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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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(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
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(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
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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.
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Total number of sequentially numbered pages
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Exhibit Index begins at sequential page number
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PART I
ITEM 1. BUSINESS
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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
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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.
YEAR ENDED DECEMBER 31,
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1994 1993 1992
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(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
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69,935 75,089 72,256
Less Promotional Allowances (7,511) (8,237) (8,258)
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$62,706 $66,852 $63,998
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(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.
Casino:
Floor area (square foot) 32,296
Slot machines 1,067
Blackjack tables 25
Craps tables 5
Caribbean Stud Poker tables 3
5
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.
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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)*
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
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:
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
15
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.
16
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
18
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:
19
LAUGHLIN MARKET DATA*
GAMING REVENUE
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."
20
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
m