<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 June 30, 1998
[ ] 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
August 13, 1998
Class A Stock 4,970,730 (After deducting 91,770
shares of Treasury Stock)
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
----------------------------------------------------------
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Notes to Consolidated
Financial Statements 3
Consolidated Balance Sheets at
June 30, 1998 and 1997 and
December 31, 1997 4
Consolidated Statements of Operations
for the three months ended June 30,
1998 and 1997 5
Consolidated Statements of Operations
for the six months ended June 30,
1998 and 1997 6
Consolidated Statements of Cash Flows
for the six months ended June 30,
1998 and 1997 7
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
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 June 30, 1998 and 1997 and December 31, 1997, and the results of its
operations for the three and six months ended June 30, 1998 and 1997 and its
cash flows for the six months ended June 30, 1998 and 1997. 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, 1997
filed with the Securities and Exchange Commission.
The results of operations for the three and six months ended June 30,
1998 and 1997 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>
June 30, December 31, June 30,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,768 12,424 12,618
Receivables, net (including $11,696 and
$18,804 at June 30, 1998 and 1997,
respectively and $19,878 at December 31,
1997, due from the Partnership) 14,268 21,467 20,272
Other current assets 4,037 3,205 3,734
--------- --------- ---------
Total current assets 30,073 37,096 36,624
--------- --------- ---------
Property and equipment, net (note 4) 30,910 32,094 33,301
Long-term receivables due from the
Partnership (note 3) 76,030 75,465 84,134
Intangible assets and deferred charges 1,788 2,020 2,296
Other assets 3,966 3,705 3,065
--------- --------- ---------
$ 142,767 150,380 159,420
========= ========= =========
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current maturities of long-term debt (note 7) $ 237 39 -0-
Accounts payable 4,140 3,202 3,275
Loan from the Partnership (note 5) 3,600 3,600 3,600
Other current liabilities (note 6) 34,560 34,393 34,358
--------- --------- ---------
42,537 41,234 41,233
--------- --------- ---------
Long-term debt (note 7) 85,179 85,023 85,000
Deferred rent due to the Partnership 9,179 16,506 23,033
Deferred income taxes (note 9) 2,580 2,580 2,580
Other noncurrent liabilities (note 8) 21,145 20,850 20,948
Stockholders' deficiency:
Common stock 5 5 5
Additional paid in capital 5,048 5,048 5,048
Accumulated deficit (22,906) (20,866) (18,427)
Treasury stock, 91,770 Class A Shares at
cost at June 30, 1998 and December 31,
1997, resepectively, and 56,158 Class A
Shares at June 30, 1997 -0- -0- -0-
--------- --------- ---------
Total stockholders' deficiency (17,853) (15,813) (13,374)
--------- --------- ---------
$ 142,767 150,380 159,420
========= ========= =========
</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 June 30, 1998 and 1997
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Casino $ 43,718 43,393
Hotel 2,303 2,414
Food and beverage 4,658 5,073
Interest from the Partnership 3,078 3,624
Interest, other 133 116
Other 656 658
-------- --------
54,546 55,278
Less promotional allowances (note 2) 4,850 4,807
-------- --------
Net revenues 49,696 50,471
-------- --------
Costs and expenses:
Casino 25,601 24,713
Hotel 611 710
Food and beverage 2,113 2,611
Other 663 643
Rent expense to the Partnership 6,069 6,337
Rent expense, other 352 315
General and administrative 7,375 6,719
Gaming taxes 3,489 3,468
Reinvestment obligation expense 422 209
Provision for uncollectible accounts 105 53
Depreciation and amortization 675 809
Interest expense 2,616 2,609
-------- --------
Total costs and expenses 50,091 49,196
-------- --------
(Loss) income before income taxes (395) 1,275
Income tax (benefit) expense -0- -0-
-------- --------
Net (loss) income $ (395) 1,275
======== ========
Net (loss) income per share (based on 4,970,730 and 5,006,342 weighted average
shares outstanding for the three months ended June 30, 1998
and 1997, respectively), basic and diluted $ (.08) .25
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Months Ended June 30, 1998 and 1997
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Revenue:
Casino $ 84,712 83,278
Hotel 4,041 4,179
Food and beverage 9,157 9,690
Interest from the Partnership 6,292 7,365
Interest, other 547 188
Other 1,400 1,244
--------- ---------
106,149 105,944
Less promotional allowances (note 2) 9,454 9,267
--------- ---------
Net revenues 96,695 96,677
--------- ---------
Costs and expenses:
Casino 50,830 48,010
Hotel 1,159 1,233
Food and beverage 3,866 4,860
Other 1,346 1,276
Rent expense to the Partnership 12,987 16,104
Rent expense, other 651 678
General and administrative 13,785 13,964
Gaming taxes 6,763 6,656
Reinvestment obligation expense 589 370
Provision for uncollectible accounts 179 107
Depreciation and amortization 1,332 1,636
Interest expense 5,248 5,323
--------- ---------
Total costs and expenses 98,735 100,217
--------- ---------
Loss before income taxes (2,040) (3,540)
Income tax benefit -0- -0-
-------- --------
Net loss $ (2,040) (3,540)
========= =========
Net loss per share (based on 4,970,730 and 5,006,342 weighted average shares
outstanding for the six months ended June 30, 1998
and 1997, respectively), basic and diluted $ (.41) (.71)
========= =========
</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 Six Months Ended June 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,040) (3,540)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,332 1,636
Deferred rent to the Partnership (7,327) (4,977)
Deferred interest receivable and
discount from the Partnership (972) (845)
Reinvestment obligation expenses 589 370
(Gain) loss on disposal of assets (71) 30
Deferred income taxes -0- (1)
Change in assets and liabilities:
Receivables, net, excluding current
portion of long-term receivables (882) (32)
Other current assets (832) (257)
Accounts payable 938 278
Other current liabilities 167 1,928
Other noncurrent liabilities 30 1,569
-------- --------
Net cash flows used in operating activities (9,068) (3,841)
-------- --------
Cash flows from investment activities:
Increase in intangible assets and deferred charges (47) (3)
Additions to property and equipment (149) (41)
Increase in other assets (850) (952)
Proceeds from disposal of assets 1,019 588
Increase in long-term receivables (445) (101)
Receipt of long-term receivables 8,933 8,436
-------- --------
Net cash flows provided by investment activities 8,461 7,927
-------- --------
Cash flows from financing activities:
Payment of long-term debt (49) -0-
-------- --------
Net cash flows used in financing activities (49) -0-
-------- --------
(Decrease) increase in cash and cash equivalents (656) 4,086
Cash and cash equivalents at beginning of period 12,424 8,532
-------- --------
Cash and cash equivalents at end of period $ 11,768 12,618
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
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. The estimated cost of providing
such promotional allowances to casino patrons for the three and six
months ended June 30, 1998 and 1997 has been allocated to casino
operating expenses as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hotel $ 931 899 1,848 1,954
Food and beverage 3,386 2,884 6,641 5,826
Other (Entertainment) 270 332 489 524
------ ------ ------ ------
Total costs allocated to
casino operating expenses $4,587 4,115 8,978 8,304
====== ====== ====== ======
</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>
June 30, December 31, June 30,
1998 1997 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Expandable Wraparound Mortgage 14%,
maturities through September 30,
2000 (net of $5,567,000 discount and
$7,445,000 discount at June 30,
1998 and 1997 respectively, and $6,539,000
discount at December 31, 1997) $ 41,433 40,461 46,555
Deferred Expandable Wraparound
Mortgage interest receivable, due
September 30, 2000 20,000 20,000 20,000
FF&E promissory notes, 14% 14,597 15,004 16,704
Expansion/Construction promissory note, 14% -0- -0- 875
-------- -------- --------
$ 76,030 75,465 84,134
======== ======== ========
</TABLE>
8
<PAGE>
THE CLARIDGE HOTEL AND CASINO
CORPORATION Notes to Consolidated
Financial Statements (cont'd.)
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Gaming equipment $ 15,932 18,366 18,244
Land and land improvements 7,598 7,598 7,598
Self-parking garage facility 20,070 20,070 20,100
Leasehold improvements 745 745 745
Capital lease asset 1,112 693 613
Other equipment 107 107 107
-------- ------- -------
45,564 47,579 47,407
Less accumulated depreciation and amortization 14,654 15,485 14,106
-------- ------- -------
Net property and equipment $ 30,910 32,094 33,301
======== ======= =======
</TABLE>
5. Loan from the Partnership
-------------------------
In accordance with the terms of the Restructuring Agreement, 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 June 30, 1998 such interest, which is included in other
current liabilities, amounted to $3,906,000.
9
<PAGE>
THE CLARIDGE HOTEL AND CASINO
CORPORATION Notes to Consolidated
Financial Statements (cont'd.)
6. Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Deferred rent, current $ 15,078 15,078 15,078
Deferred rent, 03/01/97 775 1,075 1,225
Accrued payroll and related benefits 6,685 6,508 6,687
Accrued interest, First Mortgage Notes 4,161 4,161 4,161
Accrued interest due to Partnership 3,906 3,690 3,474
Auto and general liability reserves 1,634 1,488 1,259
Other current liabilities 2,321 2,393 2,474
-------- -------- --------
$ 34,560 34,393 34,358
======== ======== ========
</TABLE>
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 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).
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
11 3/4% Notes due 2002 $ 85,000 85,000 85,000
Capital lease obligations 416 62 -0-
-------- ------- -------
85,416 85,062 85,000
Less current installments 237 39 -0-
-------- ------- -------
$ 85,179 85,023 85,000
======== ======= =======
</TABLE>
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
10
<PAGE>
THE CLARIDGE HOTEL AND CASINO
CORPORATION Notes to Consolidated
Financial Statements (cont'd.)
7. Long-Term Debt (cont'd.)
--------------
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>
June 30, December 31, June 30,
1998 1997 1997
-------- ------ ------
(in thousands)
<S> <C> <C> <C>
Contingent Payment $ 19,000 19,000 19,000
License agreement 1,406 1,444 1,488
Deferred gain on sale 265 -0- -0-
Other 474 406 460
-------- ------ ------
$ 21,145 20,850 20,948
======== ====== ======
</TABLE>
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
June 30, 1998, accrued interest would have amounted to approximately
$62.0 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
11
<PAGE>
THE CLARIDGE HOTEL AND CASINO
CORPORATION Notes to Consolidated
Financial Statements (cont'd.)
8. Other Noncurrent Liabilities (cont'd.)
Releasing Investors. Payments 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
could have been exercised any time prior to December 31, 1997.
Given recent operating results, the Corporation was not able to
exercise this Contingent Payment option, and it expired in accordance
with its terms on December 31, 1997.
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.
In December 1997, New Claridge obtained a committment from PDS Financial
Corporation ("PDS") for a $2 million sale lease-back facility (the
"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. Deferred gain on sale represents the gain on this
sale lease-back transaction which will be recognized over the term of
the lease.
9. Income Taxes
------------
The Corporation recorded an income tax benefit of $607,000, and a
corresponding increase in the valuation allowance, resulting in no
income tax provision or benefit for the six months ended June 30, 1998.
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 United States Tax Court set a trial date for this case
of June 1, 1998. In April 1998, the Corporation filed a Motion for
Continuance of Trial, which was subsequently granted; the case has been
restored to the general trial docket. The Corporation believes the
ultimate resolution of the case will not result in a material impact on
the Corporation's consolidated financial statements.
12
<PAGE>
THE CLARIDGE HOTEL AND CASINO
CORPORATION Notes to Consolidated
Financial Statements (cont'd.)
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.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations for the Three Months Ended June 30,1998
- -------------------------------------------------------------
The Corporation had a net loss of $395,000 for the three months ended
June 30, 1998, compared to net income of $1,275,000 for the same period of 1997.
Casino revenue, which is the difference between amounts wagered by and
amounts paid to casino patrons, totalled $43,718,000 during the second quarter
of 1998, a slight increase over casino revenues totalling $43,393,000 during the
same period of 1997. Citywide casino revenues, as reported, increased 1.1% in
the second quarter of 1998 over the same prior year period. Citywide casino
capacity during the second quarter of 1998 increased over the same period of
1997, resulting primarily from the opening of the Bally's Wild Wild West casino
in July 1997, as reflected in the 7.6% increase in the average number of slot
machines available citywide.
New Claridge's table games drop (the amount of gaming chips purchased by
patrons) increased 21.4% during the second quarter of 1998 over the same period
of 1997. This increase resulted from various programs designed to increase the
table games segment of the business, including a marketing initiative aimed at
domestic Asian players, increased junket activity, and increased player
development activity. The table games hold percentage (the percentage of win to
drop) during the second quarter of 1998 was 14.7%, compared to 14.6% during the
second quarter of 1997. As a result, New Claridge's table games revenue during
the second quarter of 1998 was $11,742,000, reflecting a 22.3% increase over the
same prior year period. Citywide table games drop, as reported, decreased
slightly during the second quarter of 1998 from prior year levels, while
citywide table games revenue, as reported, increased slightly, resulting from a
slightly higher hold percentage.
New Claridge's slot machine revenue during the second quarter of 1998
was $31,976,000, reflecting a decline of 5.4% from prior year revenue. Citywide
slot machine revenues, as reported, for the second quarter of 1998 increased
1.2% over the same period of 1997. As previously discussed, the average number
of slot machines available citywide during the second quarter of 1998 increased
7.6% over the same period of 1997, primarily as a result of the opening of
Bally's Wild Wild West casino. The average number of slot machines available at
the Claridge during the second quarter of 1998 remained consistent with the same
period of 1997.
During the second quarter of 1998, marketing efforts to attract bus
customers continued to ease, as reflected in the lower average coin packages
offered to patrons arriving by bus. For the three months ended June 30, 1998,
coin incentives totalling $3,771,000 were paid to 249,000 patrons arriving at
the Claridge by bus, for an average of $15 per patron. This compared to
$4,762,000 of coin incentives paid to 287,000 bus patrons during the same period
of 1997, or an average of $17 per patron. In addition to the bus program, New
Claridge offers promotional incentives to its customers through direct marketing
programs, 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 second quarter of 1998
totalled $2,726,000, compared to $2,875,000 during the same period of 1997.
Hotel occupancy during the second quarter of 1998 decreased to 87.6%,
from 91.2% during the same period of 1997, while the average room rate also
decreased slightly, to $58 during the second quarter of 1998 from $59 during the
second quarter of 1997. As a result, hotel revenues during the three months
ended June 30, 1998 of $2,303,000 were 4.6% lower than the same period of 1997.
Food and beverage revenues during the second quarter of 1998 totalled
$4,658,000, reflecting an 8.2% decline from the same period of 1997. This
decrease was due primarily to a reduction in the number of covers (meals
served), due in part to the closing of New Claridge's 24-hour restaurant during
the quarter for a complete renovation. The total number of covers
14
<PAGE>
served during the second quarter of 1998 was 309,000, at an average price per
cover of $10.13, compared to 358,000 covers served during the same period of
1997, at an average price per cover of $9.38. During the second quarter of 1998,
promotional allowances, which represent the value of goods and services provided
free of charge to casino customers under various marketing programs, were in
line with the same period of 1997.
Casino operating expenses during the second quarter of 1998 of
$25,601,000 were 3.6% higher than the same period of 1997, primarily due to
costs associated with the increased marketing initiatives to attract table games
players, offset somewhat by the decrease in promotional coin expenses. Hotel and
food and beverage expenses during the second quarter of 1998 decreased from 1997
levels, primarily due to the lower levels of business in those areas. General
and administrative expenses during the second quarter of 1998 of $7,375,000 were
9.8% higher than the same period of 1997, due to increased advertising
expenditures, as well as increased legal fees, primarily due to the ongoing
arbitration proceedings related to the accident which occurred in New Claridge's
self-parking garage in 1996. Rent expense to the Partnership in the second
quarter of 1998 was $6,069,000, reflecting a decrease from rent expense during
the second quarter of 1997 of $6,337,000. This decrease was due to lower rental
payments to the Partnership during the second quarter of 1998 for the debt
service on FF&E Loans (see "Liquidity and Capital Resources").
For the second quarter of 1998, the Corporation recorded an income tax
benefit of $55,000, offset by a corresponding increase in the valuation
allowance; this compared to income tax expense of $626,000, offset by a
corresponding decrease in the valuation allowance, during the second quarter of
1997.
Results of Operations for the Six Months Ended June 30, 1998
- ------------------------------------------------------------
For the six months ended June 30, 1998, the Corporation had a net loss
of $2,040,000, compared to a net loss of $3,540,000 for the six months ended
June 30, 1997.
New Claridge recorded total casino revenues during the first half of
1998 of $84,712,000, reflecting a 1.7% increase over the same period of 1997.
This increase was in line with the increase reported in total citywide casino
revenues, of 1.8%, for the first half of 1998. Average citywide casino capacity
also increased during the first half of 1998, as reflected in the 7.1% increase
in the average number of slot machines available and the 7.4% increase in casino
square footage.
New Claridge's table games drop and revenue increased 23.8% and 15.0%,
respectively, during the first half of 1998 as compared to the same period of
1997. These increases resulted from the marketing initiatives aimed at
increasing table games play, as previously discussed. Citywide table games drop
and revenue during the first half of 1998, as reported, decreased slightly from
the same period of 1997.
During the six months ended June 30, 1998, New Claridge's slot machine
revenue of $62,066,000 decreased 2.4% from the same period of 1997, due to the
increase in competition resulting from the expansion of citywide capacity.
Citywide slot revenues, as reported, increased 2.9% during the first half of
1998, as compared to the first half of 1997.
New Claridge issued $7,181,000 of coin incentives to 465,000 patrons
arriving at the Claridge by bus during the first half of 1998, for an average
coin incentive per passenger of $15. This was a reduction from the $8,720,000 of
coin incentives issued to 511,000 patrons during the first half of 1997, or an
average of $17 per patron. In addition, promotional incentives issued through
New Claridge's direct marketing programs during the first half of 1998 totalled
$5,670,000, compared to $5,725,000 during the same period of 1997.
15
<PAGE>
Hotel revenues during the six months ended June 30, 1998 totalled
$4,041,000, reflecting a 2.6% decrease from the same period of 1997. Hotel
occupancy and the average room rate during the first half of 1998 was 86.3% and
$53, respectively, compared to 89.5% and $52, respectively, during the first
half of 1997. Food and beverage revenues were $9,157,000 during the first half
of 1998, a 5.5% decrease from food and beverage revenues during the first half
of 1997. The total number of covers declined to 579,000 in the first half of
1998 from 680,000 during the same period of 1997, although the average price per
cover increased to $10.36 in the first half of 1998 from $9.35 in the first half
of 1997. The reduction in the number of covers served was due to the closing of
two of New Claridge's restaurants (the buffet during the first quarter of 1998
and the 24-hour restaurant during the second quarter of 1998) for renovations.
Promotional allowances during the first half of 1998 increased 2.0% over the
first half of 1997, primarily due to increased player development activities.
Total costs and expenses during the first six months of 1998 of
$98,735,000 were 1.5% lower than the same period of 1997, primarily due to lower
rent expense to the Partnership resulting from the accounting for lease
abatements allowed in accordance with the March 1, 1997 amendments to the
Operating Lease and Expansion Operating Lease. Casino operating expenses of
$50,830,000 were 5.9% higher than in the first half of 1997, primarily as a
result of increased marketing costs related to the initiatives to increase table
games business, as well as higher payroll costs incurred as a result of the
increase in business, offset somewhat by lower coin incentive costs. Hotel and
food and beverage expenses during the first half of 1998 decreased 17.5% from
1997 levels, resulting from the decline in business activity, as well as an
increase in the allocation of these costs to casino expenses for the cost of
providing promotional allowances to casino patrons. General and administrative
expenses during the first half of 1998 were $13,785,000, slightly lower than the
same period of 1997; although 1998 expenses include increased advertising
expenditures and legal fees related to the ongoing arbitration proceedings, as
previously discussed, 1997 expenses included legal and professional fees
incurred related to the Corporation's attempted reorganization in early 1997.
For the first six months of 1998 and 1997, the Corporation recorded
income tax benefits of $607,000 and $1,175,000, respectively, offset by
corresponding increases in the valuation allowance, as a result of the losses
incurred in those periods.
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 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
16
<PAGE>
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 June 30, 1998, the Corporation had a working capital deficiency of
$12,464,000 as compared to a working capital deficiency of $4,138,000 at
December 31, 1997. The increase in the working capital deficiency is principally
attributable to a decrease in receivables of $7,199,000 (primarily due to a
decrease in the current portion of the Expandable Wraparound Mortgage due from
the Partnership) and an increase in accounts payable of $938,000. The working
capital deficiency at June 30, 1997 was $4,609,000. Current liabilities at June
30, 1998 and December 31, 1997 included deferred rental payments of $15,078,000,
and a $3.6 million loan from the Partnership plus accrued interest thereon of
$3,906,000 at June 30, 1998 and $3,690,000 at December 31, 1997. 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 June 30,
1998 and December 31, 1997 would have been $10,120,000 and $18,230,000,
respectively.
For the six months ended June 30, 1998, cash flows used in operating
activities were $9,068,000, compared to $3,841,000 for the six months ended June
30, 1997. Cash flows used in operating activities in 1997 were improved by the
deferral on March 1, 1997 of $1.3 million of basic rent payable to the
Partnership under the Operating Lease and Expansion Operating Lease, in addition
to the $1.5 million license fee received from Atlantic Thermal on February 28,
1997. Cash flows provided by investment activities for the first half of 1998
were $8,461,000, compared to cash flows provided by investment activities for
the same period 1997 of $7,927,000. Cash flows provided by investment activities
in the first half of 1998 were from the receipt of Expandable Wraparound
Mortgage principal payments of $8,933,000, in addition to the approximately $1
million in proceeds received from PDS Financial Corporation for the sale of
certain slot machines under a sale lease-back arrangement (see further
discussion below). For the six months ended June 30, 1997, cash flows provided
by investment activities were primarily from the receipt of Expandable
Wraparound Mortgage principal payments of $8,436,000. Cash flows used by
financing activities in 1998 represent payments of capital lease obligations for
certain gaming equipment.
For the six months ended June 30, 1998, the Corporation's "Adjusted
EBITDA" was $5,763,000, compared to $6,403,000 for the same period of 1997.
"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 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's
17
<PAGE>
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, in November 1996 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. The Corporation
experienced a net loss for 1996 of $15.4 million, compared to a net loss of $1.9
million in 1995.
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.
The Corporation had sufficient cash to pay the interest on the Notes 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 a significant improvement in operating results in 1997 over 1996
levels in order to meet its on-going obligations, including the interest due on
the Notes. Operating results in 1997 did improve 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
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 $1.5 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. Arbitration proceedings commenced in
April 1998, and are expected to continue into the fourth quarter of 1998.
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
18
<PAGE>
successful in realizing any recovery.
In December 1997, New Claridge obtained a commitment from PDS Financial
Corporation ("PDS") for a $2 million sale lease-back facility (the "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.
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 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 June 30, 1998 (including the outstanding FF&E
Loans and the $20 million of deferred interest) was $92.1 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 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
19
<PAGE>
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. In connection with the March 1, 1997 restructuring agreement between
the Corporation, New Claridge, and the Partnership (see discussion below), New
Claridge agreed to exercise the first of the ten-year renewal options, extending
the term of the Operating Lease and Expansion Operating Lease through September
30, 2008. 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. All of the $38.8 million of basic rent abatements had
been 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 $1.3 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 in monthly installments of $25,000 for the
period April 1, 1997 through December 31, 1997, and monthly installments of
$50,000 for the year 1998 and thereafter until paid in full (subject to
acceleration under certain circumstances). For the years 1999 through 2003,
additional abatements of basic rent will be reduced to provide the Partnership
with amounts needed to meet the Partnership's cash requirements plus an
additional amount ($83,333 per month in 1999 and 2000, $125,000 per month in
2001, and $166,667 per month in 2002 and 2003). All abatements of rent in excess
of the $38.8 million which were allowed in accordance with the 1989
restructuring will be recognized as a reduction to lease expense as abated.
As previously discussed, 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.
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,
20
<PAGE>
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.
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge had an option to purchase (the "Purchase Option"), on
September 30, 1998, the Hotel Assets and the underlying land for their fair
market value at the time the Purchase Option is exercised, which in no event may
be less than (i) the amount then outstanding under the Expandable Wraparound
Mortgage, plus (ii) $2.5 million, plus (iii) any amount of the $1.3 million of
rent deferred on March 1, 1997 not then paid. To exercise the Purchase Option,
New Claridge was required to give notice to the Partnership, at least nine
months prior to the option date, of its election to do so. Based on its current
financial situation, New Claridge did not give such notice to the Partnership in
respect of the September 30, 1998 option date. However, New Claridge may also
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.
Management of the Corporation is aware of the issues 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 Corporation has
assessed its hardware, software, and other non-Information Technology ("IT")
systems, and has a plan in place to address year 2000 issues on a timely basis.
The Corporation's management anticipates using primarily internal staff to
identify, correct, and test the systems for year 2000 compliance, which
therefore are not likely to result in incremental costs, but rather will
represent a redeployment of existing IT resources. Non-essential non-year 2000
IT projects may be delayed, however, adequate resources are available to address
essential projects. The Corporation does not expect the amounts required to be
expensed related to correcting the year 2000 problem to have a material effect
on its financial position or results of operations. Implementation of this plan
has begun, and although management of the Corporation anticipates completion of
this project by the end of 1999, there can be no assurances of this. If the
modifications are not completed timely, the year 2000 problem could have a
material impact on the Corporation's ability to conduct its business.
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: August 13, 1998
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 JUNE 30, 1998
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 DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,768,000
<SECURITIES> 0
<RECEIVABLES> 14,948,000
<ALLOWANCES> 680,000
<INVENTORY> 331,000
<CURRENT-ASSETS> 30,073,000
<PP&E> 45,564,000
<DEPRECIATION> 14,654,000
<TOTAL-ASSETS> 142,767,000
<CURRENT-LIABILITIES> 42,537,000
<BONDS> 85,179,000
0
0
<COMMON> 5,000
<OTHER-SE> (17,858,000)
<TOTAL-LIABILITY-AND-EQUITY> 142,767,000
<SALES> 0
<TOTAL-REVENUES> 96,695,000
<CGS> 0
<TOTAL-COSTS> 57,201,000
<OTHER-EXPENSES> 36,107,000
<LOSS-PROVISION> 179,000
<INTEREST-EXPENSE> 5,248,000
<INCOME-PRETAX> (2,040,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,040,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,040,000)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
