SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________
to _________________
Commission File Number 1-7831
ELSINORE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0117544
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
202 FREMONT STREET, LAS VEGAS, NEVADA 89101
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (Including Area Code): 702/385-4011
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF STOCK NUMBER OF SHARES
CLASS DATE OUTSTANDING
Common August 13, 2002 4,993,965
Elsinore Corporation and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 2002
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of 4
June 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations 6
for the Three Months Ended June 30, 2002 and
June 30, 2001
Condensed Consolidated Statements of Income 8
for the Six Months Ended June 30, 2002 and
June 30, 2001
Condensed Consolidated Statement of Shareholders' 10
Equity for the Six Months Ended June 30, 2002
Condensed Consolidated Statements of Cash Flows for 11
the Six Months Ended June 30, 2002 and
June 30, 2001
Notes to Condensed Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of 18
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 32
About Market Risk
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 35
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
Unaudited
(Dollars in Thousands)
June 30, December 31,
2002 2001
--------------------- ----------------------
Assets
Current Assets:
Cash and cash equivalents $5,137 $4,643
Accounts receivable, less allowance for
doubtful accounts of $164 and $163,
respectively 1,522 1,163
Inventories 332 360
Prepaid expenses 1,438 1,165
--------------------- ----------------------
Total current assets 8,429 7,331
Property and equipment, net 24,723 23,637
Other assets 1,899 1,793
--------------------- ----------------------
Total assets $35,051 $32,761
===================== ======================
(continued)
Elsinore Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, 2002 and December 31, 2001
Unaudited
(Dollars in Thousands)
June 30, December 31,
2002 2001
---------------------- --------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $1,300 $1,095
Accrued interest 320 316
Accrued expenses 5,163 4,024
Current portion of long-term debt 554 603
---------------------- --------------------
Total current liabilities 7,337 6,038
Long-term debt, less current portion 8,801 8,684
---------------------- --------------------
Total liabilities 16,138 14,722
---------------------- --------------------
Commitments and contingencies
Shareholders' Equity:
6% cumulative convertible preferred stock, no
par value. Authorized, issued and
outstanding 50,000,000 shares. Liquidation
preference and accrued dividends of $22,403
and $21,760 at June 30, 2002 and
December 31, 2001, respectively 22,403 21,760
Common stock, $.001 par value per share.
Authorized 100,000,000 shares. Issued
and outstanding 4,993,965 shares at
June 30, 2002 and December 31, 2001,
respectively 5 5
Additional paid-in capital 5,234 5,877
Accumulated deficit (8,729) (9,603)
---------------------- --------------------
Total shareholders' equity 18,913 18,039
---------------------- --------------------
Total liabilities and shareholders'
equity $35,051 $32,761
====================== ====================
See accompanying notes to the condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(Dollars in Thousands, Except Per Share Amounts)
Three Three
Months Months
Ended Ended
June 30, 2002 June 30, 2001
----------------------- ------------------------
Revenues, net:
Casino $9,880 $9,848
Hotel 2,068 2,262
Food and beverage 2,770 2,663
Other 672 391
----------------------- ------------------------
Total revenues 15,390 15,164
Promotional allowances (1,226) (1,133)
----------------------- ------------------------
Net revenues 14,164 14,031
----------------------- ------------------------
Costs and expenses:
Casino 3,350 3,221
Hotel 2,410 2,453
Food and beverage 1,902 1,808
Taxes and licenses 1,476 1,469
Selling, general and
administrative 2,745 2,543
Rents 1,125 1,075
Depreciation and
amortization - 1,027
Interest 321 348
Merger and litigation costs, net 798 63
----------------------- ------------------------
Total costs and
expenses 14,127 14,007
----------------------- ------------------------
Net income before income taxes and
undeclared dividends on cumulative
convertible preferred stock 37 24
Income taxes - 15
----------------------- ------------------------
Net income before undeclared
dividends on cumulative
convertible preferred stock 37 9
Undeclared dividends on cumulative
convertible preferred stock 321 303
----------------------- ------------------------
Net loss applicable
to common shares ($284) ($294)
======================= ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (continued)
Unaudited
Three Three
Months Months
Ended Ended
June 30, 2002 June 30, 2001
------------------- -------------------
Basic and diluted loss
per share:
Basic loss per share ($.06) ($.06)
=================== ===================
Weighted average number of
common shares outstanding 4,993,965 4,993,965
=================== ===================
Diluted loss per share ($.06) ($.06)
=================== ===================
Weighted average number of
common and common equivalent
shares outstanding 4,993,965 4,993,965
=================== ===================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Income
Unaudited
(Dollars in Thousands, Except Per Share Amounts)
Six Six
Months Months
Ended Ended
June 30, 2002 June 30, 2001
----------------------- ------------------------
Revenues, net:
Casino $19,673 $20,013
Hotel 4,254 4,824
Food and beverage 5,716 5,533
Other 993 779
----------------------- ------------------------
Total revenues 30,636 31,149
Promotional allowances (2,678) (2,746)
----------------------- ------------------------
Net revenues 27,958 28,403
----------------------- ------------------------
Costs and expenses:
Casino 6,564 6,287
Hotel 4,616 4,830
Food and beverage 3,820 3,614
Taxes and licenses 2,930 2,976
Selling, general and
administrative 5,006 4,715
Rents 2,214 2,133
Depreciation and
amortization - 2,035
Interest 621 805
Impairment loss 324 -
Merger and litigation costs, net 989 158
----------------------- ------------------------
Total costs and
expenses 27,084 27,553
----------------------- ------------------------
Net income before income taxes and
undeclared dividends on cumulative
convertible preferred stock 874 850
Income taxes - 15
----------------------- ------------------------
Net income before undeclared
dividends on cumulative
convertible preferred stock 874 835
Undeclared dividends on cumulative
convertible preferred stock 643 607
----------------------- ------------------------
Net income applicable
to common shares $231 $228
======================= ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Income (continued)
Unaudited
Six Six
Months Months
Ended Ended
June 30, 2002 June 30, 2001
------------------- -------------------
Basic and diluted income
per share:
Basic income per share $.05 $.05
=================== ===================
Weighted average number of
common shares outstanding 4,993,965 4,993,965
=================== ===================
Diluted income per share $.01 $.01
=================== ===================
Weighted average number of
common and common equivalent
shares outstanding 97,993,965 97,993,965
=================== ===================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2002
Unaudited
(Dollars in thousands)
Common Stock Preferred Stock
------------------------- ----------------------------
Out- Out- Additional Total
Standing Standing Paid-In-Capital Accumulated Shareholders'
Shares Amount Shares Amount Deficit Equity
-------------- ---------- ---------------- ----------- --------------- ----------------- ------------------
Balance,
January 1, 2002 4,993,965 $5 50,000,000 $21,760 $5,877 ($9,603) $18,039
Net income 874 874
Undeclared preferred
stock dividends 643 (643)
-------------- ---------- ---------------- ----------- --------------- ---------------- -------------------
Balance,
June 30, 2002 4,993,965 $5 50,000,000 $22,403 $5,234 ($8,729) $18,913
============== ========== ================ =========== =============== ================ ===================
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(Dollars in Thousands)
Six Six
Months Months
Ended Ended
June 30, 2002 June 30, 2001
----------------------- ------------------------
Cash flows from operating activities:
Net income $874 $835
Adjustments to reconcile
net income to net
cash provided by
operating activities:
Depreciation and
amortization - 2,035
Impairment loss 324 -
Provision for uncollectible
accounts 2 -
Changes in assets and
liabilities:
Accounts receivable (361) (129)
Inventories 28 59
Prepaid expenses (273) 3
Other assets (106) (179)
Accounts payable 205 (323)
Accrued interest 4 (25)
Accrued expenses 1,139 60
----------------------- ------------------------
Net cash provided by
Operating activities 1,836 2,336
----------------------- ------------------------
Cash flows used in investing
activities - capital
expenditures (835) (419)
------------------------ ------------------------
Cash flows used in financing
activities - principal
payments on long-term debt (507) (1,732)
------------------------ ------------------------
Net increase in cash and
cash equivalents 494 185
Cash and cash equivalents
at beginning of period 4,643 5,008
------------------------ ------------------------
Cash and cash equivalents
at end of period $5,137 $5,193
======================== ========================
Elsinore Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
Unaudited
(Dollars in Thousands)
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
--------------------- ---------------------
Supplemental disclosure of non-cash investing and
financing activities:
Equipment purchased with capital lease financing $575 $107
Supplemental disclosure of cash activities:
Cash paid for interest $617 $741
Cash paid for income taxes $- $50
See accompanying notes to condensed consolidated financial statements.
Elsinore Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2002
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Elsinore
Corporation ("Elsinore" or the "Company") and its wholly owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
Impairment Loss
As discussed in Note 5, on March 14, 2002, Elsinore announced that its
wholly owned subsidiary, Four Queens, Inc. ("Four Queens"), which operates the
Four Queens Hotel & Casino ("Four Queens Casino") entered into a definitive
asset purchase agreement (the "Purchase Agreement") for the sale of
substantially all of Four Queens Casino's assets, including the hotel and
casino, to SummerGate, Inc., a Nevada corporation, for a purchase price, subject
to certain price adjustments, of approximately $22 million, plus the value of
cash on hand and the assumption of certain liabilities. The assets of the Four
Queens constitute substantially all of the assets of Elsinore. Subsequently, on
April 5, 2002, Four Queens amended the Purchase Agreement to, among other
things, extend the termination date to June 30, 2002, and reduce the $22 million
purchase price to approximately $21.15 million (plus the value of cash on hand
and the assumption of certain liabilities) if the sale of assets was consummated
after May 7, 2002.
In connection with the Purchase Agreement, the Company recognized a
non-cash impairment loss of approximately $13.2 million during 2001. The Company
recorded an additional impairment loss of approximately $324,000, in the first
quarter of 2002, due to the amendment of the Purchase Agreement and an increase
in the carrying value of assets being purchased at March 31, 2002. As
substantially all of the assets of the Four Queens are held for sale, no
depreciation has been recorded on these assets for the six months ended June 30,
2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from SummerGate.
As such, assets held for sale as of June 30, 2002 will be depreciated effective
July 1, 2002.
Basis of Presentation
The Company has prepared the accompanying unaudited condensed consolidated
financial statements, pursuant to rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that this report be read in conjunction with the Company's audited consolidated
financial statements included in the annual report for the year ended December
31, 2001. In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of June 30, 2002, the results of its operations for the six months
ended June 30, 2002 and June 30, 2001, and the results of its cash flows for the
six months ended June 30, 2002 and June 30, 2001. The operating results and cash
flows for these periods are not necessarily indicative of the results that will
be achieved for the full year or for future periods.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates used by the Company include the estimated useful lives for depreciable
and amortizable assets, the estimated allowance for doubtful accounts
receivable, the estimated valuation allowance for deferred tax assets, and
estimated cash flows used in assessing the recoverability of long-lived assets.
Actual results may differ from those estimates.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A fundamental conclusion
reached by the FASB in this statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company believes that
SFAS No. 146 will not have a material impact on its financial position and
results of operations.
Net Income Per Common Share
Basic per share amounts are computed by dividing net income by average
shares outstanding during the year. Diluted per share amounts are computed by
dividing net income by average shares outstanding plus the dilutive effect of
common share equivalents. Since the Company incurred a net loss for the three
month periods ended June 30, 2002 and 2001, the effect of common stock
equivalents was anti-dilutive. Therefore, basic and diluted per share amounts
are the same for these periods.
Six Months Ended
June 30, 2002
----------------------- ----------------- --------------------
Income Shares Per Share
Amounts
----------------------- ----------------- --------------------
Basic EPS:
Net income available to common
shareholders $231,000 4,993,965 $0.05
Effect of Dilutive Securities:
Cumulative convertible preferred
Stock 643,000 93,000,000 (0.04)
Diluted EPS:
----------------------- ----------------- --------------------
Net income available to common
shareholders plus assumed conversions $874,000 97,993,965 $0.01
======================= ================= ====================
Six Months Ended
June 30, 2001
----------------------- ----------------- --------------------
Income Shares Per Share
Amounts
----------------------- ----------------- --------------------
Basic EPS:
Net income available to common
shareholders $228,000 4,993,965 $0.05
Effect of Dilutive Securities:
Cumulative convertible preferred
stock 607,000 93,000,000 (0.04)
Diluted EPS:
----------------------- ----------------- --------------------
Net income available to common
shareholders plus assumed conversions $835,000 97,993,965 $0.01
======================= ================= ====================
2. Income Taxes
Due to the Company's regular tax and alternative minimum tax net operating
losses, the Company is not expected to pay federal income taxes for the year
ended December 31, 2002. Accordingly, the Company has not recorded a provision
for income taxes on the accompanying Condensed Consolidated Financial
Statements.
3. Commitments and Contingencies
The Company is a party to litigation involving a proposed merger with R&E
Gaming Corp. as discussed in Note 4 below.
The Company is a party to other claims and lawsuits which arose in the
ordinary course of business. Management believes that such matters are either
covered by insurance, or if not insured, will not have a material adverse effect
on the financial statements of the Company taken as a whole.
4. Paulson Litigation
In the first half of 1997, Elsinore and Mr. Allen E. Paulson ("Paulson")
commenced discussions which culminated in an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of September 15, 1997, between Elsinore and
entities controlled by Paulson, namely R&E Gaming Corp. ("R&E") and Elsinore
Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") the
outstanding common stock ("Common Stock") of Elsinore for $3.16 per share in
cash plus an amount of additional consideration in cash equal to the daily
portion of the accrual on $3.16 at 9.43% compounded annually, from June 1, 1997
to the date immediately preceding the date such acquisition is consummated. The
Merger Agreement provided for EAS to merge into Elsinore, and Elsinore to become
a wholly owned subsidiary of R&E.
Contemporaneously with the Merger Agreement, R&E executed an Option and
Voting Agreement (the "Option Agreement") with Morgens, Waterfall, Vintiadis and
Company, Inc. ("MWV"), on behalf of certain investment accounts ("MWV Accounts")
which owned 94.3% of the outstanding Common Stock prior to the Recapitalization.
Under certain conditions and circumstances, the Option Agreement provided for,
among other things: (i) the grant by the MWV Accounts to R&E of an option to
purchase all of their Common Stock; (ii) an obligation by R&E to purchase all of
the MWV Accounts' Common Stock; and (iii) the MWV Accounts to vote their Common
Stock in favor of the Merger Agreement. Elsinore's shareholders approved the
Merger Agreement at a special meeting of shareholders held on February 4, 1999.
Paulson also entered into discussions with Riviera to acquire a controlling
interest in that company as well. Riviera owns and operates the Riviera Hotel
and Casino in Las Vegas and is the parent corporation of Riviera Gaming
Management-Elsinore, Inc. ("RGME"). On September 16, 1997, R&E and Riviera
Acquisition Sub, Inc. ("RAS") (another entity controlled by Paulson) entered
into an Agreement and Plan of Merger with Riviera, which provided for the merger
of RAS into Riviera (the "Riviera Merger"), and for Riviera to become a wholly
owned subsidiary of R&E. R&E also entered into an Option and Voting Agreement
with certain Riviera shareholders, including MWV acting on behalf of the MWV
Accounts, containing terms similar to those described above with respect to the
Option Agreement.
The Merger Agreement contained conditions precedent to consummation of the
Merger, including: (i) the Option Agreement being in full force and effect and
MWV having complied in all respects with the terms thereof; (ii) all necessary
approvals from gaming authorities; and (iii) consummation of the Riviera Merger.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it
was R&E's position that the Merger Agreement was void and unenforceable against
R&E and EAS, or alternatively, R&E and EAS intended to terminate the Merger
Agreement. R&E alleged, among other things, violations by Elsinore of the Merger
Agreement, violations of law and misrepresentations by MWV in connection with
the Option and Voting Agreement and the non-satisfaction of certain conditions
precedent to completing the merger. The Company denied the allegations and asked
that R&E complete the merger. Thereafter, in April 1998, Paulson, R&E, EAS and
certain other entities filed a lawsuit against eleven defendants, including
Elsinore and MWV (Paulson, et al. v Jeffries & Company et al.). On January 25,
2000, the Court granted Plaintiffs' motion for leave to file a Fourth Amended
Complaint. Plaintiffs' allegations in the Fourth Amended Complaint against the
Company include breach of the Merger Agreement by Elsinore, as well as fraud and
various violations of the federal securities laws in connection with the
proposed merger. Plaintiffs were seeking: (i) unspecified actual damages in
excess of $20 million; (ii) $20 million in exemplary damages; and (iii)
rescission of the Merger Agreement and other relief. The lawsuit was filed in
the United States District Court for the Central District of California.
Pursuant to a settlement agreement dated as of April 3, 2002, this lawsuit
has now been resolved. A Settlement Bar Order and Final Judgment was entered by
the Court on July 1, 2002. Pursuant to the settlement agreement, Elsinore agreed
to pay the sum of $1,100,000, which was paid on June 1, 2002. Total litigation
and settlement costs (including the settlement payment) incurred during the
quarter ended June 30, 2002, were approximately $1,312,000. A receivable due
from the Company's directors and officers' insurance carrier related to this
matter partially offset this expense by $514,000.
5. Impairment Loss
Prior to December 31, 2001, the Company entered into a sales agency
contract in which the sales agency would provide assistance in locating
potential buyers of the Company or Four Queens. On March 14, 2002, the Company
announced that Four Queens entered into a Purchase Agreement for the sale of
substantially all of Four Queens Casino's assets, including the hotel and
casino, to SummerGate, Inc., a Nevada corporation, for a purchase price, subject
to certain adjustments, of approximately $22 million, plus the value of cash on
hand and the assumption of certain liabilities. In addition, pursuant to the
terms of the Purchase Agreement, SummerGate, Inc. would offer employment to all
Four Queens employees.
The assets of Four Queens constitute substantially all of the assets of
Elsinore. Upon the consummation of the sale of the assets of Four Queens,
Elsinore would not have an operating asset. The Board of Directors of both
Elsinore and Four Queens anticipated that, following the sale of the assets of
Four Queens, they would have adopted a plan of dissolution and begun the process
of winding-up and dissolving both the Four Queens and Elsinore. Elsinore
anticipated that the proceeds from the sale would have been used solely to pay
the debts of Four Queens and Elsinore, as well as to pay any accrued and unpaid
dividends on Elsinore's outstanding 6% cumulative convertible preferred stock
(the "Preferred Stock"), plus the liquidation preference on the Preferred Stock,
if Elsinore is dissolved. At March 31, 2002, total liabilities of Elsinore were
approximately $7.8 million, and total liabilities of the Four Queens were
approximately $8.1 million (of which SummerGate, Inc. would have assumed
approximately $4.1 million pursuant to the terms of the Purchase Agreement. In
addition, as of March 31, 2002, Elsinore had outstanding approximately
50,000,000 shares of Preferred Stock, with a liquidation preference of
approximately $22.1 million, including accumulated dividends, and approximately
4,993,965 shares of Common Stock.
In the event the Four Queens and Elsinore were dissolved, based upon the
total assets of the Four Queens and Elsinore as of May 14, 2002 and assuming the
consummation of the sale, after the payment of the Four Queens' and Elsinore's
debt and the payment of the Preferred Stock's liquidation preference, including
accumulated dividends, there would not be any remaining assets available for
distribution to the holders of the Common Stock.
The beneficial owner of a majority of Elsinore's capital stock, who
exercises voting and investment authority over 100% of the Preferred Stock and
approximately 99.6% of the Common Stock (on an as-converted basis), delivered a
written consent on May 2, 2002 approving the sale of the assets of Four Queens.
In connection with the Purchase Agreement, the Company recognized a
non-cash impairment loss of approximately $13.2 million during 2001. An
impairment loss was necessary as net proceeds resulting from the sale of the
assets of Four Queens, under the Purchase Agreement, would be less than the
carrying value of the assets to be sold as of December 31, 2001. Approximately
$12.9 million of the impairment loss was related to buildings and equipment and
the remainder was related to the impairment of reorganization value in excess of
amounts allocable to identifiable assets.
On April 5, 2002, Four Queens amended the Purchase Agreement to, among
other things, extend the termination date to June 30, 2002, and reduce the $22
million purchase price to approximately $21.15 million (plus the value of cash
on hand and the assumption of certain liabilities) if the sale of assets was
consummated after May 7, 2002. The Company recorded an adjustment to the
impairment loss of approximately $324,000, in the first quarter of 2002, due to
the amendment of the Purchase Agreement and an increase in the carrying value of
assets being purchased at March 31, 2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from SummerGate.
6. Olympia Gaming Corporation
Elsinore Corporation ("Elsinore"), through its wholly-owned subsidiary,
Olympia Gaming Corporation (collectively, with Elsinore, the "Company"), entered
into a Gaming Project Development and Management Agreement (the "Contract")
dated as of September 28, 1993 with the Jamestown S'Klallam Tribe (the "JST")
and JKT Gaming, Inc. ("JKT") to operate the 7 Cedars Casino (the "7 Cedars"),
which is located on the Olympic Peninsula in the State of Washington and is
owned by JST. Pursuant to a Loan Agreement dated November 12, 1993 between the
Company, JST and JKT, as amended, and the documents related thereto
(collectively, the "Loan Documents"), the Company loaned $9,000,000 (the "7
Cedars Note") to JST for the construction of 7 Cedars.
During 1995, the contract was terminated by 7 Cedars. As a result, the
Company recorded a reserve on the 7 Cedars Note and wrote off unamortized casino
development costs in the amount of $242,000 and all accrued interest. During
1997, the Company wrote off the 7 Cedars Note and related reserve. The Company
entered into a Settlement Agreement and Mutual Release (the "Settlement") on May
23, 2002 with JST and JKT to resolve any claims of the parties arising out of
the Loan Agreement. Pursuant to the Settlement, JST has agreed to pay the
Company $1.5 million, plus interest, over a 36 month period, with an option to
prepay, at a negotiated discount, the full amount at any time prior to the end
of such 36 month period. Pursuant to the Settlement, the Company, JST and JKT
have each agreed to mutually release each party to the Settlement from all
claims or causes of action arising from the Loan Documents and related
transactions.
The Company collected approximately $338,000 under this Settlement during
the three months ended June 30, 2002.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation
This discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and notes thereto set forth
elsewhere herein.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include statements regarding the Company's expectations, hopes or intentions
regarding the future, including but not limited to statements regarding the
Company's strategy, competition, expenses, development plans, capital
expenditures, financing, revenue, operations, the impact of the terrorist
attacks in the United States, regulations, and compliance with applicable laws.
Forward-looking statements involve certain risks and uncertainties, and actual
results may differ materially from those discussed in any such statement. Among
the factors that could cause actual results to differ materially are the
following: declines in general economic conditions, increased labor costs, the
Company's ability to refinance its debt, other financing needs, further
terrorist attacks, the availability of sufficient funds for capital improvements
and other risks related to such improvements, changes in gaming laws, loss of
licenses or permits and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. All
forward-looking statements in this document are made as of the date hereof,
based on information available to the Company as of the date hereof, and the
Company assumes no obligation to update any forward-looking statement.
The following tables sets forth certain operating information for the
Company for the three and six months ended June 30, 2002 and 2001. Revenues and
promotional allowances are shown as a percentage of net revenues. Departmental
costs are shown as a percentage of departmental revenues. All other percentages
are based on net revenues.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------------------------- -----------------------------------
Revenues, net:
Casino $9,880 69.8% $9,848 70.2%
Hotel 2,068 14.6% 2,262 16.1%
Food and beverage 2,770 19.6% 2,663 19.0%
Other 672 4.7% 391 2.8%
net --------------- --------------- --------------- ---------------
Total revenue 15,390 108.7% 15,164 108.1%
Promotional allowances (1,226) (8.7%) (1,133) (8.1%)
net --------------- --------------- --------------- ---------------
Net revenues 14,164 100.0% 14,031 100.0%
net --------------- --------------- --------------- ---------------
Costs and expenses:
Casino 3,350 33.9% 3,221 32.7%
Hotel 2,410 116.5% 2,453 108.4%
Food and beverage 1,902 68.7% 1,808 67.9%
Taxes and licenses 1,476 10.4% 1,469 10.5%
Selling, general and
administrative 2,745 19.4% 2,543 18.1%
Rents 1,125 7.9% 1,075 7.7%
Depreciation and
amortization - .0% 1,027 7.3%
Interest 321 2.3% 348 2.5%
Impairment loss - .0% - .0%
Merger and litigation costs,
net 798 5.6% 63 .4%
--------------- --------------- --------------- ---------------
Total costs and expenses 14,127 99.7% 14,007 99.8%
--------------- --------------- --------------- ---------------
Net income before income
taxes and undeclared 37 .3% 24 .2%
dividends on cumulative
convertible preferred stock
Income taxes - .0% 15 .1%
--------------- --------------- --------------- ---------------
Net income before undeclared
dividends on cumulative 37 .3% 9 .1%
convertible preferred stock
Undeclared dividends on
cumulative convertible
preferred stock 321 2.3% 303 2.2%
--------------- --------------- --------------- ---------------
Net loss applicable
to common shares (284) (2.0%) (294) (2.1%)
--------------- --------------- --------------- ---------------
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------------------------- -----------------------------------
Other Data:
Net income before undeclared
dividends on cumulative
convertible preferred stock
$37 .3% $9 .1%
Interest 321 2.3% 348 2.5%
Income taxes - .0% 15 .1%
Depreciation and amortization(1) - .0% 1,027 7.3%
--------------- --------------- --------------- ---------------
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) $358 2.5% $1,399 10.0%
=============== =============== =============== ===============
(1) As substantially all of the assets of the Four Queens were held for sale,
no depreciation was recorded on these assets for the six months ended June
30, 2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from
SummerGate. As such, assets held for sale as of June 30, 2002 will be
depreciated effective July 1, 2002.
EBITDA consists of earnings before interest, taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with accounting principles
generally accepted in the United States of America("GAAP"), it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure, and working
capital requirements. Although EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs, management believes that certain
investors find EBITDA to be a useful tool for measuring the ability of the
Company to service its debt. EBITDA margin is EBITDA as a percentage of net
revenues. The Company's definition of EBITDA may not be comparable to other
companies' definitions.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------------------------- -----------------------------------
Revenues, net:
Casino $19,673 70.4% $20,013 70.5%
Hotel 4,254 15.2% 4,824 17.0%
Food and beverage 5,716 20.4% 5,533 19.5%
Other 993 3.6% 779 2.7%
--------------- --------------- --------------- ---------------
Total revenue 30,636 109.6% 31,149 109.7%
Promotional allowances (2,678) (9.6%) (2,746) (9.7%)
--------------- --------------- --------------- ---------------
Net revenues 27,958 100.0% 28,403 100.0%
Costs and expenses:
Casino 6,564 33.4% 6,287 31.4%
Hotel 4,616 108.5% 4,830 100.1%
Food and beverage 3,820 66.8% 3,614 65.3%
Taxes and licenses 2,930 10.5% 2,976 10.5%
Selling, general and
administrative 5,006 17.9% 4,715 16.6%
Rents 2,214 7.9% 2,133 7.5%
Depreciation and
amortization - .0% 2,035 7.2%
Interest 621 2.2% 805 2.8%
Impairment loss 324 1.2% - .0%
Merger and litigation costs,
net 989 3.5% 158 .6%
--------------- --------------- --------------- ---------------
Total costs and expenses 27,084 96.9% 27,553 97.0%
--------------- --------------- --------------- ---------------
Net income before income tax
and undeclared dividends on
cumulative convertible 874 3.1% 850 3.0%
preferred stock
Income Tax - .0% 15 .1%
--------------- --------------- --------------- ---------------
Net income before income tax
and undeclared dividends on
cumulative convertible
preferred stock 874 3.1% 835 2.9%
Undeclared dividends on
cumulative convertible
preferred stock 643 2.3% 607 2.1%
--------------- --------------- --------------- ---------------
Net income applicable
to common shares 231 .8% 228 .8%
--------------- --------------- --------------- ---------------
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
----------------------------------- -----------------------------------
(Dollars in (Dollars in
thousands) % thousands) %
----------------------------------- -----------------------------------
Other Data:
Net income before undeclared
dividends on cumulative
convertible preferred stock $874 3.1% $850 3.0%
Interest 621 2.2% 805 2.8%
Income taxes - .0% 15 .1%
Depreciation and amortization(1) - .0% 2,035 7.2%
--------------- --------------- --------------- ---------------
Earnings before interest,
taxes, depreciation and
amortization (EBITDA) $1,495 5.3% $3,690 13.0%
--------------- --------------- --------------- ---------------
(1) As substantially all of the assets of the Four Queens were held for sale,
no depreciation was recorded on these assets for the six months ended June
30, 2002.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from
SummerGate. As such, assets held for sale as of June 30, 2002 will be
depreciated effective July 1, 2002.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED
TO THREE MONTHS ENDED JUNE 30, 2001
REVENUES
Net revenues increased by approximately $133,000, or .9%, from $14,031,000
during the 2001 period, to $14,164,000 for the 2002 period. This increase was
due, in part, to payments received during 2002 under a settlement agreement
between the Company, through its wholly owned subsidiary, Olympia Gaming
Corporation and the Jamestown S'Klallam Tribe and JKT Gaming, Inc., as discussed
below. However, the acts of terrorism that occurred in New York City and
Washington, D.C. on September 11, 2001, have resulted in a disruption in travel.
Management believes that these terrorist acts and travel disruptions have
resulted in decreased customer visitation to our property. We have experienced
declines, most noticeably in room and casino revenues, which has adversely
affected our operating results since September 11, 2001, also discussed below.
Although the Company cannot be certain of the impact that the events of
September 11 may continue to have, if any, on future operations, management
believes that the current results compared to the periods immediately following
September 11 are continuing to improve.
Casino revenues increased by approximately $32,000, or .3%, from $9,848,000
during the 2001 period to $9,880,000 during the 2002 period. This increase was
primarily due to a $242,000, or 12%, increase in table games revenue, offset by
a $112,000, or 1.5%, decrease in slot machine revenue, a $83,000, or 23.6%,
decrease in slot promotion revenue, and a $15,000, or 11%, decrease in keno
revenue. The increase in table games revenue was attributable to an increase in
drop of $1,799,000, or 13.9%, offset by a decrease in the win percentage of
0.26%. The decrease in slot machine revenue was attributable to a decrease in
hold percentage of 0.02% and a decrease in slot coin-in of $2,187,000, or 1.8%.
The decrease in slot promotion revenue was due to a decrease in the average
daily headcount of $21 WinsSM, a promotional slot program, of 45, or 23.3%, due
to a decline in foot traffic.
Hotel revenues decreased by approximately $194,000, or 8.6%, from
$2,262,000 during the 2001 period to $2,068,000 during the 2002 period. This
decrease was primarily due to a decrease in room occupancy, as a percentage of
total rooms available for sale, from 90.0% for the 2001 period, to 87.3% for the
2002 period and a decrease in the average daily room rate of $1.13, from $36.22
in the 2001 period to $35.09 in the 2002 period. The overall decline in
performance was primarily attributed to a reduction in individual reservations
call volume.
Food and beverage revenues increased approximately $107,000, or 4.0%, from
$2,663,000 during the 2001 period to $2,770,000 during the 2002 period. This
increase was primarily due to an increase in cash sales as a result of a higher
average check.
Other revenues increased by approximately $281,000, or 71.9%, from $391,000
during the 2001 period to $672,000 during the 2002 period. This increase was
primarily due to payments received during 2002 of approximately $338,000 under a
settlement agreement between the Company, through its wholly owned subsidiary,
Olympia Gaming Corporation and the Jamestown S'Klallam Tribe and JKT Gaming,
Inc. partially offset by a decrease in parking garage revenue of $24,200, or
17.8%, due to a decline in the number of cars parked, and a decrease in interest
income of $34,800, or 78.6%.
Promotional allowances increased by approximately $93,000, or 8.2%, from
$1,133,000 during the 2001 period to $1,226,000 during the 2002 period due to an
increase in complimentary rooms, food and beverage resulting from an increase in
casino complimentaries due, in part, to increased table games play.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $187,000, or 2.1%, from $8,951,000 for
the 2001 period to $9,138,000 for the 2002 period.
Casino expenses increased $129,000, or 4.0%, from $3,221,000 during the
2001 period to $3,350,000 during the 2002 period, and expenses as a percentage
of revenue increased from 32.7% to 33.9%. The increase was due, in part, by an
increase in labor costs associated with an increase in the number of table games
open for play as well as an increase in the reclassification of cost of
complimentary rooms, food, and beverage reflected as a casino expense.
Hotel expenses decreased $43,000, or 1.8%, from $2,453,000 during the 2001
period to $2,410,000 during the 2002 period; however, expenses as a percentage
of revenue increased from 108.4% to 116.5%. The decrease was due, in part, to an
increase in the reclassification of cost of complimentary rooms reflected as a
casino expense.
Food and beverage costs and expenses increased by approximately $94,000, or
5.2%, from $1,808,000 during the 2001 period to $1,902,000 during the 2002
period, and expenses as a percentage of revenues increased from 67.9% to 68.7%.
The increase was due, in part, to an increase in labor costs.
The Company recently concluded negotiations with the Culinary Workers Union
Local 226 and Bartenders Union Local 165 as well as the International Union of
Operating Engineers Local 501 (AFL-CIO). Pursuant to such negotiations, the
Company has commitments for various union payroll increases which are expected
to increase future payroll costs.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased $202,000, or 7.9%,
from $2,543,000 during the 2001 period to $2,745,000 during the 2002 period,
and, as a percentage of total net revenues, expenses increased from 18.1% to
19.4%. The increase was primarily due to expenses incurred relating to the
proposed sale of assets of Four Queens which, was not consummated.
Rent expense increased by approximately $50,000, or 4.7%, from $1,075,000
during the 2000 period to $1,125,000 during the 2001 period, due primarily to
corresponding annual Consumer Price Index increases for land lease agreements.
During 2002, the Company incurred approximately $798,000, net, in merger
and litigation costs. Approximately $1,312,000 was incurred as a result of
litigation and settlement costs related to the Agreement and Plan of Merger,
between Elsinore and Allen E. Paulson. See discussion in the Notes of the
Condensed Consolidated Financial Statements. A receivable due from the Company's
directors and officers' insurance carrier related to this matter partially
offset this expense by $514,000.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased by approximately $1,041,000, or 74.4%, from $1,399,000 during the 2001
period to $358,000 during the 2002 period. The decrease is primarily due to an
increase in selling, general, and administrative expenses related to the
proposed sale of assets of Four Queens, which was not consummated, and expenses
incurred in connection with the settlement of the Paulson Litigation as
discussed in the Notes to the Condensed Consolidated Financial Statements.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with GAAP, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements.
Although EBITDA is not necessarily a measure of the Company's ability to fund
its cash needs, management believes that certain investors find EBITDA to be a
useful tool for measuring the ability of the Company to service its debt. EBITDA
margin is EBITDA as a percentage of net revenues.
OTHER EXPENSES
Depreciation and amortization expense decreased by approximately
$1,027,000, or 100.0% from $1,027,000 during the 2001 period to $0 during the
2002 period. As a result of the Four Queens' assets being held for sale, no
depreciation was recorded during the 2002 period. If assets had not been held
for sale, depreciation would have been approximately $856,000. Due to the
termination of the sale of assets of the Four Queens depreciation will begin
again effective July 1, 2002.
Interest expense decreased by approximately $27,000, or 7.8% from $348,000
during the 2001 period to $321,000 for the 2002 period. The reduction in
interest expense was primarily due to a reduction in the principal balance of
the Company's 12.83% Mortgage Notes (the "Notes") as a result of a principal
payment by the Company in June 2001.
NET INCOME BEFORE PROVISION FOR INCOME TAXES AND UNDECLARED DIVIDENDS ON
CUMULATIVE CONVERTIBLE PREFERRED STOCK
As a result of the factors discussed above, the Company experienced net
income before provision for income taxes and undeclared dividends on cumulative
convertible preferred stock in the 2002 period of $37,000 compared to $24,000 in
the 2001 period, an increase of $13,000, or 54.2%.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED
TO SIX MONTHS ENDED JUNE 30, 2001
REVENUES
Net revenues decreased by approximately $445,000, or 1.6%, from $28,403,000
during the 2001 period, to $27,958,000 for the 2002 period. This decrease was
due, in part, to a decrease in casino and hotel revenues, partially offset by an
increase in other income. On September 11, 2001, acts of terrorism occurred in
New York City and Washington, D.C. As a result of such terrorist acts, there has
been a disruption in travel. Management believes that these terrorist acts and
travel disruptions have resulted in decreased customer visitation to our
property. We have experienced declines, most noticeably in room and casino
revenues, which has adversely affected our operating results since September 11,
2001, as discussed below. Although the Company cannot be certain of the impact
that the events of September 11 may continue to have, if any, on future
operations, management believes that the current results compared to the periods
immediately following September 11 are continuing to improve. The increase in
other income was primarily due to payments received during 2002 under a
settlement agreement between the Company, through its wholly owned subsidiary,
Olympia Gaming Corporation and the Jamestown S'Klallam Tribe and JKT Gaming,
Inc., also discussed below.
Casino revenues decreased by approximately $340,000, or 1.7%, from
$20,013,000 during the 2001 period to $19,673,000 during the 2002 period. This
decrease was primarily due to a $812,000, or 5.5%, decrease in slot machine
revenue and a $26,000, or 9.3%, decrease in keno revenue, partially offset by a
$490,000, or 11.3%, increase in table games revenue and a $8,000, or 1.5%,
increase in slot promotion revenue. The decrease in slot machine revenue was
attributable to a decrease in hold percentage of 0.01% and a decrease in slot
coin-in of $13,275,000 or 5.3%. The increase in table games revenue was
attributable to an increase in the win percentage of 0.37% and an increase in
drop of $2,446,000, or 8.7%. The increase in slot promotion revenue was due to
six complete months of $21 WinsSM revenue in the 2002 period. $21 WinsSM is a
promotional slot program which began in February 2001.
Hotel revenues decreased by approximately $570,000, or 11.8%, from
$4,824,000 during the 2001 period to $4,254,000 during the 2002 period. This
decrease was primarily due to a decrease in room occupancy, as a percentage of
total rooms available for sale, from 91.4% for the 2001 period, to 88.7% for the
2002 period and a decrease in the average daily room rate of $2.68, from $38.37
in the 2001 period to $35.69 in the 2002 period. The overall decline in
performance was primarily attributed to a reduction in individual reservations
call volume.
Food and beverage revenues increased approximately $183,000, or 3.3%, from
$5,533,000 during the 2001 period to $5,716,000 during the 2002 period. This
increase was primarily due to an increase in cash sales as a result of a higher
average check.
Other revenues increased by approximately $214,000, or 27.5%, from $779,000
during the 2001 period to $993,000 during the 2002 period. This increase was
primarily due to payments received during 2002 of approximately $338,000 under a
settlement agreement between the Company, through its wholly owned subsidiary,
Olympia Gaming Corporation and the Jamestown S'Klallam Tribe and JKT Gaming,
Inc. partially offset by a decrease in parking garage revenue of $52,000, or
19.3%, due to a decline in the number of cars parked, and a decrease in interest
income of $73,000, or 82.9%.
Promotional allowances decreased by approximately $68,000, or 2.5%, from
$2,746,000 during the 2001 period to $2,678,000 during the 2002 period due to a
decrease in complimentary rooms, food and beverage resulting from a decrease in
casino complimentaries due, in part, to decreased slot machine play.
DIRECT COSTS AND EXPENSES OF OPERATING DEPARTMENTS
Total direct costs and expenses of operating departments, including taxes
and licenses, increased by approximately $223,000, or 1.3%, from $17,707,000 for
the 2001 period to $17,930,000 for the 2002 period.
Casino expenses increased $277,000, or 4.46%, from $6,287,000 during the
2001 period to $6,564,000 during the 2002 period, and expenses as a percentage
of revenue increased from 31.4% to 33.4%. The increase was due, in part, by an
increase in labor costs associated with an increase in the number of table games
open for play as well as an increase in the reclassification of cost of
complimentary rooms, food, and beverage reflected as a casino expense.
Hotel expenses decreased $214,000, or 4.4%, from $4,830,000 during the 2001
period to $4,616,000 during the 2002 period; however, expenses as a percentage
of revenue increased from 100.1% to 108.5%. The decrease was due, in part, to an
increase in the reclassification of cost of complimentary rooms reflected as a
casino expense.
Food and beverage costs and expenses increased by approximately $206,000,
or 5.7%, from $3,614,000 during the 2001 period to $3,820,000 during the 2002
period, and expenses as a percentage of revenues increased from 65.3% to 66.8%.
The increase was due, in part, to an increase in labor costs.
Taxes and licenses decreased $46,000, or 1.6%, from $2,976,000 in the 2001
period to $2,930,000 in the 2002 period as a result of corresponding decreases
in casino revenues.
The Company recently concluded negotiations with the Culinary Workers Union
Local 226 and Bartenders Union Local 165 as well as the International Union of
Operating Engineers Local 501 (AFL-CIO). Pursuant to such negotiations, the
Company has commitments for various union payroll increases which are expected
to increase future payroll costs.
OTHER OPERATING EXPENSES
Selling, general and administrative expenses increased $291,000, or 6.2%,
from $4,715,000 during the 2001 period to $5,006,000 during the 2002 period,
and, as a percentage of total net revenues, expenses increased from 16.6% to
17.9%. The increase was primarily due to expenses incurred relating to the sale
of assets of Four Queens.
Rent expense increased by approximately $81,000, or 3.8%, from $2,133,000
during the 2001 period to $2,214,000 during the 2002 period, due primarily to
corresponding annual Consumer Price Index increases for land lease agreements.
In connection with the Purchase Agreement (defined below), the Company
recognized a non-cash impairment loss of approximately $13.2 million during
2001. An impairment loss was necessary as net proceeds resulting from the sale
of the Four Queens will be less than the carrying value of the assets to be sold
as of December 31, 2001. Approximately $12.9 million of the impairment loss was
related to buildings and equipment and the remainder was related to the
impairment of reorganization value in excess of amounts allocable to
identifiable assets. The Company recorded an adjustment to the impairment loss
by approximately $324,000, in the first quarter of 2002, due to the amendment of
the Purchase Agreement and an increase in the carrying value of assets being
purchased at March 31, 2002. See discussion in the Notes of the Condensed
Consolidated Financial Statements.
During 2002, the Company incurred approximately $989,000, net, in merger
and litigation costs. Approximately $2,054,000 was incurred as a result of
litigation and settlement costs related to the Agreement and Plan of Merger,
between Elsinore and Allen E. Paulson. See discussion in the Notes of the
Condensed Consolidated Financial Statements. A receivable due from the Company's
directors and officers' insurance carrier related to this matter partially
offset this expense by $1,065,000.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased by approximately $2,195,000, or 59.5%, from $3,690,000 during the 2001
period to $1,495,000 during the 2002 period. The decrease is primarily due to an
increase in selling, general, and administrative expenses related to the
proposed sale of assets of Four Queens, which was not consummated, and expenses
incurred in connection with the settlement of the Paulson Litigation as
discussed in the Notes to the Condensed Consolidated Financial Statements.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating activities,
which are determined in accordance with GAAP, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements.
Although EBITDA is not necessarily a measure of the Company's ability to fund
its cash needs, management believes that certain investors find EBITDA to be a
useful tool for measuring the ability of the Company to service its debt. EBITDA
margin is EBITDA as a percentage of net revenues.
OTHER EXPENSES
Depreciation and amortization expense decreased by approximately
$2,035,000, or 100.0% from $2,035,000 during the 2001 period to $0 during the
2002 period. As a result of the Four Queens' assets being held for sale, no
depreciation was recorded during the 2002 period. If assets had not been held
for sale, depreciation would have been approximately $1,693,000. Due to the
termination of the sale of assets of the Four Queens depreciation will begin
again effective July 1, 2002.
Interest expense decreased by approximately $184,000, or 22.9% from
$805,000 during the 2001 period to $621,000 for the 2002 period. The reduction
in interest expense was primarily due to a reduction in the principal balance of
the Company's 12.83% Mortgage Notes (the "Notes") as a result of a principal
payment by the Company in June 2001.
NET INCOME BEFORE PROVISION FOR INCOME TAXES AND UNDECLARED DIVIDENDS ON
CUMULATIVE CONVERTIBLE PREFERRED STOCK
As a result of the factors discussed above, the Company experienced net
income before provision for income taxes and undeclared dividends on cumulative
convertible preferred stock in the 2002 period of $874,000 compared to $850,000
in the 2001 period, an increase of $24,000, or 2.8%.
LIQUIDITY AND CAPITAL RESOURCES
On March 14, 2002, the Company entered into a purchase agreement (the
"Purchase Agreement") for the sale of substantially all of Four Queens Casino's
assets, including the hotel and casino, to SummerGate, Inc., a Nevada
corporation, for a purchase price, subject to certain adjustments, of
approximately $22 million, plus the value of cash on hand and the assumption of
certain liabilities. On April 5, 2002, the Four Queens amended the Purchase
Agreement to, among other things, extend the termination date to June 30, 2002,
and reduce the $22 million purchase price to approximately $21.15 million (plus
the value of cash on hand and the assumption of certain liabilities) if the sale
of assets was consummated after May 7, 2002.
In connection with the Purchase Agreement, the Company recognized a
non-cash impairment loss of approximately $13.2 million during 2001. An
impairment loss was necessary as net proceeds resulting from the sale of the
Four Queens will be less than the carrying value of the assets to be sold as of
December 31, 2001. Approximately $12.9 million of the impairment loss was
related to buildings and equipment and the remainder was related to the
impairment of reorganization value in excess of amounts allocable to
identifiable assets. The Company has recorded an adjustment to the impairment
loss of approximately $324,000, in the first quarter of 2002, due to an
amendment of the Purchase Agreement and an increase in the carrying value of
assets being purchased at March 31, 2002. See discussion in Notes of the
Condensed Consolidated Financial Statements.
On June 27, 2002, the Four Queens exercised its right to terminate the
Agreement and sent written notice to SummerGate of such termination.
Subsequently, Four Queens received a written termination notice from SummerGate.
The Company had cash and cash equivalents of approximately $5.1 million at
June 30, 2002, as compared to approximately $4.6 million at December 31, 2001.
During the first half of 2002, the Company's net cash provided by operating
activities was $1.8 million compared to $2.3 million in the first half of 2001.
As a result of the acts of terrorism which occurred in New York City and
Washington, D.C. on September 11, 2001, there have been disruptions in travel,
which have resulted in decreased customer visitation to our property. We have
experienced declines, most noticeably in room and casino revenues, which have
materially adversely affected our operating results since September 11, 2001.
The Company cannot be certain of the impact that the events of September 11 may
continue to have, if any, on future operations. Earnings before interest, taxes,
depreciation and amortization ("EBITDA"), for the six months ended 2002 and 2001
was $1.5 million and $3.7 million, respectively. While EBITDA should not be
construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), it is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. Although EBITDA is not necessarily
a measure of the Company's ability to fund its cash needs, management believes
that certain investors find EBITDA to be a useful tool for measuring the ability
of the Company to service its debt. EBITDA margin is EBITDA as a percentage of
net revenues. The Company's definition of EBITDA may not be comparable to other
companies' definitions.
The following table summarizes our obligations and commitments as of June
30, 2002:
Payments Due by Year
(Amounts in Thousands)
----------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
Long-term debt $226 $7,414 $51 $- $- $- $7,691
Capital leases 100 95 3 3 3 1,460 1,664
Operating leases
2,085 4,080 4,019 4,019 4,019 103,278 121,500
Total $2,411 $11,589 $4,073 $4,022 $4,022 $104,738 $130,855
Significant debt service on the Company's Notes is paid in August and
February, during each fiscal year, which significantly affects the Company's
cash and cash equivalents in the second and fourth quarters and should be
considered in evaluating cash increases or decreases in the second and fourth
quarters.
In connection with the Purchase Agreement, Elsinore notified the trustee
under the Company's 12.83% Second Mortgage Notes due 2003 (the "Notes"), that
the Company was going to redeem the Notes on April 30, 2002, pursuant to the
originally scheduled closing date for the asset sale transaction. Both the
failure to redeem the Notes on April 30, 2002 in accordance with the Company's
notice to the trustee, as well as the execution of the Purchase Agreement to
sell the Four Queens assets, were defaults under the Notes. The Company obtained
a waiver of such defaults. Subsequently, in connection with an amendment to the
Purchase Agreement and extension of the closing date for the asset sale, the
Company notified the trustee that it intended to redeem the Notes on June 30,
2002. The failure to redeem the Notes on this date was also a default under the
Notes. The Company is currently in the process of obtaining a waiver of this
default. Since the Purchase Agreement was terminated on June 27, 2002, the
Company does not have any current plans to redeem the Notes.
The Notes are due in full on October 20, 2003. The Notes are redeemable by
the Company at any time at 100% of par, without premium. The Company is required
to make an offer to purchase all Notes at 101% of face value upon any "Change of
Control" as defined in the indenture governing the Notes. The sale of the assets
of Four Queens does not constitute a change in control, as defined in the
indenture and does not require an offer to purchase the Notes at 101% of face.
The indenture also provides for mandatory redemption of the Notes by the Company
upon order of the Nevada Gaming Authorities. The Notes are guaranteed by Elsub
Management Corporation, Four Queens and Palm Springs East Limited Partnership
and are collateralized by a second deed of trust on, and a pledge of,
substantially all the assets of the Company and the guarantors.
Scheduled interest payments on the Notes and other indebtedness is
approximately $1 million in 2002 and 2003. Management believes that sufficient
cash flow will be available to cover the Company's debt service for the next
twelve months and enable investment in budgeted capital expenditures of
approximately $1.8 million for 2002, of which $500,000 is expected to be
financed. The Company's ability to service its debt is dependent upon future
performance, which will be affected by, among other things, prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the Company's control.
Cash flow from operations is not expected to be sufficient to pay the
remaining $7.1 million of principal of the Notes at maturity on October 20,
2003, and the ability of the Company to repay the Notes at maturity would be
dependent upon its ability to refinance the Notes. There can be no assurance
that the Company will be able to refinance the principal amount of the Notes on
favorable terms or at all.
A note agreement executed in connection with the issuance of the Notes,
among other things, places significant restrictions on the incurrence of
additional indebtedness by the Company, the creation of additional liens on the
collateral securing the Notes, transactions with affiliates and payment of
certain restricted payments. In order for the Company to incur additional
indebtedness or make a restricted payment, the Company must, among other things,
meet a specified consolidated fixed charges coverage ratio and have earned an
EBITDA in excess of $0. The ratio is defined as the ratio (the "Ratio") of
aggregate consolidated EBITDA to the aggregate consolidated fixed charges for
the twelve-month reference period. As of the reference period ended June 30,
2002 the Ratio was 3.78 to 1.00 and the Company was in compliance. Pursuant to
covenants applicable to the Company's Notes and Third Supplemental Indenture,
the Company is required to maintain a minimum consolidated fixed charges
coverage ratio of 1.25 to 1.00. At June 30, 2002, the Company was in compliance
with the Ratio requirements. The Company must also maintain a minimum
consolidated net worth of not less than an amount equal to its consolidated net
worth on the Effective Date of the Plan, less $5 million. At June 30, 2002, the
Company was in compliance with the minimum net worth requirements; however, the
Company was not in compliance with a covenant pertaining to limitations on
restricted payments. Specifically, we paid approximately $865,000 in connection
with our ownership interest of the Fremont Street Experience, while the note
agreement limited such payments to $600,000. A waiver has been obtained by the
Company from the lender through December 31, 2002.
Management considers it important to the competitive position of the Four
Queens Casino that expenditures be made to upgrade the property. Uses of cash
included capital expenditures of $835,000 and $419,000 during the six months
ended June 30, 2002 and 2001, respectively. As a result of the acts of domestic
terrorism committed in Washington D.C. and New York City on September 11,
management has budgeted mandatory and maintenance capital expenditures to be
$1.8 million for the year 2002. The Company expects to finance such capital
expenditures from cash on hand, cash flow, and lease financing. Based upon
current operating results and cash on hand, the Company estimates it has
sufficient operating capital to fund its operations and capital expenditures for
the next twelve months. The Company's ability to make such expenditures is
dependent upon future performance, which will be affected by, among other
things, prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A fundamental conclusion
reached by the FASB in this statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company believes that
SFAS No. 146 will not have a material impact on its financial position and
results of operations.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Our
accounting policies related to the allowance for casino receivables, long-lived
assets impairments and self-insurance reserves require that we use significant
judgment in the determination of estimates related to these items. We consider
historical, as well as current and projected social, economic and regulatory
information in the determination of these estimates, and there can be no
assurance that actual results will not differ from our estimates. Additionally,
see a summary of our signficant accounting policies in Note 1 to the Condensed
Consolidated Financial Statements for the quarter ended June 30, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary financial instruments include cash and long-term
debt. At June 30, 2002, the carrying values of the Company's financial
instruments approximated their fair values based on current market prices and
rates. It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies.
Therefore, the Company does not have significant overall market risk exposure at
June 30, 2002.
Elsinore Corporation and Subsidiaries
Other Information
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
In the first half of 1997, Elsinore commenced discussions with Mr. Allen E.
Paulson ("Paulson") which culminated in an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of September 15, 1997, between Elsinore and
entities controlled by Paulson, namely R&E Gaming Corp. ("R&E") and Elsinore
Acquisition Sub, Inc. ("EAS"), to acquire by merger (the "Merger") Elsinore's
outstanding common stock ("Common Stock"). The Merger Agreement provided for a
merger with EAS where Elsinore would become a wholly-owned subsidiary of R&E.
On March 20, 1998, Elsinore was notified by R&E, through Paulson, that it
was R&E's position that the Merger Agreement was void and unenforceable against
R&E and EAS, or alternatively, R&E and EAS intended to terminate the Merger
Agreement. R&E alleged, among other things, violations by Elsinore of the Merger
Agreement, violations of law and misrepresentations by certain investment
accounts (the "MWV Accounts") managed by Morgens, Waterfall, Vintiadis and
Company, Inc. ("MWV") in connection with an Option and Voting Agreement executed
by MWV in connection with the Merger and the non-satisfaction of certain
conditions precedent to completing the Merger. Elsinore denied the allegations
and asked that R&E complete the Merger. Thereafter, in April 1998, Paulson, R&E,
EAS and certain other entities filed a lawsuit against 11 defendants, including
Elsinore and MWV (Paulson, et al. v Jeffries & Company, et al.). The lawsuit was
filed in the United States District Court for the Central District of
California.
Pursuant to a settlement agreement dated as of April 3, 2002, this lawsuit
has now been resolved. A Settlement Bar Order and Final Judgment was entered by
the Court on July 1, 2002. Pursuant to the settlement agreement, Elsinore agreed
to pay the sum of $1,100,000, which was paid on June 1, 2002. Total litigation
and settlement costs (including the settlement payment) incurred during the
quarter ended June 30, 2002, were approximately $1,312,000. A receivable due
from the Company's directors and officers' insurance carrier related to this
matter partially offset this expense by $514,000.
Item 6. (a) Exhibits and Reports
10.70 Settlement Agreement and Mutual Release entered into as of
April 3, 2002 by and between John Michael Paulson, as
executor of the Will of Allen E. Paulson; John Michael
Paulson and Nicholas Diaco, M.D., as the trustees of the
Allen E. Paulson Living Trust dated December 23, 1986, as
amended; R&E Gaming Corp.; Elsinore Acquisition Sub, Inc.;
Riviera Acquisition Sub, Inc.; and Carlo Corporation, on the
one hand, and Elsinore Corporation and Morgens, Waterfall,
Vintiadis & Company, Inc., on the other.
10.71 Settlement Agreement and Mutual Release, dated May 23,
2002, by and between Olympia Gaming Corporation, a
wholly-owned subsidiary of Elsinore Corporation, The
Jamestown S'Klallam Tribe, and JKT Gaming, Inc.
10.72 Waiver of Defaults
(b) Form 8-K filed during this quarter
(1) Current report on Form 8-K was filed on April 9, 2002,
relating to an amendment of the sale of the Four Queens
Casino.
(2) Current report on Form 8-K was filed on May 28, 2002,
relating to a settlement agreement by and between Elsinore
Corporation through its wholly owned subsidiary, Olympia
Gaming Corporation, the Jamestown S'Klallam Tribe and
JKT Gaming, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto authorized.
ELSINORE CORPORATION
(Registrant)
By: /s/ Philip W. Madow
PHILIP W. MADOW, President
By: /s/ Gina L. Contner Mastromarino
GINA L. CONTNER MASTROMARINO,
Principal Financial and Accounting Officer
Dated: August 14, 2002