UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
----------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- ---------------------
Commission file number 33-27399
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2469174
- --------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification)
or organization) No.)
Indiana Avenue & the Boardwalk, Atlantic City, New Jersey 08401
- --------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 340-3400
------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 and 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
All issued and outstanding partnership units of the Partnership have been
offered and sold in reliance on exemptions from the registration requirements of
the Securities Act of 1933 as amended. Therefore, there is no established
trading market for any class of partnership units of the Partnership. The
Partnership did, in 1989, jointly with the Claridge Hotel and Casino Corporation
("Corporation") and Del Webb Corporation ("Webb"), register certain Contingent
Payment Units. As stated in the Prospectus dated May 5, 1989, the Contingent
Payment Rights may or may not be securities. None of the Partnership, the
Corporation or Webb has admitted that the Contingent Payment Rights are
securities or that any of them is the issuer of any such securities.
Registrant's Partnership Units outstanding on December 31, 1997 was 450
units.
<PAGE>
PART I
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. 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. Legal Proceedings.
The Partnership is not involved in any material litigation.
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. 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. 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.
<TABLE>
<CAPTION>
As of or for the year ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(not covered by Independent Auditors' Report) (a)
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Net income ...........................$ 2,937 4,753 2,723 1,782 309
Net income per limited
partnership unit (b)..................$ 6.42 10.39 5.95 3.90 0.68
Total assets ........................$118,244 130,417 135,175 140,309 138,524
Long term obligations,
net of current portion ...........$ 75,465 92,120 104,315 114,268 115,563
Partners' capital accounts (deficit) $21,825 18,888 14,135 11,412 9,630
</TABLE>
(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. 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. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedules are set forth at
pages F-1 to F-19 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
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. 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. 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. 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. 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 F-1. 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.
<PAGE>
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
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference in
Report on
Form 10-K
Independent Auditors' Report ............................. F-2
Balance Sheets as of December 31, 1996 and 1997 .... F-3
Statements of Operations For the Years Ended
December 31, 1995, 1996 and 1997 ................. F-4
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1995, 1996 and 1997 F-5
Statements of Cash Flows For the Years Ended
December 31, 1995, 1996 and 1997 ................. F-6
Notes to Financial Statements For the Years Ended
December 31, 1995, 1996 and 1997 ................. F-7
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation... F-19
All other schedules have been omitted as inapplicable or not required because
the required information is included in the financial statements or notes
thereto.
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Balance Sheets
December 31, 1996 and 1997
1996 1997
<S> <C> <C> <C>
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 1,446,000 552,000
Rent due from New Claridge 408,000 810,000
Interest receivable from partners 35,000 41,000
Prepaid expenses 264,000 254,000
Other assets 172,000 150,000
--------------- ---------------
Total current assets 2,325,000 1,807,000
--------------- ---------------
Hotel Assets (notes 4 and 5) 183,529,000 183,707,000
Less: Accumulated depreciation and amortization (100,281,000) (105,660,000)
----------- -----------
Net Hotel Assets 83,248,000 78,047,000
--------------- ---------------
Note receivable from New Claridge, including accrued interest of
$3,258,000 and $3,690,000 in 1996 and 1997, respectively 6,858,000 7,290,000
Deferred rent from New Claridge (notes 3 and 6) 37,807,000 31,022,000
Intangibles, net of accumulated amortization of
$3,626,000 and $3,727,000 in 1996 and 1997, respectively 179,000 78,000
--------------- ---------------
$ 130,417,000 118,244,000
=========== ===========
Liabilities and Partners' Capital Accounts
Current liabilities:
Accounts payable $ 1,035,000 1,391,000
Accrued interest due New Claridge 1,147,000 948,000
Current portion of long-term debt due principally to
New Claridge (note 5) 17,227,000 18,615,000
--------------- ---------------
Total current liabilities 19,409,000 20,954,000
Long-term debt due principally to New Claridge, including
accrued interest of $20,000,000 in 1996 and 1997 (note 5) 92,120,000 75,465,000
------------ ------------
Total liabilities 111,529,000 96,419,000
----------- ------------
Partners' capital accounts (deficit):
New general partners 105,000 134,000
Former general partners 173,000 191,000
Special limited partners (187,000) (158,000)
Investor limited partners 18,797,000 21,658,000
--------------- ---------------
Total partners' capital accounts (deficit) 18,888,000 21,825,000
Commitments and contingencies (notes 5, 6, 7 and 9) --------------- ---------------
$ 130,417,000 118,244,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Operations
For the Years Ended December 31, 1995, 1996, and 1997
<S> <C> <C> <C>
1995 1996 1997
--------------- --------------- ---------
Revenues:
Rent from New Claridge for the
lease of Hotel Assets (notes 3 and 6) $ 38,517,000 39,398,000 34,560,000
Interest from New Claridge 432,000 432,000 432,000
Interest from Special Limited Partners 36,000 36,000 36,000
Investment 130,000 100,000 34,000
Other - - 2,000
------------------ ---------------- --------------
39,115,000 39,966,000 35,064,000
--------------- --------------- --------------
Expenses:
Cost of maintaining and repairing
Hotel Assets paid to New Claridge 11,716,000 12,116,000 11,637,000
Interest, principally on mortgages to
New Claridge (note 5) 17,239,000 16,034,000 14,242,000
General and administrative 630,000 609,000 611,000
General Partners' management fee 130,000 130,000 130,000
Depreciation and amortization 6,677,000 6,324,000 5,507,000
--------------- --------------- --------------
36,392,000 35,213,000 32,127,000
--------------- --------------- --------------
Net income $ 2,723,000 4,753,000 2,937,000
=============== =============== ==============
Net income per limited partnership unit
-- basic and diluted (note 1)
(450 units outstanding at the end of each year) $ 5,953 10,391 6,422
=============== =============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1995, 1996 and 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class A Class B Total
New Former Special Special Investor Investor Partners'
General General Limited Limited Limited Limited Capital
Partners Partners Partners Partners Partners Partners Accounts
Partners' Capital
Accounts (Deficit),
December 31, 1994 $ 30,000 127,000 (17,000) (244,000) 2,806,000 8,710,000 11,412,000
Net income 27,000 17,000 2,000 25,000 651,000 2,001,000 2,723,000
-------- -------- ------- -------- ---------- ----------- -----------
Partners' Capital
Accounts (Deficit),
December 31, 1995 57,000 144,000 (15,000) (219,000) 3,457,000 10,711,000 14,135,000
Net income 48,000 29,000 3,000 44,000 1,136,000 3,493,000 4,753,000
-------- -------- ------- -------- --------- ----------- -----------
Partners' Capital
Accounts (Deficit),
December 31, 1996 105,000 173,000 (12,000) (175,000) 4,593,000 14,204,000 18,888,000
Net income 29,000 18,000 2,000 27,000 702,000 2,159,000 2,937,000
-------- -------- ------- -------- ---------- ----------- -----------
Partners' Capital
Accounts (Deficit),
December 31, 1997 $ 134,000 191,000 (10,000) (148,000) 5,295,000 16,363,000 21,825,000
======= ======= ====== ======= ========= ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Cash Flows
For the Years Ended December 31, 1995, 1996, and 1997
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- ----------
Cash flows from operating activities:
Net income $ 2,723,000 4,753,000 2,937,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,677,000 6,324,000 5,507,000
Accretion of discount on mortgage note 1,327,000 1,524,000 1,752,000
Loss on disposal of assets 46,000 - 3,000
Decrease in deferred rent 1,598,000 2,049,000 6,785,000
Deferred interest on receivable from New Claridge (432,000) (432,000) (432,000)
Changes in current assets and liabilities:
Increase in rent due from New Claridge,
interest receivable from partners,
prepaid expenses and other assets (188,000) (41,000) (376,000)
Increase (decrease) in accounts payable and
accrued interest due New Claridge 100,000 (492,000) 157,000
-------------- ------------- ------------
Net cash provided by operating activities 11,851,000 13,685,000 16,333,000
---------- ---------- ----------
Cash flows from investing activities:
Purchase of Hotel Assets (2,160,000) (3,231,000) (208,000)
Proceeds from sale of Hotel Assets 21,000 - -
------------- ------------- -----------
Net cash used in investing activities (2,139,000) (3,231,000) (208,000)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds of borrowings from New Claridge 2,483,000 3,508,000 208,000
Principal payments of debt, principally to New Claridge (12,324,000) (14,051,000) (17,227,000)
----------- ----------- -----------
Net cash used in financing activities (9,841,000) (10,543,000) (17,019,000)
----------- ---------- ----------
Net decrease in cash and cash equivalents (129,000) (89,000) (894,000)
Cash and cash equivalents, beginning of period 1,664,000 1,535,000 1,446,000
----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,535,000 1,446,000 552,000
=========== =========== ============
Supplemental cash flow information:
Interest paid $ 16,022,000 14,637,000 12,668,000
========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
<PAGE>
SCHEDULE III
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Real Estate and Accumulated Depreciation
Years Ended December 31, 1995, 1996 and 1997
Life on
Which
Depreciation
Date in Latest
Gross Amount of Statement of
Initial Cost Cost Capitalized at which Accumu- Con Operations
to Partnership Subsequent to Carried at Close lated struc- Date is
Description Encumbrances(A) Land(B) Building Acquisition of Period (C)(D) Deprec.(E) tion Acq. Computed
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
$112,500,000 Cost
Less:
Original Bldg. $ 101,353,000 N/A 10/31/83 40 yrs
Discount Bldg. Bldg. 1983-
on Impr.$28,391,000 Impr. 28,391,000 1997 N/A 10 yrs
(11,147,000) Mortgage FF&E 53,963,000 FF&E 53,963,000 N/A 1983-1997 7 yrs
------------ ---------- ----------
Hotel &
Casino
Atlantic
City, NJ $94,080,000 - $101,353,000 $ 82,354,000 $ 183,707,000 $105,660,000
----------- ------- ------------ ---------- ----------- -----------
</TABLE>
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
========== =========== ===========
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.s FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 851,000
<ASSETS-OTHER> 404,000
<OTHER-ITEMS-ASSETS> 116,989,000
<TOTAL-ASSETS> 118,244,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 75,465,000
<OTHER-ITEMS-LIABILITIES> 20,954,000
<TOTAL-LIABILITIES> 96,419,000
<SENIOR-EQUITY> 450
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 48,500
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 502,000
<OTHER-INCOME> 34,562,000
<EXPENSES-NET> 31,386,000
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,937,000
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,937,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 130,000
<INTEREST-EXPENSE> 14,242,000
<GROSS-EXPENSE> 32,127,000
<AVERAGE-NET-ASSETS> 20,356,000
<PER-SHARE-NAV-BEGIN> 41,973
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 48,500
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 101,713,500
<AVG-DEBT-PER-SHARE> 226,030
</TABLE>
