Document/Exhibit Description Pages Size
1: 10-K Annual Report 77 476K
2: EX-10.56 Senior Executive Plan 3 17K
3: EX-10.57 Senior Executive Agmt. 5 21K
4: EX-10.58 Amend. #2 to Operating Agmt. 21 82K
5: EX-10.59 Note Purchase Agmt. 41 168K
6: EX-10.60 Reg. Rights Agmt. 25 99K
7: EX-10.61 Note Purchase Agmt. 41 168K
8: EX-10.62 Regis. Rights Agmt. 25 99K
9: EX-10.63 Note Purchase Agmt. 41 168K
10: EX-10.64 Note Purchase Agmt. 41 168K
11: EX-10.65 Note Purchase Agmt. 41 168K
12: EX-10.66 Note Purchase Agmt. 41 168K
13: EX-10.67 Regis. Rights Agmt. 25 100K
14: EX-10.68 Stock Pledge Agmt. 11 35K
15: EX-21.1 Subsidiaries 1 7K
16: EX-23 Consent of Peat 1 9K
17: EX-27 Financial Data Schedule 2 8K
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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, 1994
[_] Transaction 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
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(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
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(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
PACIFIC STOCK EXCHANGE
Securities Registered Pursuant to Section 12(b) 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. [_]
The aggregate market value of the voting stock, held by non-affiliates of the
registrant on March 29, 1995 (based on the closing price per share on that date
as reported on the American Stock Exchange) was approximately $13,746,811.
On March 29, 1995 there were 15,635,218 shares of common stock issued and
outstanding.
Documents Incorporated By Reference
Parts I and III incorporate information by reference from the registrant's
definitive Proxy Statement for its 1995 Annual Meeting of Stockholders to be
filed with the Commission within 120 days after the close of registrant's
fiscal year.
================================================================================
Total number of sequentially numbered pages
-------
Exhibit Index begins at sequential page number
------
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 U.S. gaming industry. The Company
owns and operates its principal property, the Four Queens Hotel and Casino, in
downtown Las Vegas, Nevada. The Four Queens, which opened in 1966 and has been
one of the leaders in the downtown market throughout the 1980s and early 1990s,
attracts a loyal customer base through a high level of personalized service and
a variety of innovative targeted marketing techniques. Elsinore has assisted
in the development of and currently manages 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 on February 3, 1995. In addition,
the Company is a participant in a venture formed to develop and own, subject to
obtaining the necessary financing, up to four casino/hotels, which the Company
will manage, as part of the Mojave Valley Resort being developed on the
Colorado River six miles south of Laughlin, Nevada.
Since January 1993, Elsinore has substantially restructured its senior
management team. In 1993, each of the Company's Chairman and Chief Executive
Officer, President, and Senior Vice President -- Development, joined the
Company in their respective positions. In 1994, each of the Company's Senior
Vice President, Chief Financial Officer, General Counsel, and Vice President --
Facilities Management joined the management team. Over the past 27 months,
Elsinore's management team has put in place a strategy designed to (1) improve
the financial results of the Company's flagship property by improving the Four
Queen's physical plant and operations and participating in traffic-building
redevelopment projects in downtown Las Vegas, and (2) pursue growth,
diversification and attractive financial returns in casino opportunities in new
geographical markets.
To assist the implementation of management's strategy, the Company borrowed
$60 million through the issuance of its 12 1/2% First Mortgage Notes due 2000
("First Mortgage Notes") in October 1993 and an additional $3 million through
the issuance of its 20% Mortgage Notes due 1996 ("Mortgage Notes") in October
1994. The net proceeds were used to repay existing indebtedness and interest,
refurbish major portions of the Four Queens, invest in downtown redevelopment
projects, and develop and construct the two Native American gaming projects.
In 1994, the scheduled refurbishment of the Four Queens was completed,
construction commenced on a major downtown Las Vegas redevelopment project--the
Fremont Street Experience--and on each of the Native American casinos, and the
Company entered into an agreement to develop, subject to obtaining the
necessary financing, the Nashville Nevada casino/hotel at the Mojave Valley
Resort. The Native American casinos opened in January and February 1995,
respectively, and the Fremont Street Experience is scheduled for completion in
the late Fall or Winter of 1995.
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 to the Company 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, 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 1/2% Convertible Subordinated Notes due
December 31, 1996 (the "Convertible Notes"). The private placement of
Convertible Notes was completed on March 31, 1995. See "1995 Working Capital
Requirements; Insufficient Liquidity" below.
THE FOUR QUEENS; THE FREMONT STREET EXPERIENCE. Based principally on results
at the Four Queens, the Company's earnings before interest, tax, depreciation
and amortization dropped in 1994 to $3.8 million, from $7.2 million in 1993.
Although occupancy rates at the Four Queens remained above 90% in 1994, gaming
revenues declined approximately 11% from the prior year period. The Company
believes this decline is primarily due to the impact of themed mega-casinos on
the Las Vegas Strip such as the MGM Grand, Luxor, and Treasure Island, each of
which opened in the fourth quarter of 1993. It believes that customers of the
downtown casino/hotels who
1
would normally spend substantially all of their gaming and entertainment budget
at downtown casinos in 1994 were drawn to and spent a portion of their budgets
at these new Strip properties, resulting in a loss of revenue to downtown
casinos. The Company believes that similar results occurred in late 1989 and
mid-1990, when two mega-casinos, The Mirage and Excalibur, opened on the Strip.
In the year ended June 30, 1990, downtown casino revenue increased only 0.5%
over the prior year. However, in the following fiscal year, downtown gaming
revenue increased 4.2%, for reasons the Company believes included a general
increase in the number of visitors to Las Vegas and the decreased novelty of
the attractions offered by the mega-casinos on the Strip.
Elsinore also anticipates that the Four Queens and the other downtown casinos
will benefit from the opening of the Fremont Street Experience, currently
expected in the late Fall or Winter of 1995. 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 will transform four blocks of Fremont Street into a covered
pedestrian mall, connecting the Four Queens and nine other major entertainment
venues that together will offer 17,000 slot machines, over 500 blackjack and
other table games, 41 restaurants and 8,000 hotel rooms. The Fremont Street
Experience will feature a 10-story celestial vault, sound effects and a high
tech light show which will add to the neon signs and marquees for which the
downtown area is already famous. As part of the Fremont Street Experience, a
new 1,600-space parking garage is under construction. The Company believes
that the Fremont Street Experience will become a major attraction in the Las
Vegas area and will result in additional patronage in the downtown market.
Based on the observation of downtown gaming revenue patterns in 1989-1991 and
on the prospective opening of the Fremont Street Experience, 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--PALM SPRINGS, CALIFORNIA. On January 14, 1995, Elsinore
and the 29 Palms Band of Mission Indians ("29 Palms Band") opened the Spotlight
29 Casino ("Spotlight 29"), a 74,000 square foot Class II gaming facility on
tribal lands located near Palm Springs, California. Spotlight 29, which cost
approximately $10 million to develop, features high and low stakes bingo, pull
tabs, poker, Asian card games and other non-house banked card games in a 15,000
square foot gaming area. See "Native American Gaming Projects--Spotlight 29
Casino" below. Pursuant to the terms of the management contract between the 29
Palms Band and Palm Springs East L.P., a partnership of which the Company owns
90%, the Company is to receive management fee revenues equal to approximately
27% of Spotlight 29's earnings from gaming operations, after deducting certain
expenses. In addition, the 29 Palms Band is obligated 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 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Recent and Expected Losses from Operations." This lower
revenue is believed by the Company to be attributable in part to the marketing
plan of 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. See "Native American Gaming Projects--Spotlight
29 Casino" and "--Operation of Class III Gaming Devices by Competitors of
Spotlight 29" below. Pursuant to its obligations under the Spotlight 29
management contract, the Company through March 30, 1995 contributed $1.06
million to the casino to cover working capital shortfalls. There is no
assurance that Spotlight 29 will not continue to experience negative cash flow
in subsequent quarters and that further advances of funding by the Company will
not be required. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition -- Decreased
Liquidity."
2
In early March 1995, the 29 Palms Band caused electronic gaming machines to
be installed at Spotlight 29. The Company believes the operation of these
machines without a state compact violates the Spotlight 29 management contract
and may violate applicable federal law. See "Native American Gaming Projects -
- Installation of Class III Gaming Devices at Spotlight 29" below. The tribe's
actions at Spotlight 29 may subject the Company to disciplinary action by the
Nevada Gaming Commission. See "Native American Gaming Projects--Proceedings
Before Nevada Gaming Authorities" below. Following the tribe's failure to
comply with the Company's demand to remove the machines, the Company on March
16, 1995 filed an injunctive and declaratory action against the tribe to halt
the use of the machines at the casino premises. In addition, the Company
intends to take action to disengage from managing Spotlight 29 by April 30,
1995, based on the tribe's violations of the management contract, unless prior
to that date the tribe ceases operation of the gaming machines at the casino or
the machines are deemed legal pursuant to federal and state law. See "Native
American Gaming Projects--Probable Disengagement from Spotlight 29 Management
Contract" below.
7 CEDARS CASINO--WASHINGTON STATE. On February 3, 1995, Elsinore and the
Jamestown S'Klallam Tribe ("S'Klallam Tribe") opened the 7 Cedars Casino ("7
Cedars"), 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
approximately 70 miles northwest of Seattle. The development cost for 7 Cedars
was approximately $9 million. 7 Cedars' 12,500 square foot gaming area features
Las Vegas-style table games including craps, blackjack, roulette and poker, as
well as bingo, pull tabs and other non-house banked games. Pursuant to the
terms of the management contract between the S'Klallam Tribe and Olympia
Gaming Corporation, the Company's wholly-owned subsidiary, the Company is to
receive management fee revenues equal to 30% of 7 Cedars' earnings from gaming
operations, after deducting certain expenses. In addition, the S'Klallam Tribe
is obligated to repay from its share of casino earnings a $9 million loan from
the Company to finance casino development and construction. See "Native
American Gaming Projects -- 7 Cedars Casino" below.
Because 7 Cedars' opening occurred during the low season for tourism on the
Olympic Peninsula, the Company anticipated the casino would experience a
negative cash flow during its initial months of operations. In February 1995,
7 Cedars had gross revenues of approximately $1.5 million, resulting in an
estimated net operating loss of approximately $300,000, compared to an
anticipated loss for the month of approximately $200,000. 7 Cedars recently
entered into an agreement with a third party providing for furniture, fixtures
and equipment financing in the amount of $760,000. In the event such
financing, together with available cash and revenues from operations, is
insufficient to satisfy the casino's working capital requirements, the Company
would be required, pursuant to the terms of the 7 Cedars management contract,
to advance funds to the casino to cover any shortfalls. The Company
anticipates 7 Cedars' results of operations will improve in the second and
third quarters of 1995, as a result of increased tourism in the region during
that period. However, there is no assurance that these expectations will be
achieved.
MOJAVE VALLEY RESORT AND NASHVILLE NEVADA. Mojave Valley Resort is being
developed by J.F. Temple Development ("Temple"), a developer of resorts in the
Palm Springs area, as a master-planned resort featuring up to seven
casino/hotels, two championship golf courses, a marina, facilities for up to
1,300 recreational vehicles, commercial facilities and approximately 4,000
units of single and multi-family housing. See "Nashville Nevada Resort and
Casino -- Mojave Valley Resort" below. The first project to be completed at
the Resort, a casino/hotel with approximately 300 rooms and owned by the Fort
Mojave Tribe, opened in February 1995.
In May 1994, Elsinore and Temple agreed to develop and own up to four
casino/hotels at Mojave Valley Resort. Elsinore will manage each property
developed under this agreement. Subject to obtaining the necessary debt and
equity financing for the project, the first casino/hotel planned to open will
be the Nashville Nevada. A country and western theme will distinguish the
Nashville Nevada project, which is expected to feature approximately 500 hotel
rooms and 32,500 square feet of gaming space, including approximately 1,050
slot machines, as well as restaurants and other nongaming amenities. The total
project cost of Nashville Nevada is expected to be approximately $65.5 million.
If the necessary financing can be arranged, construction of Nashville Nevada is
expected to begin as soon as practicable thereafter and the Company will
acquire option rights to develop up to three additional casino/hotel projects.
In March 1995, Temple and the Company agreed to extend until September 30,
1995, the date by which the Company must complete its $10 million capital
contribution to the
3
Nashville Nevada project, in consideration for which the Company assumed
certain of Temple's payment obligations relating to the Mojave Valley Resort.
There is no assurance, however, that the Company or Temple will be able to
obtain the equity or debt financing necessary to commence construction of the
project by the extended deadline or at all. Accordingly, there is significant
uncertainty whether the Nashville Nevada project will be completed and whether
the Company will maintain the right to develop any additional projects at the
Mojave Valley Resort. See "Nashville Nevada Hotel and Casino -- Uncertainty of
Nashville Nevada Financing" below.
1995 WORKING CAPITAL REQUIREMENTS; INSUFFICIENT LIQUIDITY. For the balance
of 1995, the Company's working capital requirements will include, among other
things, monthly payments to the Internal Revenue Service ("IRS") of $275,000
(increasing to $550,000 on May 1, 1995) for prior period income tax and related
interest; semi-annual interest payments on the First Mortgage Notes of
approximately $3.56 million due on April 1 and October 1, 1995; mandatory
quarterly redemptions of $750,000 principal amount of the Mortgage Notes on
June 30, September 30, and December 31, 1995; quarterly interest payments on
the Mortgage Notes due on June 30, September 30, and December 31,
1995; one or more capital contributions (in addition to $1.06 million
advanced through March 30, 1995) to fund the initial operating expenses of
Spotlight 29 and 7 Cedars; and payment obligations of up to $169,000 in
property taxes and lease expenses relating to the Mojave Valley Resort that the
Company assumed from Temple.
The Company believes the net proceeds of sale of the Convertible Notes,
together with cash on hand and revenues from operations, will enable the
Company to complete its April 1995 debt service obligations. For the remainder
of 1995, however, based upon the Company's recent results of operations and its
projections for future quarters, the Company will require significantly
improved results of operations or additional financing in order to satisfy its
working capital requirements including, among other things, its June, September
and October 1995 debt service obligations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Decreased Liquidity." The Company's final payment of prior period taxes to the
IRS is scheduled to be completed in December 1995, and the Mortgage Notes are
scheduled to be fully repaid by March 31, 1996.
PROSPECTIVE CHANGES IN MANAGEMENT. Effective April 1, 1995, Gary R. Acord
will join the Company's management team as Chief Financial Officer and
Treasurer. Prior to joining the Company, Mr. Acord was managing partner of the
Las Vegas office of KPMG Peat Marwick LLP, where he specialized in serving
gaming industry clients both within and outside Nevada and led the firm's
International Gaming Practice. Mr. Acord will replace James L. White in the
CFO position. In addition, Richard A. LeVasseur, who has served as a Director
and a Senior Vice President of the Company, will leave the Company effective
April 1, 1995. At this time, the company does not intend to replace Mr.
LeVasseur's officer or director positions and will reduce the size of the Board
of Directors from seven to six members to reflect his departure.
Frank L. Burrell, Jr., Chairman and Chief Executive Officer, has informed the
Company's Board of Directors that he will not be a candidate for reelection as
Chief Executive Officer following this year's annual shareholders' meeting on
May 11, 1995. Mr. Burrell will nominate Thomas E. Martin to succeed him as
Chief Executive Officer effective May 11, 1995. Mr. Burrell will remain
Chairman of the Board of the Company. It is anticipated that, effective May 11,
1995, when Mr. Martin becomes Chief Executive Officer, Rodolfo E. Prieto will
assume the role of Chief Operating Officer of the Company.
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
4
15 and Interstate 515 and markets to a local population of approximately one
million residents and over 28.2 million visitors a year to Las Vegas.
In 1994, the Company completed a $5 million refurbishment of the Four Queens.
As part of this refurbishment, gaming space was increased to 32,000 square
feet. The casino floor is currently equipped with 1,067 slot machines, 25
blackjack tables, five craps tables, one pai gow poker table, three Caribbean
Stud Poker tables, three Let-It-Ride tables, two roulette wheels, a keno game
and a sports book. The hotel has 704 guest rooms and suites in two towers. In
May 1994, the Company completed a major refurbishment of the North Tower.
Every room received new wall coverings, carpeting, bathroom fixtures, furniture
and fixtures. The hallways and elevators were also renovated. The Four Queens
features four full-serve restaurants. Magnolia's offers a wide variety of
selections and is open 24 hours a day. Hugo's Cellar offers sophisticated
cuisine and an extensive wine list, and has been cited in Zagat's Review as
perhaps "the finest restaurant in Las Vegas". In May 1994, Elsinore opened its
third restaurant, Leilani's Cafe, featuring a Hawaiian theme and food selection
consistent with the Company's efforts to attract patrons from Hawaii. In June
1994, the Company opened Pastina's, which offers a selection of pasta and other
Italian specialties. The Four Queens has three cocktail lounges and an
entertainment lounge, The French Quarter, which presents a variety of
performers. As an additional part of the refurbishment, meeting space in the
Four Queens was doubled to almost 15,000 square feet in 1993. The hotel also
has parking facilities with 560 spaces.
OPERATIONS
The following tables sets forth the contributions from major activities to
the Company's total revenues for the years ended December 31, 1994, 1993 and
1992, respectively.
[Download Table]
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------- ------- -------
(Dollars in Thousands)
Casino(1) $46,270 $51,950 $49,233
Hotel(2) 9,234 9,876 9,694
Food & Beverage(2) 12,693 12,495 12,691
Other(3) 2,020 768 638
------- ------- -------
69,935 75,089 72,256
Less Promotional Allowances (7,511) (8,237) (8,258)
------- ------- -------
$62,706 $66,852 $63,998
======= ======= =======
(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 $243,000 in 1994, $136,000 in 1993, and $57,000 in 1992
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.
[Download Table]
Casino:
Floor area (square foot) 32,296
Slot machines 1,067
Blackjack tables 25
Craps tables 5
Caribbean Stud Poker tables 3
5
[Download Table]
Roulette wheels 2
Let-It-Ride tables 3
Pai gow poker tables 1
Keno (seats) 46
Sports book 1
Hotel:
Rooms 704
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
MARKETING
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. The Company believes that its focus on customer service is one
of the principal factors contributing to its high level of repeat visits. 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 almost 300,000 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 75% 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 semi-monthly
newsletter which announces upcoming tournaments and special events.
Management believes that the following areas offer the greatest potential for
attracting new customers with the same demographic profile as the Four Queens'
most regular customers:
Southern California Hawaii Texas
Arizona Vancouver, Canada Oklahoma
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.
6
CLUB MEMBERSHIPS.
REEL Winners Club---The largest component of the customer database is the
REEL Winners Club, a slot club with over 225,000 members. The objective of
this club is to provide loyal and valuable slot players the opportunity to
accumulate points that may be redeemed for entries into slot tournaments,
bingo sessions and auctions. Special parties and priority room
reservations are also benefits for REEL Winners Club members.
Additionally, the points earned may be used for slot play, scrip for use at
any non-gaming facility at the Four Queens and Spiegel gift certificates.
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 28.2 million visitors in 1994. McCarran
International Airport passenger volume is estimated to have increased 19.4% for
the first seven months of 1994. Expansive themed properties such as Excalibur,
The Mirage, The MGM Grand Hotel and Theme Park, Treasure Island and Luxor have
become destination resorts. Las Vegas is also one of the five fastest growing
cities in the United States and the population has increased from approximately
507,000 in 1982 to approximately one million in 1994. 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. More than 47,000 jobs are estimated to have been created in Las
Vegas over the 12 months ended December 31, 1994.
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 92.6% in 1994. Las Vegas's gaming revenues increased from $1.7 billion in
1984 to $4.0 billion in 1994. 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:
7
GAMING REVENUE ($000'S)*
[Download Table]
LAS VEGAS STRIP DOWNTOWN BOULDER STRIP
------------------- ------------------ ------------------
JUNE FISCAL YEAR REVENUES GROWTH REVENUES GROWTH REVENUES GROWTH
--------- ------- -------- ------- -------- -------
1985.............. 1,318,568 4.0% 441,023 7.3% NA --
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.............. 3,235,716 20.7 674,549 (0.5) 179,042 10.6
Compound Annual
Growth Rate 10.5% 4.8% 10.5%
----------------
* For casinos with gaming revenue of $1 million and over.
The Las Vegas Strip has demonstrated strong growth, and revenues have
increased at a 10.5% compound annual growth rate to approximately $3.2 billion
in 1994 from $1.3 billion in 1984. Based on 1994 statistics, the 5,000-room
MGM Grand Hotel and Theme Park, the 2,500-room Luxor Hotel and Casino and the
3,000-room Treasure Island Hotel and Casino appear to be drawing more visitors
to Las Vegas.
The downtown market has grown from approximately $441 million in 1985 to
approximately $675 million in 1994 at a compound annual growth rate of 4.8%.
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 recent openings of the MGM Grand, Luxor and Treasure
Island casino/hotels have had an adverse effect on downtown gaming revenue,
which decreased 0.5% for the 12-month period ended June 30, 1994.
THE FREMONT STREET EXPERIENCE
The casino operators in downtown Las Vegas have 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 will
feature a celestial vault and light show. The celestial vault will consist of
a 100-foot high, 100-foot wide, 1,340 foot long space frame spanning Fremont
Street from Main Street to Fourth Street and will be closed to traffic to
create a pedestrian mall. The celestial vault is the framework for a high tech
light show involving 2.3 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 will be connected by the project. A 1,600
space parking facility is under construction. The goal of Fremont Street
Experience is to create an attraction for gaming customers and other visitors
to Las Vegas,
8
drawing visitors to the historic downtown area and providing completion for the
larger and newer gaming and entertainment complexes located on or near the
Strip.
The Fremont Street Experience is expected to cost approximately $67
million, $6.7 million of which will be financed by the Las Vegas Convention and
Visitor Association, $28.7 million (consisting of an $18 million equity
investment plus additional room taxes) that will be provided by eight downtown
casino operators (including the Company) and the remainder of which will be
provided by a local bond issuance and matching federal funds. The Company's
share of the initial project costs is approximately $3 million, which funds
have already been contributed by the Company to the project. Construction on
the project began in Spring 1994 and is expected to be completed in late Fall
or Winter of 1995.
The Company and several of the other downtown casino operators will
collectively own the Fremont Street Experience. Elsinore will have a one-sixth
ownership share and will be responsible for a proportionate share of the
project's operating costs.
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.
Three new "mega-resorts" opened on the Las Vegas Strip in the fourth
quarter of 1993. These complexes increased the number of rooms in Las Vegas by
approximately 11,000, or 15%. Although the occupancy levels increased slightly
in 1994, as compared to 1993, 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. Additionally, but to
a lesser extent, the Four Queens also completes 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, California and Washington 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 such as MGM Grand and Luxor 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
9
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
The Company expects the Native American gaming industry to grow as gaming
in general continues to gain popular acceptance as entertainment. 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 Native
American Gaming Commission ("NIGC"), tribal regulatory authorities and, where
applicable, state agencies. See "Regulations -- Native American Gaming
Operations" below.
SPOTLIGHT 29 CASINO
FACILITIES. The Company has developed and currently manages Spotlight 29,
a Class II facility on tribal land of the 29 Palms Band. Spotlight 29 opened
to the public on January 14, 1995, at an estimated construction cost of $10
million. The casino is located in Coachella, California, 150 miles southeast of
Los Angeles, 100 miles northeast of San Diego and 20 miles east of Palm
Springs. The area within a 150-mile radius of the project has a population of
over 20 million people. Additionally, the property is within close proximity to
communities in the Coachella Valley including Palm Desert, La Quinta, Rancho
Mirage and Indian Wells. The casino is situated on a 55-acre parcel bordered by
Interstate 10 (approximately 21,000 cars are estimated to pass the site per
day) on one side and Dillon Road (approximately 5,500 cars are estimated to
pass the site per day) on the other. The Company believes that the Spotlight 29
site is an excellent one due to its visibility and accessibility from the
highway and proximity to large population bases.
Spotlight 29 features a modern, comfortable 74,000 square foot gaming
facility that offers bingo, pull-tabs, poker, Asian card games and other non-
house banked games. In addition, since early March 1995, the 29 Palms Band has
been operating video pull-tab gaming machines at Spotlight 29 over the
Company's strong objections. See "Installation of Class III Gaming Devices at
Spotlight 29" below. Two other Native American casinos in the Coachella Valley
offer similar games, but in facilities that are not currently comparable in
size or appearance to Spotlight 29. The bingo area of Spotlight 29 is able to
seat approximately 1,000 people per session in a theater-style circular area
with state-of-the-art lighting and sound designed specifically for high stakes
bingo. The room offers bingo players an environment not currently available at
any other casino in California. In addition, the room is convertible into a
theater/arena for shows and other types of entertainment.
STRUCTURE OF THE MANAGEMENT AGREEMENT. Palm Springs East, L.P., a
partnership of which Elsinore owns 90%, operates and manages Spotlight 29.
Under the management agreement for the facility, Palm Springs East, L.P. is to
receive a management fee equal to 30% of the casino's earnings for gaming
operations after depreciation and interest expenses are deducted (subject to
the 29 Palms Band receiving a $25,000 per month minimum payment) and the tribe
is to receive the remainder of the casino's earnings. In addition, Palm
Springs East, L.P. is to receive a fee for managing the casino's non-gaming
operations equal to $27,000 per month. Under the contract, the combined
management fee cannot exceed 35% of the casino's earnings (after depreciation
and interest expenses are deducted). The management contract for the facility
has an initial term of five years from the date gaming activities commence at
Spotlight 29 and is subject to renewal for an additional two years under
certain circumstances. Under the Palm Springs East, L.P. partnership
agreement, N.A.C.C., a limited partner that initially secured a land lease and
management agreement with the 29 Palms Band, has a 10% ownership interest in
Palm Springs East, L.P. and is entitled to receive 10% of partnership
distributions. In addition, Palm Springs East, L.P.
10
is obligated to pay an additional 5% (subject to a minimum payment of $28,450
per month) of the partnership's cash flow as consulting fees to certain
principals of N.A.C.C.
Unless the 29 Palms Band ceases -- voluntarily or by court order -- its
operation of video pull-tab gaming machines at Spotlight 29, the Company
intends to disengage from the Spotlight 29 management contract based upon the
tribe's material and continuing breach of the contract provisions. See
"Probable Disengagement from Spotlight 29 Management Contract" below and "Item
3. Legal Proceedings -- Action Against 29 Palms Band."
Elsinore has loaned $10 million to the 29 Palms Band to finance the
development and construction of Spotlight 29. This loan bears interest at the
rate of 10% per year, is payable solely from the 29 Palms Band's share of the
casino's earnings and will amortize over four years from the date the casino
opened. Pursuant to the management agreement, payments of principal on the
loan and repayments of any operating advances made by the Company to the casino
will (subject to the minimum payment to the tribe described above) be deducted
by Palm Springs East L.P. from the tribe's share of the casino's earnings. On
July 29, 1994, the NIGC approved the management agreement between the 29 Palms
Band and Palm Springs East L.P.
MARKETING. The Company's marketing plan for Spotlight 29 consists of a
multi-phase strategy designed to introduce the property, generate patronage
and, upon achieving a stable level of business, begin to target additional
customer segments and locations. The Company currently is marketing to
customers within a 50-mile radius from the casino. Following the initial
introduction of the property, the Company intends to expand its marketing
efforts to customers within a 100-mile radius, an area which has a total
population of approximately 2.8 million residents. The Company will
concentrate on attracting residents in the surrounding markets by promoting bus
tours and special tournaments. Senior citizens in the area will be a marketing
priority. Elsinore has commenced and will continue to implement training
programs designed to emphasize a high level of customer service, and intends to
expand its use of direct mail marketing, creative advertising, public
relations, special events and promotions. The Company believes that its
experience in using similar strategies at the Four Queens will be beneficial in
managing Spotlight 29.
Since its January 14, 1995 opening, Spotlight 29 has experienced delays in
implementing its marketing plan. Among other things, the 29 Palms Band is still
in the process of obtaining the requisite licenses to commence the sale of
alcoholic beverages at the casino. See "Regulations--Other Laws and
Regulations" below. Although such licensing is a tribal responsibility, the
Company intends to assist the 29 Palms Band in obtaining the Spotlight 29's
beer and wine permit and its hard liquor permit as soon as practicable,
although there can be no assurance as to when or if such permits will be
obtained. The Company believes that the current nonavailability of alcoholic
beverages at Spotlight 29 and the other delays that have been encountered in
implementing the casino's marketing plan have been a factor in the poor initial
results of operations at Spotlight 29. The Company has recently restructured
the Spotlight 29's management team and is pursuing other measures to improve
the casino's marketing efforts. There is no assurance, however, that such
measures will be successful or that additional difficulties and delays with
respect to marketing the new casino will not continue to adversely affect its
results of operations.
THE PALM SPRINGS MARKET. The Spotlight 29 facility is located to the
southeast of Palm Springs. Palm Springs is a desert city in Riverside County
about 120 miles southeast of Los Angeles and is known as a fashionable winter
resort. Total population within a 50-mile radius of the site is approximately
245,000 permanent residents and an additional 100,000 seasonal residents and
total population within a 150-mile radius which includes Los Angeles County and
San Diego County is approximately 20 million people. The Company believes that
a large portion of the casino's customer base will be comprised of residents
residing permanently in Palm Springs. The Company also believes that the
tourist and highway traffic will also contribute significantly to the number of
casino patrons. The Palm Springs and surrounding areas annually attract over 6
million tourists who generate over $1 billion of spending in the local economy.
There are over 16,000 hotel rooms in the Palm Springs area and over 85 golf
courses within 25 miles of the casino site.
The following table presents certain demographic statistics for Spotlight
29's relevant market segments:
11
[Download Table]
50-MILE 100-MILE 150-MILE
RADIUS RADIUS RADIUS
Total Population 350,000 2,846,000 20,000,000
Total Population Over Age 18 262,000 1,702,000 NA
Average Per Capita Income $ 21,000 $ 14,000 NA
Average Household Income $ 31,600 $ 33,000 NA
OPERATION OF CLASS III GAMING DEVICES BY COMPETITORS OF SPOTLIGHT 29
As a Class II gaming facility, Spotlight 29 Casino 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 other 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 tribes 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).
Two casinos operating on tribal lands in the vicinity of Spotlight 29 and
owned by the Cabazon Band and the Morongo Band, respectively, have installed and
are operating Class III gaming devices (primarily slot machines) without an
approved compact with the State of California. Although the total number of such
machines currently in operation is difficult to verify, the Company believes the
Cabazon Band is operating in excess of 500 machines and the Morongo Band
approximately 400 machines. The continuing operation of Class III devices at
these tribal casinos, each of which competes with Spotlight 29 for gaming
customers in Southern California, is regarded by the 29 Palms Band and the
Company as a significant factor in Spotlight 29's poor initial financial
performance.
Based on discussions it has had with representatives of the NIGC, the
Company understands the NIGC does not currently intend to intervene in
situations where Native American casinos in California are operating Class III
gaming devices without a compact. The Company has submitted a written request to
the United States Attorney for the Central District of California requesting
enforcement of the IGRA as to the 29 Palms Band, Cabazon Band and Morongo Band
or, alternatively for a statement as to the enforcement policy of that office
regarding the IGRA. The Company has also requested in writing that the NIGC
initiate appropriate enforcement action against the 29 Palms Band. The Company
will evaluate other potential claims and actions it may pursue seeking the
removal of Class III gaming devices operating in California in violation of the
IGRA. There can be no assurance the NIGC, the United States Attorney or any
other governmental or regulatory authority will act to enforce the IGRA in
California as it relates to Class III devices or that any other rights or
remedies pursued by the Company or Spotlight 29 to halt the unauthorized use of
such devices by Spotlight 29's competitors will succeed.
INSTALLATION OF CLASS III GAMING DEVICES AT SPOTLIGHT 29
In February 1995, the Company learned from discussions with tribal
representatives that the 29 Palms Band was contemplating the installation of
Class III gaming devices at Spotlight 29. Inasmuch as the 29 Palms Band does not
have a tribal-state compact permitting Class III gaming at Spotlight 29, the
Company believes the installation by the tribe of such gaming devices would be
unlawful and constitute a breach of the tribe's obligations under the Spotlight
29 management contract. In late February, in response to the Company's written
objection to the placement of any Class III gaming devices on Spotlight 29
premises, the 29 Palms Band advised the Company that, as the owner of Spotlight
29, the tribe would install such devices if doing so was in the tribe's best
interest and that the tribe believed this position did not conflict with the
terms of the management contract. In early March, 1995, the 29 Palms Band caused
approximately 70 gaming devices to be installed at Spotlight 29 and such devices
currently are in operation. In addition, the Company understands that a shipment
of additional devices intended for use at Spotlight 29 was intercepted and
confiscated by governmental authorities before it reached the casino premises.
12
The Company opposes these activities by the 29 Palms Band and in early
March 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 29 Palms Band a notice and demand that
the operation of the Class III devices without the Company's consent and
compliance with applicable federal law violates the management contract and
that such activity must immediately cease. Following the tribe'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 Proceedings -- Action Against 29 Palms
Band." In addition, the Company intends to disengage from managing Spotlight 29
by April 30, 1995, if the gaming devices are not removed, and it is evaluating
other legal procedures and remedies that may be available in response to the
tribe's noncompliance with the management contract and applicable law. See
"Probable Disengagement from Spotlight 29 Management Contract" below.
In March 1995, the Nevada Board conducted two public hearings and a
confidential investigative hearing, and the Nevada Gaming Commission ("Nevada
Commission") conducted a public hearing, into matters surrounding the
operation of Class III gaming devices at Spotlight 29. See "Regulations --
Proceedings Before Nevada Gaming Authorities" below. Pending appropriate
resolution of these matters, the Company will endeavor to maintain a working
relationship with the 29 Palms Band and, unless and until the Spotlight 29
management contract is lawfully terminated, to fully perform its obligations
thereunder.
PROBABLE DISENGAGEMENT FROM SPOTLIGHT 29 MANAGEMENT CONTRACT
In addition to filing its March 16, 1995, suit against the 29 Palms Band
for injunctive and declaratory relief, the Company has informed the 29 Palms
Band that unless the tribe's operation of the Class III devices at Spotlight 29
promptly ceases, the Company will pursue efforts to disengage from the
Spotlight 29 management contract based upon the tribe's material and continuing
breach of the contract provisions. Termination of the management contract will
require negotiation of an arrangement permitting the orderly transfer of
operations to the tribe or another manager, obtaining any necessary approvals
of the NIGC, and providing acceptable terms regarding the buyout of the
Company's interest in the contract as well as the tribe's repayment of the $10
million loan and other advances made by the Company. In addition, since
cessation of the Company's right to manage Spotlight 29 will constitute an
event of default under the Company's debt facilities, termination of the
management contract will require obtaining appropriate consents or waivers from
the holders of the First Mortgage Notes and Mortgage Notes. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations --Debt Covenants." The Company believes that termination of the
management contract would not be necessitated in the event the 29 Palms Band,
either voluntarily or by court order, removed the Class III gaming devices from
Spotlight 29 or if the federal courts or the State of California determined
that the operation of such devices at the tribal casino did not violate the
IGRA.
On March 28 and March 30, 1995, the Nevada Board and the Nevada
Commission, respectively, met to consider the Company's application for
approval to register its 20% Mortgage Notes, Series B, due 1996 (the "Mortgage
Note Registration Application"). The Nevada Board recommended that the Mortgage
Note Registration Application be approved on the condition that the Company
file an application by April 4, 1995 (the "License Condition Request"),
requesting imposition of a license condition requiring the Company by April 30,
1995, to terminate the Spotlight 29 management contract and sever its
relationship with the 29 Palms Band. The Nevada Commission approved the
Mortgage Note Registration Application on March 30, 1995. The Company's failure
to timely implement a lawful directive of the Nevada Commission could subject
the Company to disciplinary action, including without limitation the imposition
of fines or the suspension or revocation of the Company's Nevada Gaming
License. See "Regulations--Nevada Gaming Operations" below. However, as noted
above, termination of the management contract without obtaining appropriate
consents or waivers from the Company's noteholders would constitute an event of
default under the debt facilities. The Company intends to solicit appropriate
waivers or consents from its noteholders. There is no assurance, however, that
such waivers or consents can be obtained in a timely manner, on commercially
terms, or at all. In addition, the Company's termination of the contract
without adequate provision, agreed upon by the tribe, for repayment of the
Company's $10 million loan and other advances to the tribe could jeopardize the
likelihood of such repayment. In the event the 29 Palms Band repudiated its
payment obligations to the Company, the Company would be required to pursue
legal remedies against the tribe which ultimately could require commencing
litigation in federal court. Accordingly, in the event the Company terminates
the Spotlight 29 management contract, there is no assurance that the Company
will be adequately compensated for the damages it has incurred as a result of
the tribe's breach or repaid amounts due under the Company's loans and advances
to the tribe.
13
7 CEDARS CASINO
FACILITIES. On February 3, 1995, Elsinore and the S'Klallam Tribe opened 7
Cedars, 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
approximately 70 miles northwest of Seattle. An estimated four million
tourists visit the Olympic Peninsula annually. The development cost for 7
Cedars was approximately $9 million. 7 Cedars' 12,500 square foot gaming area
features Las Vegas-style table games including craps, blackjack, roulette and
poker, as well as bingo, pull tabs and other non-house banked games. The
casino's Class III games are authorized pursuant to a compact between the
S'Klallam Tribe and the State of Washington, which has been approved by the
Secretary of the Interior. In addition to 7 Cedars' casino operations, the
Company operates a gift shop, a video arcade and dining facilities at the site.
Additionally, the S'Klallam Tribe operates a Native American arts and crafts
shop at the facility.
STRUCTURE OF MANAGEMENT AGREEMENT. Olympia Gaming Corporation, a wholly
owned subsidiary of the Company ("Olympia"), operates and manages 7 Cedars
under a management contract with the S'Klallam Tribe. Under the contract, the
Company will receive a management fee equal to 30% of the casino's earnings
from gaming operations, after depreciation and interest expense (subject to the
S'Klallam Tribe receiving a $25,000 per month minimum payment) and the tribe
will receive the remainder of the casino's earnings. The management contract
has an initial term of five years from the date 7 Cedars opened, subject to
renewal for an additional two years (in some cases at a reduced management fee)
under certain circumstances.
Elsinore loaned $9 million to the S'Klallam Tribe to finance the
development and construction of the 7 Cedars Casino. 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. Pursuant to the
management agreement, payments of principal and repayments of any operating
advances made by the Company to the casino will (subject to the minimum payment
to the tribe described above) be deducted by the Company from the S'Klallam
Tribe's share of 7 Cedars' earnings. On July 29, 1994, the NIGC approved the
management agreement between the S'Klallam Tribe and Olympia.
MARKETING. The Company believes that the physical beauty of the site and
the casino building differentiates 7 Cedars from competing properties. In
addition, the Company has begun implementation of an active marketing plan to
further distinguish 7 Cedars. While the existing tribal casinos in the area
have relied on their regional monopoly, the Company believes that the marketing
techniques it has used at the Four Queens will draw traffic to 7 Cedars. These
techniques include the use of player clubs, frequent visitor drawings, special
events and tournaments. 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.
Media will also be a major element in the Company's marketing plan. All
employees have been trained to recognize and use public relations opportunities
and newsworthy happenings. Through this plan, the Company hopes to be able to
use press relations to play a significant role in the development of a player
base. Further, the Company has begun to utilize joint marketing programs with
local businesses that cater to the tourist market as a means of drawing new
customers who are planning to visit the Olympic Peninsula. Examples include
joint promotions with fishing charters, golf courses, restaurants, hotels and
motels and other visitor-oriented businesses.
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
County 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 263,000 and 3 million, respectively. In addition to targeting
the local population in Clallam County, the Company expects also to rely
heavily on 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
14
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 76,000 (of which 24% are of retirement
age). 7 Cedars' secondary target market includes Victoria, British Columbia
with a population of approximately 280,000, Kitsap County with a population of
approximately 186,000 and the Seattle/Tacoma area with a population of
approximately 2 million. The Company has in particular targeted the British
Columbia area. Victoria is one hour and forty minutes by ferry and ground
transportation to the site.
The following table presents certain statistics for the total target market
within a 100-mile radius:
[Download Table]
TOTAL MARKET
Total Population 3,004,000
Total Population Over Age 18 2,356,000
Average Per Capita Income $ 14,000
Average Household Income $ 28,000
COMPETITION. Numerous Native American tribes in the Washington area have
either opened or are considering opening gaming facilities with various
capacities. Currently, the closest competitor to the Company's facility is the
Class II casino located in the City of Poulsbo and operated by the Suquamish
tribe, approximately 15 miles from Seattle. In addition to this facility,
other competition within a 75-mile radius include the Muckleshoot facility
located in Auburn, Washington, approximately 15 miles from Seattle and the
Tulalip facility located in Marysville, Washington, approximately 30 miles from
Seattle. The Muckleshoot tribe currently operates a Class II casino which
offers bingo and pull tabs and has plans to construct a Class III facility.
The Tulalip casino offers both Class II and Class III gaming.
DEPENDENCE ON RELATIONSHIPS WITH NATIVE AMERICAN TRIBES
Good relations with Native American tribes and their officials and
representatives are critical to the Company's ability to manage its Native
American gaming projects. The Company's Native American gaming projects face
certain risks unique to dealing with Native American tribes, including
uncertain applicability of federal and state laws as they relate to tribes and
the sovereignty of Native American tribes. In particular, the Company's filing
of a legal action against the 29 Palms Band to enjoin the operation of Class
III gaming devices at Spotlight 29 if such devices are not removed and its
decision to pursue disengagement from the management contract are likely to
exacerbate the Company's current dispute with the tribe regarding these
devices. See "Installation of Class III Gaming Devices at Spotlight 29" above.
In addition, tribal officials are subject to replacement by appointment or
election. The Company's relationship with a tribe may improve or deteriorate
under new tribal administrations. A deterioration of the Company's relationship
with a tribe for whom the Company manages gaming operations, or with the Native
American community generally, could have a material adverse effect on the
Company including, without limitation, the termination of one or more of the
Company's Native American management contracts.
NASHVILLE NEVADA HOTEL AND CASINO
MOJAVE VALLEY RESORT
Mojave Valley Resort, Inc. ("MVR"), an affiliate of Temple, has a 65-year
lease (subject to renewal at MVR's option for an additional 20 years) with the
Fort Mojave Tribe for development of a prime portion of the Fort Mojave Indian
Reservation as a master planned resort community, the Mojave Valley Resort.
The property is located six miles south of Laughlin, Nevada and 15 miles north
of Needles, California and covers portions of Nevada and Arizona. The Nevada
portion consists of 488 acres with a mile on the Colorado River and the Arizona
portion consists of 800 acres with a 1 1/2 mile river front. MVR and the Fort
Mojave Tribe have secured all required approval rights, including Bureau of
Indian Affairs ratification of the lease, a permit to build a bridge across the
Colorado River and a fully approved Federal Environmental Impact Statement.
The Fort Mojave Tribe
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has established water rights to over 129,000 acre-feet of water per year, and
has granted rights to MVR sufficient to support up to seven casino/hotel sites,
including approximately 5,300 hotel rooms.
MVR plans to develop the 1,300 acres of leased land to create a mixed use,
master planned development, complete with all infrastructure improvements,
including roads, bridges, water, sewer, power and other utilities. The Nevada
portion of the land is expected to feature up to seven river front
casino/hotels with a total of 5,300 rooms, an 18-hole championship golf course,
650 residential and/or timeshare units, a commercial complex and a 1,300 space
recreational vehicle park. The Arizona parcel of Mojave Valley Resort is
expected to offer an additional 18-hole golf course, mobile home and
recreational vehicle parks, a second commercial complex, a marina and 3,400
residential and multifamily units, including affordable housing for casino and
hotel employees. Additionally, the project is expected to help to satisfy a
need for housing in the Laughlin/Bullhead City area.
The first casino and the general infrastructure needs of the project have
been or are being developed by the Fort Mojave Tribe, which has obtained a $33
million loan (with credit enhancement from the Bureau of Indian Affairs) to
fund the development. Infrastructure improvements include the bridge over the
Colorado River, 9.5 miles of two-lane divided highway from Nevada, Arizona and
California to the site, and water, sewer, power and other utilities. Temple
has been hired as the construction manager of the project. In addition, MVR
has provided development and financing assistance, including investments of $5
million to date which have been used for general site preparation work,
including the excavation of finger lakes for the championship golf course. The
first project to be completed at the Resort -- the tribal owned Avi Hotel and
Casino -- opened in February 1995. The Avi Hotel and Casino features a hotel
with approximately 300 rooms and casino space of over 32,500 square feet, with
approximately 700 slot machines and 25 table games.
NASHVILLE NEVADA
PROPOSED FACILITIES. Nashville Nevada Hotel and Casino will be the name of
the second casino/hotel planned for the Mojave Valley Resort, subject to
obtaining the necessary financing (see "Uncertainty of Nashville Nevada
Financing" below). As indicated by the name, a country and western theme will
be reflected in the decor and atmosphere of the casino/hotel. Nashville Nevada
will be located on 24.5 acres of riverfront property. The hotel is currently
expected to have approximately 500 guest rooms and suites. As currently
planned, the casino will be laid out in approximately 32,500 square feet of
space, and will offer approximately 1,050 slot machines and 31 table games, as
well as keno and a sports book. Additional amenities at the casino/hotel will
include a variety of dining choices, other nongaming amenities, and a 25 acre
recreational vehicle park.
STRUCTURE OF AGREEMENTS. MVR has entered into a sublease with Mojave
Valley Resort Casino Company ("MVRCC"), an affiliate of Temple, for a term of
65 years (subject to renewal at Nashville Nevada LLC's option for an additional
20 years) for the development of Nashville Nevada. MVRCC has conditionally
assigned the sublease to Nashville Nevada LLC as part of its capital
contribution to the project. Rent on the property is payable at a rate of
$616,000 per year ground rent plus an incentive rent of 10% of net operating
income, after payment of interest on debt, exceeding $616,000. The sublease is
subject to termination upon, among other things, a failure to make required
rental payments and any material breach of the covenants of the sublessee.
Nashville Nevada will be owned by Nashville Nevada LLC and operated by
Mojave Gaming, a wholly owned subsidiary of Elsinore. Under the operating
agreement for Nashville Nevada LLC, the total estimated project cost for
Nashville Nevada is $65.5 million. As the initial portion of this amount,
Mojave Gaming will be required to make a capital contribution to Nashville
Nevada LLC of $10 million in cash, less the amount of certain expenses in
connection with the project to date; MVRCC has conditionally assigned its
rights as sublessee under the sublease for the project site and will be
required to assume sole liability to pay the minimum rent charges of $616,000
per year for the first two years of the sublease as its capital contributions.
Nashville Nevada LLC will assume the remaining obligations of MVRCC under the
sublease. The parties have agreed that these contributions will be valued at
$10 million and $6 million, and their respective capital accounts will be
credited with such amounts.
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In exchange for these contributions, Mojave Gaming will receive a 70%
membership interest and MVRCC will receive a 30% membership interest in
Nashville Nevada LLC. The profits and losses of Nashville Nevada LLC will
generally be allocated according to these membership interests except as may be
otherwise required by the operating agreement. The operating agreement
contains rules for the allocation of certain adjustments, credits, losses, and
distributions, including a "qualified income offset," "minimum gain chargeback"
provisions, allocation of gain on sale or disposition of certain property of
Nashville Nevada LLC and for differences between the fair market value of the
LLC's property and its adjusted basis. These provisions may have the effect of
allocating expenses and income in ratios different from the 70%--30% ratio
described above.
As a condition to MVRCC's obligation to make its initial capital
contribution, subject to certain contingencies, Mojave Gaming is obliged to
obtain financing of $55.5 million beyond its initial capital contribution for
the construction of the hotel, a casino, and related amenities, without
diluting MVRCC's membership interest or requiring MVRCC or Mojave Gaming to
guarantee the financing or issue any debt. Of this amount, Mojave Gaming
expects to obtain $50 million of project debt financing and $5.5 million of
furniture, fixtures and equipment financing. The contingencies include
obtaining of licenses or exemptions from IGRA approvals and establishing to
Elsinore's satisfaction that necessary infrastructure will be provided by the
Fort Mojave Tribe.
Temple and the Company in March 1995 agreed to extend until September 30,
1995, the date by which the Company must complete its $10 million capital
contribution and obtain the remaining $55 million of non-recourse debt
financing for the Nashville Nevada project. In consideration for such
extension, the Company will assume Temple's obligation to pay approximately
$47,000 in current property taxes, an additional $47,000 in property taxes in
the event the Nashville Nevada project financing is not in place by September
15, 1995, and $75,000 in lease payments relating to the Mojave Valley Resort;
in addition, the Company will loan to Temple up to approximately $150,000 to
enable Temple to pay its requisite share of pre-effective date expenses
regarding the Nashville Nevada project, which loan Temple will be obligated to
repay in the event financing for the project is completed. There is no
assurance, however, that the Company or Temple will be able to obtain the
equity or debt financing necessary to commence construction of the project by
the extended deadline or at all. Accordingly, there is significant uncertainty
whether the Nashville Nevada project will be completed or option rights to
develop additional projects at the Resort will be obtained. See "Uncertainty
of Nashville Nevada Financing" below.
Temple or, at its option, an affiliate of Temple has the exclusive right to
act as the construction manager of the Nashville Nevada project and for any
major capital improvements at Nashville Nevada for ten years from its opening,
on reasonable and customary terms and conditions. Elsinore has the exclusive
right to act as project coordinator for Nashville Nevada (overseeing day-to-day
operations) for ten years from its opening, and will develop and implement a
budget and plan for the organization, service and marketing of the Nashville
Nevada project. The Company will receive as compensation a monthly
administrative fee of the greater of 1% of the project's gross revenues, or
five percent of its net revenues, and will be reimbursed for its out-of-pocket
expenses.
Two percent of Nashville Nevada LLC's gross revenues in the first three
years of its operation, and 3% thereafter, will be deposited into a reserve
account for capital improvements of Nashville Nevada to be made at the
recommendation of Mojave Gaming. The reserve account balance need not exceed
$2 million, annually adjusted according to the consumer price index. Working
capital for Nashville Nevada LLC will be funded by an account holding 2% of
gross revenues up to a cumulative amount of $2 million, adjusted annually in
accordance with the Consumer Price Index. Mojave Gaming is obliged to lend the
Nashville Nevada LLC any shortfall in the account below $2 million, up to
$750,000 outstanding at any one time, at an interest rate equal to the prime
rate plus 4%. Payments from this account will go, in order of priority, to
required reserves, sublease and tax payments, debt service, operating costs,
working capital and reserves, capital reserves, and to payment of
administrative fees to Mojave Gaming.
The existence of Nashville Nevada LLC will be terminated by the failure of
the Company to obtain the required project financing; by the termination of the
sublease for the site; by the cessation of its business; by consent of all
members; by the expulsion, bankruptcy or dissolution of a member, unless all
other members vote to continue Nashville Nevada LLC's existence; or as
otherwise required by the Nevada Limited Liability Company Act. Nashville
Nevada LLC will dissolve no later than June 30, 2024, as required by the Nevada
Limited Liability
17
Company Act. At the time of dissolution, its rights as assignee under the
sublease for the project site may be assigned to a successor company or
distributed to one or more of the members in accordance with their capital
account balances at the time of dissolution, as permitted by regulations
governing tribal property then in effect, or may be terminated if such
assignment or distribution is not so permitted.
Upon obtaining the necessary project financing for Nashville Nevada, the
Company will acquire option rights from Temple to develop up to three
additional casino/hotel projects on tribal lands at the Mojave Valley Resort
(the "Development Option").
UNCERTAINTY OF NASHVILLE NEVADA FINANCING
The Nashville Nevada project cost of approximately $65.5 million is
expected to be funded from a $10 million equity infusion from the Company, $50
million in project debt financing, and $5.5 million of furniture, fixtures and
equipment financing. The Company's obligation to arrange this $65.5 million in
financing is a condition to the obligation of a third party participant in the
Mojave Valley Resort project to make its initial capital contribution to the
project. In March 1995, Temple and the Company agreed to extend until
September 30, 1995, the date by which the Company must complete its $10 million
capital contribution to the Nashville Nevada project, in consideration for
which the Company will assume certain of Temple's payment obligations with
respect to the Mojave Valley Resort. There is no assurance, however, that the
Company or Temple will be able to obtain the equity or debt financing necessary
to commence construction of the project by the extended deadline or at all.
Any further extension of the September 30, 1995 deadline will require the
additional consent of the parties to the applicable operating agreements.
There is no assurance such consents or extensions can be obtained on terms
acceptable to the Company or at all.
None of the proceeds of the Equity Offering or the sale of the Convertible
Notes will be used to fund the Company's equity infusion to the Nashville
Nevada project. Instead, the Company will be required to implement one or more
additional equity offerings to raise the required $10 million infusion. In
addition, the Company's existing debt covenants, as well as the escrow of
future financing proceeds required under the Convertible Notes, will restrict
the Company from contributing all or a significant portion of future equity
offering proceeds to Mojave Gaming. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Debt Covenants." If
the Company is not able to obtain the necessary amounts of equity financing on
a timely basis, the Company will be required to seek an amendment of the terms
of the operating agreements for the Nashville Nevada project reducing the
required capital contribution or further extending the date for obtaining
financing, obtain additional equity investors for the project, or abandon its
participation in the project.
In addition, the Company has based its determination of the expected
project cost for Nashville Nevada upon the proposed terms of the $50 million
debt financing Nashville Nevada LLC currently intends to seek to complete the
project. If Nashville Nevada LLC is unable to obtain the debt financing on the
terms currently contemplated, it may be required to abandon the Nashville
Nevada project unless it can obtain financing on other terms, such as higher
rates of interest, or secure the addition of a third participant. Any such
change could materially and adversely affect the benefit to the Company from
Nashville Nevada LLC and increase the Company's requirement for cash from other
sources. There is no assurance that the Nashville Nevada project can be funded
on the terms currently proposed or on other commercially acceptable terms, or
that any of the additional financing can be obtained in the amounts and by the
dates required in order to proceed with development of Nashville Nevada or any
of the Company's other casino/hotel projects at the Mojave Valley Resort.
ADDITIONAL RISKS REGARDING NASHVILLE NEVADA AND THE MOJAVE VALLEY RESORT
Spotlight 29 and 7 Cedars opened in the first quarter of 1995. If the
necessary financing is obtained, construction of Nashville Nevada is intended
to begin as soon as practicable thereafter. The Company has limited prior
experience in operating and managing multiple casinos simultaneously. In
addition, major construction projects such as Nashville Nevada entail
significant risks, including financing contingencies, shortages of materials,
management personnel and skilled labor, engineering, construction,
environmental, governmental and regulatory problems, work stoppages, weather
interference and unanticipated cost increases, any of which difficulties could
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further increase the cost of or delay or prohibit the construction of Nashville
Nevada. There is no assurance that such construction will occur on schedule or
that the budgeted construction costs will not be exceeded. Substantial
portions of the Mojave Valley Resort, as described herein, will be developed by
affiliates of Temple or third parties with which Temple may reach agreement.
This development will be outside of the control of the Company. Although the
Company, in partnership with Temple, has options to develop up to four of the
seven casinos presently contemplated for the Mojave Valley Resort, it has not
obtained financing or other commitments with respect to any of these projects
and the financing it is currently seeking is intended only for the first of
these casinos. Moreover, if the Nashville Nevada financing is not obtained on
a timely basis, the Company could lose its development option rights for the
additional casino/hotel projects.
The Company understands that Temple currently is facing liquidity problems
which could adversely affect its ability to complete on a timely basis its
financing obligations both with respect to Nashville Nevada and with respect to
other projects at the resort. Any failure by Temple or other third parties to
develop the Mojave Valley Resort according to plan could have a material
adverse effect on the results of operations of Nashville Nevada or other
casinos that the Company may own and/or operate within the Mojave Valley Resort
development.
MARKETING; THE LAUGHLIN MARKET
The Company's marketing strategy for Nashville Nevada will be based on its
experience in operating the Four Queens. The Company will target patrons who
have been or are likely, based on demographics, to be attracted to the Laughlin
market. Elsinore believes that the Mojave Valley Resort is well-positioned as
an intercept location for southern Nevada casino customers. Customers from
Arizona will be able to avoid traffic delays in Bullhead City en route to
Laughlin by utilizing a new bridge across the Colorado River leading through
the Mojave Valley Resort. Customers from Southern California traveling to
Laughlin are able to enter the Mojave Valley Resort on a divided highway that
is an alternative to the two-lane Needles Highway.
Nashville Nevada will be located approximately six miles south of Laughlin,
Nevada. Laughlin is the third largest gaming market in Nevada behind Las Vegas
and Reno. The Laughlin area has witnessed considerable growth in the past
decade. Until 1966, Laughlin consisted solely of an eight-room motel with a
bar, slot machines and a bait shop. At that time, the motel was expanded to
include gaming tables and promotional programs were started. The Pioneer and
the Golden Nugget hotels were built in the early 1970's. In 1981, when Circus
Circus Enterprises, Inc. built the Edgewater Hotel and Casino, Laughlin began
to be recognized as a major gaming destination. Since that time, several
additional major hotels have been built and the number of rooms has expanded
from approximately 431 in 1982 to approximately 10,300 in 1994. The expansion
in casino/hotels has also translated into a growth in gaming revenue as shown
in the table below:
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LAUGHLIN MARKET DATA*
GAMING REVENUE
[Download Table]
JUNE FISCAL NUMBER OF NUMBER OF ROOMS OCCUPANCY RATE(1)
YEAR HOTELS ($000'S) GROWTH
1985 5 124,721 30.3% NA NA
1986 6 174,945 40.3 NA NA
1987 6 209,894 20.0 2,139 96.0%
1988 7 268,791 28.1 3,188 96.0
1989 9 318,004 18.3 3,820 96.0
1990 9 365,893 15.1 4,426 96.2
1991 10 437,461 19.6 7,324 90.5
1992 10 484,148 10.7 8,085 91.3
1993 10 522,672 8.0 8,965 91.6
1994 10 545,370 4.3 10,290 90.0
Compound Annual -- 17.8% 25.2% --
Growth Rate
* For casinos with gaming revenue of $1 million and over
(1) Calculated based on room-nights available
The vast majority of visitors to Laughlin arrive by car, recreational
vehicle and bus from Southern California and Arizona. Commuter air service
into the Bullhead City airport operates to and from Los Angeles, Phoenix and
San Diego.
COMPETITION
Elsinore believes competition for the Mojave Valley Resort project will
come from the casinos in Laughlin, Nevada and Native American casinos scattered
throughout Arizona and southern California. In addition to the 488 acres
leased to Mojave Valley Resort, the Fort Mojave Tribe has other lands in Nevada
which it has leased or intends to lease for the construction of additional
casinos. Elsinore expects that the intercept location for Nashville Nevada and
the amenities offered by the Mojave Valley Resort and Nashville Nevada will
enable it to compete effectively with the Laughlin casinos. In particular, the
Company believes that the amenities offered at the project (including
championship golf courses and RV parks) cannot be easily duplicated at Laughlin
due to its landlocked configuration and shortage of water. Native American
casinos in both Arizona and California currently offer gaming that is quite
limited in scope: slot machines, bingo and poker in Arizona, but no house-
banked games; and bingo, poker and Asian games in California, but limited slot
machines (which may not be lawful) and no house-banked table games. These
casino operations are generally scattered throughout each state and none
currently offer the resort atmosphere Nashville Nevada is expected to offer.
REGULATIONS
NEVADA GAMING OPERATIONS
The ownership and operation of casino gaming facilities in Nevada are
subject to: (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 applicable local
jurisdictions. The Nevada Commission, the Nevada Board and applicable local
jurisdictions are collectively referred to as the "Nevada Gaming Authorities."
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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 with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) the provision of a source of state and local
revenues though 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, 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 license requires 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 without first obtaining licenses
and approvals from the Nevada Gaming Authorities. The Company 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. Similarly, Nashville Nevada LLC and its affiliates will
be subject to the same licensing and regulatory oversight requirements.
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 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 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 or FQI the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company 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, the gaming
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory procedures. In addition,
FQI, 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 properties and, under certain circumstances,
earnings generated during the supervisor's appointment (except for the
reasonable rental value of the Company's gaming properties) 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.
21
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 the
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
22
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.
23
PROCEEDINGS BEFORE NEVADA GAMING AUTHORITIES
On March 8, 1995, in connection with its Mortgage Note Registration
Application, the Company appeared at a public hearing before the Nevada Board.
During this hearing, the Board inquired at length concerning the decision of
the 29 Palms Band to install Class III gaming devices at Spotlight 29. See
"Installation of Class III Gaming Devices at Spotlight 29" above. The Nevada
Board questioned the Company regarding its participation, if any, in the
installation and operation of these gaming devices and stated the agency's view
that such operation and installation constituted a violation of California and
federal gaming laws. In this regard, the Nevada Board expressed grave concerns
about the Company's continued "association" with the 29 Palms Band because of
the alleged illegal conduct of the tribe, which the Nevada Board may view as a
violation by the Company of the foreign gaming provisions of the Nevada Gaming
Control Act. At the conclusion of the hearing, the Nevada Board continued
further action on the Mortgage Note Registration Application to a special
meeting of the Nevada Board scheduled for March 28, 1995.
On March 10, 1995, the Company was served with a demand for production of
documents, records and certain demonstrative evidence by March 15, 1995, and
notified to appear before a hearing officer appointed by the Nevada Board for
the purpose of a confidential investigative hearing which was conducted on
March 17, 1995. The purpose of the investigative hearing was to solicit
testimony from the Company's management and examine evidence on confidential
business and financial matters, the Company's dispute with the 29 Palms Band,
and any related violations of the Act or the regulations of the Nevada
Commission.
On March 28, 1995, the Nevada Board conducted a special public meeting on
the Mortgage Note Registration Application. At that meeting, the Company
advised the Board as to the status of the various matters relating to the
dispute with the 29 Palms Band, and disclosed the Company's intent, absent a
dramatic change in circumstances, to terminate the Spotlight 29 management
agreement through a buy out arrangement with the 29 Palms Band. The Company
further advised the Nevada Board that the Company will seek to obtain necessary
waivers or consents from its noteholders. Based on the Company's affirmative
presentation, the Nevada Board unanimously voted to recommend approval of the
Mortgage Note Registration Application to the Nevada Commission, subject to two
conditions. These conditions provide that (1) the Company must quit the
premises of the Spotlight 29 and terminate any direct or indirect association
with the Spotlight 29 by April 30, 1995, unless the video "pull-tab" machines
the License Condition Request currently operated there by the 29 Palms Band are
removed (voluntarily or by court order), made subject to a tribal-state compact
or otherwise deemed legal pursuant to federal and state law; and (2) by April
4, 1995, the Company must file the License Condition Request requesting that
the first condition be made a permanent condition to the license of Four
Queens, Inc.
On March 30, 1995, the Nevada Commission unanimously approved the
recommendation of the Nevada Board, including the enumerated conditions.
Although the Company could avoid compliance with the referenced conditions by
refusing to consummate the transaction contemplated by the approved First
Mortgage Note Application, the Nevada Board publicly advised the Company that
such action could result in the Nevada Board commencing disciplinary action
against the Company. In this regard, both the Nevada Board and Nevada
Commission have indicated that the April 30, 1995, date for termination of the
Company's business relationship with the 29 Palms Band could be extended or
modified based on demonstrable progress in completing an agreement with the
tribe and obtaining NIGC approval of such an agreement, or changed factual or
legal circumstances.
Based on the conduct of the Company, the Nevada Board will have a broad
range of regulatory options that could be taken relative to the Company under
these circumstances. The Nevada Board could process the License Condition
Request in a manner that affords the Company ample opportunity to terminate the
Spotlight 29 management agreement in a constructive and satisfactory manner. If
the Company refuses to file the License Condition Request by the April 4, 1995
deadline, or the Company is unable to terminate the Spotlight 29 management
agreement within a time period acceptable to the Nevada state gaming regulatory
authorities, the Nevada Board could decide to file a complaint for disciplinary
action against the Company and its licensed subsidiaries based on the alleged
violation of the foreign gaming provisions of the Act and related regulations
of the Nevada Commission. A disciplinary complaint may request revocation,
suspension or limitation of a license or other approval, petition for the entry
of an order in the nature of either a mandatory or prohibitory injunction, and
the imposition of administrative fines of not more than $100,000 for each
separate violation of the Act or applicable regulation of the Nevada
Commission. In this regard, the Nevada Board could ask that each day that the
Company continues an "association" with the 29 Palms Band constitutes a
separate violation. Additionally, the Nevada Board could enter an interlocutory
stop order preventing the Company from completing any public offering of its
common stock or other securities in accordance with the prior order of the
Nevada Commission entered October 27, 1994.
Each of these various administrative actions available to the Nevada
Board are subject to review, consideration and final decision by the Nevada
Commission, which agency has the final authority and discretion to approve,
deny or modify the request of the Nevada Board. In certain limited
circumstances, the final decision of the Nevada Commission is subject to
judicial review by the Nevada courts. Moreover, under appropriate regulatory
and financial circumstances, the Nevada Board and the Nevada Commission could
petition a Nevada court for the appointment of a licensed supervisor to assume
the operations of the Four Queen Hotel and Casino.
While the Company intends to fully cooperate with the Nevada Board and
the Nevada Commission, there is no assurance that the Company will be able to
satisfy any or all of the regulatory requirements that these agencies might
impose on the Company. The loss or material limitation of any license or
approval held by the Company in Nevada would, and the imposition of
administrative fines by the Nevada Commission may, have a material adverse
impact on the Company's business and properties.
NATIVE AMERICAN GAMING OPERATIONS
24
The Company, through its wholly owned subsidiaries and affiliates, has
management contracts to manage casino facilities on tribal lands with the 29
Palms Band near Palm Springs, California and with the S'Klallam Tribe on the
northeast portion of the Olympic Peninsula approximately 70 miles northwest of
Seattle, Washington.
Gaming on Native American lands, including Spotlight 29 and 7 Cedars, 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
and 7 Cedars.
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 either of the two management contracts 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 IGRA,
the governing tribal ordinance or applicable state law could have an adverse
effect on the Company's gaming operations on Native American lands. The NIGC
has advised the Company that the operation of video pull-tab gaming devices by
the 29 Palms Band at Spotlight 29 does not adversely affect the good standing
of the Company before the NIGC.
NASHVILLE NEVADA
The ownership and operation of Nashville Nevada will be subject to
extensive regulation by federal, tribal, and state government authorities.
Nashville Nevada will be located on land within the Nevada portion of the Fort
Mojave Indian Reservation that has been leased by MVR from the Fort Mojave
Tribe. As required by federal law relating to leasing of lands held in trust
by the United States for Native American Tribes, the Secretary of the Interior
acting through the BIA, approved the Nevada lease between the Fort Mojave Tribe
and MVR (the "Lease"). MVR's Arizona lease has been conditionally approved by
the BIA.
MVR has subleased a portion of the land on which Nashville Nevada will be
located to an affiliate of Temple. As required by the Lease, both the BIA and
the Fort Mojave Tribal Council approved the Sublease (the "Sublease"). The
Sublease in turn will be assigned to Nashville Nevada LLC upon closing of the
financing. This assignment of the Sublease has been approved by the Fort
Mojave Tribal Council and by the BIA.
The Fort Mojave Tribal Council has adopted a Tribal Gaming Ordinance that
has been approved by the Chairman of the NIGC and authorizes Class III gaming
on the Nevada portion of the reservation. The Fort Mojave Tribe and the State
of Nevada have entered an Intergovernmental Agreement that has been approved by
the Secretary of Interior as a tribal-state compact relating to Class III
gaming. Under the Intergovernmental Agreement, the tribe has transferred all
civil, criminal, and regulatory authority over gaming, including licensing,
within the Nevada portion of the Fort Mojave Indian Reservation, to the Nevada
Commission. The ownership and operation of Nashville Nevada thus will be
subject to extensive regulation by the Nevada Gaming Authorities. The
25
Nevada Gaming Authorities have broad powers with respect to the licensing of
casino operations and may revoke, suspend, condition or limit Nashville
Nevada's gaming licenses and approvals, impose substantial fines, and take
other actions, any of which could have a substantial material adverse affect on
Nashville Nevada's business.
Prior to the enactment of IGRA, the Fort Mojave Tribe and the State of
Nevada signed an intergovernmental agreement, subsequently approved by the
Secretary of the United States Department of the Interior as a tribal-state
gaming compact. Under this intergovernmental agreement, all of the tribe's
civil, criminal and regulatory authority over gaming, including licensing, was
transferred to the Nevada Commission. Consequently, gaming operations on the
Nevada property leased from the Fort Mojave Tribe must be authorized, licensed
and regulated by the State of Nevada and not by the tribe. Nashville Nevada
LLC has taken the position that, because the gaming operations on the leased
property are licensed by the State of Nevada and not by the Fort Mojave Tribe,
certain provisions of IGRA which require that a Native American tribe must
receive at least 60% of net revenues (as defined by IGRA) from gaming
operations conducted by any person or entity licensed or authorized by a Native
American tribe to conduct such gaming do not apply to the distribution of
revenues from gaming operations conducted in compliance with the lease from the
Fort Mojave Tribe and the tribal-state compact. The agreements relating to the
Nashville Nevada project do not provide for the Fort Mojave Tribe to receive
60% of net revenues from gaming and any amendment of the agreements to provide
for such receipt would make the project uneconomical for Nashville Nevada LLC
or result in the loss of all of the Company's investment in the project.
IGRA, the Lease, and the Fort Mojave Tribal Gaming Ordinance reserve
certain governmental and other authorities to the Fort Mojave Tribe and the
federal government. Under IGRA, the Fort Mojave Tribal Council may, in its
sole discretion and at any time, revoke its Tribal Gaming Ordinance. Any
person then operating Class III gaming must cease doing so one year from the
date that notice of the tribe's revocation is published in the Federal
Register. The Lease provides that the tribe will take no action to limit Class
III gaming. The Lease preserves the tribe's authority to levy taxes on the
leased premises provided that any fee, taxes or other burden imposed by the
tribe on MVR must not be greater in the aggregate than that imposed by the
State of Nevada on taxpayers located off tribal lands but within Clark County,
Nevada. However, if tribal taxation results in double taxation as a result of
the State of Nevada's authorization to tax tribal lands, full credit for state
taxes will be given against the comparable tribal taxes.
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
26
Queens. The 29 Palms Band has passed a tribal ordinance to permit the sale of
beer and wine by the drink at Spotlight 29. However, the tribal ordinance is
subject to BIA and state approvals. The S'Klallam Tribe has passed a tribal
ordinance to permit the sale of Liquor by the drink at the 7 Cedars Casino.
The tribal ordinance is subject to BIA approval. The Fort Mojave Tribe's
current liquor ordinance authorizes the sale of Liquor at retail but not by the
drink. Elsinore understands the tribe is considering amending its ordinance to
authorize the sale of Liquor by the drink, which has been approved by the BIA.
OTHER BUSINESS INFORMATION
PATENTS
The Company's only significant patent covers MULTIPLE ACTION(R) 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(R) 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(R) blackjack to other casinos in
Las Vegas and throughout the United States and at December 31, 1994 had
licensed 82 locations for 128 tables. Revenues from licensing MULTIPLE
ACTION(R) blackjack through December 31, 1994 represented an immaterial part of
the Company's overall revenues.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1994, the Four Queens employed 1,151 persons, of which 37
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 recordkeeping 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, National Indian Gambling Commission, 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 $101,000,000 at December 31, 1994. 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. As a result of this Offering, the available amount will be
further limited. At December 31, 1994, the amount of loss carryforward not
limited by Section 382 and
27
therefore available to offset current federal taxable income was approximately
$38,000,000. These loss carryforwards begin to expire in the year 1999 and
will be completely expired by 2007.
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 12.5% First Mortgage Notes Due 2000 (the "First Mortgage Notes)".
(See Notes 5 and 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 Spotlight 29 or 7
Cedars. Pursuant to the Nashville Nevada operating agreement, Nashville Nevada
LLC (of which Mojave Gaming, Inc. is a member) has the right to assume all
rights as sublessee under the sublease for the Nashville Nevada project site,
subject to the satisfactory completion of financing and other contingencies
relating to the project. See "Item 1. Business -- Hotel and Casino --
Structure of Nashville Nevada Agreements."
ITEM 3. LEGAL PROCEEDINGS
-----------------
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, will be calculated 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 and no
decision has yet been rendered, although the Company understands a decision may
be rendered at any time. In the event of an adverse decision in the liability
phase, the litigation would thereafter proceed to determine the amount of
damages awarded against the defendants. There is no assurance that the Company
will prevail in this litigation or as to the amount of the damages that might
be awarded against it if the plaintiffs succeed. An adverse decision in this
case could have a material adverse effect on the Company. The Company would
likely need to obtain additional financing to meet its obligations under any
ultimate material judgment against it. There is no assurance that such
financing would be available.
ACTION AGAINST 29 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 complaint seeks injunctive and
declaratory relief based upon the tribe's breach of the
28
Spotlight 29 management contract. Plaintiffs allege that the tribe breached
the contract when it installed "pull-tab" video gaming machines at the casino
without the plaintiffs' consent and without any involvement whatsoever by the
plaintiffs in the operation of the machines. The complaint alleges that these
actions violate the terms of the contract which give plaintiffs the exclusive
right to manage and operate the casino and violated the contract's non-compete
provisions. The complaint states that plaintiffs did not, and could not,
consent to the installation and operation of the machines at the casino because
the State of California has expressed a legal position that, because such
machines are Class III gaming devices under the IGRA, their operation on Native
American reservations in California is illegal. Moreover, because plaintiffs
are subject to regulation by Nevada Gaming Authorities which require that
plaintiffs' conduct conform to the laws of the State of California and the
IGRA, plaintiffs' consent to the installation or involvement in the operation
of the gaming devices at Spotlight 29 could subject them to disciplinary action
by the Nevada gaming authorities. Consequently, plaintiffs filed the complaint
to obtain a judicial declaration as to whether "pull-tab" video gaming devices
are legal on tribal lands in California and, unless they are declared legal, to
enjoin the operation of such devices at Spotlight 29.
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. No hearing date has been
set on this motion. Management believes that 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.
CABAZON TRIBE ACTION
In December 1994, the Cabazon Tribe, which operates a casino on its tribal
lands in the vicinity of the 29 Palms Band, filed a lawsuit against the NIGC in
the Federal District Court for the District of Columbia and unsuccessfully
sought a temporary restraining order to enjoin completion of Spotlight 29. The
Company believes the suit, which alleged violation by the NIGC of certain
environmental law standards, is wholly without merit and will not be litigated
further by the Cabazon Tribe.
MISCELLANEOUS
At December 31, 1994, the Company and its subsidiaries were parties to
various other claims and lawsuits arising in the normal course of business.
While the amounts claimed in some instances are substantial and ultimate
liability with respect to such claims cannot be determined, management is of
the opinion that the resolution of all pending matters will not have a material
adverse effect upon the Company's financial statements taken as a whole.
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.
29
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"), is
traded on the American Stock Exchange and the Pacific Stock Exchange under the
symbol "ELS." The following table sets forth the closing high and low sales
price for the Common Stock on the American Stock Exchange Composite Tape during
each quarter of the last two fiscal years, as reported by the American Stock
Exchange.
Price Range
---------------------
High Low
----------- -------
Year ended December 31, 1994:
First Quarter $6.125 $3.875
Second Quarter 4.563 2.313
Third Quarter 3.500 2.563
Fourth Quarter 2.813 1.813
Year ended December 31, 1993:
First Quarter $3.438 $ .750
Second Quarter 6.750 2.500
Third Quarter 6.875 4.125
Fourth Quarter 8.375 4.250
On March 30, 1995, the number of holders of record of Common Stock was
approximately 4,232.
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
restrict the payment of cash dividends under certain circumstances.
30
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Set forth below is selected consolidated historical data with respect to the
Company for the five years ended December 31, 1994. This data should be read in
conjunction with the consolidated financial statements and notes thereto set
forth elsewhere herein.
[Enlarge/Download Table]
DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Dollars in Thousands Except Per Share Amounts, Unaudited)
BALANCE SHEET DATA:
------------------
Total Assets $ 67,315 $ 71,923 $ 41,961 $ 45,083 $ 51,998
Current Portion
of Long-Term Debt 2,309 204 3,051 3,101 3,212
Long-Term Debt Net of
Current Portion:
Notes Payable 50,791 53,018 28,513 31,181 33,800
Capital Leases 1,290 1,350 1,555 1,939 2,107
Stockholders' Equity
(Deficit) (1,664) 4,567 (182) 1,598 2,246
OPERATIONS DATA:
---------------
Revenues (Net) $ 62,706 $ 66,852 $ 63,998 $ 63,031 $ 68,213
======== ======== ======== ======== ========
Income (Loss) Before
Extraordinary Items ($ 10,176) ($ 2,252) ($ 1,780) ($ 573) $ 990
Extraordinary Items:
Gain (Loss) on
Extinguishment of Debt 735 (285) - - (20)
Tax Effect of Loss
Carryforward - - - - 604
-------- -------- --------- -------- --------
Net Income (Loss) ($ 9,441) ($ 2,537) ($ 1,780) ($ 573) $ 1,574
======== ======== ======== ======== ========
Per Share Amounts:
Income (Loss) Before
Extraordinary Items ($ .84) ($ .19) ($ .15) ($ .05) $ .08
Extraordinary Items .06 (.02) - - .05
-------- -------- -------- -------- --------
Net Income (Loss) ($ .78) ($ .21) ($ .15) ($ .05) $ .13
======== ======== ======== ======== ========
Capital Costs:
Depreciation and
Amortization $ 3,990 $ 3,206 $ 3,302 $ 3,691 $ 3,883
Interest Related to Prior-
Period Tax Obligation 885 1,385 213 313 599
Interest Expense 9,086 4,256 3,124 3,858 4,736
-------- -------- -------- -------- --------
$ 13,961 $ 8,847 $ 6,639 $ 7,862 $ 9,218
======== ======== ======== ======== ========
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION
------------
This discussion and analysis should be read in conjunction with the consolidated
financial statements and notes thereto set forth elsewhere herein.
FINANCIAL CONDITION
RECENT AND EXPECTED LOSSES FROM EXISTING OPERATIONS
FOUR QUEENS. Elsinore's historical financial information primarily reflects
the operations of the Four Queens. Although the Company historically has
generated positive cash flow from operations, the Company has experienced net
losses in four of the last five years. In 1994, the results of operations of
the Four Queens were adversely affected by, among other things, increased
competition due to the opening of three large casino/hotels on the Las Vegas
Strip and, to a lesser extent, the refurbishment program at the Four Queens. At
December 31, 1994, the Company's working capital deficit had increased to $10.5
million, from $5.3 million at December 31, 1993. Cash and cash equivalents,
including restricted amounts, decreased $23.7 million to $7.1 million during the
twelve months ended December 31, 1994 (unrestricted cash and cash equivalents
were approximately $3.4 million as of December 31, 1994, as compared to $5.1
million as of December 31, 1993). Elsinore experienced a net loss of $9.4
million and negative cash flow from operations of $3.7 million for the 1994
fiscal year. The results of operations of the Four Queens have continued to be
negatively affected since December 31, 1994 and the Company anticipates this
will be the case at least through the first half of 1995.
SPOTLIGHT 29 CASINO. Spotlight 29 opened to the public on January 14, 1995.
During the first six weeks of Spotlight 29's operations, insufficient revenues
were generated to cover the casino's operating expenses. From the casino's
opening date through February 28, 1995, gross revenues were approximately
$900,000 (compared to projected revenues during this period of $3.7 million),
resulting in an estimated net loss of approximately $1.3 million (compared to a
projected net profit of $600,000). This shortfall is believed by the Company to
be attributable in part to the marketing plan of 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 in violation
of applicable federal law. Pursuant to its obligations under the Spotlight 29
management contract, the Company through March 30 contributed $1.06 million in
the form of loans to Spotlight 29 to fund its working capital shortfall.
Spotlight 29 is seeking to obtain approximately $700,000 in furniture, fixtures
and equipment financing, although there is no assurance such financing will be
obtained. Based on the trend of the casino's first six weeks of operations, the
Company anticipates that, in the event the Company continues to manage Spotlight
29, it will be required to make one or more additional advances during the
balance of the year to the casino to fund working capital shortfalls. In
addition, there is no assurance that Spotlight 29 will not continue to
experience negative cash flow in subsequent quarters or, if such operating
losses do continue, that the Company will have sufficient working capital to
fund any additional cash contributions that would be required under the
management contract.
7 CEDARS CASINO. 7 Cedars opened to the public on February 3, 1995. In
February 1995, during its first three weeks of operations, 7 Cedars generated
gross revenues of approximately $1.5 million, which was approximately $100,000
less than the $1.6 million of revenues previously projected for the period. The
estimated net loss for the casino for February is estimated to be $300,000,
compared to a budgeted loss for the period of $200,000. Although the Company
anticipates that gaming revenues at 7 Cedars will increase in the second and
third quarters of 1995, as a result of a greater influx of tourists to the
Olympic Peninsula during the spring and summer months, there is no assurance
that 7 Cedars will generate increased gaming revenues or that the casino will
become profitable. See "Uncertainty of Operating Results of New Casino Projects"
below.
32
SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS
As of December 31, 1994, the Company had gross indebtedness of approximately
$61.3 million, inclusive of current maturities (net indebtedness, after
subtracting an aggregate discount of approximately $6.9 million, was
approximately $54.4 million), and the total stockholders' equity had decreased
approximately $400,000 since September 30, 1994, from a deficit of
approximately $1.4 million to a deficit of approximately $1.7 million.
Continuing losses in the first three months of 1995 have further increased the
amount of such deficit.
Substantially all of the Company's outstanding indebtedness for money
borrowed consists of its First Mortgage Notes, its Mortgage Notes and its
Convertible Notes. 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 "Note Exchange"). Debt service requirements on
the First Mortgage Notes currently consist of semi-annual interest payments of
approximately $3.56 million, payments of which in the current fiscal year are
due on April 1 and October 1, 1995, and repayment of principal at maturity in
the year 2000. Debt service requirements on the Mortgage Notes consist of
quarterly interest payments due on March 31, June 30, September 30 and December
31, 1995, and mandatory quarterly redemptions of $750,000 on June 30, September
30 and December 31, 1995. Repayment of remaining principal and accrued interest
on the Mortgage Notes is due on March 31, 1996.
The Company's debt service requirements on the Convertible Notes in 1995 are
limited to a single payment of approximately $115,000 of accrued interest
payable on December 31, 1995. Thereafter, the Convertible Notes will require
quarterly interest payments and mandatory redemptions of $500,000 on March 31,
June 30 and September 30, 1996, with the final payment of principal and accrued
interest due on December 31, 1996.
Although the Company anticipates the net proceeds of sale of its Convertible
Notes, together with cash on hand and revenues from operations, will be
sufficient to cover its March and April 1995 debt service obligations, based on
the Company's results of operations and projections, the Company will not be
able to meet its remaining obligations in 1995 including, among other things,
its June, September and October 1995 debt service obligations, without
significantly improved results of operations or additional financing. See
"Decreased Liquidity" below.
The leveraged nature of the Company's capital structure has placed
significant constraints on its cash position. Among other things, the Company
currently has significantly large cash requirements for debt service, the funds
available for capital expenditures are limited, and the financial covenants and
other restrictions contained in the agreements governing the First Mortgage
Notes, Mortgage Notes and Convertible Notes require the Company to meet certain
financial tests and will limit its ability to borrow additional funds or to
dispose of assets. See "Debt Covenants" below. The Company's ability to meet its
debt service obligations and ultimately to reduce its total debt will be
dependent upon significantly improving the future performance of the Four Queens
and/or Native American casinos, obtaining additional financing, or both.
DECREASED LIQUIDITY
The Company's liquidity has been significantly affected by its substantial
debt service obligations, described above, and its other capital expenditure and
operating requirements, including its obligations to fund working capital
shortfalls at the Native American casinos and to assume payment obligations from
Temple relating to the Mojave Valley Resort, also described above. In addition,
the Company is obligated to pay to the IRS in 1995 a remaining balance of
approximately $4.7 million of prior period taxes and interest, pursuant to an
installment payment plan entered into with the IRS in December 1994 (see
"Liability for Prior Period Tax; IRS Installment Agreement" below). The Company
also may be exposed to liability as a result of pending litigation, previously
reported, alleging WARN Act violations related to the Company's former
affiliated New Jersey casino/hotel operations (see "Pending WARN Act Litigation"
below).
In 1994, the Company's available cash and funds generated from operations
were insufficient to meet its aggregate debt service and capital expenditure and
operating requirements. As a result, the Company did not make the October 1,
1994 interest payment due on the First Mortgage Notes on a timely basis. The
net proceeds raised
33
from the issuance of the Mortgage Notes on October 14, 1994, enabled the Company
to make the late interest payment within the grace period permitted under the
First Mortgage Notes Indenture.
In the first quarter of 1995, the Company anticipated that it would require
additional funds to meet its aggregate debt service and capital expenditure
requirements. On January 31, 1995, the Company raised approximately $4 million
(before deducting offering expenses) of additional working capital by issuing
2.5 million shares of its Common Stock pursuant to the Equity Offering. The net
proceeds raised from the offering enabled the Company, among other things, to
make the $1 million payment due to the IRS on February 1, 1995 and to complete
its March 1995 interest payment under the Mortgage Notes. On March 31, 1995, the
Company raised approximately $1.7 million through the sale of the Convertible
Notes. The Company will use the net proceeds thereof for working capital
purposes relating to the Four Queens, Spotlight 29 and 7 Cedars and intends to
apply such proceeds toward completing its April 1995 interest installment on the
First Mortgage Notes.
In addition to the Equity Offering and the sale of Convertible Notes, the
Company will be required to complete additional financing transactions to
provide the capital needed to discharge its debt service obligations and other
working capital requirements during the remainder of 1995. In addition, the
Company intends to raise the $10 million it is required to contribute to the
Nashville Nevada project by completing one or more additional equity offerings
by September 30, 1995. If the Company is unable to obtain additional financing,
it is likely to experience a cash shortfall. In such event, unless an agreement
was reached with the noteholders to reschedule or extend the Company's debt, the
Company would be required to sell assets or seek protection under bankruptcy
laws. In addition, the Company's failure to maintain certain financial ratios or
comply with its other debt covenants would constitute a default under the First
Mortgage Notes and the Mortgage Notes. See "Debt Covenants" below.
LIABILITY FOR PRIOR PERIOD TAX; IRS INSTALLMENT AGREEMENT
In October 1994, the IRS completed and delivered to the Company a final
assessment (the "IRS Assessment") relating to certain adjustments to the
Company's taxable income for the fiscal years ended January 31, 1980, through
December 31, 1983 (which the IRS had under audit). 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. In the third quarter of 1994,
the Company recorded an additional liability of $377,000 necessary to cover the
full amount of tax and interest identified in the IRS Assessment. The issuance
of the IRS Assessment and the Notice of Tax Lien contravened Elsinore's covenant
under its debt facilities to timely pay its tax liabilities and not to incur
additional liens under its debt facilities; the debt covenant noncompliance was
waived by the noteholders on December 2, 1994. See "Debt Covenants" below.
On December 6, 1994, the Company and the IRS entered into an installment
payment agreement (the "Installment Agreement") pursuant to which the Company
paid the IRS $1 million on February 1, 1995, and an additional $275,000 on March
1, 1995, and will pay the balance of the IRS Assessment, plus additional accrued
interest, in monthly installments of $275,000 (increasing to $550,000 on May 1,
1995) during the remainder of 1995. Elsinore applied a portion of the proceeds
from the Equity Offering toward its initial payment under the Installment
Agreement. However, the proceeds from the Equity Offering will not be
sufficient to enable the Company to both fully pay the IRS Assessment and fully
meet its debt service and capital expenditure requirements in 1995. Although
the Company anticipates that its results of operations in 1995, together with
the proceeds of its proposed sale of the Convertible Notes, will allow the
Company to perform under the IRS Installment Agreement, there is no assurance
that the Company's results of operations will be sufficient to fully perform
under the Installment Agreement, or that
34
the IRS will not levy upon the Company's property or take other action to
enforce the tax lien. Such action by the IRS would violate the Company's debt
covenants under the First Mortgage Notes and Mortgage Notes. See "Debt
Covenants."
DEBT COVENANTS
The First Mortgage Notes and the Mortgage Notes are secured by substantially
all of the assets of the Four Queens and a pledge of the capital stock of
Elsinore's material subsidiaries (other than the Company's interest in
developing the Nashville Nevada project). The indenture relating to the First
Mortgage Notes and the purchase agreement relating to the Mortgage Notes contain
covenants relating to the maintenance of the right to manage the Company's
Native American casinos, maintenance of net worth and a fixed charge coverage
ratio, as well as restrictions on, among other things, the incurrence of
additional debt, liens, investments and the payment of dividends. Certain of
these covenants (including the net worth and fixed charge coverage ratio
maintenance covenants) became effective following completion of the Company's
Native American casino projects.
The issuance of the IRS Assessment and the Notice of Tax Lien contravened
Elsinore's debt covenants not to incur additional liens and to pay its taxes in
a timely manner. On December 2, 1994, the Company's noncompliance with these
debt covenants was waived pursuant to the written consent of holders of the
requisite amounts of First Mortgage Notes and Mortgage Notes. As consideration
for the grant of the waiver, the indenture governing the First Mortgage Notes
and the purchase agreement governing the Mortgage Notes were each amended to
require the Company to make available a substantial portion of its excess cash
for the purchase of Mortgage Notes and, thereafter, First Mortgage Notes on the
open market on a quarterly basis.
The Convertible Notes are secured by a pledge of the capital stock of Mojave
Gaming, Inc., the Company's wholly-owned subsidiary ("Mojave Gaming"). The
purchase agreement relating to the Convertible Notes contains covenants which,
among other things, require the Company to hold in escrow up to the first $5
million of proceeds from any future financings; permitted uses of such escrowed
proceeds would be limited to payments on the First Mortgage Notes, Mortgage
Notes and IRS Installment Agreement.
Elsinore intends to implement its required $10 million investment in the
Nashville Nevada project as an investment by Mojave Gaming, Inc. in Nashville
Nevada LLC, a Nevada limited liability company established for that purpose.
Mojave Gaming is not a guarantor of the First Mortgage Notes or the Mortgage
Notes. The Indenture governing the First Mortgage Notes and the purchase
agreement governing the Mortgage Notes restrict Elsinore's ability to make
investments in certain unrestricted subsidiary entities, including Mojave
Gaming. Among other things, the Company would be required by the terms of the
Indenture to retain and not contribute to Mojave Gaming an amount of the net
proceeds from its equity offerings equal to the Company's aggregate quarterly
consolidated net losses since January 1, 1994, as adjusted pursuant to the terms
of the debt covenant. In addition, restrictive covenants in the purchase
agreement governing the Convertible Notes would prevent the Company in most
circumstances from contributing to Mojave Gaming the first $5 million of
proceeds from any future financings. The effect of these covenants will be to
restrict the Company from using a significant portion of the net proceeds from
future equity offerings to fund its investment in Nashville Nevada LLC and, as
such, substantially reduces the likelihood of the Company being able to complete
the financing for the Nashville Nevada project.
Elsinore's ability to comply with the financial covenants contained in its
debt facilities is and will continue to be dependent upon, among other things,
the results of operations of the Four Queens, Spotlight 29 and 7 Cedars. Based
on the recent results of operations of these casinos, and the Company's
expectation as to its operating results for the remainder of 1995, the Company
likely will not be able to comply with certain of these financial covenants when
they become effective in mid-1995. See "Probable Failure to Comply with Debt
Covenants" below.
The Company's failure to cure any future debt covenant noncompliance (in
certain instances following 30 days notice to cure from the noteholders), if not
waived by the holders of the First Mortgage Notes, Mortgage Notes and
Convertible Notes, would result in a default under the applicable note facility
entitling the respective noteholders to accelerate the payment of principal and
accrued interest on the debt. The Company intends to seek appropriate waivers or
consents from the holders of its debt securities with respect to any such
defaults. However, there is no assurance such waivers or consents would be
obtained. Moreover, conditions attached to any grant of such waivers may impose
additional restrictions or financial burdens on the Company. If such waivers or
consents were not obtained, and the Company's outstanding debt was accelerated,
the Company would be required to sell assets or seek protection under bankruptcy
laws.
PROBABLE FAILURE TO COMPLY WITH DEBT COVENANTS
COVERAGE RATIO. The Indenture governing the First Mortgage Notes and the
purchase agreement governing the Mortgage Notes each requires the Company,
commencing June 30, 1995, and as of the last day of each subsequent fiscal
quarter, to maintain a Consolidated Fixed Charges Coverage Ratio ("Coverage
Ratio") of at least 1.5 to 1, and to furnish the
35
noteholders with an officer's certificate within fifty days after the end of
each such quarter setting forth the calculations of this ratio and stating that
the Company is in compliance with the covenant. As of the date hereof, the
Coverage Ratio of the Company is approximately .55 to 1. Based on the Company's
results of operations and its projections for the second quarter of 1995, the
Company will not achieve a Coverage Ratio of 1.5 to 1 by June 30, 1995. The
Company's failure to cure such debt covenant noncompliance (following thirty
days notice to cure from the noteholders), if not waived by such noteholders,
would result in a default under the applicable note facility entitling the
noteholders to accelerate the debt. While the Company intends to seek
appropriate waivers or consents in the event of such noncompliance or default,
there is no assurance such waivers or consents would be obtained. See "Debt
Covenants" above.
NET WORTH. In addition, the Indenture governing the First Mortgage Notes
requires the Company, commencing with the second quarter of 1995, to furnish the
noteholders within fifty (50) days after the end of each fiscal quarter a
certificate setting forth the Consolidated Net Worth ("Net Worth") of the
Company at the end of such quarter. If the Net Worth at the end of each of any
two consecutive fiscal quarters is negative, then the Company will be required
to make an irrevocable, unconditional offer to all of the First Mortgage
Noteholders to purchase up to $6 million aggregate principal amount of First
Mortgage Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest. Such purchase offer must remain open for a
period of twenty business days and be completed within five business days
thereafter. In addition, the commencement of such purchase offer would
constitute an event of default under the purchase agreement governing the
Mortgage Notes.
As of the date hereof, the Company's Net Worth is negative. Based on the
recent results of operations and the Company's expectation as to its operating
results for the remainder of 1995, the Company believes it is unlikely it will
achieve a positive Net Worth by the end of either the second or the third
quarter of 1995. In the event the Company's Net Worth remains negative through
the third quarter of 1995, and such covenant noncompliance is not waived by the
noteholders, the Company would not be able to complete the requisite repurchase
of First Mortgage Notes without obtaining additional financing and a waiver of
default under the Mortgage Note facility. There is no assurance such financing
could be obtained on satisfactory terms or at all. See "Decreased Liquidity"
above. While the Company intends to seek appropriate waivers or consents in the
event of such noncompliance or default, there is no assurance such waivers or
consents would be obtained. See "Debt Covenants" above.
TERMINATION OF SPOTLIGHT 29 MANAGEMENT CONTRACT. Under the Indenture governing
the First Mortgage Notes and the purchase agreement governing the Mortgage
Notes, the loss by the Company of the legal right to operate Spotlight 29, and
such loss continuing for more than 90 consecutive days, would constitute an
Event of Default, entitling the noteholders to immediately accelerate the
applicable debt. Under both debt facilities, the holders of a majority of
outstanding notes may consent to the waiver of such an Event of Default. In
connection with the Company's efforts to terminate the Spotlight 29 management
contract and sever its relationship with the 29 Palms Band, the Company intends
to solicit consents from the requisite number of noteholders to the waiver of
any Event of Default that would occur as a result of the contract termination.
There can be no assurance such waivers would be obtained.
PENDING WARN ACT LITIGATION
The trial liability phase of the Company's WARN Act litigation concluded in
August 1993 and, although no decision has yet been rendered, a decision may be
rendered at any time. See "Item 3. Legal Proceedings -- WARN Act Litigation."
There is no assurance that the Company will prevail or as to the amount of the
damages that might be awarded if the plaintiffs succeed. An adverse decision in
this case could have a material adverse effect on the Company. The Company would
likely need to obtain additional financing to meet its obligations under any
ultimate material judgment against the Company. There is no assurance that such
financing would be available.
CONSTRUCTION AND OPERATION OF NEW CASINO PROJECTS
Spotlight 29 opened on January 14, 1995 and 7 Cedars opened on February 3,
1995. The Company has limited prior experience in operating and managing
multiple casinos simultaneously. Construction of
36
Nashville Nevada is intended to begin as soon as practicable after the necessary
financing is obtained. However, major construction projects such as Nashville
Nevada entail significant risks, including financing contingencies, shortages of
materials, management personnel and skilled labor, engineering, construction,
environmental, governmental and regulatory problems, work stoppages, weather
interference and unanticipated cost increases, any of which difficulties could
further increase the cost of or delay or prohibit the construction of Nashville
Nevada. There is no assurance that such construction will occur on schedule or
at all, or that the budgeted construction costs will not be exceeded.
UNCERTAINTY OF OPERATING RESULTS OF NEW CASINO PROJECTS
The Company's historical financial information does not include results from
Spotlight 29 and 7 Cedars or Nashville Nevada, if developed. The likelihood of
success of these casinos should be considered in light of the expenses,
difficulties and delays frequently encountered in the development, opening and
management of new casinos, and the competitive and regulatory environment in
which they will operate. Since its January 14, 1995 opening, Spotlight 29 has
experienced difficulties and delays in achieving profitability. See "Item 1.
Business -- Native American Gaming Projects --Spotlight 29 Casino -- Marketing."
In addition, there is no assurance that additional losses, difficulties, delays
and expenses with respect to managing the new casinos will not continue to
adversely affect the results of operations. There can be no assurance,
therefore, that either the Spotlight 29 or 7 Cedars or the Nashville Nevada
project (if developed) will become profitable.
RISKS ASSOCIATED WITH HOTEL/GAMING BUSINESS
The Company is subject to the risks inherent in the hotel and gaming
businesses. Operating results from gaming activity can vary significantly as a
result of a number of factors, including the competitive environment, hotel
occupancy rates, weather, and general economic conditions. Licensed gaming
operations are subject to substantial government regulation. Additionally,
hotel and gaming operations are subject to the imposition of taxes or
assessments by regulatory authorities. A significant change in government
regulations or any new tax or assessment could have a material adverse effect on
the Company's operations. See "Item 1. Business -- Regulations."
RELIANCE ON CERTAIN MARKETS
The Four Queens derives a large portion of its customers from specific
geographic areas including southern California, Arizona, Las Vegas, Hawaii, and
the Midwest. Spotlight 29 and 7 Cedars depend heavily on markets in their
respective local operating areas. Nashville Nevada, if developed, is expected to
depend heavily on the southern California and Arizona markets. Adverse economic
conditions or further expansion of gaming in these markets, as a result of
regulatory change or otherwise, could also significantly and adversely affect
the Company's business. In addition, an increase in fuel costs or transportation
prices or a deterioration of relations with tour and travel agents, as they
affect travel between the Company's facilities and the markets they serve, or
other transportation-related difficulties could also have a material adverse
effect on the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
The Company's working capital deficit at December 31, 1994 increased to
$10,505,000 from $5,300,000 at December 31, 1993. Cash and cash equivalents,
including restricted amounts, decreased $23,738,000 to $7,092,000 during the
twelve months ended December 31, 1994 (unrestricted cash and cash equivalents
were approximately $3,407,000 and current liabilities were approximately
$16,709,000 as of December 31, 1994).
Net cash used by operating activities for the twelve months ended December
31, 1994 was approximately $3,437,000. Major uses of cash during the 1994
fiscal year included payment of $7,446,000 interest on the First Mortgage Notes,
capital expenditures of $4,364,000 for the refurbishment of the Four Queens, an
investment of $1,122,000 for the Company's participation in the Fremont Street
Experience, and capital costs incurred and/or loans made to the respective
tribes in conjunction with the development of the Company's Native American
casino projects
37
($7,810,000 for Spotlight 29 and $7,591,000 for 7 Cedars). Approximately
$1,730,000 of the cash used in fiscal 1994 was from the proceeds of the private
placement of the First Mortgage Notes and Mortgage Notes, with the remainder
from available cash.
In October 1993, the Company completed a private placement of the First
Mortgage Notes and warrants to purchase common stock of the Company. The net
proceeds of the offering was approximately $57,400,000, approximately
$26,700,000 of which was used to repay outstanding bank debt. The remaining
$30,700,000 was deposited in segregated accounts pending disbursement for
specified project uses. At December 31, 1994, approximately $3,685,000 of these
funds remained undisbursed and were available for the following uses: (i)
$86,000 to fund the upgrading and refurbishment of the Four Queens, (ii)
$2,190,000 to fund loans and other advances for the purpose of financing the
construction and development of Spotlight 29 and (iii) $1,409,000 to fund loans
and other advances for the purpose of financing the construction and development
of 7 Cedars. The Company anticipates that all of the funds will be utilized for
the intended purposes by the end of the first quarter of 1995.
In October 1994, the Company issued $3,000,000 aggregate principal amount of
its Mortgage Notes. Substantially all of the net proceeds thereof were used for
debt service and working capital purposes, including payment of the October 1994
interest installment due on the First Mortgage Notes. In connection with
issuing the Mortgage Notes, the Company paid certain customary fees and expenses
of the purchasers and issued to the purchasers an aggregate of 126,050 shares of
Common Stock.
In December 1994, the Company redeemed and retired $3 million principal
amount of its First Mortgage Notes, in consideration for which the Company
issued to the noteholder 930,000 shares of Common Stock (the "Note Exchange").
On January 25, 1995, the Company raised approximately $4,000,000 (before
deducting offering expenses) pursuant to the Equity Offering. The net proceeds
of the Equity Offering enabled the Company to discharge various debt service and
other working capital requirements arising during the first quarter of 1995.
On March 31, 1995, the Company sold through a private placement to six
purchasers an aggregate of $1,706,250 principal amount of its Convertible Notes.
The Company's net proceeds of the sale will be for working capital purposes
relating to the Four Queens and Native American casinos, including, without
limitation, the interest payment on the First Mortgage Notes due on April 1,
1995.
LONG-TERM DEBT
The Company's long term debt consists primarily of the First Mortgage Notes,
the Mortgage Notes and the Convertible Notes. See Note 5 of Notes to
Consolidated Financial Statements for a discussion of the terms of the First
Mortgage Notes and Mortgage Notes. The Convertible Notes have an initial
aggregate principal amount of $1,706,250 and bear interest at 7 1/2% per annum,
payable in arrears on December 31, 1995, and March 31, June 30, September 30 and
December 31, 1996. The Convertible Notes mature on December 31, 1996, with
interim mandatory redemptions due on each of March 31, June 30 and September 30,
1996. Optional redemption by the Company is permitted after December 31, 1995 at
a price of 107.5% of principal amount. Each Convertible Note may be converted at
any time into Common Stock at a price equal to $1.125 per share. The Convertible
Notes are secured by a pledge of all outstanding Common Stock of Mojave Gaming,
Inc. The Convertible Notes were issued pursuant to the terms of a Note Purchase
Agreement, dated as of March 30, 1995, between the Company and each purchaser.
LIQUIDITY
Currently, the Company's primary source of liquidity is cash flow from the
operations of the Four Queens. The Four Queens experienced in 1994 a
substantial decrease in gaming revenues, operating results and cash flows (see
"Results of Operations" below), which the Company expects will continue at least
through the first half of 1995. In addition, the Company's liquidity in 1994
was sufficiently affected by its substantial debt service obligations (see
"Financial Condition -- Substantial Leverage and Debt Service Requirements"
above) and in 1995 will be further affected by such obligations and by some or
all of the following items:
IRS Installment Agreement: The Company is obligated to pay the IRS $275,000
per month, increasing to $550,000 per month on May 1, 1995 through December
1995, at which time the IRS Assessment will be fully discharged. See "Financial
Condition --Liability for Prior Period Tax; IRS Installment Agreement" above.
Native American Casino Operating Shortfalls: In addition to the $1,060,000
already advanced to the 29 Palms Band through March 30, 1995, the Company is
required under the Spotlight 29 management contract and the 7 Cedars management
contract to fund working capital shortfalls at either Native American casino.
Depending upon Spotlight 29's future results of operations, its ability to
obtain sufficient equipment lease financing, and the outcome of the current
dispute concerning whether the
38
the Company will terminate the Spotlight 29 management contract, the Company
anticipates it may be required to advance additional funds to the 29 Palms Band
in 1995.
Obligations Assumed from Temple: In consideration for certain amendments to
the Nashville Nevada LLC operating contract beneficial to Elsinore, the Company
has assumed and will complete up to approximately $169,000 of Temple's payment
obligations relating to its development of the Mojave Valley Resort. In
addition, the Company has agreed to loan Temple up to $150,000 to fund Temple's
share of certain pre-construction costs at Nashville Nevada, which loans will be
repaid in the event the requisite financing for the project is obtained.
Nashville Nevada Project Expense: As a condition to its participation in the
Nashville Nevada project, Mojave Gaming will be required to make a capital
contribution of $10,000,000 to the venture developing Nashville Nevada on or
before September 30, 1995. There is no assurance that the Company will be able
to obtain the necessary financing for such contribution on commercially
acceptable terms, or at all.
WARN Act Litigation: See "Item 4. Legal Matters. -- WARN Act Litigation"
above. The trial in the liability phase in this matter concluded August 11,
1993. Although no decision has yet been rendered, a decision may be issued at
any time.
Other Projects Expense: The Company continues to explore potential expansion
opportunities both inside and outside Nevada. However, the Company would need
to seek additional debt or equity financing in the event it decides to pursue
any such opportunities.
In 1995, unless the Company's available cash and funds generated from
operations significantly increases or the Company is able to extend its debt
service and/or delay capital expenditure requirements, the Company will need to
obtain additional working capital in order to satisfy its payment obligations
during the year. Moreover, the need for additional capital may be further
increased in the event that (i) a material adverse judgment is rendered against
the Company in the pending WARN Act litigation; (ii) there is any significant
decline in the Company's results of operations; (iii) the development and
opening of the Fremont Street Experience is materially delayed or is subject to
material cost overruns or (iv) the Company is unable to obtain from its
noteholders the requisite waivers of default in connection with the Company's
anticipated termination of the Spotlight 29 management contract or its
anticipated noncompliance with other debt covenants in 1995. Without additional
financing, the Company believes that it is unlikely it will be able to maintain
a level of operating cash flow necessary to satisfy all of its financial
obligations in 1995. To meet these obligations, the Company anticipates it will
have to raise additional working capital, refinance or extend repayment of its
outstanding debt, obtain from the noteholders additional waivers of default or
covenant noncompliance under the First Mortgage Notes, Mortgage Notes and
Convertible Notes, or a combination of the foregoing. There is no assurance that
any of these alternatives could be effected on satisfactory terms. In
particular, certain covenants of the indenture relating to the First Mortgage
Notes and of the purchase agreements relating to the Mortgage Notes and the
Convertible Notes restrict the ability of the Company and its subsidiaries to
incur additional indebtedness or to secure such indebtedness and may impair the
Company's ability to obtain additional debt financing. If these alternatives
prove to be unavailable, Elsinore would be required to sell assets or seek
protection under bankruptcy laws.
RESULTS OF OPERATIONS
During 1994, gaming revenues, as well as the number of visitors to Las Vegas,
increased at a double digit rate when compared to the same period for 1993.
However, the downtown Las Vegas casinos, as a group, experienced slightly
decreased casino win during the period even though occupancy at the downtown
properties continued to be strong. Management believes that the results of the
downtown Las Vegas casinos for 1994 reflect that many of the visitors to
downtown Las Vegas spent at least a portion of their visit, and a proportionate
share of their gaming and entertainment budgets, at the three recently opened
Las Vegas Strip properties.
The Four Queens, not unlike its downtown competition, experienced a decrease in
gaming revenues for 1994. In response, during 1994, management implemented
several steps designed to improve revenues and contain costs, and the Company
continually explores alternatives to improve the Four Queen's competitive
position.
The Company expects to benefit from the Fremont Street Experience, which it
believes will draw additional visitors to the downtown market. The Fremont
Street Experience is currently under construction and is anticipated to be
39
completed in the late Fall or Winter of 1995. Although construction of the
Fremont Street Experience has been designed to minimize any impact on the
operations of the downtown Las Vegas casinos, there can be no assurance the
construction process will not negatively affect the Company's results of
operations.
1994 Compared to 1993:
---------------------
Total revenue, net of promotional allowances, for 1994 decreased $4,146,000 or
6.2% as compared to 1993. Decreased Casino revenue was the primary contributing
factor to the overall decrease in revenues, a portion of which was attributable
to the Company's renovation of approximately 300 of the 700 rooms at the Four
Queens Hotel and Casino during the first quarter of 1994 and a portion of which
was attributable to the discontinuation of a fee-based casino tour operator
program in the second quarter of 1994. However, management believes that the
primary reason for the decrease in revenue is that a portion of the Four Queen's
guests, as well as some of the guests of other downtown Las Vegas properties,
spent at least part of their Las Vegas gaming and entertainment budgets at the
recently opened properties on the Las Vegas Strip. Management's belief is
supported by the fact that, in contrast to the decrease in Casino revenue, hotel
occupancy at the Four Queens in 1994 increased to 92.7% from 92.4% for the prior
year. The Company expects that this phenomenon of decreased Casino revenue
despite steadily high hotel occupancy rates could continue through 1995.
As mentioned above, Casino revenue was affected most significantly and decreased
$5,680,000 (10.9%), while Hotel revenue decreased $642,000 (6.5%). Food and
Beverage revenue increased marginally by $198,000 (1.6%). Interest and Other
revenue increased $1,252,000 primarily because of increased interest income from
the investment of a portion of the proceeds of the First Mortgage Notes.
The decrease in Casino revenue from the comparable prior period resulted
primarily from a $3,502,000 (10.4%) decrease in gross slot revenue and a
$2,372,000 (14.7%) decrease in gross table game revenue. Both the decrease in
slot and table games revenue resulted from decreases in volume of play as well
as win percentage. Compared to the prior year, coin-in for slots decreased
approximately 9.7% and the revenue as a percentage of coin-in decreased one
tenth of a percentage point, while table game drop decreased about 7.8% and the
revenue as a percentage of drop decreased six tenths of a percentage point.
The decrease in Hotel revenue for 1994 as compared to the same period for 1993
was due in part to approximately 7,800 fewer available room nights being
available during the first quarter of 1994 due to refurbishment of the Four
Queens and in part to a 1.4% decrease in the average daily rate per occupied
room. In an effort to bolster lower Casino revenue, management implemented a
special summer room rate to drive-in customers without advance reservations.
While contributing to an increase in hotel occupancy in 1994 compared to 1993,
the promotion effectively lowered the average daily room rate. Management
discontinued the program in September 1994.
Total costs and expenses, excluding interest and depreciation decreased $712,000
(1.2%) for 1994 as compared to 1993. Casino costs and expenses decreased
$1,214,000 (7.2%) from the prior year primarily as a result of management's
decision to eliminate a fee-based player program, run by a third party, that was
no longer deemed profitable. The program was eliminated in April 1994, and
resulted in a reduction in expense of approximately $1,047,000 from the prior
year.
Food and Beverage costs and expenses increased $906,000 (8.7%) for 1994 compared
to 1993 due primarily to increased costs of goods on two loss leaders (prime rib
and shrimp cocktail) in an effort to attract additional casino customers and
thereby increased the number of meals served in the Four Queens' coffee shop by
5.1% in 1994. As a result of the effort to bolster Casino revenue, Food revenue
increased marginally ($280,000) due to the increase in the number of meals
served, but was offset to a great extent because the average price of a meal
decreased approximately 6.1%. However, the volume increase at lower prices was
responsible for an approximately 15.7% increase in the cost of sales.
Management's evaluation of this program resulted in an increase in its loss
leader pricing in late September 1994 in an effort to meet its objectives.
Management will continue to monitor this program and may discontinue or modify
it as necessary to achieve its objectives.
Taxes and licenses decreased $204,000 for 1994 as compared to 1993 due primarily
to lower gaming taxes as a result of the decrease in Casino revenue compared to
the prior year. This decrease was offset partially by increased payroll
40
taxes as a result of added corporate and development company level staff and
increased FICA due to tip rate adjustments imposed in January 1994 by the IRS.
Interest expense increased $4,330,000 in 1994, substantially due to the impact
of the additional debt incurred in connection with the First Mortgage Notes; the
First Mortgage Notes interest rate, which is higher than the rate for the
retired bank debt (rates of 12.5% and 8.0%, respectively) that was repaid with a
portion of the proceeds of the offering and the amortization of original issue
discount associated therewith, and the impact on both periods of accrued
interest on prior period tax obligation resulting from an audit by the IRS for
the fiscal years ended January 31, 1980 through December 31, 1983 ($885,000 and
$1,385,000, respectively).
1993 Compared to 1992: Total revenues, net of promotional allowances, for the
----------------------
year ended December 31, 1993 as compared to the year ended December 31, 1992,
increased $2,854,000, or 4.5%, primarily as a result of an increase in Casino
revenues which increased $2,717,000 (5.5%). Casino revenue increased primarily
due to increases of $3,128,000 (24.7%) in gross Table Game win and $846,000
(2.6%) in gross Slot win that were offset by a $940,000 (68.9%) decrease in
Poker revenue. Approximately 56% of the increase in gross Table Game win was
attributable to the introduction of a new game, Caribbean Stud Poker, in the
first week of April, 1993. The balance of the increase in gross Table Game win
resulted from a volume increase (4.6%) as well as an increase in the win
percentage (5.8%), while the increase in gross Slot win was due to an increase
in the win percentage (2.6%) which was partially offset by a volume decrease
(1.7%). Poker revenue decreased as a result of management's decision to close
the Four Queens' poker room in February, 1993, to allow the Company to convert
casino floor space to accommodate approximately fifty additional slot machines.
Hotel revenues increased $182,000 (1.9%) from the prior year due primarily to
the combined effects of an increase in room occupancy that was offset to some
extent by a decrease in the average daily room rate. Room occupancy increased
to 92.4% for the year ended December 31, 1993 as compared to an occupancy rate
of 87.4% for 1992, while the average daily room rate decreased 96 cents per day
from the prior year.
Food and Beverage revenues decreased $196,000 (1.5%) for 1993 compared to 1992
due to an increase in food revenue that was more than offset by a decrease in
beverage sales. Food sales increased approximately $137,000 (1.7%) due
primarily to an increase in volume, while beverage sales decreased $333,000
(6.9%) due to a decrease in the number of drinks served.
Total costs and expenses, excluding Interest and Depreciation, increased
$683,000 (1.2%) for 1993 compared to 1992. Operating costs and expenses for the
Casino, Hotel and Food and Beverage departments decreased slightly by $339,000
(0.9%). Taxes and Licenses increased by $392,000 and Selling and General &
Administrative increased by $635,000.
The decrease in operating costs and expenses of $339,000 was primarily due to
increased costs of a fee-based Casino Player program, costs of the Reel Winners
Club, increases in cost of sales for Food and Beverage ($215,000) as well as an
increase in Payroll expenses ($273,000) in the Casino department primarily as a
result of the addition of a new game, Caribbean Stud Poker, in April of 1993,
and to a lesser extent an increase in the volume of play. Savings were obtained
as a result of management's decision to close the Four Queens' poker room in
February, 1993 ($615,000, most of which was payroll related) and the elimination
of afternoon entertainment at the Four Queens in January, 1993 ($369,000).
Taxes and Licenses increased to $7,159,000 in 1993, an increase of $392,000
(5.8%) over 1992. Gaming taxes accounted for approximately one half of the
increase (about $190,000) due to additional taxes incurred as a result of
increased Casino revenues. Most of the remainder of the increase in Taxes and
Licenses resulted from a full year's impact in 1993 of an Internal Revenue
Service tip program that was implemented in July, 1992.
Selling, General and Administrative ("SG&A") expenses increased $635,000 (5.6%)
in 1993. Approximately $708,000 of such increase was due to legal fees incurred
as a result of defense costs associated with the WARN Act litigation which
increased to $816,000 in 1993 from $108,000 in 1992.
41
In addition to the competition for customers, the new entrants to the Las Vegas
gaming market are also in competition with the Four Queens for its experienced
hotel and casino employees. In July, 1993, management, anticipating such
competition for its entry level through middle management employees, granted
options to purchase a total of 229,500 shares of the Company's common stock to
123 key management and supervisory personnel and in September, 1993, granted
additional options to purchase 100 shares of the Company's common stock to each
of the remaining 1,056 non-management employees. As of January 31, 1994, the
Company's loss of employees as a result of the opening of the new properties on
the Las Vegas Strip has been minimal.
Interest related to prior-period tax obligations and income tax expense
increased $1,172,000 for the year ended December 31, 1993 primarily reflecting a
charge to earnings in the third quarter of 1993 as a result of the Company's
estimated tax liability with respect to fiscal years 1980 through 1983. (See
Note 6 to the Notes to Consolidated Financial Statements).
Interest expense increased $1,132,000 (36.2%) in 1993 from the prior year due to
the impact of the additional debt incurred in the private placement of First
Mortgage Notes which bear a higher interest rate (12.5%) than the interest rate
for the bank debt (8.0%) that was repaid with a portion of the proceeds of the
private placement, as well as the amortization of original issue discount
associated with the First Mortgage Notes.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on
operations during the past three years. Increases in labor, food and beverage
or other operating costs, however, could significantly affect the Company's
operations. In the past the Company has generally been able to increase prices
sufficiently to offset any increases in operating costs. The potential adverse
effects on operations of future price increases must be carefully considered,
however, in light of increased competition for the gaming customer.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Company's Consolidated Financial Statements and Schedules 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.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
See note at Item 13 below.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
See note at Item 13 below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
See note at Item 13 below.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by Items 10, 11, 12 and 13 is incorporated herein by
reference from the Company's proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
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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, 1994 and 1993 F-2
Consolidated Statements of Operations, Years Ended
December 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Stockholders' Equity, (Deficit)
Years Ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows, Years Ended
December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-7
(II) FINANCIAL STATEMENT SCHEDULES:
Schedule VIII - Valuation and Qualifying Accounts and
Reserves F-22
Schedules other than those listed above are omitted because they are either
not required or not applicable, or the required information is presented in
the Consolidated Financial Statements.
(III) EXHIBITS:
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)
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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 Findley 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)
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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,
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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)
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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
10.57 Form of Senior Executive Severance Agreement by and between the
Company and certain senior executives.
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., and Mojave Valley Resort Casino Company, and Nashville
Nevada, L.L.C.
10.59 Note Purchase Agreement, dated as of March 30, 1995, between
the Company and Magnolia Partners, L.P., a Delaware limited
partnership.
10.60 Common Stock Registration rights Agreement, dated as of
March 31, 1995, between the Company and Magnolia Partners, L.P.
10.61 Note Purchase Agreement, dated as of March 30, 1995, between
the Company and Mojave Partners, L.P., a Delaware limited
partnership.
10.62 Common Stock Registration Rights Agreement, dated as of
March 31, 1995, between the Company and Mojave Partners, L.P.
10.63 Note Purchase Agreement, dated as of March 30, 1995, between
the Company and G & O Partners, L.P., a Delaware limited
partnership.
10.64 Note Purchase Agreement, dated as of March 30, 1995, between the
Company and GroRan LLC1, a Delaware limited liability company.
10.65 Note Purchase Agreement, dated as of March 30, 1995, between the
Company and Paul Orwicz.
10.66 Note Purchase Agreement, dated as of March 30, 1995, between the
Company and David Ganek.
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.
10.68 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.
21.1 List of Subsidiaries.
23.1 Consent of KPMG Marwick
27 Financial Data Schedule.
*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 State on Form S-4 filed January 23, 1995
48
B. REPORTS ON FORM 8-K:
During the fourth quarter of 1994, the Company filed the following Current
Reports on Form 8-K:
Form 8-K dated October 24, 1994
Form 8-K dated November 23, 1994
Form 8-K dated December 6, 1994
49
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: March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities as indicated on March 31, 1995.
/s/ Frank L. Burrell, Jr. /s/ Howard Carlson
--------------------------------- ------------------------------
Frank L. Burrell, Jr. Howard Carlson
Chairman of the Board of Directors Director
and Chief Executive Officer
/s/ Edward M. Fasulo /s/ Julian H. Levi
--------------------------------- ------------------------------
Edward M. Fasulo Julian H. Levi
Director Director
/s/ Richard A. LeVasseur /s/ Robert A. McKerroll
--------------------------------- -------------------------------
Richard A. LeVasseur Robert A. McKerroll
Director Director
/s/ Thomas E. Martin /s/ James L. White
--------------------------------- ---------------------------------
Thomas E. Martin James L. White
President and Director Treasurer, Chief Financial
(Chief Operating Officer) Officer and Chief Accounting
Officer
50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Elsinore Corporation:
We have audited the consolidated financial statements of Elsinore Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elsinore Corporation
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 14 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has a net capital
deficiency, has a working capital deficiency, must obtain waivers from
noteholders for debt covenant noncompliance in order to avoid default under
terms of the First Mortgage and Mortgage Notes payable, must negotiate the
termination of the management contract with and repayment of advances to a
Native American tribe, and obtain additional financing to meet its obligations,
all of which raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 14. Additionally, as discussed in Note 7, the Company is involved in
certain litigation, the ultimate outcome of which cannot presently be
determined. The consolidated financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of
these uncertainties.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1992 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
KPMG PEAT MARWICK LLP
Las Vegas, Nevada
March 29, 1995
F-1
ELSINORE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
ASSETS
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1994 1993
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CURRENT ASSETS:
Cash and Cash Equivalents $ 3,407 $ 5,114
Accounts Receivable, Less Allowance for
Doubtful Accounts of $214 and $200,
Respectively 742 699
Inventories 396 202
Prepaid Expenses 1,659 1,484
-------- --------
Total Current Assets 6,204 7,499
-------- --------
Cash and Cash Equivalents-Restricted (Note 5) 3,685 25,716
Advances to Native American Tribes 16,952 1,044
Casino Development Costs 1,250 948
Investment in Fremont Street Experience (Note 7) 3,000 1,878
Property and equipment, net (Notes 2, 5 & 8) 28,341 27,168
Leasehold acquisition costs, net 2,354 2,560
Deferred charges and other assets (Note 3) 5,529 5,110
-------- --------
$ 67,315 $ 71,923
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable $ 2,088 $ 2,292
Prior period income taxes and related interest (Note 6) 5,870 5,035
Accrued Expenses 6,442 5,268
Current Portion of Long-Term Debt (Note 5) 2,309 204
-------- --------
Total Current Liabilities 16,709 12,799
-------- --------
Long Term Debt, Net of Current Maturities (Note 5) 52,081 54,368
Deferred Income Taxes (Note 6) 189 189
-------- --------
68,979 67,356
Stockholders' (deficit) equity:
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
13,135,214 and 12,070,017 shares, respectively 13 12
Additional paid in capital 61,346 58,149
Accumulated deficit (63,023) (53,582)
-------- --------
(1,664) 4,579
Less: cost of common shares in treasury of 0 and 7,853,
respectively - (12)
-------- --------
Net stockholders' (deficit) equity (1,664) 4,567
-------- --------
Commitments and contingencies (Notes 7, 8, 9 and 14).
$ 67,315 $ 71,923
======== ========
See Notes to Consolidated Financial Statements
F-2
ELSINORE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Download Table]
1994 1993 1992
---------- ---------- ----------
REVENUE:
Casino $ 46,270 $ 51,950 $ 49,233
Hotel 9,234 9,876 9,694
Food & Beverage 12,693 12,495 12,691
Interest and Other 2,020 768 638
Promotional Allowances (7,511) (8,237) (8,258)
NET REVENUE 62,706 66,852 63,998
---------- ---------- ----------
COSTS AND EXPENSES:
Casino 15,665 16,879 17,472
Hotel 9,824 10,096 9,991
Food and Beverage 11,272 10,366 10,217
Taxes and Licenses (Note 10) 6,955 7,159 6,767
Selling, General and Administrative 11,892 11,980 11,345
Rent 3,313 3,153 3,158
Depreciation and Amortization 3,990 3,206 3,302
Interest Related to Prior-Period Tax
Obligation (Note 6) 885 1,385 213
Interest (Note 5) 9,086 4,256 3,124
---------- ---------- ----------
TOTAL COSTS AND EXPENSES 72,882 68,480 65,589
---------- ---------- ----------
Loss Before Income Taxes
and Extraordinary Item (10,176) (1,628) (1,591)
Income Tax Expense (Note 6) - (624) (189)
---------- ---------- ----------
Loss Before Extraordinary Item (10,176) (2,252) (1,780)
Extraordinary Item (Note 12) 735 (285) -
---------- ---------- ----------
Net Loss $ (9,441) $ (2,537) $ (1,780)
========== ========== ==========
Loss Per Common and Equivalent Share:
Loss Before Extraordinary Item $ (.84) $ (.19) $ (.15)
Extraordinary Item (Note 12) .06 (.02) -
---------- ---------- ----------
$ (.78) $ (.21) $ (.15)
========== ========== ==========
Weighted Average Number of Common and
Equivalent Shares Outstanding 12,106,778 12,049,430 12,017,164
========== ========== ==========
See Notes to Consolidated Financial Statements
F-3
ELSINORE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
Common Stock Additional
---------------------- Paid-In Accumulated Treasury Net Stockholders'
Shares Amount Capital Deficit Stock Equity (Deficit)
------------ ------- ------------ ----------- -------- -----------------
BALANCE,
DECEMBER 31, 1991 12,025,017 $ 12 $50,930 $(49,265) $(79) $ 1,598
NET LOSS - - - (1,780) - (1,780)
---------- ---- ------- -------- ---- --------
BALANCE,
DECEMBER 31, 1992 12,025,017 12 50,930 (51,045) (79) (182)
ISSUANCE OF TREASURY
STOCK 45,000 - (22) - 67 45
PROCEEDS FROM ISSUANCE
OF LONG-TERM DEBT
ALLOCATED TO STOCK
PURCHASE WARRANTS
(NOTE 5) - - 7,241 - - 7,241
NET LOSS - - - (2,537) - (2,537)
---------- ---- ------- -------- ---- --------
BALANCE,
DECEMBER 31, 1993 12,070,017 12 58,149 (53,582) (12) 4,567
ISSUE STOCK PURCHASE
WARRANTS TO FIRST
MORTGAGE BONDHOLDERS
(NOTE 5) - - 1,125 - - 1,125
ISSUE 17,000 SHARES,
INCLUDING 7,853 SHARES
HELD IN TREASURY, UPON
EXERCISE OF STOCK OPTIONS 9,147 - 3 - 12 15
ISSUE SHARES AS PARTIAL
CONSIDERATION FOR DEBT
(NOTE 5) 126,050 - 268 - - 268
ISSUE SHARES IN EXCHANGE
FOR FIRST MORTGAGE BONDS
(NOTE 12) 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)
=========== ==== ======= ======== ==== =======
See Notes to Consolidated Financial Statements
F-4
ELSINORE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
[Download Table]
December 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
Cash Flows from Operating Activities:
Net Loss $ (9,441) $ (2,537) $(1,780)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 3,990 3,206 3,302
Amortization of Debt Discount
and Issuance Costs 1,171 446 -
Loss on Disposition of Property and
Equipment - 100 -
Extraordinary Item on Extinguishment
of Debt (735) 285 -
Change in Assets and Liabilities:
Decrease (Increase) in Accounts
Receivable (43) (160) 192
Decrease (Increase) in Inventories (194) 124 (71)
Decrease (Increase) in Prepaid
Expenses (175) (107) 4
Decrease (Increase) in
Other Assets 185 (839) 152
Increase (Decrease) in Accounts
Payable (204) (177) 60
Increase (Decrease) in
Prior-Period Income Taxes and
Related Interest 835 2,009 118
Increase in Accrued Expenses 1,174 1,315 1,393
Increase in Deferred Income Taxes - - 189
-------- -------- -------
Net Cash (Used in) Provided by Operating
Activities (3,437) 3,665 3,559
-------- -------- -------
Cash Flows from Investing Activities:
Advances, Native American projects (15,908) (1,044) -
Casino development costs (302) (690) (258)
Investment in Fremont Street Experience (1,122) (1,878) -
Purchase of property & equipment (4,364) (2,511) (861)
-------- -------- -------
Net Cash Used by Investing Activities (21,696) (6,123) (1,119)
-------- -------- -------
Cash Flows from Financing Activities:
Proceeds from Issuance of Long-Term
Debt 3,000 60,208 -
Debt Issuance Costs (1,416) (3,071)
Principal Payments on Long-Term Debt (204) (31,773) (3,102)
Proceeds from Issuance of Common Stock 15 45 -
-------- -------- -------
Net Cash Provided by (Used in)
Financing Activities 1,395 25,409 (3,102)
-------- -------- -------
Net Increase (Decrease) in
Cash and Cash Equivalents (23,738) 22,951 (662)
Cash and Cash Equivalents at
Beginning of Year 30,830 7,879 8,541
-------- -------- -------
Cash and Cash Equivalents at
End of Year (Including Restricted Amounts
of $3,685 and $25,716 as of
December 31, 1994 and 1993, Respectively) $ 7,092 $ 30,830 $ 7,879
======== ======== =======
See Notes to Consolidated Financial Statements
F-5
ELSINORE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid $7,750,000, $2,270,000, and $3,029,000 for interest in 1994,
1993 and 1992, respectively, and $50,000, $20,000 and $95,000 for income taxes
in 1994, 1993 and 1992, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
The Company acquired equipment in the amounts of $0, $613,000 and $316,000 in
1994, 1993 and 1992, respectively, which were financed through short-term
installment purchase contracts.
The Company reduced equipment and related accumulated depreciation by
$1,909,000, $195,000 and $913,000 to reflect the write-off of fully depreciated
assets taken out of service during 1994, 1993 and 1992, respectively.
In connection with the Private Placement in 1993 of the Company's 12.5% First
Mortgage Notes due 2000 (See Note 5), the Company recorded a discount on the
notes and increased additional paid-in capital by $7,241,000, the fair market
value of the stock purchase warrants issued with the notes.
In connection with the issuance in 1994 of 750,000 stock purchase warrants, the
Company recorded a discount on the notes and increased additional paid-in
capital by $1,125,000, the fair market value of the stock purchase warrants
issued with the notes.
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.
See Notes to Consolidated Financial Statements
F-6
ELSINORE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
Accounting for Casino Revenue and Promotional Allowances:
In accordance with industry practice, the Company recognizes as casino revenue
the net win from gaming activities, which is the difference between gaming wins
and losses. The retail value of complimentary food, beverages and hotel
services furnished to customers is included in the respective revenue
classifications and then deducted as promotional allowances. The estimated costs
charged to the casino department related to providing complimentaries were as
follows:
[Download Table]
Years Ended December 31,
---------------------------
1994 1993 1992
------- ------- -------
(Dollars in Thousands)
Rooms $2,179 $2,439 $1,988
Food & Beverage 5,022 4,898 4,686
------ ------ ------
Total $7,201 $7,337 $6,674
====== ====== ======
CASH EQUIVALENTS:
Cash equivalents are comprised of commercial paper and repurchase agreements
which are stated at cost, which approximates market, and have a maturity date of
three months or less at date of purchase.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
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 is recorded
at the net present value of minimum lease payments at inception and is amortized
over the useful lives of the related assets.
LEASEHOLD ACQUISITION COSTS:
The costs of acquiring leasehold interests are deferred and amortized using the
straight-line method over the lesser of the term of the lease or the useful life
of the property. Accumulated amortization was $4,485 and $4,278 at December 31,
1994 and 1993, respectively.
AMORTIZATION OF DEBT DISCOUNT AND ISSUANCE COSTS:
Original issue discount is amortized over the life of the related indebtedness
using the effective interest method.
Costs associated with the issuance of the debt have been deferred and are being
amortized over the life of the related indebtedness using the straight-line
method.
F-7
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 (See Note 7) and
legal and other costs incurred to secure the 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 agreements) to construct and develop the casinos
will be loaned to the Tribal enterprises in the form of promissory notes.
Amounts advanced to the Tribes for the years ended December 31, 1994, and 1993
were $16,952,000 and $1,044,000, respectively. Other casino development costs
associated with management of the Native American owned casinos are deferred and
are amortized over the five year terms of the related management contracts.
INCOME TAXES:
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Statement 109 requires a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of Statement
109, 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.
Effective January 1, 1992, prospectively, the Company adopted Statement 109 and
there was no cumulative effect of that change in the method of accounting for
income taxes in the 1992 consolidated statement of operations.
LOSS PER SHARE:
Loss per share has been computed by dividing net loss by the weighted average
common shares and common share equivalents outstanding during the year.
RECLASSIFICATION:
Certain items in the 1993 and 1992 financial statements have been reclassified
for comparability with the 1994 presentation.
F-8
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
2. PROPERTY AND EQUIPMENT, NET:
Property and equipment, net, consists of the following:
[Download Table]
December 31,
-------------------------
1994 1993
------------- ---------
(Dollars in Thousands)
Land $ 1,275 $ 1,275
Buildings 39,041 36,861
Equipment 24,121 23,197
Construction in Progress 161 810
-------- -------
64,598 62,143
Less Accumulated Depreciation
and Amortization 36,257 34,975
-------- -------
$ 28,341 $27,168
======== =======
3. OTHER ASSETS:
Other assets consist of the following:
[Download Table]
December 31,
--------------------
1994 1993
-------- -------
(Dollars in Thousands)
Debt Issuance Costs, Net $ 3,365 $ 2,966
Deposits and Other 2,164 2,144
-------- -------
$ 5,529 $ 5,110
======== =======
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
[Download Table]
December 31,
--------------------
1994 1993
-------- -------
(Dollars in Thousands)
Salaries and Wages $ 1,448 $ 1,435
Payroll Taxes and Related Benefits 690 876
Accrued Interest 2,063 1,834
Other 2,241 1,123
-------- -------
$ 6,442 $ 5,268
======== =======
5. LONG-TERM DEBT:
Long-term debt consists of the following:
[Download Table]
December 31,
--------------------
1994 1993
-------- -------
(Dollars in Thousands)
12.5% First Mortgage Notes Payable,
Net of $6,646 Unamortized Discount $ 50,354 $53,018
20% Mortgage Notes Payable,
Net of $313 Unamortized Discount 2,687 -
Capital Lease Obligations 1,349 1,554
-------- -------
54,390 54,572
Less Current Portion (2,309) (204)
-------- -------
$52,081 $54,368
======== =======
F-9
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
FIRST MORTGAGE NOTES
On October 8, 1993, the Company completed a private placement of the Company's
12.5% First Mortgage Notes due 2000 (the "First Mortgage Notes") and warrants
(the "Warrants") to purchase common stock, par value $.001 per share ("Common
Stock"), of the Company. The net proceeds of the offering were approximately
$57.4 million. Approximately $26.7 million of the net proceeds were used to
repay outstanding bank debt and the remaining $30.7 million was deposited in
segregated accounts (the "Escrow Account") pending disbursement pursuant to the
terms of an Escrow and Disbursement Agreement, dated as of October 8, 1993,
among the Company, First Trust National Association (the "Trustee") and First
Interstate Bank of Nevada, N.A., as escrow agent (the "Escrow and Disbursement
Agreement"). The amount of $3,685,000 held in the Escrow Account at December 31,
1994 is included in "Cash and Cash Equivalents --Restricted" in the accompanying
December 31, 1994 consolidated balance sheet. This amount was available for the
following uses: (i) $86,000 to fund the upgrading and refurbishment of the Four
Queens Hotel and Casino, (ii) $2,190,000 to fund loans and other advances for
the purpose of financing the construction and development of the Spotlight 29
Casino, and (iii) $1,409,000 to fund loans and other advances for the purpose of
financing the construction and development of the 7 Cedars Casino. The Company
anticipates that all of the funds will be utilized for the intended purposes by
the end of the first quarter of 1995. 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. At March 15, 1995, the Warrants had an exercise price of $5.29 per
share of Common Stock, will expire on October 8, 1998, and are exercisable for
approximately 3,100,340 shares of Common Stock, subject to certain anti-dilution
adjustments.
MORTGAGE NOTES
On October 14, 1994, the Company completed a private placement of $3,000,000
aggregate principal amount of its 20% Mortgage Notes due 1996 (the "Mortgage
Notes"). Substantially all of the net proceeds thereof were used for debt
service and working capital purposes, including payment of the October 1994
interest installment due on the First Mortgage Notes. In connection with
issuing the Mortgage Notes, the Company paid certain customary fees and expenses
of the purchasers, and issued to the purchasers an aggregate of 126,050 shares
of Common Stock. The purchasers also received registration rights under the
federal securities laws with respect to such shares, which rights were exercised
by the purchasers on March 7, 1995.
TERMS OF SECURITIES
FIRST MORTGAGE NOTES. The First Mortgage Notes have an initial aggregate
principal amount of $60 million ($57 million as of December 30, 1994), bear
interest at an annual rate of 12.5% and mature on October 8, 2000. The First
Mortgage Notes are unconditionally guaranteed (the "FMN Guaranties") as to
principal, premium, if any, and interest by all existing material subsidiaries
(other than Mojave Gaming) and all future subsidiaries of the Company, unless
designated to be unrestricted subsidiaries (the "FMN Guarantors"). The First
Mortgage Notes and the FMN Guaranties will, subject to certain exceptions
(including the Mortgage Notes, as discussed below), rank pari passu with all
existing and future senior indebtedness of the Company and the FMN Guarantors,
respectively. The First Mortgage Notes and the FMN Guaranties were issued
pursuant to the terms of an Indenture (the "Indenture"), dated as of October 8,
1993 among the Company, the FMN Guarantors and the Trustee.
The Indenture contains certain covenants relating to maintenance of the Native
American casino management contracts, maintenance of net worth, and maintenance
F-10
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
of the specified fixed charge coverage ratio as well as restrictions on, among
other things, the incurrence of additional debt, liens and the payment of
dividends. Certain of these covenants (including the net worth and fixed charge
coverage ratio maintenance covenants) become effective beginning the quarter
after completion of the Company's Native American casino projects, i.e., the
second quarter of 1995.
On April 20, 1994, the company reached an agreement with the holders of the
First Mortgage Notes to amend the Indenture in order to extend the deadlines by
which the Company was required to obtain all federal statutory approvals and to
complete construction and open each of the Native American casinos. All
requisite regulatory approvals were received from the NIGC and both the Palm
Springs Casino and the Washington Casino were completed and opened by the
extended deadlines.
As consideration for obtaining the consent of First Mortgage Noteholders to the
Indenture amendments, the Company issued to First Mortgage Noteholders warrants
(the "Consent Warrants") to purchase an aggregate of 750,000 shares of Common
Stock, at an exercise price of $3.25 per share (the "Exercise Price"). The
Consent Warrants expire on October 8, 1998. The Company is entitled to redeem
the Consent Warrants, unless earlier exercised, at a price equal to their
exercise Price per share at any time from and after the 15th business day
following the mailing of a notice by the Company to the holders of the Consent
Warrants that, from and after April 7, 1996, the closing trading price of the
Common Stock has equaled or exceeded 200% of the Exercise Price for any 20
trading days within a period of any 30 consecutive trading days.
The First Mortgage Notes are secured by (i) a pledge of the stock of all of the
FMN Guarantors and all future subsidiaries of the Company, in each case subject
to obtaining certain required regulatory approvals, and all intercompany notes,
(ii) a first priority security interest in, subject to certain limitations,
substantially all of the assets of Four Queens, Inc., other than equipment and
other assets financed by third party lenders, (iii) a collateral assignment of
all of the Company's rights and interests under the management contracts with
respect to the Palm Springs Casino and the Washington Casino, (iv) an exclusive
security interest in the segregated account in which the proceeds of the
Offering will be held pending disbursement pursuant to the terms of the Escrow
and Disbursement Agreement, (v) an exclusive security interest in the segregated
account in which the proceeds of certain asset sales will be held pending
disbursement pursuant to the terms of the Escrow and Disbursement Agreement, and
(vi) an exclusive security interest in a portion of the segregated account to
fund certain lease payments on behalf of Four Queens, Inc. pursuant to the terms
of the Escrow and Disbursement Agreement.
The First Mortgage Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after October 1, 1996, at a premium to the
principal amount thereof, declining ratably from 106.25% to par on or after
October 1, 1999. Pursuant to the Indenture, the First Mortgage Notes are also
redeemable at par, at any time, upon the occurrence of certain gaming regulatory
events.
Beginning in the years ending after December 31, 1993, the Company will (subject
to certain gaming regulatory requirements) be required to offer to repurchase
the portion of the principal amount of the First Mortgage Notes then outstanding
equal to 50% of the Company's prior fiscal year Excess Available Cash Flow (as
defined in the Indenture), at 101% of the principal amount thereof, plus accrued
interest.
F-11
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The Indenture includes other covenants of the Company and the Guarantors
including, among other things, insurance, maintenance of net worth, maintenance
of fixed charge coverage ratio and limitations on: occurrence of additional
indebtedness, liens, change of control, dividends and other restricted payments
and investments, transactions with affiliates, consolidations, mergers and sales
of assets, restrictions on subsidiary dividends, lines of business and use of
proceeds.
MORTGAGE NOTES. The Mortgage Notes have an aggregate principal amount of $3
million and bear interest at 20% per annum, payable quarterly commencing
December 31, 1994. The Mortgage Notes will mature on March 31, 1996 with
interim mandatory redemptions of $750,000 due on each of June 30, September 30,
and December 31, 1995. The Mortgage Notes were issued pursuant to the terms of
a Note and Stock Purchase Agreement (the "Purchase Agreement"), dated as of
October 11, 1994, among the Company, the Guarantors named therein and the
Purchasers named therein. The holders of the Mortgage Notes were granted
certain rights under the Purchase Agreement, substantially similar to those of
the First Mortgage Noteholders under the Indenture, which would require the
Company to repurchase the Mortgage Notes at 101% of their principal amount upon
occurrence of certain events.
Like the First Mortgage Notes, the Mortgage Notes are unconditionally guaranteed
(the "Subsidiary Guarantees") as to principal, premium, if any, and interest by
all existing material subsidiaries (other than Mojave Gaming) and all future
subsidiaries of the Company unless designated to be unrestricted subsidiaries
(the "Guarantors").
In order to induce the Purchasers to purchase the Mortgage Notes and to secure
the Company's and Guarantors' payment and other obligations under the Mortgage
Notes and the Purchase Agreement, the Company (or a Guarantor as applicable)
granted to the Purchasers (i) a first priority security interest in certain
existing and future property of the Company, including the shares of common
stock held by the Company in its subsidiaries, the real property of Four Queens
and substantially all other property previously pledged (or required to be
pledged) as collateral under the Indenture (collectively, the "Purchasers'
Security Interest"), (ii) a first priority lien on the proceeds in the accounts
established under the First Mortgage Notes disbursement and escrow agreement
(the "Purchasers' Lien"), and (iii) an assignment of the income and proceeds
from the casino management contracts and other operating agreements relating to
the Spotlight 29 Casino and the 7 Cedars Casino projects (the "Purchasers'
Assignment"), in addition to certain other rights and remedies under the
Purchase Agreement. The Purchasers' Security Interest, Purchasers' Lien and
Purchasers' Assignment are senior to the liens under the mortgage that secures
the First Mortgage Notes.
The execution, delivery, and performance by the Company and the Guarantors of
the Purchase Agreement, including without limitation the sale of the Mortgage
Notes, conveyance of the Purchasers' Security Interest, Purchasers' Lien, and
Purchasers' Assignment, and issuance of the Subsidiary Guarantees (collectively,
the "Mortgage Note Transactions") required a waiver in accordance with the
provisions of the Indenture, which waiver was obtained in a timely manner.
AGGREGATE PRINCIPAL MATURITIES
Aggregate principal maturities of long term debt as of December 31, 1994 are as
follows:
F-12
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
[Download Table]
Years Ending December 31, (Dollars in Thousands)
------------------------- ----------------------
1995 $ 2,309
1996 795
1997 41
1998 1
1999 2
Thereafter 58,201
Less: Unamortized Discount (6,959)
-------
$54,390
=======
6. INCOME TAXES:
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to loss before income taxes and extraordinary
item as a result of the following:
[Download Table]
Years Ended December 31,
-------------------------
1994 1993 1992
---- ----- -----
(Dollars in Thousands)
Computed "Expected" Tax Benefit $(3,460) $(554) $(541)
Effect of Loss Carried Forward 554 541
Accrual of Revised Estimate of Prior-
Period Income Taxes 3,460 624 -
Provision for Future Alternative
Minimum Taxes - - 189
------- ----- -----
$ - $ 624 $ 189
======= ===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
[Download Table]
December 31,
----------------------
1994 1993
---- --------
(Dollars in Thousands)
Deferred Tax Assets:
Accounts Receivable Principally Due to
Allowance for Doubtful Accounts $ 73 $ 68
Accrued Compensation, Principally Due to
Accrual for Financial Reporting Purposes 530 516
Progressive Slot Accrual 45 107
Interest Accrued on Prior-Period Income Taxes - -
Net Operating Loss Carryforwards 34,328 30,667
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 253 253
Contribution Deduction Carryforward, Principally
Due to Amounts not Deductible in Prior Periods 50 50
Tax Loss Due to Sale of New Jersey
Subsidiaries in Prior Periods 685 731
-------- --------
Total Gross Deferred Tax Assets 36,604 33,032
Less Valuation Allowance (32,402) (28,220)
-------- --------
Net Deferred Tax Assets 4,202 4,812
-------- --------
F-13
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
[Download Table]
Deferred Tax Liabilities:
Plant and Equipment, Principally Due to
Differences in Depreciation (4,391) (4,586)
-------- --------
Prepaid Expenses, Principally Due to
Deduction for Tax Purposes - (415)
-------- --------
Total Gross Deferred Tax Liabilities (4,391) (5,001)
-------- --------
Net Deferred Tax Liability $ (189) $ (189)
======== ========
Management has re-evaluated transactions which occurred in prior years and
estimated the effects of the IRS examination discussed below and as a result
believes the Company's total net operating loss carryforward for tax purposes is
approximately $101,000,000 at December 31, 1994. 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, 1994, the amount of loss carryforward not limited by Section 382
and therefore available to offset current federal taxable income is
approximately $38,000,000. 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 which have also been adjusted to reflect the IRS examination, 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 $253,000 which are available to reduce
future federal regular income taxes, if any, over an indefinite period.
The Company and its subsidiaries file a consolidated federal income tax return.
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. The Company has accrued a
liability of $5,870,000, as of December 31, 1994 of which approximately
$885,000, $2,009,000, and $213,000, was charged to earnings in the years ended
December 31, 1994, 1993 and 1992, respectively, for taxes and related interest
and the remainder of which was an adjustment to periods prior to 1992. 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. On December 6, 1994, the Company and the IRS entered into an
installment payment agreement (the "Installment Agreement") pursuant to which
the Company paid the IRS $1 million on February 1, 1995, and an additional
$275,000 on March 1, 1995, and will pay the balance of the IRS Assessment, plus
additional accrued interest, in monthly
F-14
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
installments of $275,000 (increasing to $550,000 on May 1, 1995) during the
remainder of 1995.
Of the $2,009,000 of prior-period income taxes and related interest charged to
earnings in the year ended December 31, 1993, $1,743,000 represents a change in
management's estimate of the impact of the aforementioned IRS examinations based
upon additional adjustments brought to management's attention in a revenue
agent's report received in October 1993. The $1,743,000 is comprised of prior
period income taxes of $624,000 and related interest of $1,119,000.
7. COMMITMENTS AND CONTINGENCIES:
FREMONT STREET EXPERIENCE
-------------------------
The Company and seven other downtown Las Vegas property owners who together
operate ten casinos, have formed the Fremont Street Experience Corporation
(FSEC), a limited liability company of which the Company is a one-sixth owner,
to develop a "celestial vault" over Fremont Street which will be resurfaced and
closed to through traffic from Main Street to Fourth Street to create a
"pedestrian mall" concept. The Company's capital contribution for its one-sixth
ownership of FSEC is $3,000,000, and has been contributed as of January, 1994.
The project, as well as a 1,600 space parking facility, is under construction
with completion expected in late fall or winter of 1995. The investment is
accounted for using the cost method.
LEGAL PROCEEDINGS
-----------------
The Company is a defendant in two consolidated lawsuits pending in the Federal
Court for the District of New Jersey, alleging violation by the Company and
certain of its subsidiaries and affiliates of the WARN Act and breach of
contract. The Company has vigorously defended the action on, among other
grounds, the basis that the Company is not responsible for claims against
affiliates and even if the WARN Act does apply as a matter of law to a
regulatory-forced closing, such closing, as a matter of fact, was due to
unforeseeable business circumstances and accordingly, the notice given was as
timely as practicable. The trial concluded August 11, 1993 and no decision has
yet been rendered by the court.
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 complaint seeks injunctive and declaratory
relief based upon the tribe's breach of the Spotlight 29 management contract.
Plaintiffs allege that the tribe breached the contract when it installed "pull-
tab" video gaming machines at the casino without the plaintiffs' consent and
without any involvement whatsoever by the plaintiffs in the operation of the
machines. The complaint alleges that these actions violated the terms of the
contract which give plaintiffs the exclusive right to manage and operate the
casino and violated the contract's non-compete provisions. The complaint states
that plaintiffs did not, and could not, consent to the installation and
operation of the machines at the casino because the State of California has
expressed a legal position that, because such machines are Class III gaming
devices under the IGRA, their operation on Native American reservations in
California is illegal. Moreover, because plaintiffs are subject to regulation by
Nevada gaming authorities which require that plaintiffs' conduct conform to the
laws of the State of California and the IGRA, plaintiffs' consent to the
installation or involvement in the operation of the gaming devices at Spotlight
29 could subject them to disciplinary action by the Nevada gaming
F-15
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
authorities. Consequently, plaintiffs filed the complaint to obtain a judicial
declaration as to whether "pull-tab" video gaming devices are legal on tribal
lands in California and, unless they are declared legal, to enjoin the operation
of such devices at Spotlight 29.
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. No hearing date has been set on this motion.
Management believes that 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.
In December, 1994, the Cabazon Tribe, which operates a casino on its tribal
lands in the vicinity of the 29 Palms Band, filed a lawsuit against the NIGC in
the Federal District Court for the District of Columbia and unsuccessfully
sought a temporary restraining order to enjoin completion of Spotlight 29. The
Company believes the suit, which alleged violation by the NIGC of certain
environmental law standards, is wholly without merit and will not be litigated
further by the Cabazon Tribe.
At December 31, 1994, the Company and its subsidiaries were parties to various
other claims and lawsuits arising in the normal course of business. While the
amounts claimed in some instances are substantial and ultimate liability with
respect to such claims cannot be determined, management is of the opinion that
the resolution of all pending matters will not have a material adverse effect
upon the Company's financial statements taken as a whole.
LIABILITY FOR PRIOR PERIOD TAX; IRS INSTALLMENT AGREEMENT
In October 1994, the IRS completed and delivered to the Company a final
assessment (the "IRS Assessment") relating to certain adjustments to the
Company's taxable income for the fiscal years ended January 31, 1980, through
December 31, 1983 (which the IRS had under audit). 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. In the third quarter of 1994,
the Company recorded an additional liability of $377,000 necessary to cover the
full amount of tax and interest identified in the IRS Assessment. The issuance
of the IRS Assessment and the Notice of Tax Lien contravened Elsinore's covenant
under its debt facilities to timely pay its tax liabilities and not to incur
additional liens under its debt facilities; the debt covenant noncompliance was
waived by the noteholders on December 2, 1994.
F-16
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
On December 6, 1994, the Company and the IRS entered into an installment payment
agreement (the "Installment Agreement") pursuant to which the Company paid the
IRS $1 million on February 1, 1995, and an additional $275,000 on March 1, 1995,
and will pay the balance of the IRS Assessment, plus additional accrued
interest, in monthly installments of $275,000 (increasing to $550,000 on May 1,
1995) during the remainder of 1995. Elsinore applied a portion of the proceeds
from the Equity Offering toward its initial payment under the Installment
Agreement. However, the proceeds from the Equity Offering will not be
sufficient to enable the Company to both fully pay the IRS Assessment and fully
meet its debt service and capital expenditure requirements in 1995. The Company
anticipates, based upon its recent results of operations, that additional
financing will be required in order for the Company to perform under the IRS
Installment Agreement and satisfy its other working capital requirements in
1995. There is no assurance that such additional financing, if any, will be
sufficient to fully perform under the Installment Agreement, or that the IRS
will not levy upon the Company's property or take other action to enforce the
tax lien. Such action by the IRS would violate the Company's debt covenants
under the First Mortgage Notes and Mortgage Notes.
NATIVE AMERICAN CASINO PROJECTS
PALM SPRINGS. The Company, through its wholly owned subsidiary, Elsub
Management Corporation, is the general partner with a 90% interest in Palm
Springs East Limited Partnership, a limited partnership that has a management
contract with the Twenty-nine Palms Band of Mission Indians to manage a casino
facility (the "Palm Springs Casino") of approximately 74,000 square feet located
on tribal land near Palm Springs, California. This facility cost approximately
$10 million to construct and opened January 14, 1995. Funds for construction of
the facility were secured through the issuance of the 12.5% First Mortgage Notes
due 2000 (See Note 5). As of December 31, 1994, approximately $2,190,000 of
such funds were in an escrow account and were restricted as to their use for the
construction of the Palm Springs Casino facility (See Note 5).
WASHINGTON STATE. The Company, through its wholly owned subsidiary, Olympia
Gaming Corporation ("Olympia Gaming"), has a management contract with the
Jamestown S'Klallam Tribe for the management of a casino facility (the
"Washington Casino") of approximately 54,000 square feet located on tribal land
on the northeast portion of the Olympic Peninsula, 70 miles northwest of
Seattle, Washington. This facility cost approximately $9 million to construct
and opened February 3, 1995. Funds for the construction of the facility were
secured through the issuance of the 12.5% First Mortgage Notes due 2000 (See
Note 5). As of December 31, 1994, $1,409,000 of such funds were in an escrow
account and were restricted as to their use for the construction of the
Washington Casino facility (See Note 5).
MOJAVE VALLEY RESORT AND NASHVILLE NEVADA
Mojave Valley Resort is being developed by J.F. Temple Development ("Temple"), a
developer of resorts in the Palm Springs area, as a master-planned resort
featuring up to seven casino/hotels, two championship golf courses, a marina,
facilities for up to 1,300 recreational vehicles, commercial facilities and
approximately 4,000 units of single and multi-family housing. The resort will
be located on land leased from the Fort Mojave Tribe along the Colorado River at
the southern tip of Nevada, six miles south of Laughlin. Elsinore and Temple
have agreed to develop and own up to four casino/hotels at Mojave Valley Resort.
Elsinore will manage each property developed under this agreement. Subject to
obtaining the necessary debt and equity financing for the project, the first
casino/hotel planned to open will be the Nashville Nevada, which is expected to
feature approximately 500 hotel rooms and 32,500 square feet of gaming space,
including approximately 1,050 slot machines, as well as restaurants and other
F-17
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
nongaming amenities. The total project cost of Nashville Nevada is expected to
be approximately $65.5 million. If the necessary financing can be arranged,
construction of Nashville Nevada is expected to begin as soon as practicable
thereafter. Upon obtaining the necessary project financing for Nashville
Nevada, the Company will acquire option rights from Temple to develop up to
three additional casino/hotel projects on tribal lands at the Mojave Valley
Resort (the "Development Option").
Temple and the Company have agreed in March 1995 to extend until September 30,
1995, the date by which the Company must complete its $10 million capital
contribution and obtain the remaining $55.5 million of non-recourse debt
financing for the Nashville Nevada project. In consideration for such extension,
the Company will assume Temple's obligation to pay approximately $47,000 in
current property taxes, an additional $47,000 in property taxes in the event the
Nashville Nevada project financing is not in place by September 15, 1995, and
$75,000 in lease payments relating to the Mojave Valley Resort; in addition, the
Company will loan to Temple up to approximately $150,000 to enable Temple to pay
its requisite share of pre-effective date expenses regarding the Nashville
Nevada project, which loan Temple will be obligated to repay if financing for
the project is completed. There is no assurance, however, that the Company or
Temple will be able to obtain the equity or debt financing necessary to commence
construction of the project by the extended deadline or at all. Accordingly,
there is significant uncertainty whether the Nashville Nevada project will be
completed or option rights to develop additional projects at the Resort will be
obtained.
8. LEASES:
All non-cancelable leases have been classified as capital or operating leases.
At December 31, 1994, 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:
[Download Table]
December 31,
------------------------
1994 1993
----------- ----------
(Dollars in Thousands)
Building $ 2,051 $ 2,051
Equipment 1,972 1,972
------- --------
4,023 4,023
Less Accumulated Amortization (1,642) (1,355)
------- --------
$ 2,381 $ 2,668
======= ========
Amortization of assets leased 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, 1994:
[Download Table]
Capital Operating
Leases Leases
--------- ----------
(Dollars in Thousands)
Years Ending December 31,
1995 $ 255 $ 3,706
F-18
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
[Download Table]
1996 242 3,710
1997 231 3,573
1998 179 2,737
1999 178 2,292
Thereafter 5,897 102,280
------- --------
Total Minimum Lease Payments 6,982 $118,298
========
Less: Amount Representing Interest
(at imputed rates ranging
from 12.5% to 15.0%) (5,633)
-------
Present Value of Net
Minimum Capital Lease Payments $ 1,349
=======
9. BENEFIT PLANS:
Four Queens, Inc. makes contributions to several multi-employer pension and
welfare benefit plans covering its union employees, of whom there were 37, 39
and 67 individuals at December 31, 1994, 1993 and 1992, respectively. The plans
provide defined benefits to covered employees. Amounts charged to pension cost
and contributed to the plans for the years 1994, 1993 and 1992 totaled $103,000,
$96,000 and $101,000, 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 unit. 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 $150,000, $145,000 and $140,000 for 1994, 1993 and
1992, respectively. There were 465, 460 and 465 participants in the savings
plan as of December 31, 1994, 1993 and 1992, 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. The 1993 Plan provides for awards of restricted shares, stock units,
options or stock
F-19
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
appreciation rights to all employees of the Company and its subsidiaries. Non-
statutory stock options granted under the 1993 Plan generally vest in equal
annual increments over a three-year period.
The following table summarizes option activity through December 31, 1994:
[Enlarge/Download Table]
Aggregate
Shares Available Options Average Exercise Value
for Grant Outstanding Price Per Share Combined
--------------------- ---------------------- ------------------- Plans
1991 Plan/1993 Plan 1991 Plan/1993 Plan 1991 Plan/1993 Plan -----------
Balance at
December 31, 1991 444,000 - 156,000 - $1.000 $ - $ 156,000
Shares Reserved - - - - - - -
Options Granted (17,000) - 17,000 - 0.875 - 14,875
Options Exercised - - - - - - -
Options Cancelled 34,000 - (34,000) - 1.000 - (34,000)
-------- -------- ------- --------- ------ ------ ----------
Balance at
December 31, 1992 461,000 - 139,000 - 0.985 - 136,875
Shares Reserved - 600,000 - - - - -
Options Granted (476,000) (626,700) 476,000 626,700 2.760 4.291 4,003,138
Options Exercised - - (45,000) - 1.000 - (45,000)
Options Cancelled 26,500 39,900 (26,500) (39,900) 2.688 4.279 (241,963)
-------- -------- ------- --------- ------ ------ ----------
Balance at
December 31, 1993 11,500 13,200 543,500 586,800 2.456 4.292 3,853,050
Shares Reserved - 600,000 - - - - -
Options Granted (11,500) (817,900) 11,500 817,900 5.375 2.687 $2,198,224
Options Exercised - - (17,000) - 0.875 - (14,875)
Options Cancelled - 64,100 - (64,100) - 5.224 (334,858)
-------- -------- ------- --------- ------ ------ ----------
Balance at
December 31, 1994 0 (140,600) 538,000 1,340,600 $2.623 $3.268 $5,701,541
======== ======== ======== ========= ====== ====== ==========
At December 31, 1994, options to purchase 1,878,600 shares were outstanding
including 1,340,600 under the 1993 Plan for a total of 1,980,000 authorized
(subject to shareholder approval at the 1995 Annual Shareholders Meeting) for
issuance under such plan. Of such number, 464,596 were exercisable. Through
December 31, 1994, 62,000 options had been exercised.
On March 15, 1993, the Company adopted an Amended and Restated Senior Executive
Severance Plan (the "Severance Plan") and, pursuant thereto, severance
agreements with eight employees of the Company have been executed. The
severance agreements provide (subject to certain limitations) that the covered
employees will receive two times their annual base salaries in the event of
their involuntary termination within two years after a change of control (as
defined in the Severance Plan and related agreements). Pursuant to the
severance agreements, the Company has also agreed, under certain circumstances,
to pay the covered employees, a cash payment equal to the difference (if
positive) between the "fair market value" (as defined in the Severance Plan) of
the Company's common stock and the exercise price of options to purchase common
stock held by such employees.
F-20
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
10. 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
------ ----- -------- ----- -----
1994 $ 4,710 $ 474 $ 535 $ 1,236 $ 6,955
======= ======= ======= ======= =======
1993 $ 5,028 $ 457 $ 464 $ 1,210 $ 7,159
======= ======= ======= ======= =======
1992 $ 4,748 $ 440 $ 418 $ 1,161 $ 6,767
======= ======= ======= ======= =======
11. TRANSACTIONS WITH RELATED PARTIES:
Attorney fees were paid to a firm of which a former director of the Company is a
partner in the approximate amounts of $6,000, $507,000 and $87,000, for the
years ended December 31, 1994, 1993, and 1992, respectively.
In 1994, approximately $91,000 in fees were paid to two executive officers and
one former executive officer of the Company in conjunction with an agreement
that assigned the rights to the MULTIPLE ACTION "registered trademark" blackjack
patent to the Company. In 1993, such fees amounted to approximately $54,600 to
the three individuals.
12. EXTRAORDINARY ITEM:
On October 8, 1993, the Company repaid the outstanding principal balance and
accrued interest thereon of its mortgage notes payable (See Note 5). The
Company recognized an extraordinary loss of $285,000 as a result of the write-
off of unamortized debt issuance costs. Income taxes are not applicable to this
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.
13. SELECTED QUARTERLY DATA (UNAUDITED):
Summarized unaudited interim and annual financial data for the years ended
December 31, 1994, 1993 and 1992 follow (In Thousands, Except Per Share Data):
[Enlarge/Download Table]
Quarter Ended Year Ended
-------------------------------------------------------- -----------
3/31/94 6/30/94 9/30/94 12/31/94 12/31/94
----------- ----------- ----------- ----------- -----------
Revenues $ 15,490 $ 16,199 $ 15,782 $ 15,235 $ 62,706
Income (Loss) Before Income Taxes
F-21
ELSINORE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
[Enlarge/Download Table]
And Extraordinary Item (2,040) (2,113) (2,927) (3,096) (10,176)
Income Tax Benefit (Expense) - - - - -
Income (Loss) Before Extraordinary Item (2,040) (2,113) (2.927) (3,096) (10,176)
Extraordinary Item:
Gain on Extinguishment of Debt - - - 735 735
Net Income (Loss) (2,040) (2,113) (2,927) (2,361) (9,441)
Per Common Share and Equivalent Share:
Income (Loss) Before Extraordinary Item (0.17) (0.18) (0.24) (0.25) (0.84)
Net Income (Loss) (0.17) (0.18) (0.24) (0.19) ( 0.78)
=========== =========== =========== =========== ===========
Weighted Average Common and Common
Equivalent Shares Outstanding 12,062,164 12,066,648 12,079,164 12,217,729 12,106,778
=========== =========== =========== =========== ===========
Quarter Ended Year Ended
-------------------------------------------------------- -----------
3/31/93 6/30/93 9/30/93 12/31/93 12/31/93
----------- ----------- ----------- ----------- -----------
Revenues $ 16,477 $ 17,210 $ 16,893 $ 16,272 $ 66,852
Income (Loss) Before Income Taxes
And Extraordinary Item 525 1,250 (594) (2,809) (1,628)
Income Tax Benefit (Expense) (28) (65) (646) 115 (624)
Income (Loss) Before Extraordinary Item 497 1,185 (1,240) (2,694) (2,252)
Extraordinary Item:
Loss on Extinguishment of Debt - - - (285) (285)
Net Income (Loss) 497 1,185 (1,240) (2,979) (2,537)
Per Common and Equivalent Share:
Income (Loss) Before
Extraordinary Item 0.04 0.10 (0.10) (0.22) (0.19)
Net Income (Loss) 0.04 0.10 (0.10) (0.25) (0.21)
=========== =========== =========== =========== ===========
Weighted Average Common and Common
Equivalent Shares Outstanding 12,017,164 12,404,315 12,062,164 12,062,164 12,049,430
=========== =========== =========== =========== ===========
Quarter Ended Year Ended
-------------------------------------------------------- -----------
3/31/92 6/30/92 9/30/92 12/31/92 12/31/92
----------- ----------- ----------- ----------- -----------
Revenues $ 15,655 $ 15,912 $ 16,432 $ 15,989 $ 63,998
Income (Loss) Before Income Taxes 91 244 280 (2,206) (1,591)
Income Tax Benefit (Expense) - - - (189) (189)
Net Income (Loss) 91 244 280 (2,395) (1,780)
Per Common and Equivalent Share:
Net Income (Loss) 0.01 0.02 0.02 (0.20) (0.15)
=========== =========== =========== =========== ===========
Weighted Average Common and Common
Equivalent Shares Outstanding 12,017,164 12,017,164 12,017,164 12,017,164 12,017,164
=========== =========== =========== =========== ===========
F-22
14. FINANCIAL CONDITION, LIQUIDITY AND GOING CONCERN
Recent and Expected Losses from Existing Operations
FOUR QUEENS. Elsinore's historical financial information primarily reflects
the operations of the Four Queens. Although the Company historically has
generated positive cash flow from operations, the Company has experienced net
losses in the last four years. In 1994, the results of operations of
the Four Queens were adversely affected by, among other things, increased
competition due to the opening of three large casino/hotels on the Las Vegas
Strip and, to a lesser extent, the refurbishment program at the Four Queens. At
December 31, 1994, the Company's working capital deficit had increased to $10.5
million. The results of operations of the Four Queens have continued to be
negatively affected since December 31, 1994 and the Company anticipates this
will be the case at least through the first half of 1995.
SPOTLIGHT 29 CASINO. Spotlight 29 opened to the public on January 14, 1995.
During the first six weeks of Spotlight 29's operations, insufficient revenues
were generated to cover the casino's operating expenses. This shortfall is
believed by the Company to be attributable in part to the marketing plan of
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 in violation of applicable federal law. Pursuant to its obligations
under the Spotlight 29 management contract, the Company through March 17 lent
$10 million for the casino's construction and advanced $1.0 million in the form
of loans to Spotlight 29 to fund its working capital shortfall. Based on the
trend of the Casino's first six weeks of operations, the Company anticipates
that, in the event the Company continues to manage Spotlight 29, it will be
required to make additional contributions during the balance of 1995 to the
casino to fund working capital shortfalls. In addition, there is no assurance
that Spotlight 29 will not continue to experience negative cash flow in
subsequent quarters or, if such operating losses do continue, that the Company
will have sufficient working capital to fund any additional cash advances that
would be required under the management contract.
In late February, in response to the Company's written objection to the
placement of any Class III gaming devices on Spotlight 29 premises, the 29 Palms
Band advised the Company that, as the owner of Spotlight 29, the tribe would
install such devices if doing so was in the tribe's best interest and that the
tribe believed this position did not conflict with the terms of the management
contract. In early March, 1995, the 29 Palms Band caused approximately 70 gaming
devices to be installed at Spotlight 29 and such devices currently are in
operation.
The Company opposes these activities by the 29 Palms Band and has 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 29 Palms Band a notice and demand that the operations of
the Class III devices without the Company's consent and compliance with
applicable federal law violates the management contract and that such activity
must immediately cease. Following the tribe'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.
In March, 1995, the Nevada Board conducted hearings into matters
surrounding the operation of Class III gaming devices at Spotlight 29. The
Company's failure to abide by a directive of the Nevada Board could subject the
Company to disciplinary action, including without limitation, the imposition of
fines or the suspension or revocation of the Company's Nevada gaming license.
In addition to filing its March 16, 1995, suit against the 29 Palms Band
for injunctive and declaratory relief, the Company has informed the 29 Palms
Band that unless the tribe's operation of the Class III devices at Spotlight 29
promptly ceases, the Company will pursue efforts to disengage from the
Spotlight 29 management contract based upon the tribe's material and continuing
breach of the contract provisions. Termination of the management contract will
require negotiation of an arrangement permitting the orderly transfer of
operations to the tribe or another manager, obtaining any necessary approvals
of the NIGC, and providing acceptable terms regarding the buyout of the
Company's interest in the contract as well as the tribe's repayment of the $10
million loan and other advances made by the Company. In addition, since
cessation of the Company's right to manage Spotlight 29 would constitute an
event of default under the Company's debt facilities, termination of the
management contract will require obtaining appropriate consents or waivers from
the holders of the First Mortgage Notes and Mortgage Notes.
7 CEDARS CASINO. In February 1995, during its first three weeks of
operations, 7 Cedars generated a net loss for the casino. Although the Company
anticipates that gaming revenues at 7 Cedars will increase in the second and
third quarters of 1995, as a result of a greater influx of tourists to the
Olympic Peninsula during the spring and summer months, there is no assurance
that 7 Cedars will generate increased gaming revenues or that the casino will
become profitable.
F-23
LIQUIDITY
Currently, the Company's primary source of liquidity is cash flow from the
operations of the Four Queens. The Four Queens experienced in 1994 a
substantial decrease in gaming revenues, operating results and cash flows, which
the Company expects will continue at least through the first half of 1995. In
addition, the Company's liquidity in 1994 was significantly affected by its
substantial debt service obligations and in 1995 will be further
affected by such obligations and by some or all of the following items:
IRS Installment Agreement: The Company is obligated to pay the IRS $275,000
per month, increasing to $550,000 per month on May 1, 1995 through December
1995, at which time the IRS Assessment will be fully discharged. The Company has
paid the IRS $1,000,000 on February 1, 1995 and an additional $275,000 on March
1, 1995.
Native American Casino Operating Shortfalls: In addition to the approximately
$1 million already advanced to the 29 Palms Band through March 17, 1995, the
Company is required under the Spotlight 29 management contract and the 7 Cedars
management contract to fund working capital shortfalls at either Native American
casino. Depending upon Spotlight 29's future results of operations, its ability
to obtain sufficient equipment lease financing, and the outcome of the current
dispute concerning whether
F-24
the Company will terminate the Spotlight 29 management contract, the Company
anticipates it may be required to advance additional funds to the 29 Palms Band
in 1995.
Obligations Assumed from Temple: In consideration for certain amendments to
the Nashville Nevada LLC operating contract beneficial to Elsinore, the Company
has assumed and will complete up to approximately $169,000 of Temple's payment
obligations relating to its development of the Mojave Valley Resort. In
addition, the Company has agreed to loan Temple up to $150,000 to fund Temple's
share of certain pre-construction costs at Nashville Nevada, which loans will be
repaid in the event the requisite financing for the project is obtained.
Nashville Nevada Project Expense: As a condition to its participation in the
Nashville Nevada project, Mojave Gaming will be required to make a capital
contribution of $10,000,000 to the venture developing Nashville Nevada on or
before September 30, 1995. There is no assurance that the Company will be able
to obtain the necessary financing for such contribution on commercially
acceptable terms, or at all.
WARN Act Litigation: The trial in the liability phase in this matter
concluded August 11, 1993. Although no decision has yet been rendered, a
decision may be issued at any time.
In 1995, unless the Company's available cash and funds generated from
operations significantly increases or the Company is able to extend its debt
service and/or delay capital expenditure requirements, the Company will need to
obtain additional working capital in order to satisfy its payment obligations
during the year. Moreover, the need for additional capital may be further
increased in the event that (i) a material adverse judgment is rendered against
the Company in the pending WARN Act litigation; (ii) there is any significant
decline in the Company's results of operations; (iii) the development and
opening of the Fremont Street Experience is materially delayed or is subject to
material cost overruns or (iv) the Company is unable to obtain from its
noteholders the requisite waivers or consents in connection with the Company's
termination of the Spotlight 29 management contract or its other anticipated
debt covenant noncompliance. Without additional financing, the Company believes
that it is unlikely it will be able to maintain a level of operating cash flow
necessary to satisfy all of its financial obligations in 1995. To meet these
obligations, the Company anticipates it will have to raise additional working
capital, refinance or extend repayment of its outstanding debt, obtain from the
noteholders additional waivers of default or covenant noncompliance under the
First Mortgage Notes and Mortgage Notes, or a combination of the foregoing.
There is no assurance that any of these alternatives could be effected on
satisfactory terms. In particular, certain covenants of the indenture relating
to the First Mortgage Notes and of the purchase agreement relating to the
Mortgage Notes restrict the ability of the Company and its subsidiaries to incur
additional indebtedness or to secure such indebtedness and may impair the
Company's ability to obtain additional debt financing. If these alternatives
prove to be unavailable, Elsinore would be required to sell assets or seek
protection under bankruptcy laws.
In addition to the Equity Offering completed in January, 1995 and the
Convertible Note offering expected to be funded by March 31, 1995, the Company
intends to complete additional financing transactions to provide the capital
required to discharge its remaining working capital requirements in 1995. In
addition, the Company intends to raise the $10 million it is required to
contribute to the Nashville Nevada project by completing one or more additional
equity offerings by September 30, 1995.
F-25
SCHEDULE VIII
ELSINORE CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(000'S OMITTED)
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BALANCE AT OTHER CHANGES BALANCE AT
BEGINNING OF ADDITIONS ADD (DEDUCT) END OF
CLASSIFICATION PERIOD AT COST DESCRIBE PERIOD
-------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994:
-----------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $ 200 $ 40 $26 (A) $ 214
ACCUMULATED AMORTIZATION
EXPENSE DEDUCTED FROM LEASEHOLD
ACQUISITION COSTS 4,278 207 - 4,485
YEAR ENDED DECEMBER 31, 1993:
----------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS 180 82 62 (A) 200
ACCUMULATED AMORTIZATION EXPENSE
DEDUCTED FROM LEASEHOLD
ACQUISITION COSTS 4,071 207 - 4,375
YEAR ENDED DECEMBER 31, 1992:
-----------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS 104 135 59 (A) 180
ACCUMULATED AMORTIZATION EXPENSE
DEDUCTED FROM LEASEHOLD
ACQUISITION COSTS 3,865 206 - 4,071
(A) WRITE-OFF OF UNCOLLECTIBLE ACCOUNTS
F-26
Dates Referenced Herein and Documents Incorporated by Reference
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