<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------
[ ] 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 0-11268
THE CLARIDGE HOTEL AND CASINO CORPORATION
(Exact name of registrant as specified in its charter)
New York 22-2469172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Indiana Avenue and the Boardwalk
Atlantic City, New Jersey 08401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 340-3400
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ___
The number of shares outstanding of each class of the Registrant's Stock is as
follows:
Number of Shares Outstanding
November 13, 1997
-----------------
Class A Stock 4,970,729.5 (After deducting 91,770.5 shares of
Treasury Stock)
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
----------------------------------------------------------
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Introductory Notes to Consolidated
Financial Statements 3
Consolidated Balance Sheets at
September 30, 1997 and 1996 and
December 31, 1996 4
Consolidated Statements of Operations
for the three months ended September 30,
1997 and 1996 5
Consolidated Statements of Operations
for the nine months ended September 30,
1997 and 1996 6
Consolidated Statements of Cash Flows
for the nine months ended September 30,
1997 and 1996 7
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
PART II. OTHER INFORMATION
No information is provided under this
Section as the answers to Items 1 through 6
are either inapplicable or negative
</TABLE>
1
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
----------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Notes to Consolidated Financial Statements
- -------------------------------------------------------
The accompanying consolidated financial statements have been prepared by
The Claridge Hotel and Casino Corporation ("Corporation") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, these financial statements contain all adjustments
necessary to present fairly the consolidated financial position of The Claridge
Hotel and Casino Corporation and its wholly-owned subsidiaries, The Claridge at
Park Place, Incorporated ("New Claridge") and Claridge Gaming Incorporated
("CGI") at September 30, 1997 and 1996 and December 31, 1996, and the results of
its operations for the three and nine months ended September 30, 1997 and 1996
and its cash flows for the nine months ended September 30, 1997 and 1996. All
adjustments made are of a normal recurring nature.
Although management believes that the disclosures included herein are
adequate to make the information contained herein not misleading, certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. It is suggested that these financial statements be read in conjunction
with the financial statements and the related disclosures contained in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996
filed with the Securities and Exchange Commission.
The results of operations for the three and nine months ended September
30, 1997 and 1996 are not necessarily indicative of the operating results to be
expected for the full year. Historically, the gaming industry in Atlantic City,
New Jersey has been seasonal in nature with peak demand months occurring during
the summer season.
3
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
--------- --------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,788 8,532 10,605
Receivables, net (including $19,787 and
$17,238 at September 30, 1997 and 1996,
respectively and $18,392 at December 31,
1996, due from the Partnership) 21,197 19,744 18,391
Other current assets 3,520 3,477 3,364
--------- --------- --------
Total current assets 37,505 31,753 32,360
--------- --------- --------
Property and equipment, net (note 4) 32,713 35,188 35,828
Long-term receivables due from the
Partnership (note 3) 79,614 92,120 96,191
Intangible assets and deferred charges 2,161 2,575 2,717
Other assets 3,421 2,527 2,636
--------- --------- --------
$ 155,414 164,163 169,732
========= ========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,591 2,997 5,094
Loan from the Partnership (note 5) 3,600 3,600 3,600
Other current liabilities (note 6) 31,898 32,430 29,827
--------- --------- --------
39,089 39,027 38,521
--------- --------- --------
Long-term debt (note 7) 85,000 85,000 85,000
Deferred rent due to the Partnership 19,770 28,010 28,559
Deferred income taxes (note 9) 2,580 2,581 1,723
Other noncurrent liabilities (note 8) 21,001 19,379 19,341
Stockholders' equity:
Common stock 5 5 5
Additional paid in capital 5,048 5,048 5,048
Accumulated deficit (17,079) (14,887) (8,465)
Treasury stock, 91,770.5 Class A Shares at cost
at September 30, 1997 and 16,436 Class A
shares at cost at December 31, 1996 and
September 30, 1996, respectively -0- -0- -0-
--------- --------- --------
Total stockholders' deficiency (12,026) (9,834) (3,412)
--------- --------- --------
$ 155,414 164,163 169,732
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended September 30, 1997 and 1996
(in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Casino $43,975 42,757
Hotel 3,102 2,977
Food and beverage 5,353 5,960
Interest from the Partnership 3,495 4,000
Interest, other 106 107
Other 694 694
------- -------
56,725 56,495
Less promotional allowances (note 2) 5,317 5,798
------- -------
Net revenues 51,408 50,697
------- -------
Costs and expenses:
Casino 24,764 25,942
Hotel 702 602
Food and beverage 2,742 3,046
Other 659 899
Rent expense to the Partnership 7,065 9,496
Rent expense, other 300 372
General and administrative 6,621 7,309
Gaming taxes 3,514 3,416
Reinvestment obligation expense 170 164
Provision for uncollectible accounts 57 70
Depreciation and amortization 829 896
Interest expense 2,637 2,605
------- -------
Total costs and expenses 50,060 54,817
------- -------
Income (loss) before income taxes 1,348 (4,120)
Income tax benefit -0- (1,467)
------- -------
Net income (loss) $ 1,348 (2,653)
======= =======
Net income (loss) per share (based on 4,997,826 and 5,046,064 weighted average
shares outstanding for the three months ended September 30, 1997 and
1996, respectively) $ .27 (.53)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine Months Ended September 30, 1997 and 1996
(in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue:
Casino $ 127,253 125,405
Hotel 7,281 7,038
Food and beverage 15,043 15,927
Interest from the Partnership 10,860 12,119
Interest, other 294 638
Other 1,938 1,868
--------- --------
162,669 162,995
Less promotional allowances (note 2) 14,584 14,667
--------- --------
Net revenues 148,085 148,328
--------- --------
Costs and expenses:
Casino 72,774 77,063
Hotel 1,935 2,051
Food and beverage 7,602 8,601
Other 1,935 2,345
Rent expense to the Partnership 23,169 28,871
Rent expense, other 978 1,113
General and administrative 20,585 22,785
Gaming taxes 10,170 10,020
Reinvestment obligation expense 540 588
Provision for uncollectible accounts 164 174
Depreciation and amortization 2,465 2,337
Interest expense 7,960 6,745
--------- --------
Total costs and expenses 150,277 162,693
--------- --------
Loss before income taxes (2,192) (14,365)
Income tax benefit -0- (5,398)
--------- --------
Net loss $ (2,192) (8,967)
========= ========
Net loss per share (based on 5,003,472 and 5,046,064 weighted average shares
outstanding for the nine months ended September 30, 1997
and 1996, respectively) $ (.44) (1.78)
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,192) (8,967)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,465 2,337
Deferred rent to the Partnership (8,240) (2,188)
Deferred interest receivable and
discount from the Partnership (1,291) (1,123)
Reinvestment obligation expenses 540 588
Loss (gain) on disposal of assets 30 (138)
Deferred income taxes (1) (5,400)
Change in assets and liabilities:
Receivables, net, excluding current
portion of long-term receivables 41 524
Other current assets (43) (377)
Accounts payable 594 1,214
Other current liabilities (532) (3,113)
Other noncurrent liabilities 1,622 (888)
--------- ---------
Net cash flows used in operating activities (7,007) (17,531)
--------- ---------
Cash flows from investment activities:
Increase in intangible assets and deferred charges (8) (195)
Additions to property and equipment (142) (13,335)
Increase in other assets (1,476) (1,297)
Proceeds from disposition of property 587 184
Increase in long-term receivables (149) (3,312)
Receipt of long-term receivables 12,451 10,344
--------- ---------
Net cash flows provided by (used in) investment activities 11,263 (7,611)
--------- ---------
Increase (decrease) in cash and cash equivalents 4,256 (25,142)
Cash and cash equivalents at beginning of period 8,532 35,747
--------- ---------
Cash and cash equivalents at end of period $ 12,788 10,605
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. The consolidated financial
statements include the accounts of the Corporation and its wholly-owned
subsidiaries, New Claridge and CGI. All material intercompany accounts
and transactions have been eliminated in consolidation.
2. Promotional Allowances
----------------------
The retail value of complimentary rooms, food and beverages and other
complimentaries furnished to patrons is included in gross revenues and
then deducted as promotional allowances. In addition, the estimated cost
of providing such promotional allowances to casino patrons for the three
and nine months ended September 30, 1997 and 1996 has been allocated to
casino operating expenses as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hotel $ 975 1,012 2,929 2,593
Food and beverage 3,008 3,262 8,834 9,061
Other (Entertainment) 259 489 783 1,166
------- ------ ------- -------
Total costs allocated to
casino operating expenses $ 4,242 4,763 12,546 12,820
======= ====== ======= =======
</TABLE>
3. Long-Term Receivables
---------------------
Long-term receivables consist of the following amounts due from Atlantic
City Boardwalk Associates, L.P. (the "Partnership"):
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Expandable Wraparound Mortgage 14%,
maturities through September 30, 2000
(net of $7,000,000 discount and
$8,692,000 discount at September 30, 1997
and 1996 respectively, and $8,291,000
discount at December 31, 1996) $ 43,500 52,709 55,308
Deferred Expandable Wraparound
Mortgage interest receivable, due
September 30, 2000 20,000 20,000 20,000
FF&E promissory notes, 14% 15,920 17,244 18,104
Expansion/Construction promissory note, 14% 194 2,167 2,779
-------- -------- --------
$ 79,614 92,120 96,191
======== ======== ========
</TABLE>
8
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
4. Property and Equipment
----------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Gaming equipment $18,290 19,153 19,154
Land and land improvements 7,598 8,100 8,100
Building 20,070 20,100 19,983
Leasehold improvements 745 745 745
Capital lease asset 697 613 613
Other equipment 107 107 102
------- ------- -------
47,507 48,818 48,697
Less accumulated depreciation and amortization 14,794 13,630 12,869
------- ------- -------
Net property and equipment $32,713 35,188 35,828
======= ======= =======
</TABLE>
5. Loan from the Partnership
-------------------------
In accordance with the terms of the Restructuring Agreement entered into
by the Corporation and New Claridge on June 16, 1989, the Partnership
loaned to New Claridge $3.6 million, which represented substantially all
cash and cash equivalents remaining in the Partnership other than funds
needed to pay expenses incurred through the closing of the
restructuring. This loan is evidenced by an unsecured promissory note
and will become payable (i) upon a sale or refinancing of the Claridge;
(ii) upon full or partial satisfaction of the Expandable Wraparound
Mortgage; and (iii) upon full satisfaction of any first mortgage then in
place. Interest, which accrues at 12% per annum, is payable in full upon
maturity. As of September 30, 1997, such interest, which is included in
other current liabilities, amounted to $3,582,000.
6. Other Current Liabilities
-------------------------
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Deferred rent, current $15,078 15,078 15,078
Deferred rent, 03/01/97 1,150 -0- -0-
Accrued payroll and related benefits 6,353 6,187 6,665
Accrued interest, First Mortgage Notes 1,665 4,161 1,665
Accrued interest due to Partnership 3,582 3,258 3,150
Auto and general liability reserves 1,392 1,228 1,008
Other current liabilities 2,678 2,518 2,261
------- ------- -------
$31,898 32,430 29,827
======= ======= =======
</TABLE>
9
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
6. Other Current Liabilities (cont'd.)
-------------------------
Deferred rent of $15,078,000 represents the maximum deferral allowed in
accordance with the Operating Lease Agreement and Expansion Operating
Lease Agreement, as amended in June 1989. The deferred rent will become
payable (i) upon a sale or refinancing of the Claridge; (ii) upon full
or partial satisfaction of the Expandable Wraparound Mortgage; and (iii)
upon full satisfaction of any first mortgage then in place.
The 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 $1.3 million of basic rent on March 1, 1997, and for
additional monthly abatements of rent beginning April 1, 1997. The $1.3
million of basic rent deferred on March 1, 1997 is to be paid to the
Partnership as additional rent of $25,000 per month for the period April
1, 1997 through December 31, 1997, and of $50,000 per month for the year
1998 and thereafter until paid in full (subject to acceleration under
certain circumstances).
7. Long-Term Debt
--------------
On January 31, 1994, the Corporation completed an offering of $85
million of First Mortgage Notes (the "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, (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, 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 lien which may be placed on New Claridge's gaming and other
assets to secure any future revolving credit line arrangement. Interest
on the Notes is payable semiannually on February 1 and August 1 of each
year. A portion of the net proceeds of $82.2 million was used to repay
in full the then outstanding debt under the Revolving Credit and Term
Loan Agreement (the "Loan Agreement"), including the outstanding balance
of the Corporation's revolving credit line, which was secured by a first
mortgage. In conjunction with the full satisfaction of the Loan
Agreement, the Corporation's $7.5 million revolving credit line
arrangement was terminated.
8. Other Noncurrent Liabilities
----------------------------
Other noncurrent liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Contingent Payment $19,000 19,000 19,000
License agreement 1,467 -0- -0-
Other 534 379 341
------- ------- -------
$21,001 19,379 19,341
======= ======= =======
</TABLE>
10
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
8. Other Noncurrent Liabilities (cont'd.)
----------------------------
Pursuant to the Restructuring Agreement, Del Webb Corporation ("Webb")
retained an interest, which was assigned to a trustee for the benefit of
the Valley of the Sun United Way on April 2, 1990, equal to $20 million
plus interest at a rate of 15% per annum, compounded quarterly,
commencing December 1, 1988, in any proceeds ultimately recovered from
operations and/or the sale or refinancing of the Claridge facility in
excess of the first mortgage loan and other liabilities ("Contingent
Payment"). Consequently, New Claridge has deferred the recognition of
$20 million of forgiveness income with respect to the Contingent Payment
obligation. Interest on the Contingent Payment has not been recorded in
the accompanying consolidated financial statements since the likelihood
of paying such amount is not considered probable at this time. As of
September 30, 1997, accrued interest would have amounted to
approximately $53.5 million.
In connection with the restructuring, Webb agreed to grant those
investors in the Corporation and the Partnership ("Releasing
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 investors provided
releases and became Releasing Investors. Payments on the Contingent
Payment and to Releasing Investors are to be made in accordance with a
schedule of priorities, as defined in the Restructuring Agreement.
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 of $1 million was recorded as an offset to the
Contingent Payment liability which is included in other noncurrent
liabilities on the Corporation's consolidated balance sheet. The option
may be exercised any time prior to December 31, 1997. Upon exercise of
the option, the purchase price of the Contingent Payment would be $10
million, plus interest at 10% per annum for the period from January 1,
1997 to the date of payment of the purchase price. As a result, if the
option is exercised, any obligation to pay the accrued interest on the
Contingent Payment, as discussed above, would be eliminated, except in
respect of the obligation to the Releasing Investors. The purchase price
may also increase in an amount not to exceed $10 million if future
distributions to Releasing Investors exceed $20 million.
Under the terms of the option, upon purchase of the Contingent Payment,
the Corporation and/or the Partnership would be required to make
distributions in excess of $7 million to the Releasing Investors. The
Corporation and the Partnership have agreed to cooperate in the purchase
of the option and the Contingent Payment, with each contributing
one-half of the purchase price of the option and each anticipated to
contribute one-half of the purchase price of the Contingent Payment. A
portion of the Partnership's contribution would be contributed through
additional abatements of basic rent payments due under the Operating
Lease and Expansion Operating Lease.
Given recent operating results, it is unlikely that the Corporation
would be able to exercise this Contingent Payment option using available
working capital, or absent a refinancing or sale transaction.
In the event that the option is exercised, it is anticipated that the
Contingent Payment would be cancelled so that neither the Corporation
nor the Partnership would have any obligation to make any payment in
respect of the Contingent Payment before making a distribution to
shareholders or limited partners. Upon the purchase and cancellation,
however, the Corporation and the Partnership would remain obligated to
make payments to the Releasing Investors, in respect of the Contingent
Payment Rights, before any
11
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
8. Other Noncurrent Liabilities (cont'd.)
----------------------------
distribution may be made to shareholders or limited partners. These
payments would be required to be in the same amounts as if the
Contingent Payment had not been purchased and cancelled. As a result, it
is not likely that shareholders or limited partners who are not
Releasing Investors will receive any distribution from the Corporation
or the Partnership. In the aggregate, Releasing Investors are entitled
to receive up to an amount equal to approximately 72% of the Contingent
Payment.
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. This
amount will be recognized as income over the term of the agreement,
commencing April 1997.
9. Income Taxes
------------
The Corporation recorded an income tax benefit of $511,000, and a
corresponding increase in the valuation allowance, resulting in no
income tax provision or benefit for the nine months ended September 30,
1997.
During 1995, the Corporation received notice from the Internal Revenue
Service ("IRS") asserting deficiencies in Federal corporate income taxes
for the Corporation's 1990 and 1991 taxable years. Many of the proposed
adjustments to the Corporation's tax returns have been settled with no
adverse impact to the Corporation's consolidated financial statements.
There is a remaining IRS asserted deficiency for the 1990 and 1991
taxable years. In October 1996, the IRS sent the Corporation a statutory
notice of deficiency for the Corporation's 1990 and 1991 taxable years.
On January 23, 1997, the Corporation filed a petition with the United
States Tax Court requesting a redetermination of the asserted
deficiency. The Corporation believes the ultimate resolution of the case
will not result in a material impact on the Corporation's consolidated
financial statements.
10. Claridge License Renewal
------------------------
On September 22, 1995, New Claridge was issued a four-year casino
license by the New Jersey Casino Control Commission (the "Commission")
for the period commencing September 30, 1995.
11. 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. Management believes the
adoption of SFAS 128 will not have a material effect on Corporation's
earnings per share.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations for the Three Months Ended September 30, 1997
- -------------------------------------------------------------------
The Corporation had net income of $1,348,000 for the three months ended
September 30, 1997, compared to a net loss of $2,653,000 for the three months
ended September 30, 1996.
During the third quarter of 1997, New Claridge earned total casino
revenue (the difference between amounts wagered by and amounts paid to casino
patrons) of $43,975,000, reflecting a 2.8% increase over casino revenues earned
in the third quarter of 1996. Citywide casino revenues, as reported, for the
third quarter of 1997 increased only slightly over the same period of 1996.
Citywide casino capacity (i.e. casino square footage) during the third quarter
of 1997 increased 4.9% over the third quarter of 1996 as a result of the opening
of Bally's Wild Wild West casino on July 1, 1997.
Table games revenue earned by the Claridge during the third quarter of
1997 totalled $10,302,000, an increase of 2.9% over the third quarter of 1996
table games revenue. Table games drop (the amount of gaming chips purchased by
patrons) during the third quarter of 1997 decreased 1.6% from the same period of
1996; however, the "hold" percentage (the percentage of win to drop) was 13.7%
during the three months ended September 30, 1997, compared to 13.1% during the
same period of 1996. Citywide table games revenue, as reported, decreased 3.7%
during the third quarter of 1997 as compared to the third quarter of 1996, while
citywide table games drop decreased slightly.
Slot machine revenues earned by New Claridge during the three months
ended September 30, 1997 totalled $33,673,000, reflecting a 2.8% increase over
the same period of 1996. Citywide slot machine revenues, as reported, increased
2.3% during the third quarter of 1997 compared to the third quarter of 1996. The
average number of slot machines available citywide increased 6.6% during the
third quarter of 1997 over the prior year, resulting primarily from the opening
of the Bally's Wild Wild West casino; the average number of slot machines
available at the Claridge during the third quarter of 1997 decreased 7.3% from
the third quarter of 1996, resulting from a reconfiguration project in early
1997 which provided a more comfortable atmosphere for casino patrons.
Citywide competition for attracting bus passengers continued to ease
during the third quarter of 1997, as reflected in the lower average coin
incentives issued to bus passengers. During the third quarter of 1997, 237,000
passengers arrived at the Claridge by bus and were issued $3,107,000 in coin
incentives, for an average coin incentive per passenger of $13, compared to
total bus coin incentives issued during the same period of 1996 of $4,201,000 to
254,000 bus passengers, for an average per passenger of $17. In addition, New
Claridge offers promotional incentives to its customers, in the form of coin to
play slot machines and gaming chips to play table games, based on their levels
of gaming activity. Promotional incentives issued through these direct marketing
programs during the third quarter of 1997 totalled $2,977,000, compared to
$3,208,000 issued during the third quarter of 1996.
Hotel revenues for the third quarter of 1997 were $3,102,000, a 4.2%
increase over hotel revenues earned during the third quarter of 1996. This
increase was due primarily to an increase in the average room rate, to $70 in
the third quarter of 1997, from $65 during the same period of 1996; the
occupancy rate of 98% during the third quarter of 1997 was slightly lower than
the 99% occupancy during the third quarter of 1996. Food and beverage revenues
earned during the third quarter of 1997 of $5,353,000 were 10.2% lower than
revenues earned during the same period of 1996, due primarily to a reduction in
the number of covers (meals served) in the Claridge's buffet, as well as the
outsourcing of New Claridge's "fast food" restaurant in late 1996 to an
13
<PAGE>
independent operator. This reduction in covers was offset somewhat, by an
increase in the average price per cover, to $9.37 in 1997, from $8.27 in 1996.
Promotional allowances, which represent the value of goods and services provided
free of charge to casino customers under various marketing programs, were
$5,317,000 during the third quarter of 1997, a decrease of 8.3% from the third
quarter of 1996.
Total costs and expenses for the third quarter of 1997 of $50,060,000
were 8.7% lower that the third quarter of 1996 expenses of $54,817,000. Casino
operating expenses of $24,764,000 decreased 4.5% from expenses during the third
quarter of 1996, primarily as a result of lower coin incentives paid, as
previously discussed. General and administrative expenses of $6,621,000 reflect
a 9.4% decrease from third quarter of 1996 expenses, primarily resulting from
lower payroll expenses due to reduced staffing levels initiated as part of New
Claridge's cost containment efforts.
Rent expense due to the Partnership for the third quarter of 1997 of
$7,065,000 reflects a decrease from the same period of 1996, 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, 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 will vary depending on the Partnership's cash flow,
the actual amount abated on a monthly basis is recorded as a reduction to lease
expense. For the three months ended September 30, 1997, the reduction to lease
expense resulting from the abatement of rent was approximately $2.5 million.
The Corporation recorded income tax expense of $664,000, offset by a
corresponding decrease in the valuation allowance, for the third quarter of
1997, compared to an income tax benefit of $1,467,000 recorded in the third
quarter of 1996, as a result of the losses incurred in that period.
Results of Operations for the Nine Months Ended September 30, 1997
- ------------------------------------------------------------------
The Corporation had a net loss of $2,192,000 for the nine months ended
September 30, 1997, compared to a net loss of $8,967,000 for the same period of
1996.
Total casino revenue earned by New Claridge during the first nine months
of 1997 of $127,253,000 was 1.5% higher than casino revenues earned during the
same period of 1996. Citywide casino revenues during that period, as reported,
increased 2.3% over the same period of 1996. Casino revenues earned during early
1996 were adversely affected by several severe winter storms; in addition, 1997
results reflect the effects of the 7.1% increase in citywide casino capacity,
resulting from the opening of the Trump World's Fair casino in May 1996 and
Bally's Wild Wild West casino in July 1997.
Table games revenue earned by New Claridge during the nine months ended
September 30, 1997 was $29,995,000, a decrease of 1.5% from the same period of
1996, due to a lower hold percentage of 14.6% in 1997, compared to 14.9% in
1996. Table games drop during the first nine months of 1997 increased slightly
over the same period of 1996. Citywide table games drop, as reported, increased
2.9% during the first nine months of 1997, while citywide table games revenue
decreased slightly from 1996 levels.
New Claridge earned revenues from slot machines of $97,258,000 during
the nine months ended September 30, 1997, a 2.4% increase over slot revenues
earned during the same period of 1996. Citywide slot machine revenues, as
reported, increased 3.7% over the first nine months of 1996. The average number
of slot machines available citywide during the first nine months of 1997
increased 7.6% over the same period of 1996
14
<PAGE>
as a result of the opening of new properties and expansions at existing
properties. The average number of slot machines available at the Claridge during
the first nine months of 1997 decreased 6.0% from the same period of 1996 as a
result of the reconfiguration of the casino floor.
During the nine months ended September 30, 1997, 748,000 bus passengers
arrived at the Claridge, and were issued $11,827,000 in coin incentives, for an
average coin incentive per passenger of approximately $16. In the same period of
1996, $15,313,000 of coin incentives were issued to 803,000 bus passengers
arriving at the Claridge, an average of approximately $19 per passenger. In
addition, New Claridge issued promotional incentives through its direct
marketing programs of $8,702,000 during the first nine months of 1997, compared
to $8,404,000 of incentives issued during the same period of 1996.
Hotel and food and beverage revenues earned during the first nine months
of 1997 were $22,324,000, reflecting a 2.8% decrease from the same period of
1996, due primarily to a reduction in food revenues. This decrease in food
revenues resulted from a reduction in the number of covers, to 1,076,000 in 1997
from 1,401,000 in 1996, offset somewhat by an increase in the average price per
cover, to $9.36 in 1997 from $7.77 in 1996. The decrease in volume was due
primarily to a decline in buffet business, as well as the outsourcing of New
Claridge's "fast food" restaurant in late 1996. Hotel occupancy during the first
nine months of 1997 was 92%, with an average room rate of $58, compared to 94%
occupancy and an average room rate of $55 in the same period of 1996.
Promotional expenses during the nine months ended September 30, 1997 were
$14,584,000, a slight decrease from the same period of 1996.
Total costs and expenses during the first nine months of 1997 of
$150,277,000, a 7.6% decrease from the same period of 1996. Casino expenses of
$72,774,000 were 5.6% lower than 1996 expenses, due to decreased coin incentives
paid and lower payroll costs as a result of reduced staffing levels. Food and
beverage expenses of $7,602,000 were 11.6% lower than expenses during the first
nine months of 1996, 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 for the nine months ended September 30, 1997 were
$20,585,000, a 9.7% decrease from the same period of 1996 due to lower
advertising expenditures and decreased payroll costs resulting from lower
staffing levels, offset somewhat by increased legal and professional fees
incurred as a result of the restructuring/sale efforts in the first quarter of
1997. Interest expense for the nine months ended September 30, 1997 was higher
than the same period of 1996 due to the capitalization of interest during the
construction of the self-parking garage facility in 1996. Rent expense to the
Partnership for the first nine months of 1997 of $23,169,000 was lower than the
same period of 1996 as a result of the accounting for lease abatements allowed
in accordance with the March 1, 1997 amendments to the Operating Lease and
Expansion Operating Lease, as previously discussed.
The Corporation recorded an income tax benefit of $511,000, offset by a
corresponding increase in the valuation allowance, for the nine months ended
September 30, 1997, compared to an income tax benefit of $5,398,000 recorded in
the same period of 1996, as a result of the losses incurred in that period.
Liquidity and Capital Resources
- -------------------------------
On January 31, 1994, the Corporation completed an offering of $85
million of First Mortgage Notes (the "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, (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, and by a lien on New Claridge's gaming and other assets, which lien
will be subordinated to liens that
15
<PAGE>
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
arrangement. Interest on the Notes is payable semiannually on February 1 and
August 1 of each year.
The net proceeds of the Notes, totalling $82.2 million, were used as
follows: (i) to repay the then outstanding debt of the Corporation under the
Revolving Credit and Term Loan Agreement of approximately $35 million, including
the outstanding balance of the Corporation's revolving credit line, which was
secured by a first mortgage; (ii) to expand the casino capacity of the Claridge
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, at a
cost of approximately $12.7 million; (iii) to purchase property in 1995 and
construct on that property a self-parking garage, which opened in 1996, at a
cost (excluding capitalized interest of approximately $2.2 million) of
approximately $28 million (of which approximately $7.5 million represents the
cost of acquiring the land and approximately $20.5 million represents the costs
attributable to building the garage facility); and (iv) to acquire the
Contingent Payment Option (see Note 8, "Other Noncurrent Liabilities") at a cost
of $1 million. With the completion of the construction of the self-parking
garage, the proceeds of the offering of the Notes had largely been expended.
At September 30, 1997, the Corporation had a working capital deficiency
of $1,584,000 as compared to a working capital deficiency of $7,274,000 at
December 31, 1996. The decrease in the working capital deficiency is principally
attributable to an increase in cash of $4,256,000, an increase in receivables of
$1,453,000 (primarily due to an increase in the current portion of the
Expandable Wraparound Mortgage due from the Partnership), and a decrease in
interest payable on the Notes of $2,496,000, offset by an increase in other
current liabilities of $1,964,000 (primarily due to the deferral of basic rent
of $1.3 million on March 1, 1997) and an increase in accounts payable of
$594,000. The working capital deficiency at September 30, 1996 was $6,161,000.
Current liabilities at September 30, 1997 and December 31, 1996 included
deferred rental payments of $15,078,000, and a $3.6 million loan from the
Partnership plus accrued interest thereon of $3,582,000 at September 30, 1997
and $3,258,000 at December 31, 1996. These amounts will only be payable upon (i)
a 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. If these amounts were not included in current
liabilities, the Corporation's working capital at September 30, 1997 and
December 31, 1996 would have been $20,676,000 and $14,662,000, respectively.
For the nine months ended September 30, 1997, cash flows used in
operating activities were $7,007,000, compared to $17,531,000 for the nine
months ended September 30, 1996. The improved cash flow was due to (i) improved
operating results; (ii) the amendment to the Operating Lease and Expansion
Operating Lease, effective March 1, 1997, (as further discussed below) which
provided for the deferral of basic rent of $1.3 million on March 1, 1997; and
(iii) a February 28, 1997 license agreement with Thermal Energy Limited
Partnership ("Atlantic Thermal"), in consideration for which New Claridge was
paid $1.5 million (as further discussed below). Cash flows provided by
investment activities for the nine months ended September 30, 1997 were
$11,263,000, compared to cash flows used in investment activities for the nine
months ended September 30, 1996 of $7,611,000. Cash flows provided by investment
activities in the first nine months of 1997 were primarily from the receipt of
Expandable Wraparound Mortgage principal payments of $12,451,000. Cash flows
used in investment activities in the same period of 1996 for additions to
property and equipment include expenditures for the construction of the
self-parking garage facility, offset somewhat by Expandable Wraparound Mortgage
principal payments of $10,344,000.
16
<PAGE>
For the nine months ended September 30, 1997, the Corporation's
"Adjusted EBITDA" was $11,693,000, compared to $2,338,000 for the same period of
1996. "EBITDA" represents earnings before interest expense, income taxes,
depreciation, amortization, and other non-cash items. "Adjusted EBITDA" is equal
to "EBITDA" plus rent expense to the Partnership, less interest income from the
Partnership, less "Net Partnership Payments", which represent the Corporation's
net cash outflow to the Partnership. Adjusted EBITDA is used by the Corporation
to evaluate its financial performance in comparison to other gaming companies
with more traditional financial structures. Adjusted EBITDA may be used as one
measure of the Corporation's historical ability to service its debt, but should
not be considered as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an indicator of
operating performance, or to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a measure of
liquidity, or to other consolidated income or cash flow statement data, as are
determined in accordance with generally accepted accounting principles.
During 1994 and 1995, the cash provided by operations of the Claridge
was sufficient to meet the Corporation's obligations to pay interest on the
Notes, as well as to make at least some moderate capital improvements.
Commencing in the latter part of 1995, however, competition in the Atlantic City
casino market for bus customers, a principal source of customers for the
Claridge at the time, increased; this competition intensified even more during
1996 as additional casino square footage was added, principally due to the
opening of the Trump World's Fair casino. During 1996, the average coin
incentive issued per bus patron at the Claridge increased to approximately $19,
from approximately $13 in 1995. Total cash incentives issued to Claridge's
casino patrons (in the form of coin to play slot machines and gaming chips to
play table games) increased to approximately $30.5 million in 1996, from
approximately $25.2 million in 1995. While the Corporation's promotional costs
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, 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. 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, at which time the noteholders were urged to form a steering
committee or other representative body to conduct negotiations. Although a group
of noteholders formed and met with the management of the Corporation on a few
occasions, by the time the committee formally organized itself on
17
<PAGE>
January 7, 1997, it consisted of six members representing ownership of less than
5% of the total amount of Notes outstanding. At that time, the Corporation
determined that the committee did not represent a sufficient portion of the
noteholders to negotiate on behalf of the noteholders generally. As a result,
the Corporation did not formally recognize the committee and did not engage in
any negotiation with the committee or its members, although it did encourage the
members of the committee to continue to attempt to obtain broader representation
of the noteholders.
On January 12, 1997, management of the Corporation was contacted,
through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a possible
sale of the Corporation to Hilton, and shortly thereafter, the Corporation began
negotiations with Hilton. On January 30, 1997, the Corporation issued a press
release indicating that the Corporation would not make the interest payment due
on the Notes on February 3, 1997, and that the Corporation had entered
negotiations with Hilton regarding acquisition of the Corporation by Hilton
through a prepackaged bankruptcy plan. At that time, a representative of Hilton
indicated that Hilton had acquired approximately 35% to 40% of the Notes. On
February 5, 1997, three holders of the Notes, who were members of the unofficial
committee which they had formed, filed a petition for involuntary bankruptcy
against the Corporation in the bankruptcy court for the District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related
state court lawsuit against the Corporation, New Claridge, the Partnership,
certain officers and directors of the Corporation, and the general partners of
the Partnership. On March 4, 1997, contrary to earlier expectations, the
Corporation was able to pay the interest that was due on the Notes on February
3, 1997, under the 30-day grace period allowed in accordance with the terms of
the Indenture. 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 were
amended to provide for the deferral of basic rent of $1.3 million on March 1,
1997 (as further discussed below); and (iii) on February 28, 1997, New Claridge
entered into an agreement with 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.
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 have improved over 1996 levels, due
primarily to the positive impact of the availability of the self-parking garage,
lower bus package pricing, and other cost containment initiatives. Although
management of the Corporation believes that operating results will continue to
improve over prior year levels, no assurances as to the continuation of this
improvement can be given.
Management will continue to conserve cash through various cost
containment measures, including limiting capital expenditures in 1997 to
approximately $1 million. Given the various improvements made to the property
18
<PAGE>
in recent years, including the casino expansion in 1994, the construction of the
self-parking garage, and other projects such as the refurbishment of all of its
guest rooms, the current condition of the property is such that the
above-mentioned level of capital expenditures is deemed adequate. Management
will also continue to consider various refinancing alternatives, 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 evaluating the
recovery of certain expenses incurred in reopening the self-parking garage and
in evaluating potential lost profit claims as a result of the accident which
occurred in the self-parking garage on July 10, 1996. 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.
New Claridge is obligated under its Operating Lease with the Partnership
to lend the Partnership, at an annual interest rate of 14%, any amounts
necessary to fund the cost of furniture, fixtures and equipment replacements.
The Expandable Wraparound Mortgage, granted by the Partnership to New Claridge,
by its terms may secure up to $25 million of additional loans to the Partnership
from New Claridge to finance the replacements of furniture, fixtures and
equipment and facility maintenance and engineering shortfalls. The advances to
the Partnership are in the form of FF&E Loans and are secured by the Hotel
Assets. One half of the FF&E Loan principal is due in the 48th month following
the advance, with the remaining balance due in the 60th month following the date
of issuance. 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 internal improvements to the
Claridge, which were funded through additional FF&E Loans. 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 Loans will be payable at final maturity
of the Expandable Wraparound Mortgage. New Claridge is obligated to pay as
additional rent to the Partnership the debt service on the FF&E Loans.
The Expandable Wraparound Mortgage requires monthly principal payments
to be made by the Partnership to New Claridge, commencing in the year 1988 and
continuing through the year 1998, in escalating amounts totaling $80 million.
The Expandable Wraparound Mortgage, which will mature on September 30, 2000,
bears interest at an annual rate equal to 14% with the deferral until maturity
of $20 million of certain interest payments which accrued between 1983 and 1988.
In addition, in 1986 the principal amount secured by the Expandable Wraparound
Mortgage was increased to provide the Partnership with funding for the
construction of an expansion improvement, which resulted in approximately 10,000
square feet of additional casino space and a 3,600 square foot lounge. Effective
August 28, 1986, the Partnership commenced making level monthly payments of
principal and interest calculated to provide for the repayment in full of the
principal balance of this increase in the Expandable Wraparound Mortgage by
September 30, 1998. Under the terms of the Expandable Wraparound Mortgage, New
Claridge is not permitted to foreclose on the Expandable Wraparound Mortgage and
take ownership of the Hotel Assets so long as a senior mortgage is outstanding.
The face amount outstanding of the Expandable Wraparound Mortgage at September
30, 1997 (including the outstanding FF&E Loans and the $20 million of deferred
interest) was $105.2 million.
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 (the "Wraparound Modification") that is permitted
by, or is in compliance with, the terms of the indenture governing the Notes
(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
19
<PAGE>
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
addition to the modification to the Expandable Wraparound Mortgage, the
Corporation, New Claridge, and the Partnership agreed to modify certain terms of
the Operating Lease and Expansion Operating Lease agreements, as discussed
below.
The Hotel Assets are owned by the Partnership and leased by the
Partnership to New Claridge under the terms of the Operating Lease originally
entered into on October 31, 1983, and the Expansion Operating Lease, which
covered the expansion improvements made to the Claridge in 1986. The initial
terms of both leases are scheduled to expire on September 30, 1998 and each
lease provides for three 10-year renewal options at the election of New
Claridge. The Operating Lease requires basic rental payments to be made in equal
monthly installments escalating annually up to $41,775,000 in 1997, and
$32,531,000 for the remainder of the initial lease term. Prior to the
Corporation's 1989 restructuring, basic rent expense (recognized on a leveled
basis in accordance with Statement of Financial Accounting Standards No. 13),
was $31,902,000 per year. Therefore, in the early years of the lease term,
required cash payments under the Operating Lease (not including the Expansion
Operating Lease) were significantly lower than the related expense recognized
for financial reporting purposes. Rental payments under the Expansion Operating
Lease are adjusted annually based on a Consumer Price Index with any increase
not to exceed two percent per year. Pursuant to the 1989 Restructuring
Agreement, the Operating Lease and the Expansion Operating Lease were amended to
provide for the abatement of $38.8 million of basic rent payable through 1998
and the deferral of $15.1 million of rental payments, thereby reducing the
Partnership's cash flow to an amount estimated to be necessary only to meet the
Partnership's cash requirements. Effective on completion of the 1989
restructuring, lease expense recognized on a level basis was reduced
prospectively, based on a revised schedule of rent leveling based on the agreed
rental abatements. During the third quarter of 1991, the Corporation had accrued
the maximum amount of $15.1 million of deferred rent liability under the lease
arrangements. The deferred rent liability will become payable (i) upon a sale or
refinancing of the Claridge; (ii) upon full or partial satisfaction of the
Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first
mortgage then in place. The $38.8 million of basic rent abatements were fully
utilized by the end of the first quarter of 1997. Additional abatements
totalling $500,000, which became available as a result of the acquisition of the
option to purchase the Contingent Payment, were also utilized in 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 $1.3 million
of basic rent on March 1, 1997, and provide for additional abatements of basic
rent, commencing on April 1, 1997, as necessary to reduce the Partnership's cash
flow to an amount necessary only to meet the Partnership's cash requirements
through December 31, 1998. The $1.3 million of basic rent deferred on March 1,
1997 is to be paid to the Partnership as additional rent of $25,000 per month
for the period April 1, 1997 through December 31, 1997, and of $50,000 per month
for the year 1998 and thereafter until paid in full (subject to acceleration
under certain circumstances). For the years 1999 through 2003, additional
abatements of basic rent will be reduced to provide the Partnership with amounts
needed to meet the Partnership's cash requirements plus an additional amount
($83,333 per month in 1999 and 2000, $125,000 per month in 2001, and $166,667
per month in 2002 and 2003). All abatements of rent in excess of the $38.8
million which was allowed in accordance with the 1989 restructuring will be
recognized as a reduction to lease expense as abated.
In addition, under the March 1, 1997 restructuring agreement between the
Corporation, New Claridge and the Partnership, 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.
20
<PAGE>
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge has an option to purchase, on September 30, 1998, the Hotel
Assets and the underlying land for their fair market value at the time the
option is exercised, which in no event may be less than an amount equal to the
amount then outstanding under the Expandable Wraparound Mortgage plus $2.5
million, plus any amount of the $1.3 million of rent deferred on March 1, 1997
not then paid. If New Claridge does not exercise this option on September 30,
1998, it may exercise an option, on September 30, 2003, to purchase the Hotel
Assets and the underlying land on January 1, 2004, for their fair market value
at the time the option is exercised.
Basic rent during the renewal term of the Operating Lease will be
calculated pursuant to a formula with annual basic rent not to be more than
$29.5 million or less than $24 million for the twelve months commencing October
1, 1998, and subsequently, not to be greater than 10% more than the basic rent
for the immediately 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 annual basic rent not to be more than $3
million or less than $2.5 million for the twelve months commencing October 1,
1998, and subsequently, not to be greater than 10% more than the basic rent for
the immediately preceding lease year in each lease year thereafter.
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.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Claridge Hotel and Casino Corporation
- -----------------------------------------
(Registrant)
By: /s/ Jean I. Abbott
-------------------------------------------
Jean I. Abbott
Executive Vice President of Finance/
Chief Financial Officer
(Authorized Officer, Principal Financial Officer
and Principal Accounting Officer)
Dated: November 13, 1997
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CLARIDGE
HOTEL AND CASINO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000730409
<NAME> CLARIDGE HOTEL AND CASINO CORPORATION
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
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0
0
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</TABLE>
