Elsinore Corporation

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Elsinore Corporation

202 Fremont Street
Las Vegas, Nevada 89101
U.S.A.
Telephone: (702) 385-4011
Fax: (702) 387-5125
Web site: http://www.fourqueens.com

Public Company
Incorporated: 1972
Employees: 889
Sales: $59.2 million (2001)
Stock Exchanges: Over-the-Counter Bulletin Board
Ticker Symbol: ELSO
NAIC: 721120 Casino Hotels

The Elsinore Corporation owns and operates the Four Queens Hotel and Casino in downtown Las Vegas. The Four Queens hotel provides accommodations in 690 rooms, including 45 suites, and houses 14,600 feet of meeting and convention space. The 30,000 square foot casino offers gaming with nearly 1100 slot machines, a keno lounge, a sport book, and over 25 gaming tables. The Four Queens also distributes a table game, Multiple Action blackjack, in Nevada and New Jersey. The Four Queens is part of the Freemont Street Experience, a covered pedestrian mall where special events and a nightly laser light show draw visitors downtown. The original owner of the Four Queens named the property for his four daughters. In 2002 Elsinore announced plans to sell the Four Queens, its main asset, to a Nevada-based gaming company called SummerGate Inc. Though this deal fell through in July 2002, the company’s future plans remained unclear.

1970s Origins

The Elsinore Corporation originated as a wholly owned subsidiary of the Hyatt Corporation; formed in 1972, Elsinore oversaw casino hotel operations in Nevada. The Four Queens Hotel and Casino in downtown Las Vegas, in operation since 1966, offered 316 hotel rooms and 20,000 square feet of gaming space with slot machines and table games with low to mid-level betting. The Hyatt Lake Tahoe, secluded on a private beach on the north shore of Lake Tahoe, offered 433 hotel rooms in an upscale setting, an 18,000 square foot gaming area, and convention and meeting facilities.

During the 1970s business and revenues grew at the Elsinore properties, particularly at the Four Queens, as a rise in available hotel accommodations in downtown Las Vegas drew more people to downtown casinos. In 1978 alone casino income increased 23 percent due to new business activity and a 6,000 square foot expansion of the Four Queens gaming area. Revenues at both hotels increased with higher occupancy rates and higher average room rates. Elsinore recorded casino revenues of $33.7 million in 1979, compared to $18 million in 1976, and hotel revenues climbed to $17.6 million compared to $9.5 million in 1976. The company reported net income of $5.5 million in 1979, compared to $682,000 in 1976.

Elsinore became an independent company in 1979 when the Pritzker family of Chicago took Hyatt private. Hyatt shareholders received 1.12 shares of Elsinore stock and $13.00 cash for each share of Hyatt common stock. Hyatt retained 27.5 percent interest in Elsinore and continued to manage the Lake Tahoe facility. In June, a public offering of stock raised $17.6 million, which Elsinore invested in a joint venture with Playboy Enterprises Inc. (PEI) to construct a hotel and casino in Atlantic City. A January offering of subordinated debentures raised $22.5 million. Elsinore applied those funds to refurbishment and expansion of the hotel at the Four Queens. The project involved the construction of an 18-story tower holding 400 guest rooms, twofold expansion of the three restaurants, and expansion of casino space to 33,000 square feet.

In 1980, Playboy/Elsinore Associates began construction on a $159 million hotel and casino in Atlantic City. The Playboy Hotel and Casino offered 500 hotel rooms and suites, 52,000 square feet of gaming space, 25,000 square feet of convention and meeting facilities, and a 1,000-seat entertainment lounge, the Playboy Cabaret. Elsinore and Playboy sought to attract the international, high roller market with a design modeled on European casinos and Playboy casinos in England. Spread over three floors in small rooms the Playboy provided an intimate setting for gaming, including European favorites such as European Single O Roulette, American Double O Roulette, and Chemin de Fer, a game similar to baccarat. The Playboy Hotel and Casino in Atlantic City opened on April 14, 1981.

The 1980s: Problems at Playboy Hotel and Casino Lead to Bankruptcy

While business at the Four Queens and Hyatt Lake Tahoe provided some financial stability for the company, the new hotel and casino venture in Atlantic City proved troublesome from the beginning. Within a few months of operation it became clear that the market for luxury, high stakes gaming was limited in Atlantic City. The high roller business proved to be barely profitable, with participants given free hotel accommodations, meals, and other incentives. Most local gaming business was being generated from bus groups and low stakes players. Also, while the 22-story tower was easily spotted from a distance, its narrow entrance in a bland section of town made the facility difficult to locate from the street. By August, Playboy and Elsinore began to direct its promotional efforts to the mass market.

In it’s first full year in operation, in 1982, the Playboy Hotel and Casino lost $10.8 million. That year Robert Maxey, formerly president of Golden, Nugget, Inc., became president and CEO of Elsinore. Upon his first visit to the Playboy Hotel and Casino, Maxey immediately noticed basic problems with the casino, particularly that it was not located on the first floor for easy street access, and that the casino was not all on one, spacious floor. Maxey decided to change the company’s marketing strategy to use the three-story casino to its best advantage. Maxey planned to redesign each floor of the casino to appeal to different income levels. The first level casino appealed to low stakes gamblers with an emphasis on slot machines, an expanded coffee shop, and easy access to the bus unloading and loading site. The second story offered more table games and a bar and restaurant for mid-level players. The third casino level was to be remodeled in luxury for high stakes gaming.

Meanwhile, in April 1982, after some questionable dealings by Hugh Hefner’s other enterprises came to light, the New Jersey Casino Control Commission demanded that PEI sell its 45.7 percent interest in Playboy/Elsinore Associates. Though a buyout from Elsinore should have been based on the actual value of the property, a money-losing operation, the Commission allowed PEI to sell its stock for the amount of its initial investment of $51 million.

Elsinore completed its acquisition of PEI’s interests in joint venture subsidiaries that operated the Playboy in Atlantic City in April 1984. Elsinore Shore Associates (ESA), formerly Playboy/Elsinore Associates, paid PEI $7.6 million in cash with the balance due according to the terms of a promissory note. Also, ESA owed PEI $5.6 million in management fees, due by April 1990. ESA owned 91.5 percent of the hotel-casino, with 8.5 percent owned by unaffiliated third parties.

Elsinore renamed the Atlantic City property Atlantis Casino Hotel, after the mythological civilization. The Riverboat Casino on the first level was completed in March 1984 and refurbishment of the second level, in an Asian, Shangri-la motif, began in December. In June the company launched an advertising campaign, using the monolithic appearance of the glass tower in a spoof on the movie 2001: A Space Odyssey. With music from the title soundtrack and the tagline, “Civilization Comes to Atlantic City,” the television commercials showed the hotel appear from under the ocean. Advertising media included newspapers, magazines, radio, and billboards.

With the consolidation of Atlantis revenues for the last three quarters of 1984, Elsinore recorded revenues of $77.5 million. Though The Playboy Hotel and Casino managed to earn a net profit of approximately $500,000 in 1983, by 1984 the facility operated at a loss of approximately $9 million, with revenues declining 19.4 percent, by $30 million, primarily in casino gaming. Lack of name recognition hurt the company’s business while free food and alcohol and other expenses exceeded intake from a clientele of primarily low stakes gamblers. The Atlantis won $3,291 per square foot of gaming space compared to an overall average in Atlantic City of $4,594. Elsinore’s Lake Tahoe property operated profitably with increased hotel and casino revenues; however, a strike by the Culinary Workers Union and Bartenders Union at the Four Queens (and several other Las Vegas hotels) resulted in a net loss of $233,000 at that property.

Key Dates:

1979:: Elsinore becomes an independent company when its parent, the Hyatt Corporation, becomes a private company.
1981:: The Playboy Hotel and Casino opens in Atlantic City.
1984:: After New Jersey Casino Commission forces Playboy Enterprises to sell its interest to Elsinore, Atlantic City property is renamed Atlantis Casino Hotel.
1985:: While the Four Queens prospers, losses and debt at Atlantic City property leads to bankruptcy.
1988:: To pay debt, Elsinore sells its Hyatt Lake Tahoe property and agrees to sell Atlantis.
1994:: Joint ventures begin construction on two Native American casinos.
1995:: Elsinore files Chapter 11 bankruptcy.
1997:: Riviera Management begins to operate the Four Queens and changes its gaming format.
2000:: Payment from former casino partner gives company a temporary reprieve from losses.
2002:: Potential sale of Four Queens leaves Elsinore’s future questionable.

In 1984 the company recorded a net profit of $5.6 million due to the extinguishment of debt, but the refinancing of this debt pushed Elsinore into bankruptcy within the next year. Elsinore Finance Corporation (EFC) issued $115 million of senior mortgage bonds at 15.5 percent interest due November 1, 1999. Elsinore used the funds to refinance a $69.2 million first mortgage held by ESA, to pay other debt, and to pay PEI. Elsinore secured the new debt with a $25 million lien on the Hyatt Lake Tahoe and a $90 million mortgage on the Atlantis. The bonds increased the company’s interest expense, however, as interest rates declined shortly afterward. Also, according to David Johnston in Temples of Chance, the Pritzker family’s influence on the Elsinore board of directors led the Hyatt Lake Tahoe to loan $20 million to the Hyatt Corporation at 8.5 percent interest, though Elsinore paid 15.5 percent interest on the same money.

Elsinore’s financial troubles became evident early in 1985. After making only one payment to PEI, Elsub, the financing subsidiary of the Atlantis, was unable to make a $400,000 payment in April. In November, Elsub missed a $7 million payment on interest due on the senior mortgage bonds and the Lake Tahoe property missed a $2 million payment. This situation led PEI to file an involuntary petition for reorganization under Chapter 11 Bankruptcy Code as well as a civil lawsuit. Elsinore subsidiaries followed with their own bankruptcy filings, prompting Maxey to resign; Jeanne Hood, president of the Four Queens since 1977, became president of Elsinore.

Under the plan of reorganization Elsinore planned to sell the Hyatt Tahoe to pay $20 million in accrued interest through June 30, 1986, while the balance due bondholders was to be paid in company stock. The company also planned to sell the Atlantis. Elsinore subsidiaries wrote down the value of assets at $37.9 million in 1985 and $42.4 million in 1986, resulting in net losses of $24.2 million in 1985 and $39.6 million at Elsinore in 1986. Despite the company’s financial instability, the New Jersey Casino Control Commission renewed the Atlantis gaming license annually, allowing operations to continue.

An uneasy stability stemmed from a brisk business at the Four Queens. As poor management decisions by Hood drove high stakes gamblers from the Atlantis to competing casinos, Atlantis revenues declined 9.2 percent in 1985, to $181 million, primarily from a $10 million decline in casino revenues. Meanwhile, the culmination of marketing programs at the Four Queens resulted in increased hotel occupancy from 83 percent in 1985 to 94 percent in 1986. Overall revenues increased 13.2 percent in 1985 to $87.8 million, and 9.3 percent in 1986 to $95 million due to growth in its Las Vegas operation. Interest on income tax assessments led to a pretax loss of $2.4 million at the Four Queens in 1986, however.

Litigation between Atlantis and its creditors delayed final court approval of the Plan of Reorganization until 1988, costing the company $15 million in legal fees. Under the plan, Elsinore sold the Hyatt Lake Tahoe to the Hyatt Corporation for $45.3 million, $28.8 million in cash plus the assumption of debt. In June 1989, Elsinore finalized the sale of the Atlantis and its subsidiaries to Donald Trump. That year the company recorded $67.5 million in revenues and a loss of $11.6 million.

Early 1990s

By 1990, the company had achieved a somewhat stable financial position on the strength of its Four Queens property. That first full year of operating a single hotel and casino, Elsinore recorded $68.3 million in revenues and net income of $2.2 million, despite competition from large, new casino hotels on the Las Vegas Strip. The recession of 1991 and 1992 negatively affected business, but the property did well compared to other downtown properties, attaining higher income and lower expenses. Also, the Four Queens created and patented a new game, Multiple Action Blackjack, which found immediate popularity at Four Queens, and the company licensed the game to casinos in New Jersey. Business rebounded in 1993, garnering $67 million in revenues; however, a $2 million income tax interest and assessment from 1980 to 1983 eroded $4 million in operating revenues for a net loss of $2.5 million.

With Thomas E. Martin as president of Elsinore, the company initiated several programs to enhance operations at the Four Queens. These involved cost reduction, improved employee relations, including a stock options program, and enhanced customer service. The Four Queens emphasized the smaller, welcoming ambiance of the property, as an advantage over new mega-resorts along the Las Vegas Strip, obtaining a high level of customer loyalty through repeat business. The Reel Winners program for frequent customers counted 38,000 members at this time. The company reorganized the layout of the casino to make better use of the space and to accommodate a new mix of games, such as the addition of Let-it-Ride and Caribbean Stud Poker table games, as well as electronic slot machines. Promotional programs focused on niche markets in the southwestern United States, especially southern California. Special package programs successfully attracted Hawaiians to the Four Queens, leading the company to open a Hawaiian style cafe in April 1994. In June, the Four Queens opened a moderately priced Italian restaurant. Hugo’s Cellar, the casino hotel’s fine dining restaurant, was named one of the best restaurants in Las Vegas in 1993.

Elsinore prepared for the redevelopment of downtown Las Vegas, in the vicinity of the Four Queens, contributing $3 million to the project. Meeting facilities were expanded to 15,000 square feet, double its existing capacity in 1993 and, in January 1994, the Four Queens began an 18-month refurbishment of its 704 hotel rooms in preparation for the grand unveiling of the Freemont Street Experience. Redevelopment of downtown Las Vegas at Freemont Street and Las Vegas Boulevard involved a covered pedestrian mall closed to motor vehicles, an area which included the entrance to the Four Queens. The company planned to renovate the exterior of the property at street-level and to open a new entryway on Freemont Street. The canopy covering the pedestrian mall was designed with special, reflective materials to maximize the effects of laser light shows choreographed to music.

In early 1994, Elsinore announced new joint ventures with Native American tribes. One proposal involved a Class II gaming facility on the land of the Twenty-nine Palms Band of Mission Indians near Palm Springs. Another project planned for a Las Vegas-style casino at Jamestown on S’Klallam tribal land on the Olympic peninsula northwest of Seattle. Both of these projects received regulatory approval from the National Indian Gaming Commission in August. The company funded its projects with a new financing and a public offering of stock. In autumn 1993, the company obtained $60 million in first mortgage notes to pay debt, refurbish the Four Queens, and to fund development of new casinos. An additional $3 million in short term mortgage notes provided funds to supplement working capital. In January 1995, Elsinore raised $4 million through a public offering of stock.

The Spotlight 29 Casino and the 7 Cedars Casino opened in January and February 1995, respectively. Spotlight 29, a $10 million project, involved a 74,000 square foot facility in a circular design. Gaming included off-track betting, bingo, pull tabs, poker, Asian card games, and other card games. The 7 Cedars offered blackjack, craps, roulette, poker, keno, bingo, pull-tabs, and other games in a 54,000 square foot gaming space. Initially, business at 7 Cedars exceeded expectations, returning a small profit when losses were expected during the slow, winter season. From the start Spotlight 29 lost money due to competition from Class III gaming at other tribal casino operations in California. To maintain cash flow at that casino Elsinore obtained $1.4 million in convertible subordinated notes in March.

1995 Bankruptcy Woes

Disappointing results at the two Native American casinos and other problems inclined Elsinore to another bankruptcy in 1995. In March, the Twenty-nine Palms Band installed Class III, electronic slot machines at Spotlight 29 without a compact with the state of California. As the company believed this act to be in violation of Nevada gaming regulations and its management contract, Elsinore filed appropriate lawsuits to dissolve its partnership in the casino. Also, construction of the Freemont Street Experience, which opened in November, had a negative impact on casino revenues at the Four Queens. Elsinore filed for bankruptcy protection in October 1995, as it could not make its interest payment on the first mortgage notes. As a result Elsinore recorded a net loss of $45.8 million on $57 million in revenues in 1995.

The court approved a Plan of Reorganization in March 1996, at which time Elsinore issued common stock in return for a reduction of the claim on the first mortgage notes from $60 million to $30 million. The investment firm Morgens, Waterfall, Vintiadis & Company (MWV) obtained 99 percent ownership of the company, naming Bruce Waterfall as chairman and Jeffery T. Leeds as president and CEO. In August, Riviera Holding Corporation assumed management of the Four Queens as part of the bankruptcy reorganization.

The newly formed management company, Riviera Gaming Management-Elsinore (RGME), changed the gaming format of the Four Queens, believing slot machines to be the most profitable means of revenue support. RGME removed several table games, including some of the popular Caribbean Stud and Let-it-Ride games, and added more slot machines. In 1998, the Four Queens offered 26 game tables, compared to more than forty during the mid-1990s, and 1,068 slot machines, compared to fewer than 1,000 previously. The change in format changed the customer base at the Four Queens to a low stakes clientele.

These actions contributed to lower casino revenues, from $42.3 million in 1996 to $36.5 million in 1997. Overall revenues declined from $61.2 million in 1996, with a net loss of $1.6 million, to $53.8 million in 1997. The institution of new promotions for slot machine gaming facilitated a rebound in casino revenues to $39.4 million in 1998, though hotel and food and beverage revenues continued to decline. Total revenues of $55.9 million in 1998 included the first payment of $1.2 million from a settlement with Palm Springs East for Elsinore’s investment in Spotlight 29. Royalties from Multiple Action blackjack accounted for $103,000 in revenues, down from $198,000 in 1996.

While attempts to find a buyer for the Four Queens failed, payments from Palm Springs East compensated for operating losses. Elsinore received $1.2 million in 1999 and $6.2 million in 2000, for a total settlement of $8.6 million. Also, Elsinore terminated its management agreement with RGME, saving more than $1 million in annual fees, and hired a new general manager for the Four Queens, Dual Cooper. In 2000, Elsinore recorded a net profit of $5.1 million on total revenues of $60.7 million. Management at Elsinore viewed this profitability as a temporary respite, however, as cash flow was not expected to handle the $8 million principal on notes payable in October 2003.

In May 2002 Elsinore announced that it had entered an agreement to sell Four Queens to SummerGate Inc. for around $22 million. With Four Queens representing the clear majority of Elsinore’s assets, Elsinore planned to dissolve. By July of that year, however, the agreement had been dissolved and Elsinore’s future was again unclear.

Principal Subsidiaries

Four Queens, Inc.; Four Queens Experience Corporation; Elsinore Finance Corporation.

Principal Competitors

Boyd Gaming Corporation; Harrah’s Entertainment, Inc.; Las Vegas Sands, Inc.; MGM Mirage; Mandalay Resort Group Inc.; Park Place Entertainment Corporation.