<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, 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 November 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
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Notes to Consolidated
Financial Statements 3
Consolidated Balance Sheets at
September 30, 1998 and 1997 and
December 31, 1997 4
Consolidated Statements of Operations
for the three months ended September 30,
1998 and 1997 5
Consolidated Statements of Operations
for the nine months ended September 30,
1998 and 1997 6
Consolidated Statements of Cash Flows
for the nine months ended September 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 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
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, 1998 and 1997 and December 31, 1997, and the results of
its operations for the three and nine months ended September 30, 1998 and 1997
and its cash flows for the nine months ended September 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 nine months ended September
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>
September 30, December 31, September 30,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $8,702 12,424 12,788
Receivables, net (including $7,159 and
$19,787 at September 30, 1998 and 1997,
respectively and $19,878 at December 31,
1997, due from the Partnership) 10,218 21,467 21,197
Other current assets 3,370 3,205 3,520
--------- --------- ---------
Total current assets 22,290 37,096 37,505
-------- -------- --------
Property and equipment, net (note 4) 30,705 32,094 32,713
Long-term receivables due from the
Partnership (note 3) 75,906 75,465 79,614
Intangible assets and deferred charges 1,648 2,020 2,161
Other assets 4,328 3,705 3,421
--------- --------- ---------
$134,877 150,380 155,414
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt (note 7) $ 364 39 -0-
Accounts payable 3,990 3,202 3,591
Loan from the Partnership (note 5) 3,600 3,600 3,600
Other current liabilities (note 6) 32,297 34,393 31,898
--------- --------- ---------
40,251 41,234 39,089
--------- --------- ---------
Long-term debt (note 7) 85,263 85,023 85,000
Deferred rent due to the Partnership 5,517 16,506 19,770
Deferred income taxes (note 9) 2,579 2,580 2,580
Other noncurrent liabilities (note 8) 21,119 20,850 21,001
Stockholders' equity:
Common stock 5 5 5
Additional paid in capital 5,048 5,048 5,048
Accumulated deficit (24,905) (20,866) (17,079)
Treasury stock, 91,770 Class A Shares at cost
at September 30, 1998, December 31, 1997 and
September 30, 1997, respectively -0- -0- -0-
--------- --------- ---------
Total stockholders' deficiency (19,852) (15,813) (12,026)
--------- --------- ---------
$134,877 150,380 155,414
======== ========= =========
</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, 1998 and 1997
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Casino $ 43,519 43,975
Hotel 3,135 3,102
Food and beverage 5,402 5,353
Interest from the Partnership 2,942 3,495
Interest, other 112 106
Other 866 694
--------- ---------
55,976 56,725
Less promotional allowances (note 2) 5,742 5,317
-------- --------
Net revenues 50,234 51,408
-------- -------
Costs and expenses:
Casino 26,965 24,764
Hotel 646 702
Food and beverage 2,434 2,742
Other 705 659
Rent expense to the Partnership 7,087 7,065
Rent expense, other 302 300
General and administrative 6,931 6,621
Gaming taxes 3,465 3,514
Reinvestment obligation expense 176 170
Provision for uncollectible accounts 227 57
Depreciation and amortization 663 829
Interest expense 2,632 2,637
------- --------
Total costs and expenses 52,233 50,060
------- -------
(Loss) income before income taxes (1,999) 1,348
Income tax benefit -0- -0-
------- -------
Net (loss) income $ (1,999) 1,348
========= =======
Net (loss) income per share (based on 4,970,730 and 4,997,826 average shares
outstanding for the three months ended September 30, 1998 and
1997, respectively) $ (.40) .27
========== =======
</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, 1998 and 1997
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Revenue:
Casino $128,231 127,253
Hotel 7,176 7,281
Food and beverage 14,559 15,043
Interest from the Partnership 9,234 10,860
Interest, other 659 294
Other 2,266 1,938
-------- --------
162,125 162,669
Less promotional allowances (note 2) 15,196 14,584
-------- --------
Net revenues 146,929 148,085
-------- --------
Costs and expenses:
Casino 77,795 72,774
Hotel 1,805 1,935
Food and beverage 6,300 7,602
Other 2,051 1,935
Rent expense to the Partnership 20,074 23,169
Rent expense, other 953 978
General and administrative 20,716 20,585
Gaming taxes 10,228 10,170
Reinvestment obligation expense 765 540
Provision for uncollectible accounts 406 164
Depreciation and amortization 1,995 2,465
Interest expense 7,880 7,960
-------- ---------
Total costs and expenses 150,968 150,277
-------- --------
Loss before income taxes (4,039) (2,192)
Income tax benefit -0- -0-
-------- --------
Net loss $ (4,039) (2,192)
======== ========
Net loss per share (based on 4,970,730 and 5,003,472 weighted average shares
outstanding for the nine months ended September 30, 1998
and 1997, respectively) $ (.81) (.44)
========= ========
</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, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands)
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,039) (2,192)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,995 2,465
Deferred rent to the Partnership (10,989) (8,240)
Deferred interest receivable and
discount from the Partnership (1,484) (1,291)
Reinvestment obligation expenses 765 540
(Gain) loss on disposal of assets (86) 30
Deferred income taxes (1) (1)
Change in assets and liabilities:
Receivables, net, excluding current
portion of long-term receivables (1,085) 41
Other current assets (165) (43)
Accounts payable 788 594
Other current liabilities (2,096) (532)
Other noncurrent liabilities 44 1,622
-------- --------
Net cash flows used in operating activities (16,353) (7,007)
-------- --------
Cash flows from investment activities:
Increase in intangible assets and deferred charges (47) (8)
Additions to property and equipment (209) (142)
Increase in other assets (1,388) (1,476)
Proceeds from disposition of property 1,034 587
Increase in long-term receivables (569) (149)
Receipt of long-term receivables 13,945 12,451
-------- --------
Net cash flows provided by investment activities 12,766 11,263
-------- --------
Cash flows from financing activities:
Payment of long-term debt (135) -0-
-------- --------
Net cash flows used in financing activities (135) -0-
-------- --------
(Decrease) increase in cash and cash equivalents (3,722) 4,256
Cash and cash equivalents at beginning of period 12,424 8,532
-------- --------
Cash and cash equivalents at end of period $ 8,702 12,788
======== ========
</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, 1998 and 1997 has been allocated to
casino operating expenses as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Hotel $ 1,020 975 2,868 2,929
Food and beverage 3,678 3,008 10,319 8,834
Other (Entertainment) 286 259 775 783
-------- ------- --------- --------
Total costs allocated to
casino operating expenses $ 4,984 4,242 13,962 12,546
======= ====== ======= =======
</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,
1998 1997 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Expandable Wraparound Mortgage 14%, maturities through
September 30, 2000 (net of $5,055,000 discount and $7,000,000
discount at September 30, 1998 and 1997 respectively, and
$6,539,000 discount at December 31, 1997) $41,945 40,461 43,500
Deferred Expandable Wraparound
Mortgage interest receivable, due
September 30, 2000 20,000 20,000 20,000
FF&E promissory notes, 14% 13,961 15,004 15,920
Expansion/Construction promissory note, 14% -0- -0- 194
------- ------- -------
$75,906 75,465 79,614
======= ======= =======
</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,
1998 1997 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Gaming equipment $ 15,485 18,366 18,290
Land and land improvements 7,598 7,598 7,598
Building 20,070 20,070 20,070
Leasehold improvements 745 745 745
Capital lease asset 1,416 693 697
Other equipment 107 107 107
-------- ------- -------
45,421 47,579 47,507
Less accumulated depreciation and amortization 14,716 15,485 14,794
-------- ------- -------
Net property and equipment $ 30,705 32,094 32,713
======== ======= =======
</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, 1998, such interest, which is included in
other current liabilities, amounted to $4,014,000.
9
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
6. Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
--------- -------- -------
(in thousands)
<S> <C> <C> <C>
Deferred rent, current $ 15,078 15,078 15,078
Deferred rent, 03/01/97 625 1,075 1,150
Accrued payroll and related benefits 6,757 6,508 6,353
Accrued interest, First Mortgage Notes 1,665 4,161 1,665
Accrued interest due to Partnership 4,014 3,690 3,582
Auto and general liability reserves 1,719 1,488 1,392
Other current liabilities 2,439 2,393 2,678
--------- -------- -------
$ 32,297 34,393 31,898
========= ======== =======
</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>
September 30, December 31, September 30,
1998 1997 1997
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
11 3/4% Notes due 2002 $ 85,000 85,000 85,000
Capital lease obligations 627 62 -0-
--------- -------- --------
85,627 85,062 85,000
Less current installments 364 39 -0-
--------- -------- --------
$ 85,263 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 granted
by the Partnership representing a first lien on the Hotel Assets, (ii) a
pledge granted by the Corporation of
10
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
7. Long-Term Debt (cont'd.)
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,
1998 1997 1997
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Contingent Payment $ 19,000 19,000 19,000
License agreement 1,387 1,444 1,467
Deferred gain on sale 225 -0- -0-
Other 507 406 534
-------- --------- --------
$ 21,119 20,850 21,001
======== ======= ======
</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
September 30, 1998, accrued interest would have amounted to
approximately $65.1 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.
11
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)
8. Other Noncurrent Liabilities (cont'd.)
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 $1.8 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 $1.8 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 $1,611,000, and a
corresponding increase in the valuation allowance, resulting in no
income tax provision or benefit for the nine months ended September 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.
A United States Tax Court trial has been scheduled to begin on January
25, 1999. 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.
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, 1998
The Corporation had a net loss of $1,999,000 for the three months ended
September 30, 1998, compared to net income of $1,348,000 for the same period of
1997.
During the third quarter of 1998, casino revenue, which is the
difference between amounts wagered by and amounts paid to casino patrons,
totalled $43,519,000, a decrease of 1.0% from casino revenue of $43,975,000
during the third quarter of 1997. Citywide casino revenue, as reported,
increased 4.0% in the third quarter of 1998 over the same period of 1997.
Citywide casino capacity also increased during the third quarter of 1998, as
reflected in the 4.0% increase in citywide casino square footage. This increase
was primarily due to a casino expansion at Caesars Atlantic City Casino, which
added approximately 800 slot machines to its existing casino.
Table games revenue during the third quarter of 1998 was $10,841,000, an
increase of 5.2% over the table games revenue during the third quarter of 1997.
This increase was due to an 11.8% increase in table games drop (the amount of
gaming chips purchased by patrons) over the third quarter of 1997, offset by a
decrease in the table games hold percentage (the percentage of win to drop) to
12.9% in the third quarter of 1998 from 13.7% in the same period of 1997. The
increase in table games drop is attributable to ongoing efforts to increase New
Claridge's table games business through various marketing initiatives aimed at
domestic Asian players, junket business, and player development. Citywide table
games drop, as reported, decreased slightly from prior year levels. However,
citywide table games revenue, as reported, increased 4.6% over the third quarter
of 1997 as a result of a higher hold percentage.
Slot machine revenues reported by New Claridge during the third quarter
of 1998 totalled $32,678,000, reflecting a 3.0% decrease from the third quarter
of 1997. Citywide slot machine revenue, as reported, during the third quarter of
1998 increased 3.8% over the same period of 1997. As a result of the casino
expansion at Caesars during the second quarter of 1998, as previously discussed,
the average number of slot machines available citywide increased 3.0% during the
third quarter of 1998 over the prior year, while the number of slot machines
available at the Claridge did not change.
Citywide competition for attracting bus customers began to accelerate
during the third quarter of 1998 as companies struggled to increase revenues to
support recently expanded properties, such as the Caesars expansion, which
opened in spring 1998, and Bally's Wild Wild West casino, which opened in the
third quarter of 1997. As a result, coin incentives issued to bus customers
increased. During the third quarter of 1998, 247,000 bus passengers arrived at
the Claridge, and were issued $4,037,000 in coin incentives, for an average
incentive per passenger of $16.34. This compares to total bus coin incentives
issued during the third quarter of 1997 of $3,107,000 to 237,000 bus passengers,
for an average of $13.11 per passenger. 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 third
quarter of 1998 totalled $2,633,000, compared to $2,977,000 during the third
quarter of 1997.
Hotel revenues for the three months ended September 30, 1998 were
$3,135,000, reflecting a slight increase over hotel revenues for the same period
of 1997 of $3,102,000. Hotel occupancy during the third quarter of 1998 was 95%,
with an average room rate of $71; this compares to 98% occupancy during the
third quarter of 1997, with an average room rate of $70. Food and beverage
revenues for the three months ended September 30, 1998 of $5,402,000 were also
slightly higher than the same period of 1997. During the third quarter of 1998,
the number of covers (meals served) declined to 339,000 from 396,000 in the
third quarter of 1997; however, the average price per cover increased to $11.69
in 1998
13
<PAGE>
from $9.37 in 1997. Promotional allowances, which represent the value of goods
and services provided free of charge to casino customers under various marketing
programs, were $5,742,000 during the third quarter of 1998, reflecting an 8.0%
increase over the same period of 1997.
Total costs and expenses incurred during the third quarter of 1998 were
$52,233,000, an increase of 4.3% over expenses incurred during the third quarter
of 1997. The increase was reflected primarily in increased casino operating
expenses, resulting from the higher coin incentive costs, as previously
discussed, as well as increased payroll and marketing costs resulting from the
efforts to enhance the table games segment of the business, and the increased
costs of providing promotional allowances to casino patrons.
For the third quarter of 1998, the Corporation recorded an income tax
benefit of $1,004,000, offset by a corresponding increase in the valuation
allowance; this compared to income tax expense of $664,000, offset by a
corresponding decrease in the valuation allowance, for the third quarter of
1997.
Results of Operations for the Nine Months Ended September 30, 1998
For the nine months ended September 30, 1998, the Corporation had a net
loss of $4,039,000, compared to a net loss of $2,192,000 for the same period of
1997.
Total casino revenue recorded by New Claridge during the nine months
ended September 30, 1998 was $128,231,000, reflecting a slight increase over the
same period of 1997. Citywide total casino revenues, as reported, increased 2.6%
during the first three quarters of 1998 over the same period of 1997. Average
citywide casino capacity during the first nine months of 1998 also increased
over 1997, as reflected in the 6.2% increase in casino square footage and the
5.6% increase in the average number of slot machines available. These increases
were due to expansions at existing Atlantic City casinos, as previously
discussed.
New Claridge's table games drop increased 19.4% during the first nine
months of 1998 as compared to the same period of 1997. However, due to a decline
in the hold percentage, to 13.7% in 1998 from 14.6% in 1997, New Claridge's
table games revenue of $33,487,000 was only 11.6% higher than 1997 table games
revenue. Citywide table games revenue, as reported, for the nine months ended
September 30, 1998, was 1.1% higher than the same period of 1997.
New Claridge's slot machine revenue for the nine months ended September
30, 1998 was $94,744,000, reflecting a decrease of 3.0% from the same period of
1997, due to the increase in competition resulting from the expansion of
citywide casino capacity. Citywide slot revenues, as reported, for the first
nine months of 1998, increased 3.2% over the same period of 1997.
During the nine months ended September 30, 1998, New Claridge issued
$11,218,000 in coin incentives to 712,000 patrons arriving by bus at the
Claridge, for an average of $15.76 per passenger. This compares to $11,827,000
of coin incentives issued to 748,000 bus passengers during the first nine months
of 1997, or an average incentive of $15.81 per passenger. In addition,
promotional incentives issued through New Claridge's direct marketing programs
totalled $8,303,000 during the first nine months of 1998, compared to $8,702,000
during the same period of 1997.
Hotel revenues during the first nine months of 1998 of $7,176,000 were
slightly lower than the same period of 1997, primarily due to a decline in hotel
occupancy during that period to 89% in 1998 from 92% in 1997. This decline was
offset somewhat by an increase in the average room rate, to $59 in 1998 from $58
in 1997. Food and beverage revenues during the nine months ended September 30,
1998 of $14,559,000 decreased 3.2% from the same period of 1997, due to a
decline in the number of covers served to 918,000 in 1998 from 1,076,000 in
1997. This decrease, which was primarily a result of the closing of two of New
Claridge's restaurants for renovations (the buffet during
14
<PAGE>
the first quarter of 1998 and the 24-hour restaurant during the second quarter
of 1998), was offset somewhat by an increase in the average price per cover, to
$10.85 in 1998, from $9.36 in 1997. Promotional expenses during the first nine
months of 1998 increased 4.2% over the same period of 1997, primarily due to
increased marketing initiatives.
Total costs and expenses during the first nine months of 1998 of
$150,968,000 were slightly higher than the same period of 1997. Casino operating
expenses of $77,795,000 were 6.9% higher than 1997 expenses, resulting from
increased marketing costs related to the initiatives to increase table games
business, as well as higher payroll costs, higher costs of providing promotional
allowances, and higher equipment rental costs as a result of the limited capital
expenditure funding available. Hotel and food and beverage expenses during the
first nine months of 1998 decreased 15.0% from 1997 levels, primarily due to an
increase in the allocation of these costs to casino expenses for the cost of
providing promotional allowances to casino patrons. Rent expense to the
Partnership of $20,074,000 reflects a decrease from the 1997 expense of
$23,169,000 resulting from the March 1, 1997 amendment to the Operating Lease
and Expansion Operating Lease; abatements of rent which were due to this
amendment are recorded as a reduction to lease expense as abated.
For the first nine months of 1998 and 1997, the Corporation recorded
income tax benefits of $1,611,000 and $511,000, 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 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, 1998, the Corporation had a working capital deficiency
of $17,961,000 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 cash and cash equivalents of $3,722,000, a
decrease in receivables of $11,249,000 (primarily due to a decrease in the
current portion of the Expandable Wraparound Mortgage due from the
15
<PAGE>
Partnership) and an increase in accounts payable of $788,000, offset by a
decrease in other current liabilities of $2,096,000 (primarily resulting from a
decrease in interest payable on the Notes). The working capital deficiency at
September 30, 1997 was $1,584,000. Current liabilities at September 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 $4,014,000 at
September 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 September 30, 1998 and
December 31, 1997 would have been $4,731,000 and $18,230,000, respectively.
For the nine months ended September 30, 1998, cash flows used in
operating activities were $16,353,000, compared to $7,007,000 for the nine
months ended September 30, 1997. This increase was primarily due to a decrease
in operating results. In addition, receivables increased and 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 three quarters of 1998 were $12,766,000,
compared to cash flows provided by investment activities for the same period
1997 of $11,263,000. Cash flows provided by investment activities during the
nine months ended September 30, 1998 were from the receipt of Expandable
Wraparound Mortgage principal payments of $13,945,000, 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 nine months ended September 30, 1997, cash
flows provided by investment activities were primarily from the receipt of
Expandable Wraparound Mortgage principal payments of $12,451,000. Cash flows
used in financing activities in 1998 represent payments of capital lease
obligations for certain gaming equipment.
For the nine months ended September 30, 1998, the Corporation's
"Adjusted EBITDA" was $8,073,000, compared to $11,693,000 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 obligations to pay interest on the Notes,
as well as to make at least some modest 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,
16
<PAGE>
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. However, operating
results for the first nine months of 1998 were below 1997 levels due to
increased competition for casino customers. New Claridge has redirected its bus
program to reduce the number of customers who arrive by bus and, thereby,
related costs. Marketing efforts are being directed toward the mid-level slot
customer through the use of promotions and advertising. Additionally, management
continues to conserve cash through various cost containment measures, including
limiting capital expenditures in 1998 to approximately $1.5 million. Management
will also consider various refinancing efforts, including a sale of the
Corporation.
In view of the operating results of New Claridge, and in order to meet
its obligations, the Corporation is taking steps to enhance its cash position
through both operational changes and certain transactions with PDS Financial
Corporation ("PDS") and the New Jersey Casino Reinvestment Development Authority
("CRDA"), as further discussed below. No assurances can be given that these
efforts will be successful.
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 successful in realizing any recovery.
In December 1997, New Claridge obtained a commitment from PDS for a $1.8
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 $1.8
million. In February 1998, New Claridge sold 370 slot machines to PDS for
approximately $1 million under this Facility. The machines were then
17
<PAGE>
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.
On September 15, 1998 New Claridge initiated the sale of an additional 379 slot
machines to PDS for approximately $775,000. These machines will also be leased
back to New Claridge under an operating lease arrangement for two years with
terms similar to those described above. This transaction is expected to be
completed in early November 1998. Once completed, no additional financing will
be available under the Facility.
On October 22, 1998, the CRDA approved the direct investment of New
Claridge funds, already on deposit with the CRDA, and the completion of certain
donations of New Claridge funds also already on deposit. These transactions are
expected to result in New Claridge's receiving approximately $925,000 from the
CRDA prior to December 31, 1998.
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 September 30, 1998 (including the outstanding
FF&E Loans and the $20 million of deferred interest) was $87.2 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 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
18
<PAGE>
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 is 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 is also 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
19
<PAGE>
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. As
calculated pursuant to the defined formulas, basic rent for the twelve months
commencing October 1, 1998 will be $24 million under the Operating Lease, and
$2.5 million under the Expansion Operating Lease. Lease payments from New
Claridge for the period October 1, 1998 through December 31, 1998, as recently
amended are not sufficient to pay the Partnership's debt service and operating
expenses. As a result, New Claridge will pay, as additional rent, in accordance
with the terms of the Operating Lease, the amount necessary, which is
approximately $1.7 million, to meet the operating needs of the Partnership.
After December 31, 1998, lease payments from New Claridge will be sufficient to
pay the Partnership's debt service and operating expenses.
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 believes it 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. While non-essential, non-year
2000 IT projects may be delayed, adequate resources are available to address
essential non-year 2000 projects, such as regulatory requirements and marketing
programs. The total cost of addressing year 2000 issues is estimated to be
approximately $2.2 million. Approximately 75% of the total cost relates to
labor, where the remaining 25% relates to the cost of supplies, equipment,
software and hardware. Through September 30, 1998 the Corporation has spent
approximately $600,000, or 27% of the anticipated year 2000 project cost. 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. 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.
20
<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, 1998
21
<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,
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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,702,000
<SECURITIES> 0
<RECEIVABLES> 11,123,000
<ALLOWANCES> 905,000
<INVENTORY> 301,000
<CURRENT-ASSETS> 22,290,000
<PP&E> 45,421,000
<DEPRECIATION> 14,716,000
<TOTAL-ASSETS> 134,877,000
<CURRENT-LIABILITIES> 40,251,000
<BONDS> 85,263,000
0
0
<COMMON> 5,000
<OTHER-SE> (19,852,000)
<TOTAL-LIABILITY-AND-EQUITY> 134,877,000
<SALES> 0
<TOTAL-REVENUES> 146,929,000
<CGS> 0
<TOTAL-COSTS> 87,951,000
<OTHER-EXPENSES> 54,731,000
<LOSS-PROVISION> 406,000
<INTEREST-EXPENSE> 7,880,000
<INCOME-PRETAX> (4,039,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,039,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,039,000)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> 0
</TABLE>
