Item 1. Business.
THE FOLLOWING DISCUSSION CONTAINS INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF THE OPERATIONS OF ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. COULD DIFFER MATERIALLY FROM HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED BELOW IN THE DISCUSSION ENTITLED "CURRENT FINANCIAL SITUATION OF THE CLARIDGE HOTEL AND CASINO CORPORATION" AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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.
Relationship with the Claridge
Substantially all of the revenues of the Partnership are derived from leases with New Claridge. Accordingly, the ability of the Partnership to fulfill its obligations is dependent upon the ability of New Claridge to pay rental payments when due. The financial stability of the Partnership is therefore dependent upon the financial condition of New Claridge. The following discussions entitled "Recent Developments at New Claridge," "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." While the Partnership was formed to own and to lease to the Corporation and its affiliates, certain real estate and related assets, the Partnership is separate and distinct from the Corporation. Any person or entity seeking information regarding the Corporation or its debt or equity securities should review the reports, statements and other information filed by the Corporation with the Securities and Exchange Commission, and should not rely upon the Partnership's discussion of the Corporation.
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 93% 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.
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 a 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).
Current Developments at New Claridge
The Claridge has reported as follows:
During 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 the 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, 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. The Corporation did not receive 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.
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. Negotiations with Hilton regarding acquisition of the Corporation terminated in April 1997.
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.
In December 1997, New Claridge obtained a commitment from PDS Financial Corporation ("PDS") for a $2 million sale lease-back facility ("Facility"). Under the terms of the Facility, New Claridge may sell certain of its slot machines to PDS under a sale lease-back arrangement, for a specified amount per slot machine, for up to $2 million. In February 1998, New Claridge sold 370 slot machines to PDS for approximately $1 million under this Facility. The machines will be leased back to New Claridge under an operating lease arrangement for two years. After two years, New Claridge has an option to either purchase the machines, renew the lease arrangement for twelve months, or return the equipment to PDS.
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 $39,030,000 in 1995, $39,906,000 in 1996, $41,775,000 in 1997 and will be $32,531,000 for the nine month period ending September 30, 1998. Basic rent during the renewal term 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.
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 1997, 1996, and 1995 amounted to $4,812,000, $4,718,000, and $4,625,000, respectively. Basic rent during the renewal term 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 could not exceed $10 million in any one calendar year, nor $38,820,000 in the aggregate. All of the $38,820,000 of available rent abatements was fully utilized by the end of the first quarter of 1997.
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 provides 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 are to be made to provide the Partnership with the amount 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). Rents abated during the years ended December 31, 1996 and 1997 amounted to $8,307,000 and $10,802,000, respectively. Cumulative abated rents as of December 31, 1997 total $47,868,000.
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.
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) full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) 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 New Jersey Casino Control 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 could have been exercised any time prior to December 31, 1997. Upon exercise of the option, the purchase price of the Contingent Payment would have been $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 occurred after December 31, 1996. The purchase price could have increased in an amount not to exceed $10 million if future distributions to Releasing Partners/Investors exceeded $20 million. It is estimated that at December 31, 1997, the aggregate amount owing in respect of the Contingent Payment was $76.2 million.
Given the recent operating results at New Claridge (see Item 1. Business - "Recent Developments at New Claridge"), the Corporation was not able to exercise this Contingent Payment Option, and it expired in accordance with its terms on December 31, 1997.
Current Financial Situation of The Claridge Hotel and Casino Corporation
The Claridge has reported as follows:
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 1,767 slot machines and sixty-four table games, including thirty-two blackjack tables, eight craps tables, five roulette tables, four Caribbean stud poker tables, two mini-baccarat tables and two baccarat tables, and seven 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 (the "Act") and regulations thereunder which affect virtually all aspects of casino operations.
Results of Operations for the Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996
The Corporation had a net loss of $5,979,000 for the year ended December 31, 1997, as compared to a net loss of $15,389,000 for the year ended December 31, 1996. The overall decrease in net loss was due mainly to New Claridge's cost containment efforts, as well as additional rent abatements made available in 1997. Casino expenses decreased as a result of lower bus program coin incentives paid, as well as lower payroll costs resulting from reduced staffing levels. Food and beverage expenses decreased due to lower payroll and other operating costs as a result of the reduced volume in the restaurants and cost containment efforts. General and administrative expenses decreased due to lower advertising expenditures and decreased payroll costs resulting from lower staffing levels; 1997 expenses included approximately $1.3 million for financial and legal service related to the Corporation's attempted reorganization early in the year. Rent expense to the Partnership in 1997 was lower than 1996 expense due to the abatement of rent pursuant to the March 1, 1997 amendments to the Operating Lease and Expansion Operating Lease. Prior to these amendments, lease expense (including the effect of the $38.8 million of rent abatements provided in accordance with the 1989 Restructuring Agreement) was recognized on a leveled basis over the initial lease term ending September 30, 1998. Since the amount of abatements permitted in accordance with the March 1997 amendments varies depending on the Partnership's cash flow, the actual amount abated on a monthly basis was recorded as a reduction to lease expense. For the year ended December 31, 1997, the reduction to lease expense resulting from the abatement of rent was approximately $9 million.
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 needed to experience 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 did improve over 1996 levels, due primarily to the positive impact of the availability of the self-parking garage, lower bus package pricing, limited capital expenditures, and other cost containment initiatives. Although management of the Corporation believes that operating results will continue to improve over 1996 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 1998 to approximately $2 million. Given the various improvements made to the property in recent years, including the casino expansion in 1994, and the construction of the self-parking garage, the current condition of the property is such that the above-mentioned level of capital expenditures is deemed adequate. Management will also consider various refinancing efforts, including a sale of the Corporation. In addition, New Claridge has retained the law firm of Zelle and Larson LLP of Minneapolis, Minnesota to assist in the recovery of certain expenses incurred in reopening the self-parking garage and potential lost profit claims as a result of the accident which occurred in the self-parking garage on July 10, 1996. On July 22, 1997, New Claridge filed a Complaint and Demand for Arbitration in the amount of $10 million against the general contractor and the architect for the self-parking garage; recovery of these claims would have a positive impact on New Claridge's financial results and liquidity. However, there is no assurance that the Corporation will be successful in realizing any recovery.
Competition
Competition in the Atlantic City casino-hotel market is intense. As of December 31, 1997, the twelve existing casino facilities offered approximately 1,173,000 square feet of gaming space, a 8.6% increase over the casino square footage as of December 31, 1996 of approximately 1,080,000 square feet. In July 1997, Bally's Wild Wild West Casino (located at the existing Bally's at Park Place Casino) commenced operations, adding approximately 74,000 square feet of gaming space to the existing market. The increase in casino square footage in 1996 over 1995 was approximately 12.5%, resulting from the opening of the Trump World's Fair casino and minor casino expansions at several other properties. However, for the years ended December 31, 1997 and 1996, citywide gaming revenues, as reported, increased only 2.4% and 1.8%, 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. In addition to recent increases in casino space and hotel rooms at the existing casinos, several Las Vegas casino operators have 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, which was completed in May 1997, contains 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 is the largest exhibition space between Boston and Atlanta. A 500-room non-casino hotel which is linked to the new convention center by an elevated walkway, opened in November 1997. The development of the corridor which links the convention center to the boardwalk area is nearing completion, and features a wide, landscaped boulevard with a reflecting pool, an expanded park area, and a 60-foot lighthouse which is intended to be illuminated each night by a light show. In February 1997, construction of the 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 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 also increased their hotel space in 1997, including Harrah's (approximately 400 rooms), Hilton (approximately 300 rooms), and Caesars (approximately 600 rooms), for a total increase in 1997 of approximately 1,500 hotel rooms. 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 its 1,200-space parking facility, New Claridge will continue to rely on its bus customers as a significant source of business. In 1997, the total number of patrons arriving in Atlantic City by bus decreased slightly, to approximately 9.4 million. In addition, bus package pricing competition eased somewhat; the average coin cost per patron arriving by bus to the Claridge decreased to $16 in 1997.
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 table game "hold" percentages (the ratio of win to the amount of gaming chips purchased by patrons). The majority of the Claridge's casino revenue is generated by slot machine play, the fastest growing segment of gaming play. In 1996, 75% of the Claridge's casino revenue came from slot play as compared to 69% reported for all Atlantic City properties. The trend has continued in 1997 with 76% 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.
Competition in Atlantic City also extends to the employment market. The Commission has promulgated regulations which require staffing levels at Atlantic City casinos which are higher than those for casino-hotels in Nevada. In addition, although the January 1995 amendments to the Act have eased the licensing requirements for some employees, all of New Claridge's casino employees must be licensed. Partly as a result of the licensing requirements, there has been intense competition for experienced casino employees in Atlantic City. Difficulties in hiring personnel licensed by the Commission have elevated labor costs, and licensed personnel frequently leave their current positions for higher paying jobs in other casinos. In addition, the expansion of casino gaming into other jurisdictions has increased the competition for experienced casino management personnel.
Beginning in the Fall of 1988, three events occurred that accelerated the presence of casino gaming in the United States" (i) a statewide ballot issue in South Dakota approved limited-stakes gaming in Deadwood; (ii) the state legislature approved river boat gaming in Iowa in early 1989; and (iii) Congress passed the Indian Gaming Regulatory Act of 1988, which permits unrestricted gaming on Indian land in any state that already allows similar gaming (for example, if the state allows charitable gaming for non-profit organizations, the federally-recognized Indian tribes can run similar operations on their land). Since these events occurred, the gaming industry rapidly expanded; during 1996 and 1997, however, the expansion of gaming slowed considerably. In 1996, although voters in Michigan approved casino gaming for the city of Detroit, gambling measures were defeated in several other states. In January 1997, the New York State Senate voted to deny a statewide referendum to legalize casino gaming in that state. However, in 1997 the New York City Gambling Control Commission was established to regulate the operation of cruises leaving out of New York harbor which offer gambling once the boat is beyond the three-mile limit of city jurisdiction and in international waters ("cruises to nowhere"). Currently one company is operating an overnight gambling cruise under these regulations, and several more have applied to the New York City Gambling Control Commission for licenses. Legislation to put the issue before Pennsylvania voters has been introduced several times in the past few years, but none has so far succeeded. The current Pennsylvania Governor, Tom Ridge, has indicated that he will require a statewide vote on gaming, as well as local referendum; the requirement for statewide vote would make the legalization of casino gaming in Pennsylvania a more difficult and expensive possibility than previously anticipated. Management believes that, should casino gaming be legalized in the future in Philadelphia, the effects on Atlantic City casinos and on the Claridge would depend upon the form and scope of such gaming. In 1995, two racetracks in Delaware began offering slot machines at the facilities, with a third racetrack opening a slot machine facility in August 1996. Total combined revenues for these three facilities in 1996 was reported to be $184.4 million, and in 1997 increased to a reported $298.9 million
Indian gaming is currently authorized in many states including New York, Michigan, Minnesota, California, and most notably, Connecticut. In February 1992, the Foxwoods High Stakes Casino and Bingo Hall ("Foxwoods"), operated by the Mashantucket Pequot Indian tribe in Ledyard, Connecticut commenced operations, offering the table games found in Atlantic City as well as bingo rooms. In January 1993, approval was granted by the Connecticut government for Foxwoods to offer slot machines; as of December 31, 1997, this facility, owned by the Mohegan Indians, had approximately 3,000 slot machines, as well as table games. In 1997, these two properties reported an average win per slot machine per day of $326, compared to the Atlantic City average win per slot machine per day of $220.
The continued expansion of casino gaming, lotteries, including video lottery terminals (VLTs) , and offtrack betting in other nearby states could also 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. 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.
The Partnership is not involved in any material litigation.
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 1997.
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, 1997.
(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, 1997 as Compared to the Year Ended December 31, 1996
Rental income for the year ended December 31, 1997 decreased $4,838,000 as compared to the year ended December 31, 1996. This decrease is primarily due to the abatement of rent pursuant to the March 1, 1997 amendments to the Operating Lease and Expansion Operating Lease (see "Liquidity and Capital Resources"). Prior to these amendments, rental income (including the effect of the $38.8 million of rent abatements provided in accordance with the 1989 Restructuring Agreement) was recognized on a leveled basis over the initial lease term (ending September 30, 1998), in accordance with Statement of Financial Accounting Standards No. 13. Since the amount of abatements permitted in accordance with the March 1997 amendments will vary depending on the Partnership's cash flow, leveling of these abatements over the lease term is not possible; the actual amount abated on a monthly basis is recorded as a reduction of rental income. For the year ended December 31, 1997 the amount of rent abated in accordance with the March 1997 amendments was $9,048,000. In addition to the basic rent, New Claridge pays as additional rent, certain expenses and debt service relating to furniture, fixture and equipment replacements and building improvements ("FF&E"). During 1997, FF&E note principal and interest payments were higher than in 1996 resulting in increased additional rents in 1997. The overall decrease in rents is due to the abatement of rents offset by the increase in additional rents.
Investment income earned on repurchase agreements decreased $66,000 for the year ended December 31, 1997 as compared to the year ended December 31, 1996. Investment income decreased due to a reduction in cash available to invest. On March 1, 1997 the Partnership's cash flow was reduced $1.3 million as a result of deferred rent from New Claridge which is to be paid to the Partnership on a monthly basis through October 1999.
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 decreased $479,000 during the year ended December 31, 1997 as compared to the same period in 1996. This decrease is due to an overall decrease in New Claridge's repairs and maintenance expenditures in an effort to conserve cash.
For the year ended December 31, 1997, interest expense decreased $1,792,000 from the prior year due to principal payments made during 1996 and 1997 that reduced the average outstanding balance of the wraparound and expansion mortgages and FF&E notes.
Depreciation and amortization expense for the year ended December 31, 1997 decreased $817,000 as compared to the same period in 1996. Assets purchased during the 1986 expansion became fully depreciated in mid-1996. Therefore, depreciation expense taken on these assets during the first half of 1996 was not available during 1997, resulting in decreased depreciation expense in 1997.
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.
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 were deferred or abated so that excess cash did not 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) full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) 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 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 could not exceed $10 million in any one calendar year, nor $38,820,000 in the aggregate. All of the $38,820,000 of available rent abatements was fully utilized by the end of the first quarter of 1997.
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 provides 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 are to be made to provide the Partnership with the amount 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). Rents abated during the years ended December 31, 1996 and 1997 amounted to $8,307,000 and $10,802,000, respectively. Cumulative abated rents as of December 31, 1997 total $47,868,000.
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.
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 $19,147,000 as of December 31, 1997 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.
The Partnership is aware of the issue associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000" problem is the result of computer programs which were written using two digits rather than four to define the applicable year, which could cause certain systems to recognize the year 2000 as the year 1900. The Partnership is in the process of developing a plan to deal with this issue and does not anticipate any significant costs associated with these system changes. Substantially all of the Partnership's revenues are derived from the New Claridge, therefore any "year 2000" issues impacting on New Claridge could also impact the Partnership's financial condition. The New Claridge has reported that is has addressed this issue and does not expect the amounts required to be expensed related to correcting this problem over the next two years to have a material effect on its financial position or results of operations.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128, which is effective for financial statements for annual and interim periods ending after December 15, 1997, changes the calculation of earnings per share, and requires dual presentation of "basic" and "diluted" earnings per share. The adoption of SFAS 128 did not have a material effect on the Partnership's earnings per limited partnership unit.
Statement of Financial Accounting Standards No. 130, "Comprehensive Income" (SFAS 130), was issued in June 1997. SFAS 130 becomes effective for the Partnership's fiscal year 1998, and requires reclassification of earlier financial statement for comparative purposes. SFAS 130 requires that all items defined as comprehensive income, including changes in the amounts of certain items, foreign currency translation adjustments, and gains and losses on certain securities, be shown in a financial statement. SFAS 130 does not require a specific format for the financial statements in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. Management of the Partnership believes that the adoption of SFAS 130 will not have a material effect on the financial statements.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 "Disclosures About Segment of an Enterprise and Related Information." This statement supersedes Statement No. 14 and provides accounting guidance for reporting information about operating segments in annual financial statements and requires public business enterprises to report selected information about operating segments in interim financial reports. This statement is effective for financial statements for periods beginning after December 15, 1997. Segment information for earlier years that is presented for comparative purposes is to be restated to conform to the requirements of the Statement unless it is impracticable to do so. The required interim disclosures are not required to be made in the initial year of application. Management of the Partnership believes that this recently issued standard will not result in expanded disclosure regarding reporting the results of the Partnership's operations.
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 56 Gerald C. Heetland General Partner 57
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, 1997, 1996 and 1995.
Other Annual Individual Capacity Year Compensation
Anthony C. Atchley General Partner 1997 $65,000 1996 $65,000 1995 $65,000
Gerald C. Heetland General Partner 1997 $65,000 1996 $65,000 1995 $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 93% 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.
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.
*****Exhibits are incorporated by reference to the Exhibits filed with Form 10-K for the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April 14, 1997.
(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: March 30, 1998 /s/ ANTHONY C. ATCHLEY -------------- --------------------------------------- by Anthony C. Atchley, General Partner
Date: March 30, 1998 /s/ GERALD C. HEETLAND -------------- --------------------------------------- by Gerald C. Heetland, General Partner
Date: March 30, 1998 /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: March 30, 1998 /s/ GERALD C. HEETLAND -------------- --------------------------------------- by Gerald C. Heetland, General Partner and Chief Financial Officer
Date: March 30, 1998 /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, 1996 and 1997 ....
Statements of Operations For the Years Ended December 31, 1995, 1996 and 1997 .................
Statements of Partners' Capital Accounts (Deficit) For the Years Ended December 31, 1995, 1996 and 1997
Statements of Cash Flows For the Years Ended December 31, 1995, 1996 and 1997 .................
Notes to Financial Statements For the Years Ended December 31, 1995, 1996 and 1997 .................
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 of December 31, 1997 and 1996, and the related statements of operations, stockholders equity (deficit) and cash flows for the three-year period ended December 31, 1997. 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, 1997 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, 1997, in conformity with generally accepted accounting principles.
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 experienced diminishing liquidity as a result of a deterioration in its cash flow and limited availability of working capital sources. 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.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedule III is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada March 16, 1998
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. Notes to Financial Statements For the Years Ended December 31, 1995, 1996, and 1997
(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) Relationship with the Claridge
Substantially all of the revenues of the Partnership are derived from leases with New Claridge. Accordingly, the ability of the Partnership to fulfill its obligations is dependent upon the ability of New Claridge to pay rental payments when due. The financial stability of the Partnership is therefore dependent upon the financial condition of New Claridge. While the Partnership was formed to own and to lease to the Corporation and its affiliates, certain real estate and related assets, the Partnership is separate and distinct from the Corporation. Any person or entity seeking information regarding the Corporation or its debt or equity securities should review the reports, statements and other information filed by the Corporation with the Securities and Exchange Commission, and should not rely upon the Partnership's discussion of the Corporation.
(c) 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. 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.
(d) 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.
(e) 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.
(f) 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 and 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 thos 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 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.
Following are the Partnership's assets and liabilities as determined in accordance with GAAP and for federal income tax reporting purposes at December 31:
1996 1997 --------------------- ------------------- GAAP Tax GAAP Tax Basis Basis Basis Basis (in thousands) Total assets $ 130,417 61,521 $ 118,244 50,766 Total liabilities $ 111,529 114,906 $ 96,419 98,946
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 and not the Partnership.
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. For other financial instruments, their carrying value approximates their fair value. The carrying amount of cash and 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, the disclosure of contingent 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.
(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) full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) 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, 1996 and 1997 is as follows: Accumulated Depreciation and Net December 31, 1996 Cost Amortization Hotel Assets ----------------- ----------------- ------------ ------------ Building $ 101,353,000 $ 33,362,000 $ 67,991,000 Building improvements 28,287,000 20,071,000 8,216,000 Furniture, fixtures and equipment 52,736,000 46,160,000 6,576,000 Capital lease asset 1,153,000 688,000 465,000 ------------- ------------- ------------ $ 183,529,000 $ 100,281,000 $ 83,248,000 =========== =========== ==========
Accumulated Depreciation and Net December 31, 1997 Cost Amortization Hotel Assets ----------------- -------------- ------------ ------------
Building $ 101,353,000 $ 35,896,000 $ 65,457,000 Building improvements 28,391,000 21,214,000 7,177,000 Furniture, fixtures and equipment 52,810,000 47,749,000 5,061,000 Capital lease asset 1,153,000 801,000 352,000 ------------- ------------ ----------- $ 183,707,000 $ 105,660,000 $ 78,047,000 =========== =========== ==========
(5) Long-term Debt
At December 31, 1996 and 1997, long-term debt consisted of the following:
1996 1997 ---- ----
14% Wraparound mortgage, net of $ 84,709,000 $ 74,461,000 unaccreted discount of $8,291,000 and $6,539,000, respectively 14% Expansion mortgage 4,496,000 2,167,000 14% FF&E notes 20,035,000 17,452,000 Capital lease obligations 107,000 - ----------- ----------- 109,347,000 94,080,000 Less: Current portion of long-term debt (17,227,000) (18,615,000) ----------- -----------
$ 92,120,000 $ 75,465,000 =========== ============
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:
1998 $ 18,615,000 1999 2,046,000 2000 77,996,000 2001 1,858,000 2002 104,000 Thereafter - --------------
100,619,000 Less: Discount (6,539,000) --------------- $ 94,080,000 ==============
(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:
1998 $ 47,557,000 1999 30,504,000 2000 38,540,000 2001 28,503,000 2002 26,611,000 Thereafter 152,375,000 ------------
Minimum future rentals $ 324,090,000 ===========
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) full or partial satisfaction of the Expandable Wraparound Mortgage; and (iii) full satisfaction of any first mortgage then in place.
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 provides 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 are to be made to provide the Partnership with the amount 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). Rents abated during the years ended December 31, 1996 and 1997 amounted to $8,307,000 and $10,802,000, respectively. Cumulative abated rents as of December 31, 1997 total $47,868,000.
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.
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, 1997 and December 31, 1996, deferred rent from New Claridge included rental income of $15,470,000 and $22,729,000, respectively, that was earned in excess of actual rent receipts.
(7) Current 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.
The Claridge has reported as follows:
During 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.
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. Negotiations with Hilton regarding acquisition of the Corporation terminated in April 1997.
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.
In December 1997, New Claridge obtained a commitment from PDS Financial Corporation ("PDS") for a $2 million sale lease-back facility ("Facility"). Under the terms of the Facility, New Claridge may sell certain of its slot machines to PDS under a sale lease-back arrangement, for a specified amount per slot machine, for up to $2 million. In February 1998, New Claridge sold 370 slot machines to PDS for approximately $1 million under this Facility. The machines will be leased back to New Claridge under an operating lease arrangement for two years. After two years, New Claridge has an option to either purchase the machines, renew the lease arrangement for twelve months, or return the equipment to PDS.
Management of the Corporation will consider various refinancing efforts, including a sale of the Corporation.
(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 93% 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 is in effect during the entire term of the Operating Lease including any subsequent renewal terms.
(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 New Jersey Casino Control 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 could have been exercised any time prior to December 31, 1997. Upon exercise of the option, the purchase price of the Contingent Payment would have been $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 occurred after December 31, 1996. The purchase price could have increased in an amount not to exceed $10 million if future distributions to Releasing Partners/Investors exceeded $20 million. It is estimated that at December 31, 1997, the aggregate amount owing in respect of the Contingent Payment was $76.2 million.
Given the recent operating results at New Claridge (see Note 7, "Current Developments at New Claridge"), the Corporation was not able to exercise this Contingent Payment Option, and it expired in accordance with its terms on December 31, 1997.
NOTES:
(A) Encumbrances represents the amount owed at December 31, 1997 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, 1997 for Federal income tax purposes is $196,359,000.
(D) Reconciliation of Real Estate Carrying Costs:
1995 1996 1997 ---- ---- ----
Balance at beginning of year $ 177,682,000 $180,298,000 $183,529,000 Building improvements 259,000 2,376,000 104,000 Furniture, fixtures and equipment (FF&E) acquired 2,459,000 855,000 104,000 FF&E retired (102,000) - (30,000) ----------- ----------- ------------
Balance at end of year $ 180,298,000 $183,529,000 $183,707,000 =========== =========== ===========
(E) Reconciliation of Accumulated Depreciation:
1995 1996 1997 ---- ---- ----
Balance at beginning of year $87,541,000 $94,057,000 $100,281,000 Provision for depreciation 6,550,000 6,224,000 5,407,000 Accumulated depreciation of FF&E retired (34,000) - (28,000) ---------- ----------- ----------- Balance at end of year $94,057,000 $100,281,000 $105,660,000 ========== =========== ===========