were no shares granted during 1993. Therefore the per share weighted average fair value of stock options granted during 1996 and 1995 was $0 and $.07 on the date of grant using the black Scholes option -pricing model with the following weighted-average assumptions for 1995: expected dividend yield of 0%, risk free interest rate of 6.01% and an expected life of one year. The Company applies APB Opinion No. 25 in accounting for their Plans and, accordingly, no compensation cost has been recognized for their stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for their stock options under SFAS 123, the impact on the Company's net income would not be material, therefore proforma net income and earnings per share disclosures have not been presented. Stock option activity during the periods indicated for the Company's two stock option plans is as follows: Number of Weighted Average Shares Exercise Price Outstanding at December 31, 1993 1,130,300 $3.41 Granted 829,400 2.65 Exercised (17,000) (.88) Cancelled (64,100) (5.22) Outstanding at December 31, 1994 1,878,600 3.03 Granted 171,000 1.32 Exercised - - Cancelled (543,400) (2.51) Outstanding at December 31, 1995 1,506,200 3.03 Granted - - Exercised - - Cancelled (1,200,000) (2.94) Outstanding at December 31, 1996 306,200 3.40 All outstanding options will be cancelled upon the effective date of the plan when the old common stock interests in Elsinore are cancelled. 14. 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 1996 $4,496 $ 468 $ 497 $1,132 $6,592 1995 4,377 454 483 1,313 6,627 1994 4,710 474 535 1,236 6,955 15. Extraordinary Item: On December 29, 1994, $3 million of the original $60 million principal amount of First Mortgage Notes was repurchased by the Company and retired in exchange for the issuance to the noteholder of 930,000 shares of Common Stock of the Company. The Company recorded an extraordinary gain of $735,000 as a result of this debt retirement. Income taxes are not applicable to this extraordinary item. 16. Supplemental Financial Information A summary of additions and deductions to the allowance for doubtful accounts receivable for the years ended December 31, 1996, 1995 and 1994 follows: Balance at Balance Allowance for Beginning At End Doubtful Accounts of Year Additions Deductions of Year Years Ended 1996 $201 $321 $175 $347 1995 214 68 81 201 1994 200 40 26 214

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Filed on:2/21/97
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9/1/9535
8/23/9535
7/7/9538-K
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5/16/953510-Q/A
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3/31/953510-K,  10-Q,  10-Q/A
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