Item 1. Business.
General Development of the Business
Atlantic City Boardwalk Associates, L.P. ("Partnership") was formed on October 31, 1983 to acquire the buildings, parking facility and non-gaming depreciable, tangible property ("Hotel Assets") of The Claridge Hotel and Casino ("Claridge") located in Atlantic City, New Jersey; to hold a leasehold interest in the land on which the Claridge is located; and to engage in activities related or incidental thereto. On June 16, 1989, as part of a financial restructuring ("Restructuring Agreement"), the Partnership acquired all of the rights to the land underlying the Hotel Assets, the air rights and related easement. The Partnership's principal business is to lease the Hotel Assets, land and air rights to The Claridge at Park Place, Incorporated ("New Claridge"), a wholly-owned subsidiary of The Claridge Hotel and Casino Corporation ("Corporation"), under operating leases. All revenues of the Partnership, other than immaterial investment income, are derived from those leases.
The Partnership maintains offices at The Claridge Hotel and Casino, Indiana Avenue and the Boardwalk, Atlantic City, New Jersey 08401, telephone number (609) 340-3400; and at 2880 West Meade Avenue, Suite 204, Las Vegas, Nevada 89102, telephone number (702) 253-7662.
New Claridge's Corporate Structure
In 1983, New Claridge acquired the Claridge's casino license and its gaming equipment (collectively, "Casino Assets") from Del E. Webb New Jersey, Inc. ("DEWNJ"), a wholly-owned subsidiary of Del Webb Corporation ("Webb"); leased the Hotel Assets and subleased the land on which the Claridge is located from the Partnership; and assumed certain liabilities related to the acquired assets. In connection with those transactions, the Partnership granted the Expandable Wraparound Mortgage (defined below) to New Claridge. These transactions were entered into in connection with the private placement of equity interests in the Partnership and the Corporation. Following the 1983 transactions, Webb and its affiliates retained significant interest in the Claridge. The common stock of the Corporation and the limited partnership interests of the Partnership were sold together in a private placement as units, and because there has been relatively little trading in the stock or partnership interest, there is a substantial similarity between the equity ownership of the Corporation and the Partnership. Although the Partnership and the Corporation are independent entities, approximately 95% of the Corporation's common stock is owned by persons who also own limited partnership interests in the Partnership. The Partnership does not currently engage in any significant business activities other than those relating to the Claridge.
In October 1988, the Partnership, the Corporation and New Claridge entered into the Restructuring Agreement. The restructuring, which was consummated in June 1989 (the "Closing"), resulted in (i) a reorganization of the ownership interest in the Claridge; (ii) modifications of the rights and obligations of certain lenders; (iii) satisfaction and termination of the obligations and commitments of Webb and DEWNJ under the original structure; (iv) modifications of the lease agreements between New Claridge and the Partnership; and (v) the forgiveness by Webb of substantial indebtedness.
On January 31, 1994, the Corporation completed an offering of $85 million of First Mortgage Notes ("Notes") due 2002, bearing interest at 11 3/4%. The Notes are secured by (i) a non-recourse mortgage granted by the Partnership representing a first lien on the Hotel Assets and the underlying land, (ii) a pledge granted by the Corporation of all outstanding shares of capital stock of New Claridge, and (iii) a guarantee by New Claridge. New Claridge's guarantee of the Notes is secured by a collateral assignment of the second lien Expandable Wraparound Mortgage (described below), and by a lien on the Claridge's gaming and other assets, which lien will be subordinated to liens that may be placed on those gaming and other assets to secure any future revolving credit line arrangement. On January 28, 1997, New Claridge entered into an agreement to subject the new self-parking garage to the lien of the mortgage; such lien will not be subordinated to any liens which may be placed on New Claridge's gaming and other assets to secure any future revolving credit line arrangements. Interest on the Notes is payable semiannually on February 1 and August 1 of each year, commencing August 1, 1994.
The net proceeds of the Notes, totaling $82.2 million net of fees and expenses, were used as follows: (i) to repay in full on January 31, 1994, the Corporation's then outstanding debt under the Revolving Credit and Term Loan Agreement ("Loan Agreement"), including the outstanding balance of the Corporation's revolving credit line, which was secured by the First Mortgage; (ii) to expand New Claridge's casino capacity by 12,000 square feet in 1994, including the addition of approximately 500 slot machines and the relocation of two restaurants and their related kitchens; (iii) to purchase property in 1995 and construct on that property a self-parking garage, which opened in mid-1996; and (iv) to acquire the Contingent Payment Option (described below).
Recent Developments at New Claridge
During 1994 and 1995, the cash provided by operations of the Claridge was sufficient to meet the Corporation's obligations to pay interest on the Notes, as well as to make at least some moderate capital improvements. Commencing in the latter part of 1995, however, competition in the Atlantic City casino market for bus customers, a principal source of customers for the Claridge at the time, increased; this competition intensified even more during 1996 as additional casino square footage was added, principally due to the opening of the Trump World's Fair casino. During 1996, the average coin incentive issued per bus patron at the Claridge increased to approximately $19, from approximately $13 in 1995. Total cash incentives issued to Claridge's casino patrons (in the form of coin to play slot machines and gaming chips to play table games) increased to approximately $30.5 million in 1996, from approximately $25.2 million in 1995. While the Corporation's promotional costs have increased significantly, total casino revenues in 1996 actually decreased from 1995 levels. It had been the expectation of the Corporation that, upon opening of its new self-parking garage, the Corporation would be able to reduce its reliance on the bus patron market; however, the Corporation was forced to close the garage facility on July 10, 1996, only ten days after its opening following a fatal accident. Because the facility was not able to reopen until the end of September 1996, the Corporation lost any possible benefit of the facility during the normally busy summer season. In addition, severe winter weather in the first quarter of 1996 adversely affected revenues. As a result, the Corporation experienced a net loss for 1996 of $15.4 million, compared to a net loss of $1.9 million in 1995.
In late July 1996, management of the Corporation determined that due to the serious deterioration in the Corporation's cash flow, that without a significant improvement in its operating results, it was unlikely that the Corporation would be able to meet its obligations to pay interest on the Notes beyond the August 1996 payment. In addition to taking steps to conserve cash by reducing various operating expenses, the Corporation engaged a financial advisor, Dillon, Read & Co., Inc., to assist in formulating a proposal to the holders of the Notes to
restructure the Corporation's obligations under the Notes. At the same time, the Corporation was working with Dillon, Read & Co., Inc. to attempt to find a buyer of the Corporation or an investor that would be in a position to inject additional capital into the Corporation to enable the Corporation to meet its ongoing obligations. To date, the Corporation has not received any acceptable proposals in regards to the possible sale of the Corporation.
In November 1996, while the sales efforts were continuing, the Corporation announced that there was a strong likelihood that the Corporation would be unable to pay the interest due on the Notes on February 3, 1997. Accordingly, management, working together with financial and legal advisors, formulated a plan for restructuring the Corporation's obligations. The terms of the proposed plan were presented to the noteholders at a meeting held on December 3, 1996, at which time the noteholders were urged to form a steering committee or other representative body to conduct negotiations. Although a group of noteholders formed and met with the management of the Corporation on a few occasions, by the time the committee formally organized itself on January 7, 1997, it consisted of six members representing ownership of less than 5% of the total amount of Notes outstanding. At that time, the Corporation determined that the committee did not represent a sufficient portion of the noteholders to negotiate on behalf of the noteholders generally. As a result, the Corporation did not formally recognize the committee and did not engage in any negotiation with the committee or its members, although it did encourage the members of the committee to continue to attempt to obtain broader representation of the noteholders.
On January 12, 1997, management of the Corporation was contacted, through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a possible sale of the Corporation to Hilton, and shortly thereafter, the Corporation began negotiations with Hilton. On January 30, 1997, the Corporation issued a press release indicating that the Corporation would not make the interest payment due on the Notes on February 3, 1997, and that the Corporation had entered negotiations with Hilton regarding acquisition of the Corporation by Hilton through a prepackaged bankruptcy plan. At that time, a representative of Hilton indicated that Hilton had acquired approximately 35% to 40% of the Notes. On February 5, 1997, three holders of the Notes, who were members of the unofficial committee which they had formed, filed a petition for involuntary bankruptcy against the Corporation in the bankruptcy court for the District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related state court lawsuit against the Corporation, New Claridge, the Partnership, certain officers and directors of the Corporation, and the general partners of the Partnership. On March 4, 1997, contrary to earlier expectations, the Corporation was able to pay the interest that was due on the Notes on February 3, 1997, under the 30-day grace period allowed in accordance with the terms of the indenture governing the Notes ("Indenture"). In addition, the Corporation reached agreement with the unofficial committee of noteholders, as well as the three holders of the Notes, providing for the joint dismissal of the involuntary bankruptcy petition and the related state court lawsuit. On March 19, 1997, an order was entered dismissing the involuntary bankruptcy petition; as part of that order, a settlement agreement was entered whereby the state court lawsuit was also dismissed. The Corporation expects the negotiations with Hilton to continue.
The Corporation had sufficient cash to pay the interest on the Notes on March 4, 1997 due to several events: (i) cash flow from operations for January and February 1997 improved significantly over what had been expected; (ii) effective March 1, 1997, the Operating Lease and Expansion Operating Lease (defined below) were amended to provide for the deferral of basic rent of $1.3 million on March 1, 1997 (see further discussion
below); and (iii) on February 28, 1997, New Claridge entered into an agreement with Thermal Energy Limited Partnership I ("Atlantic Thermal"), pursuant to which Atlantic Thermal was granted an exclusive license for a period of twenty years to use, operate and maintain certain steam and chilled water production facilities at the Claridge. In consideration for this license agreement, Atlantic Thermal paid New Claridge $1.5 million.
Certain Agreements between the Partnership, the Corporation and New Claridge
The current relationships and agreements between the Partnership, the Corporation and New Claridge are described below:
Property Ownership and Related Leases and Mortgage
The Casino Assets are owned by New Claridge. In addition, the new self-parking garage and the land on which it is located are owned by New Claridge. The Hotel Assets, the underlying land and air rights are owned by the Partnership and leased by the Partnership to New Claridge. The lease obligations are set forth in an operating lease ("Operating Lease"), originally entered into on October 31, 1983, and an expansion operating lease ("Expansion Operating Lease"), covering additions to the Claridge made in 1986.
Operating Lease and Expansion Operating Lease
New Claridge leases from the Partnership the Hotel Assets and the land on which the Claridge is located for an initial term of 15 years with three 10-year renewal options. Basic annual rent during the initial term of the Operating Lease in equal monthly installments was $38,055,000 in 1994, $39,030,000 in 1995, $39,906,000 in 1996, and escalates thereafter to $41,775,000 in 1997 and $32,531,000 for the nine month period ending September 30, 1998. If the terms of the lease are extended, basic rent will be calculated pursuant to a formula, with such rent not to be more than $29.5 million nor less than $24 million in the lease year October 1, 1998 through September 30, 1999, and not to be greater than 10% more than the basic rent for the preceding lease year in each lease year thereafter. Under the terms of the Operating Lease, New Claridge has an option to purchase, on September 30, 1998 and, if it renews the Operating Lease, on September 30, 2003, the Hotel Assets and the underlying land for their fair market value at the time the option is exercised.
New Claridge is also required to pay, as additional rent, certain taxes, insurance and other charges relating to the occupancy of the land and Hotel Assets, certain expenses and debt service relating to furniture, fixture and equipment replacements and building improvements (collectively, "FF&E Replacements") and certain general and administrative costs of the Partnership. The Partnership is required during the entire term of the Operating Lease, and any subsequent renewal terms, to provide New Claridge with FF&E Replacements and to provide facility maintenance and engineering services to New Claridge. New Claridge is obligated to lend the Partnership any amounts necessary to fund the cost of FF&E Replacements, and if the Partnership's cash flow, after allowance for certain distributions, is insufficient to provide the facility maintenance and engineering services required of it, New Claridge is also required to lend the Partnership such necessary funds (collectively, "FF&E Notes"). The FF&E Notes are secured under the Expandable Wraparound Mortgage (see discussion below), and are payable as follows. Generally, one half of the principal is due in 48 months and the remainder is due 60 months from the issue date of the individual notes, with the
following exception. As required by the offering of $85 million of Notes on January 31, 1994, $8 million was used to finance internal improvements at the Claridge. In connection therewith, the Expandable Wraparound Mortgage as well as the Operating Lease and the Expansion Operating Lease were amended to provide that the $8 million principal on these additional FF&E Notes will be payable on September 30, 2000, or at final maturity of the Expandable Wraparound Mortgage, as amended. All FF&E notes are secured under the Wraparound Mortgage up to $25 million. Thereafter, such advances shall be secured under separate security agreements. New Claridge is obligated to pay as additional rent to the Partnership the debt service on all FF&E Notes.
On March 17, 1986, New Claridge entered into a lease with the Partnership whereby New Claridge leases from the Partnership the Claridge expansion improvements for an initial term beginning March 17, 1986 and ending on September 30, 1998 with three 10-year renewal options. Basic annual rent during the initial term of the Expansion Operating Lease was $3,870,000 in 1986 (prorated based on the number of days that the expansion improvements were open to the public) and was based on the cost of the construction of the expansion improvements. Annually thereafter the rental amount is adjusted based on the Consumer Price Index with any increase not to exceed two percent per annum. Basic annual rent for 1996, 1995, and 1994 amounted to $4,718,000, $4,625,000, and $4,534,000, respectively. If the terms of the lease are extended, basic rent will be calculated pursuant to a formula, with such rent not to be more than $3 million nor less than $2.5 million in the lease year October 1, 1998 through September 30, 1999, and not to be greater than 10% more than the basic rent for the preceding lease year in each lease year thereafter.
New Claridge is also required under the Expansion Operating Lease to pay as additional rent certain expenses and debt service relating to furniture, fixture and equipment replacements and building improvements (collectively, "Expansion FF&E Replacements") for the expanded facility. The Partnership is required during the entire term of the Expansion Operating Lease, and any subsequent renewal terms, to provide New Claridge with Expansion FF&E Replacements and to provide facility maintenance and engineering services to New Claridge. New Claridge is obligated to lend to the Partnership, in the form of FF&E Notes, any amounts necessary to fund the Expansion FF&E Replacements. Any advances by New Claridge for the foregoing will be secured under the Expandable Wraparound Mortgage (see discussion below) in an amount up to $25,000,000. Thereafter, such advances shall be secured under separate security agreements.
The Operating Lease and the Expansion Operating Lease were amended as part of the Restructuring Agreement to provide for the deferral of $15,078,000 of rental payments during the period July 1, 1988 through the beginning of 1992, and to provide for the abatement of $38,820,000 of basic rent through 1998, thereby reducing the Partnership's cash flow to an amount estimated to be necessary only to meet the Partnership's cash requirements. During the third quarter of 1991, the maximum deferral of rent was reached. On August 1, 1991, the Operating Lease and the Expansion Operating Lease were amended further to revise the abatement provisions so that, commencing January 1, 1991, for each calendar year through 1998, the lease abatements may not exceed $10 million in any one calendar year, and $38,820,000 in the aggregate. Cumulative abated rents as of December 31, 1996 total $37,066,000 leaving $1,754,000 to be abated in the future period. Additional abatements of rent totaling $500,000 became available as a result of the acquisition of the option to purchase the Contingent Payment. All available rent abatements were fully utilized in the first quarter of 1997. Further abatements would become available in the event that the Contingent Payment option is exercised (see Item 1. Business - "Contingent Payment Rights").
The Fifth Amendment to the Operating Lease and the Fourth Amendment to the Expansion Operating Lease, which were effective on March 1, 1997, provided for the abatement of $867,953 of basic rent and for the deferral of $1,300,000 of basic rent on March 1, 1997, and provide for additional abatements of basic rent, commencing on April 1, 1997, as necessary to reduce the Partnership's cash flow to an amount necessary to meet the Partnership's cash requirements through December 31, 1998 (determined without regard to the repayment of the deferred rent). The $1.3 million of basic rent deferred on March 1, 1997 is to be paid to the Partnership in monthly installments of $25,000 for the period April 1, 1997 through December 31, 1997, and monthly installments of $50,000 for the year 1998 and thereafter until paid in full (subject to acceleration under certain circumstances). For the years 1999 through 2003, additional abatements of basic rent will be reduced to provide the Partnership with amounts needed to meet the Partnership's cash requirements plus an additional amount ($83,333 per month in 1999 and 2000, $125,000 per month in 2001, and $166,667 per month in 2002 and 2003).
In conjunction with the Fifth Amendment to the Operating Lease and the Fourth Amendment to the Expansion Operating Lease, as discussed above, the Corporation, New Claridge and the Partnership entered into a restructuring agreement, effective March 1, 1997, to modify certain terms of the Expandable Wraparound Mortgage (see below). In addition, under the March 1, 1997 restructuring agreement, New Claridge agreed to exercise the first of three ten-year renewal options extending the term of the Operating Lease and Expansion Operating Lease through September 30, 2008.
Under the terms of the Operating Lease, as amended effective March 1, 1997, New Claridge has an option to purchase, on September 30, 1998, the Hotel Assets and the underlying land for their fair market value at the time the option is exercised, which in no event may be less than an amount equal to the amount then outstanding under the Expandable Wraparound Mortgage (see below) plus $2.5 million, plus any amount of the $1.3 million of rent deferred on March 1, 1997 not then paid. If New Claridge does not exercise this option on September 30, 1998, it may exercise an option, on September 30, 2003, to purchase the Hotel Assets and the underlying land on January 1, 2004, for their fair market value at the time the option is exercised.
If the Partnership should fail to make any payment due under the Expandable Wraparound Mortgage, New Claridge may exercise a right of offset against rent or other payments due under the Operating Lease and Expansion Operating Lease to the extent of any such deficiency. In turn, if the Claridge should fail to make any lease payment due under the Operating Lease and Expansion Operating Lease, the Partnership is not required to make mortgage payments due under the Expandable Wraparound Mortgage.
Expandable Wraparound Mortgage
On October 31, 1983, the Partnership executed and delivered to New Claridge a mortgage on the Hotel Assets ("Expandable Wraparound Mortgage") which was subordinate to an $80 million first mortgage ("First Mortgage") granted by the Partnership to a group of banks and a $47 million purchase money second mortgage ("Purchase Money Second Mortgage") granted by the Partnership to DEWNJ. The Purchase Money Second Mortgage, which was due on September 30, 2000, was canceled upon satisfaction of certain conditions set forth in an agreement entered into at the time of the 1989 restructuring. In conjunction
with the offering of $85 million of Notes on January 31, 1994, the outstanding debt under the Loan Agreement, which included the First Mortgage and a revolving credit line, was satisfied in full.
By its terms, the Expandable Wraparound Mortgage may secure up to $25 million of additional borrowings by the Partnership from New Claridge to finance FF&E Replacements and facility maintenance and engineering shortfalls. The Expandable Wraparound Mortgage provides that, so long as the Partnership is not in default on its obligations under the Expandable Wraparound Mortgage, New Claridge is obligated to make payments required under any senior mortgage indebtedness. The indebtedness secured by the Expandable Wraparound Mortgage, which matures on September 30, 2000, bears interest at an annual rate equal to 14% with certain interest installments that accrued in 1983 through 1988 totaling $20 million being deferred until maturity. In addition, the Partnership is required under the Expandable Wraparound Mortgage to make payments of principal and interest in respect of any loans made to finance FF&E Replacements or facility maintenance or engineering costs as described above. To the extent those borrowings exceed $25 million in the aggregate outstanding at any time, they will be secured under separate security agreements and not by the lien of the Expandable Wraparound Mortgage.
On March 17, 1986, the First Mortgage was amended and assumed by New Claridge. The amount of the amended and assumed First Mortgage was increased to secure up to $96.5 million to provide financing for the Expansion Improvements. Indebtedness secured by the Expandable Wraparound Mortgage was increased by an amount up to $17 million to provide the Partnership with the necessary funding.
Effective August 28, 1986, the Partnership commenced making level monthly payments of principal and interest so as to repay on September 30, 1998, in full, the principal balance of this $17 million increase in the Expandable Wraparound Mortgage. The Expandable Wraparound Mortgage was amended to require that the $127 million aggregate principal amount secured by it would be repayable in installments during the years 1988 through 1998 in escalating amounts totaling $80 million, with a balloon principal payment of $47 million and the $20 million of deferred interest due on September 30, 2000.
Effective March 1, 1997, the Corporation, New Claridge, and the Partnership entered into a restructuring agreement, pursuant to which New Claridge agreed to use its best efforts to cause a modification of the Expandable Wraparound Mortgage ("Wraparound Modification") that is permitted by, or is in compliance with, the terms of the Indenture. The Wraparound Modification, if so permitted, will provide for an extension of the maturity date of the Expandable Wraparound Mortgage from September 30, 2000 to January 1, 2004. If the Wraparound Modification is not permitted by or in compliance with the terms of the Indenture, New Claridge has agreed to effect the Wraparound Modification at such time as the Notes are no longer outstanding, and to forbear from taking any action to foreclose on the Expandable Wraparound Mortgage until February 2002.
In connection with the offering of $85 million of the Notes on January 31, 1994, the Corporation agreed to use not less than $8 million from the net proceeds of the offering to finance certain internal improvements to the Claridge which were funded through additional FF&E Notes. In connection therewith, the Expandable Wraparound Mortgage Loan Agreement as well as the Operating Lease, and the Expansion Operating Lease were amended to provide that the principal on these additional FF&E Notes will be payable at final maturity of the Expandable Wraparound Mortgage.
Note Receivable from New Claridge
Pursuant to the Restructuring Agreement the Partnership lent to New Claridge $3.6 million representing, at the Closing, substantially all of the Partnership's cash and cash equivalents in excess of amounts required to pay Partnership expenses. The loan bears interest at 12% per annum and is due and payable, along with the principal, upon (i) the sale or refinancing of the Claridge; (ii) upon full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first mortgage then in place.
Contingent Payment Rights
The Restructuring Agreement provided for Webb to retain an interest equal to $20 million plus interest from December 1, 1988 accruing at the rate of 15% per annum compounded quarterly ("Contingent Payment") in any proceeds ultimately recovered from the operations and/or the sale or refinancing of the Claridge facility in excess of the First Mortgage loan and other liabilities. To give effect to this Contingent Payment, the Corporation and the Partnership agreed not to make any distributions to the holders of their equity securities, whether derived from operations or from sale or refinancing proceeds, until Webb had received the Contingent Payment.
In connection with the 1989 restructuring, Webb agreed to permit those partners/investors in the Partnership and Corporation ("Releasing Partners/Investors") from whom Webb had received written releases from all liabilities, rights ("Contingent Payment Rights") to receive certain amounts to the extent available for application to the Contingent Payment. Approximately 84% in interest of the partners/investors provided releases and became Releasing Partners/Investors. Payments to Releasing Partners/Investors are to be made in accordance with a schedule of priorities, as defined in the Restructuring Agreement.
On April 2, 1990, Webb transferred its interest in the Contingent Payment to an irrevocable trust for the benefit of the Valley of the Sun United Way, and upon such transfer Webb was no longer required to be qualified or licensed by the Commission.
On February 23, 1996, the Corporation acquired an option to purchase, at a discount from the carrying value, the Contingent Payment. The purchase price of the option was $1 million, and the option may be exercised any time prior to December 31, 1997. Upon exercise of the option, the purchase price of the Contingent Payment would be $10 million, plus interest at 10% per annum for the period from January 1, 1997 to the date of payment of the purchase price if the purchase occurs after December 31, 1996. The purchase price may also increase in an amount not to exceed $10 million if future distributions to Releasing Partners/Investors exceed $20 million. It is estimated that at December 31, 1996, the aggregate amount owing in respect of the Contingent Payment was $65.8 million.
Given the recent operating results at New Claridge (see Item 1. Business - "Recent Developments at New Claridge"), it is unlikely that the Corporation would be able to exercise this Contingent Payment Option using available working capital, or absent a refinancing or sale transaction.
In the event that the option is exercised, it is anticipated that the Contingent Payment would be canceled so that neither the Corporation nor the Partnership would have any obligation to make any payment in respect
of the Contingent Payment before making a distribution to limited partners or shareholders. Upon the purchase and cancellation, however, the Corporation and the Partnership would remain obligated to make payments to the Releasing Partners/Investors, in respect of the Contingent Payment Rights, before any distribution may be made to limited partners or shareholders. These payments would be required to be in the same amounts as if the Contingent Payment had not been purchased and canceled. As a result, it is not likely that limited partners or shareholders who are not Releasing Partners/Investors will receive any distribution from the Partnership or the Corporation. In the aggregate, Releasing Partners/ Investors are entitled to receive an amount equal to approximately 72% of the Contingent Payment if the option is exercised.
Under the terms of the option, upon purchase of the Contingent Payment, the Partnership and/or the Corporation would be required to make distributions in excess of $7 million to the Releasing Partners/Investors. The Partnership and the Corporation have agreed to cooperate in the purchase of the option and the Contingent Payment, with each contributing one-half of the purchase price of the option and each anticipated to contribute one-half of the purchase price of the Contingent Payment. A portion of the Partnership's contribution would be contributed through additional abatements of basic rent payments due under the Operating Lease and the Expansion Operating Lease.
Current Financial Condition of The Partnership
The ability of the Partnership to fulfill its obligations is dependent upon the ability of New Claridge to pay rental payments when due. Accordingly, the financial stability of the Partnership is dependent upon the financial condition of New Claridge. The previous discussion entitled "Recent Developments at New Claridge," the following discussion entitled "Current Financial Situation of The Claridge Hotel and Casino Corporation" and the discussion concerning New Claridge in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are taken from the Annual Report on Form 10-K of the Corporation, and the Partnership disclaims any responsibility for the content thereof, except for the information also included in Item 8, "Financial Statements and Supplementary Data."
Current Financial Situation of The Claridge Hotel and Casino Corporation
The Claridge
The Claridge, located in the Boardwalk casino section of Atlantic City, New Jersey, is a 26-story building that contains the Corporation's casino and hotel facilities. The Claridge's casino consists of approximately 59,000 square feet of casino space on three main levels with various adjacent mezzanine levels. The casino currently contains approximately 1,750 slot machines and sixty-five table games, including forty-one blackjack tables, ten craps tables, five roulette tables, three Caribbean stud poker tables, one mini-baccarat table, and five other specialty games. The hotel with related amenities consists of 502 guest rooms (including 28 corner suites, 26 specialty suites and five tower penthouse suites), four restaurants, a buffet area, three lounges, a private player's club, a 600-seat theater, limited meeting rooms, a gift shop, a beauty salon and a health club with an indoor swimming pool.
Built in 1929 as a hotel, the Claridge was remodeled at a cost of approximately $138 million prior to its reopening as a casino hotel in 1981. The Claridge was further renovated and expanded in 1986 at a cost of
approximately $20 million, which provided approximately 10,000 square feet of casino space together with a 3,600 square foot lounge ("Expansion Improvements"). In 1994, approximately $12.7 million was expended to expand the Claridge's casino square footage by approximately 12,000 feet. In 1996, New Claridge constructed a self-parking garage facility connected to its existing valet-parking garage, at a cost of approximately $28 million. The combined garage facility provides parking for approximately 1,200 vehicles.
New Claridge experiences a seasonal fluctuation in demand, which is typical of casino-hotel operations in Atlantic City. Historically, peak demand has occurred during the summer season. New Claridge's principal market is the Mid-Atlantic area of the United States. Casino gaming in Atlantic City is highly competitive and is strictly regulated under the New Jersey Casino Control Act and regulations thereunder which affect virtually all aspects of casino operations.
Results of Operations for the Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
The Corporation had a net loss of $15,389,000 for the year ended December 31, 1996, as compared to a net loss of $1,908,000 for the year ended December 31, 1995. Casino revenue in 1996 decreased $6,238,000 or 3.8% from the prior year. Casino revenues were adversely affected by several severe winter storms during the first quarter of 1996, most notably the January blizzard, which blanketed the Northeastern United States with a record amount of snow; this compared to the mild weather conditions experienced in the first quarter of 1995. In the second quarter of 1996, the Trump World's Fair casino commenced operations, contributing to the 9.1% increase in citywide casino square footage in 1996. In addition, the number of hotel rooms available citywide increased in the second quarter of 1996 with the opening of the Trump World's Fair casino (approximately 500 rooms) and the Tropicana's new 600-room hotel tower, adding to the already intense competition for casino patrons. On July 10, 1996, the Claridge's self-parking garage, which had opened on June 28, 1996, was closed due to a fatal accident, and was not reopened until September 20, 1996 , when certain structural enhancements were completed. As a result of not having the use of the self-parking garage during the busy summer season, the Claridge was unable to fully take advantage of certain promotional programs designed to capture the more profitable drive-in casino patron.
Beginning in the latter part of 1995, competition for bus customers began to increase, in the form of increased coin incentives offered to these customers. Because of its lack of a self-parking garage at that time, and therefore its dependency on the bus market, New Claridge had to remain competitive with the incentives offered by other Atlantic City casinos in order to maintain its share of this market. In 1996, the competition for bus customers became even more intense, as the average cost of coin incentives issued to patrons arriving by bus to the Claridge increased to approximately $19 in 1996, from approximately $13 in 1995. In total, during 1996, New Claridge issued $19,495,000 in coin incentives to 1,015,000 bus patrons, compared to $12,502,000 of coin incentives issued to 976,000 bus patrons.
Total costs and expenses for the year ended December 31, 1996 increased $8,472,000 or 4.1% over the same period in 1995. The increase was primarily a result of the increase in casino and general and administrative expenses. The increase in casino expenses was primarily a result of the increase in coin incentives issued through the bus program as well as the increase in the cost of providing promotional allowances to casino
patrons. The increase in general and administrative expenses was primarily a result of increased advertising expenditures during the year.
Factors Which May Influence New Claridge's Future Operating Results
As discussed, the Corporation experienced recurring losses and serious deterioration in its cash flow in 1996. Since the Corporation does not have substantial cash reserves or access to a line of credit, the Corporation will need to experience a significant improvement in operating results in 1997 over 1996 levels in order to meet its on-going obligations, including the interest due on the Notes. Operating results in 1997 have improved over 1996 levels, due primarily to the positive impact of the availability of the self-parking garage. Although management of the Corporation believes that operating results will continue to improve over prior year levels, no assurances as to the continuation of this improvement can be given. Management will continue to conserve cash through various cost containment measures, including limiting capital expenditures in 1997 to approximately $1 million. Given the various improvements made to the property in recent years, including the casino expansion in 1994, the construction of the self-parking garage, and other projects such as the refurbishment of all of its guest rooms, the current condition of the property is such that the above-mentioned level of capital expenditures is deemed adequate. Management, together with the Corporation's Board of Directors, will also continue to work with Dillon, Read & Co., Inc. to pursue a sale of the Corporation or some other plan for a significant infusion of capital into the Corporation. In addition, New Claridge has retained the law firm of Zelle and Larson LLP of Minneapolis, Minnesota to assist in evaluating the recovery of certain expenses incurred in reopening the self-parking garage and in evaluating potential lost profit claims as a result of the accident which occurred in the self-parking garage on July 10, 1996. Management of the Corporation intends to file a claim to recover these expenses and lost profits; recovery of these claims would have a positive impact on New Claridge's financial results and liquidity. No formal claims have been filed to date, and there is no assurance that the Corporation will be successful in realizing any recovery.
Competition in the Atlantic City casino-hotel market is intense. As of December 31, 1996, the twelve existing casino facilities offered approximately 1,080,000 square feet of gaming space, a 12.5% increase over the casino square footage as of December 31, 1995 of approximately 960,000 square feet. In May 1996, the 49,000 square foot Trump World's Fair casino opened, and minor casino expansions occurred at several other properties in 1996. For the years ended December 31, 1996 and 1995, citywide gaming revenues, as reported, increased 1.8% and 9.5%, respectively, over prior year levels.
The Atlantic City gaming market is expected to experience significant growth beginning over the next several years as Atlantic City transforms itself from a "day-trip" market to a "destination resort." As a result of current high room occupancy rates, a more favorable regulatory climate, the reduced threat of competition from potential new gaming jurisdictions, and significant infrastructure developments making Atlantic City more accessible, over $4.6 billion of new investment has been announced or recently completed in the Atlantic City gaming market. As currently scheduled, the planned expansion of existing casinos alone will increase total Atlantic City casino space by over 34%, and hotel rooms by almost 145%. In addition, several Las Vegas casino operators have recently announced plans to construct new casinos in Atlantic City.
In addition to the major casino expansions and the announced new casinos, major infrastructure improvements have begun. A new $268 million convention center, scheduled for completion in May 1997,
is expected to contain approximately 500,000 square feet of exhibition space, 45 meeting rooms, food service facilities and a 1,600-car underground parking garage. The new convention center will be the largest exhibition space between Boston and Atlanta. A 500-room non-casino hotel is currently being constructed, and is expected to be completed in the Fall of 1997; it will be linked to the new convention center by an elevated walkway. The development of a corridor which will link the convention center to the boardwalk area is currently underway, and will feature a wide, landscaped boulevard with a reflecting pool, and expanded park area, and a 60-foot lighthouse which will be illuminated each night by a spectacular light show. In February 1997, construction of a new $7.5 million bus terminal, which is a major component of this corridor, was completed. The State of New Jersey is also implementing a capital plan of approximately $125 million to upgrade and expand the Atlantic City International Airport.
All casinos in Atlantic City are part of hotels which offer dining, entertainment, and other guest facilities. As the size of the gaming facilities continue to grow, the need for additional hotel rooms has become evident. During 1996, the number of hotel rooms available citywide increased in the second quarter of 1996 with the opening of the Trump World's Fair casino (approximately 500 rooms) and the Tropicana's new 600-room hotel tower. Several existing Atlantic City casinos have plans to increase their hotel space in 1997 and 1998, including Harrah's, Trump Taj Mahal, Hilton, and Caesars, for a total expected increase of approximately 2,100 hotel rooms. In addition, a 500-room non-casino hotel is expected to be constructed adjacent to the new convention center, which is scheduled to open in 1997. Competition among the existing casino-hotels is based on factors such as promotional allowances and incentives; the attractiveness of the casino area; advertising; customer service; the availability, quality and price of rooms, food, and beverage; ease and availability of parking and accessing the facility; and entertainment.
The Atlantic City business is seasonal, with the highest level of activity occurring during the summer months, and the lowest level of activity during the winter months. The primary markets for Atlantic City casino patrons are Philadelphia, New Jersey and New York City, together with the secondary markets of central Pennsylvania, Delaware, Baltimore and Washington, D.C. Casinos offer incentives, in the form of cash and complimentaries for rooms, food and beverages, to their customers based on their casino play. In recent years, competition for, and as a result, incentives offered to, customers has increased significantly. Many Atlantic City casino patrons arrive by bus and stay for approximately six hours. Competitive factors in Atlantic City require the payment of cash incentives and coupons for use towards the price of meals to patrons arriving under bus programs sponsored by the casino operators. Competition for bus patrons intensified in 1996. During 1996, 9.8 million casino patrons arrived in Atlantic City by bus, an 11% increase over 1995 levels. The increased competition took the form of higher coin incentives, which New Claridge matched, thus increasing its per patron average coin cost to approximately $19 in 1996 from approximately $13 in 1995. New Claridge has relied heavily on attracting patrons who travel to Atlantic City by bus because the Claridge previously lacked a self-parking facility, and has therefore had to remain competitive with other casino operators in regards to the incentives offered. Even with the 1,200-space parking facility, New Claridge will continue to rely on its bus customers as a significant source of business.
The Claridge has positioned itself as the "smaller, friendlier" alternative to the other Atlantic City casinos. This strategy, implemented in 1989, is designed to capitalize on the Claridge's unique physical facility, which the Corporation believes retains the atmosphere of a grand hotel, and on the Claridge's smaller, more intimate size relative to the larger Atlantic City casinos. By emphasizing an environment that is intimate, friendly and service-oriented, the Claridge targets a market niche different than that of a majority of its
competitors. The Claridge seeks to attract and retain a customer base whose wagering spans the same market segments serviced by other casino hotels, but primarily targets the middle, leaving the high-end business to its competitors. New Claridge believes it is uneconomical to pursue the high-end market as its core business because of the high maintenance cost and potential volatility in "hold" percentages (the ratio of win to the amount of gaming chips purchased by patrons). The typical Claridge patron has a lesser need for credit as well as a lower average complimentary cost. The majority of the Claridge's casino revenue is generated by slot machine play, the fastest growing segment of gaming play. In 1995, 77% of the Claridge's casino revenue came from slot play as compared to 68% reported for all Atlantic City properties. The trend has continued in 1996 with 75% of the Claridge's casino revenue generated from slot play, compared to 69% for all Atlantic City casinos.
The key elements of New Claridge's marketing plan include the use of complimentaries, promotional activities, entertainment events, player development hosts, a bus program, and the use of commissioned agents to attract groups from outside the company's traditional market areas. New Claridge also operates a direct marketing program to attract and retain customers. New Claridge's Compcard Gold Program, which allows patrons to earn various complimentaries, including coins for slot machine play and gaming chips for table play, based on their levels of gaming activity, provides a valuable database of information on playing preferences, frequency and denominations of play, and the amount of gaming revenues produced by gaming patrons. Because of the expanded facilities and amenities now offered at the Claridge, the "Because Smaller is Friendlier" positioning statement was changed to "Smaller, Friendlier and So Much More." This position retains the equity in the intimacy-seeking patron, but extends it to communicate that the Claridge now has a facility capable of comfortably servicing a larger customer base, and offering the same amenities and entertainment found at larger Atlantic City casino hotels.
Beginning in the Fall of 1988, several events occurred that accelerated the presence of casino gaming in the United States. Since then there has been a continued expansion of casino gaming, lotteries, including video lottery terminals, and off-track betting in other nearby states. This could have a negative effect on the Atlantic City market.
Current Licensing Status of the Partnership and New Claridge
The ownership and operation of casino-hotel facilities in Atlantic City are subject to extensive state regulation under the Casino Control Act under the direction of the New Jersey Casino Control Commission ("Commission"). The Casino Control Act provides that various categories of entities must hold appropriate casino licenses. The Partnership currently operates under a four-year casino service industry license effective October 31, 1995, while New Claridge operates under a four-year casino license effective September 30, 1995.
Employees
The Partnership has one part-time employee who assists the General Partners with investor-related matters. The General Partners are paid management fees pursuant to the Partnership Agreement, as amended. See Items 10 and 11, "Directors and Executive Officers of the Registrant" and "Executive Compensation."
Item 2.
Item 2. Properties.
The Claridge hotel was constructed in 1929 at the northeastern end of Absecon Island, on which Atlantic City is located. After remodeling, modernization and expansion at a cost of approximately $138 million, the Claridge opened as a casino-hotel in July 1981. Located in the Boardwalk Casino section of Atlantic City on Brighton Park, approximately 550 feet north of the Boardwalk, the Claridge occupies three parcels of property. In October 1983 the Partnership acquired the building, parking facility and non-gaming depreciable, tangible property of the Claridge casino-hotel. On June 16, 1989, as part of the Restructuring Agreement, the Partnership acquired all of the rights to the land underlying the Hotel Assets, the air rights and related easement.
The casino-hotel, situated on the main parcel of land (41,408 square feet with 138 feet fronting the park and 300 feet deep), is a concrete steel frame structure, 26 stories high at its highest point. The valet-parking garage, situated on an adjacent parcel of land (21,840 square feet) west of the casino-hotel site, is an eight-level reinforced concrete ramp structure, built in 1981. Including the bus drive-through area, a bus patron waiting room and electrical room, it totals an area of 197,100 square feet and provides parking for approximately 475 automobiles. In 1996, New Claridge completed the construction of a self-parking garage, located on a parcel of land (29,120 square feet) connected to its existing valet-parking garage. The combined garage facility provides parking for approximately 1,200 vehicles. The office building, situated on an adjacent parcel of land (7,766 square feet), is a two-story reinforced concrete and brick structure with a flat roof. Constructed over 50 years ago, its interior has been modernized. The building is utilized as an administration facility, and totals an area of 14,020 square feet. With the exception of the self-parking garage, all of the existing facilities are owned by the Partnership and are leased to New Claridge under the Operating Lease and the Expansion Operating Lease. The self-parking garage and the property on which it is located are owned by New Claridge.
Item 3.
Item 3. Legal Proceedings.
On February 5, 1997, three holders of the Notes, who were members of the unofficial committee which they had formed, filed a petition for involuntary bankruptcy against the Corporation in the bankruptcy court for the District of New Jersey. Contemporaneously, the same three holders of the Notes filed a related state court lawsuit against the Corporation, New Claridge, the Partnership, certain officers and directors of the Corporation, and the general partners of the Partnership. On March 4, 1997, contrary to earlier expectations, the Corporation was able to pay the interest that was due on the Notes on February 3, 1997, under the 30-day grace period allowed in accordance with the terms of the indenture governing the Notes. In addition, the Corporation reached agreement with the unofficial committee of noteholders, as well as the three holders of the Notes, providing for the joint dismissal of the involuntary bankruptcy petition and the related state court lawsuit. On March 19, 1997, an order was entered dismissing the involuntary bankruptcy petition; as part of that order, a settlement agreement was entered whereby the state court lawsuit was also dismissed.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
No partnership interests in the Partnership have been registered under the Securities Act of 1933, as amended ("Securities Act"). All outstanding partnership interests have been offered and sold in reliance on exemptions from the registration requirements of the Securities Act. Therefore, there is no established trading market for any class of partnership interests of the Partnership. Two partnership interests equal one partnership unit, and there are approximately 479 holders of partnership interests.
The Contingent Payment Rights received by Releasing Partners/Investors may or may not be securities. The Partnership, the Corporation and Webb filed a registration statement under the Securities Act with respect to the Contingent Payment Rights as if they were securities and each of the Corporation, the Partnership and Webb were an issuer of such securities. However, by such actions, none of the Partnership, the Corporation or Webb admitted that the Contingent Payment Rights are securities or that any of them is the issuer of any such securities. There is no market for the Contingent Payment Rights.
Item 6.
Item 6. Selected Financial Data.
Set forth below is selected financial data regarding the Partnership as of or for each of the years in the five-year period ended December 31, 1996.
(a) The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this annual report.
(b) 450 limited partnership units were outstanding at the end of each period.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations for the Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
Rental income for the year ended December 31, 1996 increased $881,000 as compared to the year ended December 31, 1995 . New Claridge pays as additional rent, certain expenses and debt service relating to furniture, fixture and equipment replacements and building improvements ("FF&E"). During 1996, FF&E note principal and interest payments were higher than in 1995, resulting in increased rents in 1996.
Investment income earned on repurchase agreements for the year ended December 31, 1996 decreased $30,000 as compared to the year ended December 31, 1995. This decrease reflects the decrease in the interest rate offered for these investments during 1996 as compared to 1995.
The Partnership has an agreement with New Claridge whereby New Claridge provides facility and maintenance and engineering services for the Claridge. The agreement calls for the reimbursement of the actual facilities and maintenance costs incurred on the Partnership's behalf. The cost of maintaining and repairing Hotel Assets increased $400,000 for the year ended December 31, 1996 as compared to 1995 due primarily to an increase in New Claridge's maintenance and engineering salaries and wages and payroll related expenses.
For the year ended December 31, 1996, interest expense decreased $1,205,000 from the prior year due to principal payments made during 1995 and 1996 that reduced the average outstanding balance of the wraparound and expansion mortgages and FF&E notes.
General and administrative expenses decreased $21,000 during the year ended December 31, 1996 as compared to 1995. Insurance expense increased approximately $44,000 due to an increase in the insurance premium. The decrease in general and administrative expense is primarily due to a $46,000 loss on the disposal of assets that was recognized in 1995 and classified as a general and administrative expense, as well as a decrease in professional fees. Professional fees during 1995 included additional fees incurred with regard to the Contingent Payment.
Refer to the "Liquidity and Capital Resources" section below for further discussion on the Partnership's operations.
Results of Operations for the Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
Rental income for the year ended December 31, 1995 increased $1,281,000 as compared to the year ended December 31, 1994 . New Claridge pays as additional rent, certain expenses and debt service relating to furniture, fixture and equipment replacements and building improvements ("FF&E"). During 1994 the Claridge
expanded its casino. The expansion (as well as the related debt) was occurring throughout 1994 and had been completed prior to the beginning of 1995. This caused the Partnership's debt service relating to FF&E to be higher in 1995 when compared to 1994, resulting in increased rents in 1995.
Investment income earned on repurchase agreements for the year ended December 31, 1995 increased $47,000 as compared to the year ended December 31, 1994. This increase reflects the increase in the interest rate offered for these investments during 1995 as compared to 1994.
The Partnership has an agreement with New Claridge whereby New Claridge provides facility and maintenance and engineering services for the Claridge. The agreement calls for the reimbursement of the actual facilities and maintenance costs incurred on the Partnership's behalf. The cost of maintaining and repairing Hotel Assets increased $399,000 for the year ended December 31, 1995 as compared to 1994 due primarily to an increase in New Claridge's maintenance and engineering salaries and wages and payroll related expenses.
For the year ended December 31, 1995, interest expense decreased $490,000 from the prior year due to principal payments made during 1994 and 1995 that reduced the average outstanding balance of the wraparound and expansion mortgages and FF&E notes.
General and administrative expenses decreased $54,000 during the year ended December 31, 1995 as compared to 1994. Insurance and professional fees increased approximately $67,000 due to an increase in insurance premium as well as professional fees incurred with regard to the Contingent Payment. The decrease is primarily due to a $46,000 loss on the disposal of assets that was recognized in 1995 compared to a similar loss of $170,000 in 1994. Both of these losses were classified as a general and administrative expense.
During 1994, in connection with the Claridge's casino expansion project, a significant amount of Hotel Assets were placed into service. A full year's depreciation was taken on these assets during 1995. As a result, depreciation and amortization for the year ended December 31, 1995 increased $532,000 as compared to 1994.
Liquidity and Capital Resources
The ability of the Partnership to continue to fulfill its obligations is dependent upon the ability of New Claridge to continue to make rental payments when due. Current lease payments from New Claridge, as recently amended, are sufficient to pay the Partnership's debt service and operating expenses. As part of the 1989 Restructuring Agreement, rental payments in excess of monthly cash flow requirements are deferred or abated so that excess cash does not currently accumulate in the Partnership. The 1997 restructuring continued this deferral or abatement of excess cash flow through 1998. At the Closing of the 1989 restructuring the Partnership loaned New Claridge $3.6 million. The note, including interest, along with those rentals deferred under the amendment to the operating leases, are to be repaid to the Partnership upon (i) the sale or refinancing of the Claridge; (ii) upon full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first mortgage then in place. The deferral of $1.3 million of rental obligation as part of the 1997 restructuring leaves the Partnership with minimal liquidity.
The Operating Lease, together with the Expansion Operating Lease, was amended as part of the Restructuring Agreement to provide for the deferral of $15,078,000 of rental payments during the period July 1, 1988 through the beginning of 1992, and to provide for the abatement of $38,820,000 of basic rent through 1998, thereby
reducing the Partnership's cash flow to an amount estimated to be necessary only to meet the Partnership's cash requirements. During the third quarter of 1991, the maximum deferral of rent was reached. On August 1, 1991, the Operating Lease and the Expansion Operating Lease were amended further to revise the abatement provisions so that, commencing January 1, 1991, for each calendar year through 1998, the lease abatements may not exceed $10 million in any one calendar year, and $38,820,000 in the aggregate. Rents abated during the years ended December 31, 1995 and 1996 amounted to $7,858,000 and $8,307,000, respectively. Cumulative abated rents as of December 31, 1996 total $37,066,000. The remaining $1,754,000 of available abatement was fully utilized in the first quarter of 1997. Additional abatements of rent totaling $500,000 are available as a result of the acquisition of the option to purchase the Contingent Payment, and further abatements would become available upon exercising the Contingent Payment option (see Item 1. Business - "Contingent Payment Rights"). Because the initial term of the Operating Lease continues through September 30, 1998, rental payments after the $38,820,000 abatement is fully utilized will increase substantially to $39.7 million in 1997, as compared to $31.5 million (net of abatement) in 1996.
The Fifth Amendment to the Operating Lease and the Fourth Amendment to the Expansion Operating Lease, which were effective on March 1, 1997, provided for the abatement of $867,953 of basic rent and for the deferral of $1,300,000 of basic rent on March 1, 1997, and provide for additional abatements of basic rent, commencing on April 1, 1997, as necessary to reduce the Partnership's cash flow to an amount necessary to meet the Partnership's cash requirements through December 31, 1998 (determined without regard to the repayment of the deferred rent). The $1.3 million of basic rent deferred on March 1, 1997 is to be paid to the Partnership in monthly installments of $25,000 for the period April 1, 1997 through December 31, 1997, and monthly installments of $50,000 for the year 1998 and thereafter until paid in full (subject to acceleration under certain circumstances). For the years 1999 through 2003, additional abatements of basic rent will be reduced to provide the Partnership with amounts needed to meet the Partnership's cash requirements plus an additional amount ($83,333 per month in 1999 and 2000, $125,000 per month in 2001, and $166,667 per month in 2002 and 2003).
In conjunction with the Fifth Amendment to the Operating Lease and the Fourth Amendment to the Expansion Operating Lease, as discussed above, the Corporation, New Claridge and the Partnership entered into a restructuring agreement, effective March 1, 1997, to modify certain terms of the Expandable Wraparound Mortgage. In addition, under the March 1, 1997 restructuring agreement, New Claridge agreed to exercise the first of three ten-year renewal options extending the term of the Operating Lease and Expansion Operating Lease through September 30, 2008.
Under the terms of the Operating Lease, as amended effective March 1, 1997, New Claridge has an option to purchase, on September 30, 1998, the Hotel Assets and the underlying land for their fair market value at the time the option is exercised, which in no event may be less than an amount equal to the amount then outstanding under the Expandable Wraparound Mortgage plus $2.5 million, plus any amount of the $1.3 million of rent deferred on March 1, 1997 not then paid. If New Claridge does not exercise this option on September 30, 1998, it may exercise an option, on September 30, 2003, to purchase the Hotel Assets and the underlying land on January 1, 2004, for their fair market value at the time the option is exercised.
Basic rent during the renewal term of the Operating Lease will be calculated pursuant to a formula, with such rent not to be more than $29.5 million nor less than $24 million in the lease year October 1, 1998 through September 30, 1999, and subsequently, not to be greater than 10% more than the basic rent for the preceding
lease year in each lease year thereafter. Basic rent during the renewal term of the Expansion Operating Lease will also be calculated pursuant to a formula, with such rent not to be more than $3 million nor less than $2.5 million in the lease year October 1, 1998 through September 30, 1999, and subsequently, not to be greater than 10% more than the basic rent for the preceding lease year in each lease year thereafter. Therefore, the aggregate basic rent payable during the initial years of the renewal term of the leases will be significantly below the 1997 level.
The Partnership funds the purchase of additional Hotel Assets by borrowing funds, at a 14% interest rate, from New Claridge. The ensuing notes are secured under the Expandable Wraparound Mortgage up to $25 million. Principal and interest on these notes are then reimbursed to the Partnership through additional rentals from New Claridge. Under the Operating Lease, New Claridge is required to reimburse the Partnership for all taxes, assessments, insurance and general and administrative costs of the Partnership.
The Partnership had a working capital deficiency of approximately $14,352,000 as of December 31, 1995 and $17,084,000 as of December 31, 1996. The working capital deficiency primarily results from the consummation of the 1989 Restructuring Agreement. As part of the 1989 restructuring, the Partnership's cash flow was reduced to an amount no greater than what the Partnership needs to pay Partnership expenses, including debt service. Such concept was continued through 1998 in the 1997 restructuring (see Item 1. Business - "Recent Developments at New Claridge"). Thus, so long as the Claridge is financially viable and New Claridge continues to make all payments under the operating leases, the Partnership expects to be able to pay its current liabilities.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedules are set forth at pages to of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Name Position Age
Anthony C. Atchley General Partner 55 Gerald C. Heetland General Partner 56
Mr. Atchley has served as General Partner since June 16, 1989. He served as President and Chief Executive Officer of Consolidated Casinos Corp., a subsidiary of Webb, and of the Del Webb Hotel Group from November 1985 to September 1989. He served as Executive Vice President of Sahara Nevada Corporation, a subsidiary of Webb, from October 1982 to November 1985 and as President and General Manager of the High
Sierra Casino and Hotel from October 1983 to November 1985. Mr. Atchley served as President and General Manager of the Claridge from April 1982 to November 1982, as well as Vice Chairman and a member of the Board of Directors of the Corporation from November 1986 to July 1989.
Mr. Heetland has served as General Partner since June 16, 1989. He has served as General Counsel of Becker Gaming, Inc., from January 1997 to present and served as a private consultant and attorney from December 1995 to January 1997. He served as Vice President General Counsel and Secretary of Fitzgeralds Casino & Hotel in Las Vegas, Nevada and Fitzgeralds Casino & Hotel, Harolds Club and Nevada Club in Reno, Nevada from September 1990 to November 1995. He served as Vice President, Secretary and General Counsel of Del Webb Hotels and all affiliated hotel group subsidiaries from March 1986 to June 1989. He served as Vice President, General Counsel-Casino/Hotels and Assistant Secretary of Webb and Vice President and Secretary of all Webb hotel group subsidiaries from April 1985 to March 1986, as Vice President, Associate General Counsel and Assistant Secretary of Webb from November 1983 to March 1985, and as Associate General Counsel and Assistant Secretary of Webb from July 1981 to November 1983. He served in similar capacities in all Webb hotel group subsidiaries during the 1981 to 1985 periods noted. From June 1984 through March 1986, Mr. Heetland was the Secretary of the Corporation, and from March 1986 through May 1987 he was Assistant Secretary of the Corporation.
Item 11.
Item 11. Executive Compensation.
The following table shows the general partners' management fee which is all of the compensation paid by the Partnership to all of its executive officers for the years ended December 31, 1996, 1995 and 1994.
Other Annual Individual Capacity Year Compensation
Anthony C. Atchley General Partner 1996 $65,000 1995 $65,000 1994 $65,000
Gerald C. Heetland General Partner 1996 $65,000 1995 $65,000 1994 $65,000
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security ownership of certain beneficial owners
Not applicable.
Security ownership of management
Per the terms of the Partnership agreement, the General Partners, as a group, are entitled to a 1% general partnership interest in the Partnership as described below:
Name and Address Amount and Nature of Beneficial Owner of Beneficial Ownership
Anthony C. Atchley 2880 W. Meade Avenue Suite 204 Las Vegas, NV 89102 0.5% Partnership Interest
Gerald C. Heetland 2880 W. Meade Avenue Suite 204 Las Vegas, NV 89102 0.5% Partnership Interest
Changes in Control
Not applicable.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Partnership does not currently engage in any significant business activities other than those relating to the Claridge. New Claridge has a direct material interest in the Expandable Wraparound Mortgage and Operating Leases. See Item 1. Business - "Current Financial Condition of The Partnership."
The common stock of the Corporation and the limited partnership interests of the Partnership were sold together in a private placement as units, and because there has been relatively little trading in the stock or partnership interest, there is a substantial similarity between the equity ownership of the Corporation and the Partnership. Although the Partnership and the Corporation are independent entities, approximately 95% of the Corporation's common stock is owned by persons who also own limited partnership interests in the Partnership.
The Partnership has an agreement with New Claridge whereby New Claridge provides facility and maintenance and engineering services for the Claridge. The agreement calls for the reimbursement of the actual facilities and maintenance costs incurred on the Partnership's behalf, as well as an annual fee equal to 10% of such facility and maintenance costs, but not to exceed $530,000 per annum. The agreement is in effect during the entire term of the Operating Lease including any subsequent renewal terms.
Under the terms of the option to purchase the Contingent Payment, upon purchase of the Contingent Payment, the Partnership and/or the Corporation are required to make distributions in excess of $7 million to the Releasing Partners/Investors. The Partnership and the Corporation have agreed to cooperate in the purchase of the option and the Contingent Payment, with each contributing one-half of the purchase price of the option and each anticipated to contribute one-half of the purchase price of the Contingent Payment. A portion of the
Partnership's contribution would be contributed through additional abatements of basic rent payments due under the Operating Lease and the Expansion Operating Lease (see Item 1. Business - "Contingent Payment Rights").
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) and (2): The response to this portion of Item 14 is submitted as a separate section of this report beginning on page. All other schedules have been omitted as inapplicable or not required because the required information is included in the financial statements or notes thereto.
(a) (3) Exhibits
3 (a) Agreement of Limited Partnership of the Partnership, as amended*
10 (a) Form of Amended and Restated Loan Agreement*
10 (b) Form of Amendment to Operating Lease and Expansion Operating Lease*
10 (c) Form of Amendment to Wraparound Mortgage Loan and Wraparound Mortgage*
10 (d) Form of Note from New Claridge to the Partnership*
10 (e) Form of Restructuring Agreement*
10 (f) Form of Second Amendment to Operating Lease and Expansion Operating Lease**
10 (g) Form of Third Amendment to Operating Lease and Expansion Operating Lease**
10 (h) Form of Fourth Amendment to Operating Lease and Expansion Operating Lease***
10 (i) Form of Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement***
10 (j) Form of Option Agreement****
10 (k) Form of Side Agreement****
10 (l) Form of First Amendment to the Option Agreement****
10 (m) Form of First Amendment to the Side Agreement****
10 (n) Form of Fifth Amendment to Operating Lease Agreement and Fourth Amendment to Expansion Operating Lease Agreement
10 (o) Form of Restructuring Agreement
*Exhibits are incorporated by reference to the Exhibits filed with a Registration Statement filed with the Securities and Exchange Commission on March 13, 1989 (Registration #33-27399)
**Exhibits are incorporated by reference to the Exhibits filed with Form 10-K for the fiscal year ended December 31, 1991 filed with the Securities and Exchange Commission on March 26, 1992.
***Exhibits are incorporated by reference to the Exhibits filed with Form 10-K for the fiscal year ended December 31, 1993 filed with the Securities and Exchange Commission on March 30, 1994.
****Exhibits are incorporated by reference to the Exhibits filed with Form 10-K for the fiscal year ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996.
(b) Reports on Form 8-K
The Partnership filed no reports on Form 8-K during the last quarter of the period covered by this report.
Supplemental Information
No proxy materials are being or have been sent to the Limited Partners.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Atlantic City Boardwalk Associates, L.P. Registrant
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY -------------- --------------------------------------- by Anthony C. Atchley, General Partner
Date: April 14, 1997 /s/ GERALD C. HEETLAND -------------- --------------------------------------- by Gerald C. Heetland, General Partner
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY -------------- --------------------------------------- by AC Boardwalk Partners Corporation, General Partner by Anthony C. Atchley, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: April 14, 1997 /s/ GERALD C. HEETLAND -------------- -------------------------------------- by Gerald C. Heetland, General Partner and Chief Financial Officer
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY -------------- -------------------------------------- by Anthony C. Atchley, General Partner
AND FINANCIAL STATEMENT SCHEDULES
Page Reference in Report on Form 10-K
Independent Auditors' Report ..................................
Balance Sheets as of December 31, 1995 and 1996 ................
Statements of Operations For the Years Ended December 31, 1994, 1995 and 1996 ..........................
Statements of Partners' Capital Accounts (Deficit) For the Years Ended December 31, 1994, 1995 and 1996 .......
Statements of Cash Flows For the Years Ended December 31, 1994, 1995 and 1996 ...........................
Notes to Financial Statements For the Years Ended December 31, 1994, 1995 and 1996 ...........................
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation.....
All other schedules have been omitted as inapplicable or not required because the required information is included in the financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
The General Partners Atlantic City Boardwalk Associates, L.P.
We have audited the accompanying financial statements of Atlantic City Boardwalk Associates, L.P. as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Atlantic City Boardwalk Associates, L.P. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 7 to the financial statements, the Partnership has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada March 21, 1997
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. Balance Sheets December 31, 1995 and 1996
1995 1996 --------- --------- Assets
Current assets: Cash and cash equivalents $ 1,535,000 1,446,000 Rent due from New Claridge 298,000 408,000 Interest receivable from partners 28,000 35,000 Prepaid expenses 313,000 264,000 Other assets 199,000 172,000 ---------- -------------
Total current assets 2,373,000 2,325,000 ---------- -------------
Hotel Assets (notes 4 and 5) 180,298,000 183,529,000 Less: Accumulated depreciation and amortization 94,057,000 100,281,000 ------------ -------------
Net Hotel Assets 86,241,000 83,248,000 ------------ -------------
Note receivable from New Claridge, including accrued interest of $2,826,000 and $3,258,000 in 1995 and 1996, respectively 6,426,000 6,858,000 Deferred rent from New Claridge (notes 3 and 6) 39,856,000 37,807,000 Intangibles, net of accumulated amortization of $3,526,000 and $3,626,000 in 1995 and 1996, respectively 279,000 179,000 ----------- -------------
$ 135,175,000 130,417,000 =========== ============= Liabilities and Partners' Capital Accounts
Current liabilities: Accounts payable $ 1,400,000 1,035,000 Accrued interest due New Claridge 1,274,000 1,147,000 Current portion of long-term debt due principally to New Claridge (note 5) 14,051,000 17,227,000 ----------- ---------------
Total current liabilities 16,725,000 19,409,000 ----------- ---------------
Long-term debt due principally to New Claridge, including accrued interest of $20,000,000 104,315,000 92,120,000 in 1995 and 1996 (note 5) ----------- ------------
Partners' capital accounts (deficit): New general partners 57,000 105,000 Former general partners 144,000 173,000 Special limited partners (234,000) (187,000) Investor limited partners 14,168,000 18,797,000 ----------- ---------------
Total partners' capital accounts (deficit) 14,135,000 18,888,000
Commitments and contingencies (notes 5, 6, 7 and 9)
$ 135,175,000 130,417,000 =========== ============== See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. Statements of Operations For the Years Ended December 31, 1994, 1995, and 1996
See accompanying notes to financial statements.
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. Notes to Financial Statements For the Years Ended December 31, 1994, 1995, and 1996
(1) The Partnership
(a) General
Atlantic City Boardwalk Associates, L.P. ("Partnership") was formed on October 31, 1983 to acquire the buildings, parking facility and non-gaming depreciable, tangible property (collectively, "Hotel Assets") of The Claridge Hotel and Casino ("Claridge") located in Atlantic City, New Jersey; to hold a leasehold interest in the land on which the Claridge is located ("Land"), which Land was subsequently acquired by the Partnership as part of a financial restructuring ("Restructuring Agreement"); and to engage in activities related or incidental thereto. The Partnership leases the Land and Hotel Assets to The Claridge at Park Place, Incorporated ("New Claridge"), a wholly-owned subsidiary of The Claridge Hotel and Casino Corporation ("Corporation"), under operating leases.
(b) Current Licensing Status
The ownership and operation of casino-hotel facilities in Atlantic City are subject to extensive state regulation under the Casino Control Act under the direction of the New Jersey Casino Control Commission ("Commission"). The Casino Control Act provides that various categories of entities must hold appropriate casino licenses. The Partnership currently operates under a four-year casino service industry license effective October 31, 1995, while New Claridge operates under a four-year casino license effective September 30, 1995.
(c) General Partners
The General Partners of the Partnership are Anthony C. Atchley, Gerald C. Heetland and AC Boardwalk Partners Corporation, a New Jersey corporation formed on August 26, 1983, all of whose shares of capital stock are owned by Messrs. Atchley and Heetland. The General Partners receive, in the aggregate, an annual compensation of $130,000 from the Partnership as well as a 1% interest in the Partnership's income, gains, losses and deductions for periods subsequent to the restructuring. The Partnership maintains insurance to protect the General Partners against certain liabilities arising from their actions as General Partners. Del Webb Corporation ("Webb"), formerly affiliated with the Claridge, has agreed to indemnify the General Partners for claims and liabilities resulting from acts or omissions occurring as a result of or prior to the restructuring.
The general partners prior to the Restructuring Agreement executed on June 16, 1989 were Robert K. Swanson, Everett L. Mangam and T. Edward Plant ("Former General Partners"). The Former General Partners were entitled to receive, in the aggregate, a 1% interest in the Partnership's income, gains, losses and deductions for the periods prior to the restructuring, and now are entitled to receive a 0.6% interest for periods subsequent to the restructuring, as limited partners. The Partnership and Del E. Webb New Jersey, Inc. ("DEWNJ"), a wholly-owned subsidiary of Webb, have agreed to indemnify the Former General Partners against certain liabilities arising from their actions as general partners.
(d) Special Limited Partners
Oppenheimer Holdings, Inc. and officers and employees of affiliated Oppenheimer & Co., Inc. ("Special Limited Partners") committed to contribute $400,000 by issuing 9% notes maturing in 1998. This contribution entitles them to an aggregate of 1% interest in the Partnership's income, gains, losses and deductions until the Limited Partners, as described below, receive aggregate cash distributions equal to their capital contributions. Thereafter, the Special Limited Partners are entitled to an aggregate of 10% of each item. Upon receipt of the cash, the Partnership will reflect this contribution in its financial statements.
Subsequent to the Restructuring Agreement, the Special Limited Partners were classified into two categories, those not consenting to the restructuring ("Class A Special Limited Partners") and those consenting to the restructuring ("Class B Special Limited Partners"). Class A Special Limited Partners' interest after the restructuring is .065%, in the aggregate, representing their same proportionate share as before the restructuring. Class B Special Limited Partners' interest subsequent to the restructuring was reduced by a portion of the 0.6% interest issued to the Former General Partners, thereby entitling the Class B Special Limited Partners to a .927% interest, in the aggregate.
(e) Investor Limited Partners
Investor Limited Partners contributed $37,151,000 in cash to the Partnership for a 98% interest in the Partnership's income, gains, losses and deductions, to be reduced to 89% upon receipt of cash distributions equal to their capital contributions. Subsequent to the restructuring the Investor Limited Partners were classified into two categories, those not consenting to the restructuring ("Class A Investor Limited Partners") and those consenting to the restructuring ("Class B Investor Limited Partners"). Class A Investor Limited Partners' interest after the restructuring is 23.912%, in the aggregate, representing their same proportionate share as before the restructuring. Class B Investor Limited Partners' interest subsequent to the restructuring was reduced by a portion of the 0.6% interest issued to the Former General Partners, thereby entitling the Class B Investor Limited Partners to a 73.496% interest, in the aggregate.
(2) Basis of Presentation and Summary of Significant Accounting Policies
The Partnership's policy is to maintain its books of records and prepare its income tax returns on the accrual basis of accounting ("Tax Basis"). The accompanying financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") and differ from Tax Basis as follows:
o Certain property and equipment are depreciated on a different basis and over different lives for GAAP than those used for Tax Basis;
o In 1994 the Claridge facilities were remodeled and expanded. During the construction period interest was incurred on the debt related to this project. This interest was capitalized for GAAP and is being amortized on a straight-line basis over 10 years, while for Tax Basis the interest was expensed in full in 1994;
o The Expandable Wraparound Mortgage was discounted for GAAP as a result of the effect on the obligation of $20 million of deferred interest;
o Tax Basis rental income is recognized according to the terms of the Operating Lease, whereas for GAAP rental payments are leveled so that each period reflects the same basic rent.
The significant accounting policies used to prepare the accompanying GAAP financial statements are as follows:
a. Hotel Assets are stated at cost and are depreciated or amortized on a straight-line basis over the following estimated useful lives:
Building 40 years Building improvements 10 years Furniture, fixtures and equipment 7 years
b. The Partnership adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Partnership's financial position, results of operations, or liquidity.
c. Deferred financing costs are being amortized on a straight-line basis over 5 to 17 years.
d. The Expandable Wraparound Mortgage Note has been discounted utilizing a 14% interest rate. The resulting discount is reflected in the basis of the Hotel Assets.
e. The accompanying financial statements do not reflect federal income tax expense or benefit since such liability or benefit is that of the individual partners.
f. Cash equivalents are composed of investments in interest-bearing repurchase agreements with initial or remaining maturities of less than three months at the time the investment is made.
g. Due to the nature of the relationships between the Partnership and New Claridge and the Partnership and the partners, estimation of the fair value of the financial instruments due from and due to these related parties is not practical as there is no trading market for these financial instruments. See Notes 3 and 5 for a
description of the terms of these instruments. All other financial instruments are stated at their carrying value which approximates their fair value. The carrying amount of cash equivalents, interest receivable from partners and current liabilities approximates fair value because of the short-term maturity of these instruments.
h. Management of the Partnership has made estimates and assumptions relating to the reporting of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Following are the Partnership's assets and liabilities as determined in accordance with GAAP and for federal income tax reporting purposes at December 31:
(3) Restructuring Agreement
On October 27, 1988, the Partnership, the Corporation, New Claridge, Webb and the mortgage lenders entered into the Restructuring Agreement. On June 13, 1989 the required majority of the partners approved the Restructuring Agreement and on June 16, 1989 the restructuring was concluded (the "Closing"). The following paragraphs are an overview of the events that took place as a result of the restructuring.
o Webb transferred all of its rights to the land underlying the Hotel Assets, the air rights and the related easement to the Partnership. The Partnership's book value of the Hotel Assets was not affected due to the uncertainty of the incremental value, if any, of the land.
o The operating and expansion operating leases were amended to add the land and air rights, defer portions of rent through 1992 totaling $15,078,000 otherwise payable to the Partnership by New Claridge, and to abate approximately $39,820,000 of future rents commencing in 1992. In addition, the Partnership lent to New Claridge $3.6 million representing, at the Closing, substantially all of the Partnership's cash and cash equivalents in excess of amounts required to pay Partnership expenses. The loan bears interest at 12% per annum that becomes payable at the time the principal is paid. The
deferred rent and the $3,600,000 loan become due upon (i) the sale or refinancing of the Claridge; (ii) upon full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first mortgage then in place. The Restructuring Agreement requires that the Partnership maintain cash flows in amounts necessary to pay Partnership expenses, including debt service, only, and prohibits the Partnership from making distributions to partners for an indefinite period of time.
o The Partnership (as successor in interest to DEWNJ) and New Claridge terminated the Land Option Agreement which gave New Claridge the option to purchase from the Partnership certain parcels and tracts of land in Atlantic City, New Jersey. This termination resulted in payment of $100,000 by the Partnership to New Claridge.
o New General Partners were admitted to the Partnership. The Former General Partners became limited partners with an aggregate limited partnership interest of 0.6%. This limited partnership interest was made available by reducing proportionately the limited partnership interests of those limited partners consenting to the restructuring. In addition, for nominal consideration, the Former General Partners transferred to the General Partners all of the outstanding shares of the common stock of AC Boardwalk Partners Corporation, the corporate general partner of the Partnership.
(4) Hotel Assets
A summary of Hotel Assets at December 31, 1995 and 1996 is as follows:
(5) Long-term Debt
At December 31, 1995 and 1996, long-term debt consisted of the following:
1995 1996 ---- ----
14% Wraparound mortgage, net of $ 93,185,000 $ 84,709,000 unaccreted discount of $9,815,000 and $8,291,000, respectively 14% Expansion mortgage 6,522,000 4,496,000 14% FF&E notes 18,346,000 20,035,000 Capital lease obligations 313,000 107,000 ------------- -------------- 118,366,000 109,347,000 Less: Current portion of long-term debt 14,051,000 17,227,000 ------------- ------------
$ 104,315,000 $ 92,120,000 ============= ==============
The wraparound and expansion mortgages are non-recourse obligations as neither the Partnership nor its partners are personally liable to New Claridge for non-payment of any principal of, or interest on, the notes. Various restrictions are placed upon the Partnership's ability to sell assets and incur additional obligations. Included in the wraparound mortgage is $20 million of accrued interest, discounted at 14%, which accrued from 1983 to 1988 and has been deferred without interest until maturity. Monthly principal and interest payments continue through 1998 with interest only payments from January 1999 until October 2000 at which time a balloon principal payment of $47 million and the $20 million of deferred interest is due. The expansion mortgage has principal and interest payments of $234,000 due monthly through September 30, 1998.
The Partnership funds the purchase of additional furniture, fixtures and equipment ("FF&E") by borrowing from New Claridge at a 14% interest rate. In addition, during the term of the Expansion Operating Lease, the Partnership is required to provide New Claridge with expansion FF&E replacements under the same borrowing arrangement. Generally, one half of the principal is due in 48 months and the remainder is due 60 months from the issue date of the individual notes, with the following exception. As required by the terms of the Claridge's $85 million debt offering, $8 million was used to finance internal improvements at the Claridge. The $8 million principal on these notes will come due on September 30, 2000. All FF&E notes are secured under the wraparound mortgage up to $25 million.
During 1995 the Partnership financed the purchase of some computer equipment through a 6.5% capital lease. This thirty-six month lease required the final six month's payments be made at its inception and
that principal and interest payments of approximately $17,000 be made monthly until its maturity in July 1997. During 1991 the Partnership financed the purchase of a Hotel Asset through a 14% capital lease. This five year lease required monthly principal and interest payments of approximately $4,000 until its maturity in June 1996.
Aggregate maturities of debt for each of the next five years are as follows:
1997 $ 17,227,000 1998 18,615,000 1999 2,046,000 2000 77,996,000 2001 1,754,000 -------------
117,638,000 Less: Discount 8,291,000 --------------
$ 109,347,000 =============
(6) Leases
The Partnership leases the Land and the Hotel Assets, excluding the FF&E, to New Claridge under an operating lease expiring September 30, 1998, with three 10-year renewal options. The Partnership also leases the FF&E to New Claridge for an amount sufficient to fund payment of principal and interest on the FF&E notes. The operating leases provide that New Claridge will have the option to purchase the Hotel Assets and the leasehold interest in the land and air rights at their fair market value on September 30, 1998.
Minimum future rental receipts for each of the next five years under leases to New Claridge are as follows:
1997 $ 50,233,000 1998 42,034,000 1999 7,583,000 2000 12,010,000 2001 1,877,000 -------------
Minimum future rentals $ 113,737,000 ===========
Future Partnership activities including anticipated purchases of Hotel Assets and payments of related debt may cause actual future rentals to differ from those presented above. Rents are used to fund debt service, facilities and maintenance costs and fees, general partners' management fees and
general and administrative expenses of the Partnership. The Restructuring Agreement requires that the Partnership maintain cash flows in amounts necessary to pay Partnership expenses including debt service, only, and is prohibited from making distributions to partners for an indefinite period of time. Any rents not required for the cash flow needs of the Partnership are to be deferred up to $15,078,000. As of December 31, 1991, $15,078,000 in rents had been deferred, and excess rents are now being abated, as described below. The deferred rent becomes payable upon (i) the sale or refinancing of the Claridge; (ii) upon full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first mortgage then in place.
Per the terms of an amendment to the Operating Lease Agreement executed as of August 1, 1991, during the years 1991 to 1998 contractual rents in excess of debt service and Partnership expenses can be abated up to $38,820,000 in the aggregate but not in excess of $10,000,000 in any one calendar year. Prior to this amendment, scheduled rents totaling $39,820,000 were to be abated beginning in 1992 through the end of 1999. Rents abated during the years ended December 31, 1995 and 1996 amounted to $7,858,000 and $8,307,000, respectively. Cumulative abated rents as of December 31, 1996 total $37,066,000, leaving $1,754,000 still to be abated. Additional abatements of rent totaling $500,000 are available as a result of the acquisition of the option to purchase the Contingent Payment, and further abatements would become available upon exercising the Contingent Payment option (see Note 9, "Contingencies"). As of March 1997 the abatement remaining as of December 31, 1996 has been fully utilized.
The Partnership accounts for leases in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 13, Accounting for Leases, whereby rental income is recognized on a straight-line basis over the life of the lease. As of December 31, 1995 and December 31, 1996, deferred rent from New Claridge included rental income of $24,778,000 and $22,729,000, respectively, that was earned in excess of actual rent receipts.
(7) Recent Developments at New Claridge
The ability of the Partnership to fulfill its obligations is dependent upon the ability of New Claridge to pay rental payments when due. Accordingly, the financial stability of the Partnership is dependent upon the financial condition of New Claridge.
During 1994 and 1995, the cash provided by operations of the Claridge was sufficient to meet the Corporation's obligations to pay interest on the Notes, as well as to make at least some moderate capital improvements. Commencing in the latter part of 1995, however, competition in the Atlantic City casino market for bus customers, a principal source of customers for the Claridge at the time, increased; this competition intensified even more during 1996 as additional casino square footage was added, principally due to the opening of the Trump World's Fair casino. During 1996, the average coin incentive issued per bus patron at the Claridge increased to approximately $19, from approximately $13 in 1995. Total cash incentives issued to Claridge's casino patrons (in the form of coin to play slot machines and gaming chips to play table games) increased to approximately $30.5 million in 1996, from approximately $25.2 million in 1995. While the Corporation's promotional costs have increased significantly, total casino revenues in 1996 actually decreased from 1995 levels. It had been the expectation of the Corporation that, upon opening of its new self-parking garage, the Corporation would
be able to reduce its reliance on the bus patron market; however, the Corporation was forced to close the garage facility on July 10, 1996, only ten days after its opening following a fatal accident. Because the facility was not able to reopen until the end of September 1996, the Corporation lost any possible benefit of the facility during the normally busy summer season. In addition, severe winter weather in the first quarter of 1996 adversely affected revenues. As a result, the Corporation experienced a net loss for 1996 of $15.4 million, compared to a net loss of $1.9 million in 1995.
In late July 1996, management of the Corporation determined that due to the serious deterioration in the Corporation's cash flow, that without a significant improvement in its operating results, it was unlikely that the Corporation would be able to meet its obligations to pay interest on the Notes beyond the August 1996 payment. In addition to taking steps to conserve cash by reducing various operating expenses, the Corporation engaged a financial advisor, Dillon, Read & Co., Inc., to assist in formulating a proposal to the holders of the Notes to restructure the Corporation's obligations under the Notes. At the same time, the Corporation was working with Dillon, Read & Co., Inc. to attempt to find a buyer of the Corporation or an investor that would be in a position to inject additional capital into the Corporation to enable the Corporation to meet its ongoing obligations. To date, the Corporation has not received any acceptable proposals in regards to the possible sale of the Corporation.
In November 1996, while the sales efforts were continuing, the Corporation announced that there was a strong likelihood that the Corporation would be unable to pay the interest due on the Notes on February 3, 1997. Accordingly, management, working together with financial and legal advisors, formulated a plan for restructuring the Corporation's obligations. The terms of the proposed plan were presented to the noteholders at a meeting held on December 3, 1996, at which time the noteholders were urged to form a steering committee or other representative body to conduct negotiations. Although a group of noteholders formed and met with the management of the Corporation on a few occasions, by the time the committee formally organized itself on January 7, 1997, it consisted of six members representing ownership of less than 5% of the total amount of Notes outstanding. At that time, the Corporation determined that the committee did not represent a sufficient portion of the noteholders to negotiate on behalf of the noteholders generally. As a result, the Corporation did not formally recognize the committee and did not engage in any negotiation with the committee or its members, although it did encourage the members of the committee to continue to attempt to obtain broader representation of the noteholders.
On January 12, 1997, management of the Corporation was contacted, through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a possible sale of the Corporation to Hilton, and shortly thereafter, the Corporation began negotiations with Hilton. On January 30, 1997, the Corporation issued a press release indicating that the Corporation would not make the interest payment due on the Notes on February 3, 1997, and that the Corporation had entered negotiations with Hilton regarding acquisition of the Corporation by Hilton through a prepackaged bankruptcy plan. At that time, a representative of Hilton indicated that Hilton had acquired approximately 35% to 40% of the Notes. On February 5, 1997, three holders of the Notes, who were members of the unofficial committee which they had formed, filed a petition for involuntary bankruptcy against the Corporation in the bankruptcy court for the District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related state court lawsuit against the Corporation, New Claridge, the Partnership, certain officers and directors of the Corporation, and the general partners of the Partnership. On March 4, 1997, contrary to earlier expectations, the Corporation was able to pay the interest that was due on the Notes on February 3, 1997, under the 30-day grace period allowed in accordance with the terms of the indenture governing the Notes ("Indenture"). In addition, the Corporation reached agreement with the unofficial committee of noteholders, as well as the three holders of the Notes, providing for the joint dismissal of the involuntary bankruptcy petition and the related state court lawsuit. On March 19, 1997, an order was entered dismissing the involuntary bankruptcy petition; as part of that order, a settlement agreement was entered whereby the state court lawsuit was also dismissed. The Corporation expects the negotiations with Hilton to continue.
The Corporation had sufficient cash to pay the interest on the Notes on March 4, 1997 due to several events: (i) cash flow from operations for January and February 1997 improved significantly over what had been expected; (ii) effective March 1, 1997, the Operating Lease and Expansion Operating Lease were amended to provide for the deferral of basic rent of $1.3 million on March 1, 1997 (see further discussion below); and (iii) on February 28, 1997, New Claridge entered into an agreement with Thermal Energy Limited Partnership I ("Atlantic Thermal"), pursuant to which Atlantic Thermal was granted an exclusive license for a period of twenty years to use, operate and maintain certain steam and chilled water production facilities at the Claridge. In consideration for this license agreement, Atlantic Thermal paid New Claridge $1.5 million.
The Fifth Amendment to the Operating Lease and the Fourth Amendment to the Expansion Operating Lease, which were effective on March 1, 1997, provided for the abatement of $867,953 of basic rent and for the deferral of $1,300,000 of basic rent on March 1, 1997, and provide for additional abatements of basic rent, commencing on April 1, 1997, as necessary to reduce the Partnership's cash flow to an amount necessary to meet the Partnership's cash requirements through December 31, 1998 (determined without regard to the repayment of the deferred rent). The $1.3 million of basic rent deferred on March 1, 1997 is to be paid to the Partnership in monthly installments of $25,000 for the period April 1, 1997 through December 31, 1997, and monthly installments of $50,000 for the year 1998 and thereafter until paid in full (subject to acceleration under certain circumstances). For the years 1999 through 2003, additional abatements of basic rent will be reduced to provide the Partnership with amounts needed to meet the Partnership's cash requirements plus an additional amount ($83,333 per month in 1999 and 2000, $125,000 per month in 2001, and $166,667 per month in 2002 and 2003).
Also effective March 1, 1997, the Corporation, New Claridge, and the Partnership entered into a restructuring agreement, pursuant to which New Claridge agreed to use its best efforts to cause a modification of the Expandable Wraparound Mortgage ("Wraparound Modification") that is permitted by, or is in compliance with, the terms of the Indenture. The Wraparound Modification, if so permitted, will provide for an extension of the maturity date of the Expandable Wraparound Mortgage from September 30, 2000 to January 1, 2004. If the Wraparound Modification is not permitted by or in compliance with the terms of the Indenture, New Claridge has agreed to effect the Wraparound Modification at such time as the Notes are no longer outstanding, and to forbear from taking any action to foreclose on the Expandable Wraparound Mortgage until February 2002.
As discussed, the Corporation experienced recurring losses and serious deterioration in its cash flow in 1996. Since the Corporation does not have substantial cash reserves or access to a line of credit, the Corporation will need to experience a significant improvement in operating results in 1997 in order to meet its on-going obligations, including the interest due on the Notes. Operating results in 1997 have improved over 1996 levels, due primarily to the positive impact of the availability of the self-parking garage. Although management of the Corporation believes that operating results will continue to improve over prior year levels, no assurances as to the continuation of this improvement can be given. Management will continue to conserve cash through various cost containment measures, including limiting capital expenditures in 1997 to approximately $1 million. Given the various improvements made to the property in recent years, including the casino expansion in 1994, the construction of the self-parking garage, and other projects such as the refurbishment of all of its guest rooms, the current condition of the property is such that the above-mentioned level of capital expenditures is deemed adequate. Management will also continue to work with Dillon, Read & Co., Inc. to pursue a sale of the Corporation or some other plan for a significant infusion of capital into the Corporation. In addition, New Claridge has retained the law firm of Zelle and Larson LLP of Minneapolis, Minnesota to assist in evaluating the recovery of certain expenses incurred in reopening the self-parking garage and in evaluating potential lost profit claims as a result of the accident which occurred in the self-parking garage on July 10, 1996. Management of the Corporation intends to file a claim to recover these expenses and lost profits; recovery of these claims would have a positive impact on New Claridge's financial results and liquidity. No formal claims have been filed to date, and there is no assurance that the Corporation will be successful in realizing any recovery.
(8) Related Party Transactions
The common stock of the Corporation and the limited partnership interests of the Partnership were sold together in a private placement as units, and because there has been relatively little trading in the stock or partnership interests, there is a substantial similarity between the equity ownership of the Corporation and the Partnership. Although the Partnership and the Corporation are independent entities, approximately 95% of the Corporation's common stock is owned by persons who also own limited partnership interests in the Partnership.
The Partnership has an agreement with New Claridge whereby New Claridge provides facility and maintenance and engineering services for the Claridge. The agreement calls for the reimbursement of the actual facilities and maintenance costs incurred on the Partnership's behalf, as well as an annual fee equal to 10% of such facility and maintenance costs not to exceed $530,000 per annum. The agreement expires on September 30, 1998.
Under the terms of the option to purchase the Contingent Payment (see Note 9, "Contingencies"), upon purchase of the Contingent Payment, the Partnership and/or the Corporation would be required to make distributions in excess of $7 million to the Releasing Partners/Investors. The Partnership and the Corporation have agreed to cooperate in the purchase of the option and the Contingent Payment, with each contributing one-half of the purchase price of the option and each anticipated to contribute one-half of the purchase price of the Contingent Payment. A portion or the Partnership's contribution would be contributed through additional abatements of basic rent payments due under the Operating Lease and the Expansion Operating Lease. Given the recent operating results at New Claridge (see Note 7, "Recent
Developments at New Claridge"), it is unlikely that the Corporation would be able to exercise this Contingent Payment Option using available working capital, or absent a refinancing or sale transaction.
(9) Contingencies
The Restructuring Agreement provided for Webb to retain an interest equal to $20 million plus interest from December 1, 1988 accruing at the rate of 15% per annum compounded quarterly ("Contingent Payment") in any proceeds ultimately recovered from the operations and/or the sale or refinancing of the Claridge facility in excess of the First Mortgage loan and other liabilities. To give effect to this Contingent Payment, the Corporation and the Partnership agreed not to make any distributions to the holders of their equity securities, whether derived from operations or from sale or refinancing proceeds, until Webb had received the Contingent Payment.
In connection with the 1989 restructuring, Webb agreed to permit those partners/investors in the Partnership and Corporation ("Releasing Partners/Investors") from whom Webb had received written releases from all liabilities, rights ("Contingent Payment Rights") to receive certain amounts to the extent available for application to the Contingent Payment. Approximately 84% in interest of the partners/investors provided releases and became Releasing Partners/Investors. Payments to Releasing Partners/Investors are to be made in accordance with a schedule of priorities, as defined in the Restructuring Agreement.
On April 2, 1990, Webb transferred its interest in the Contingent Payment to an irrevocable trust for the benefit of the Valley of the Sun United Way, and upon such transfer Webb was no longer required to be qualified or licensed by the Commission.
On February 23, 1996, the Corporation acquired an option to purchase, at a discount from the carrying value, the Contingent Payment. The purchase price of the option was $1 million, and the option may be exercised any time prior to December 31, 1997. Upon exercise of the option, the purchase price of the Contingent Payment would be $10 million, plus interest at 10% per annum for the period from January 1, 1997 to the date of payment of the purchase price. The purchase price may also increase in an amount not to exceed $10 million if future distributions to Releasing Partners/Investors exceed $20 million. It is estimated that at December 31, 1996, the aggregate amount owing in respect of the Contingent Payment was $65.8 million.
Given the recent operating results at New Claridge (see Note 7, "Recent Developments at New Claridge"), it is unlikely that the Corporation would be able to exercise this Contingent Payment Option using available working capital, or absent a refinancing or sale transaction.
In the event that the option is exercised, it is anticipated that the Contingent Payment would be canceled so that neither the Corporation nor the Partnership would have any obligation to make any payment in respect of the Contingent Payment before making a distribution to limited partners or shareholders. Upon the purchase and cancellation, however, the Corporation and the Partnership would remain obligated to make payments to the Releasing Partners/Investors, in respect of the Contingent Payment Rights, before any distribution may be made to limited partners or shareholders. These payments would be required to be in the same amounts as if the Contingent Payment had not been purchased and canceled. As a result, it is not likely that limited partners or shareholders who are not Releasing
Partners/Investors will receive any distribution from the Partnership or the Corporation. In the aggregate, Releasing Partners/Investors are entitled to receive an amount equal to approximately 72% of the Contingent Payment if the option is exercised.
Under the terms of the option, upon purchase of the Contingent Payment, the Partnership and/or the Corporation would be required to make distributions in excess of $7 million to the Releasing Partners/Investors. The Partnership and the Corporation have agreed to cooperate in the purchase of the option and the Contingent Payment, with each contributing one-half of the purchase price of the option and each anticipated to contribute one-half of the purchase price of the Contingent Payment. A portion of the Partnership's contribution would be contributed through additional abatements of basic rent payments due under the Operating Lease and the Expansion Operating Lease.
NOTES:
(A) Encumbrances represents the amount owed at December 31, 1996 on the Wraparound Mortgage, Expansion Mortgage, FF&E Notes and Capital lease obligations.
(B) The land under the building was acquired from DEWNJ, at no cost to the Partnership, as part of the 1989 Restructuring.
(C) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is $196,181,000.
(D) Reconciliation of Real Estate Carrying Costs:
1994 1995 1996
Balance at beginning of year 168,303,000 177,682,000 180,298,000 Building improvements 6,299,000 259,000 2,376,000 Furniture, fixtures and equipment (FF&E) acquired 4,384,000 2,459,000 855,000 FF&E retired (311,000) (102,000) - Construction completed (993,000) - - ------------ ----------- ----------- Balance at end of year 177,682,000 180,298,000 183,529,000 =========== =========== ===========
(E) Reconciliation of Accumulated Depreciation:
1994 1995 1996
Balance at beginning of year 81,583,000 87,541,000 94,057,000 Provision for depreciation 6,017,000 6,550,000 6,224,000 Accumulated depreciation of FF&E retired (59,000) (34,000) - ---------- ---------- ----------- Balance at end of year 87,541,000 94,057,000 100,281,000 ========== ========== ===========
INDEPENDENT AUDITORS' REPORT
The General Partners Atlantic City Boardwalk Associates, L.P.
We have audited the accompanying financial statements of Atlantic City Boardwalk Associates, L.P. as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statements scheduled listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Out responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Atlantic City Boardwalk Associates, L.P. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statements schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 7 to the financial statements, New Claridge has suffered recurring losses from operations and has a net capital deficiency as of December 31, 1996. The Partnership is dependent upon New Claridge making its contractual lease payments to provide the Partnership the ability to make its contractual debt service payments and other obligations. These circumstances raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick L.L.P.
Las Vegas, Nevada March 21, 1997