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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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[ ] 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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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First Mortgage Notes, due 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class A Stock, $.001 par value
(Title of Class)
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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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
All issued and outstanding shares of the Corporation have been offered and
sold in reliance on exemptions from the registration requirements of the
Securities Act of 1933, as amended. Therefore, there is no established trading
market for any class of shares of the Corporation. The Corporation did, in
1989, jointly with Atlantic City Boardwalk Associates, L.P. ("Partnership")
and Del Webb Corporation ("Webb"), register certain Contingent Payment Rights.
As stated in the Prospectus dated May 5, 1989, Contingent Payment Rights may
or may not be securities. None of the Corporation, the Partnership, or Webb
has admitted that the Contingent Payment Rights are securities or that any of
them is the issuer of any such securities.
Indicate the number of shares outstanding of each class of the Registrant's
Stock, as of the latest practicable date:
Number of Shares Outstanding
March 30, 1998
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Class A Stock 4,970,730 (After deducting 91,770 shares of
Treasury Stock)
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DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K PART
Portions of the definitive Proxy Statement with III
respect to the Annual Meeting of Shareholders
scheduled to be held on June 16, 1998 (hereinafter
referred to as the "Proxy Statement"), but
specifically excluding the section entitled "Report
on Executive Compensation" which shall not be
deemed to be incorporated by reference herein
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PART I
Item 1. BUSINESS
General
The Claridge Hotel and Casino Corporation (the "Corporation"), through
its wholly-owned subsidiary, The Claridge at Park Place, Incorporated ("New
Claridge"), operates The Claridge Hotel and Casino ("Claridge") in Atlantic
City, New Jersey. The Corporation was formed as a New York corporation on
August 26, 1983, and qualified to engage in business in New Jersey as a
foreign corporation in September 1983. New Claridge was formed as a New Jersey
corporation on August 29, 1983.
The Corporation maintains its executive and administrative offices at
Indiana Avenue and the Boardwalk, Atlantic City, New Jersey 08401, telephone
number (609) 340-3400.
Corporate Structure
On October 31, 1983, New Claridge acquired certain assets of the
Claridge including gaming equipment ("Casino Assets"), from Del E. Webb New
Jersey, Inc. ("DEWNJ"), a wholly-owned subsidiary of Del Webb Corporation
("Webb"); leased certain other of the Claridge's assets, including the
buildings, parking facility and non-gaming, depreciable, tangible property of
the Claridge ("Hotel Assets"), from Atlantic City Boardwalk Associates, L.P.,
a New Jersey limited partnership ("Partnership"); subleased the land on which
the Claridge is located from the Partnership; assumed certain liabilities
related to the acquired assets; and undertook to carry on the business of the
Claridge. In connection with these transactions, the Partnership granted the
Expandable Wraparound Mortgage (described below) to New Claridge. These
transactions were entered into in connection with the private placement of
equity interests in the Corporation and the Partnership. The offering was
structured to furnish the investors with certain tax benefits available under
the federal tax law then in effect. The common stock of the Corporation and
the limited partnership interests of the Partnership were sold together in the
private placement as units, and because there has been relatively little
trading in the stock or Partnership interests, there is a substantial
similarity between the equity ownership of the Corporation and the
Partnership. Although the Corporation and the Partnership are independent
entities, approximately 93% of the Corporation's common stock is owned by
persons who also own limited partnership interests in the Partnership. The
Partnership does not currently engage in any significant business activities
other than those relating to the Claridge.
In October 1988, the Corporation and New Claridge entered into an
agreement to restructure the financial obligations of the Corporation and New
Claridge (the "Restructuring Agreement"). The restructuring, which was
consummated in June 1989, resulted in (i) a reorganization of the ownership
interests in the Claridge; (ii) modifications of the rights and obligations of
certain lenders; (iii) satisfaction and termination of the obligations and
commitments of Webb and DEWNJ under the original structure; (iv) modifications
of the lease agreements between New Claridge and the Partnership; and (v) the
forgiveness by Webb of substantial indebtedness.
On January 31, 1994, the Corporation completed an offering of $85
million of First Mortgage Notes (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
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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 liens which may be placed on New Claridge's
gaming and other assets to secure any future revolving credit line
arrangements. Interest on the Notes is payable semiannually on February 1 and
August 1 of each year.
The net proceeds of the Notes, totalling $82.2 million net of fees and
expenses, were used as follows: (i) to repay in full on January 31, 1994, the
then outstanding debt of the Corporation 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; (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; (iii) to
purchase property in 1995 and construct on that property a self-parking
garage, which opened in mid-1996; and (iv) to acquire the Contingent Payment
Option (see Item 1. Business - "Contingent Payment").
Current Developments
During 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's obligations to pay interest on the Notes,
as well as to make at least some moderate capital improvements. Commencing in
the latter part of 1995, however, competition in the Atlantic City casino
market for bus customers, a principal source of customers for the Claridge at
the time, increased; this competition intensified even more during 1996 as
additional casino square footage was added, principally due to the opening of
the Trump World's Fair casino. During 1996, the average coin incentive issued
per bus patron at the Claridge increased to approximately $19, from
approximately $13 in 1995. Total cash incentives issued to Claridge's casino
patrons (in the form of coin to play slot machines and gaming chips to play
table games) increased to approximately $30.5 million in 1996, from
approximately $25.2 million in 1995. While the Corporation's promotional costs
increased significantly, total casino revenues in 1996 actually decreased from
1995 levels. It had been the expectation of the Corporation that, upon the
opening of its new self-parking garage, the Corporation would be able to
reduce its reliance on the bus patron market; however, the Corporation was
forced to close the garage facility on July 10, 1996, only ten days after its
opening, following a fatal accident. Because the facility was not able to
reopen until the end of September 1996, the Corporation lost any possible
benefit of the facility during the normally busy summer season. In addition,
severe winter weather in the first quarter of 1996 adversely affected
revenues. As a result, the Corporation experienced a net loss for 1996 of
$15.4 million, compared to a net loss of $1.9 million in 1995.
In late July 1996, management of the Corporation determined that due to
the serious deterioration in the Corporation's cash flow, without a
significant improvement in its operating results, it was unlikely that the
Corporation would be able to meet its obligations to pay interest on the Notes
beyond the August 1996 payment. In addition to taking steps to conserve cash
by reducing various operating expenses, the Corporation engaged a financial
advisor, Dillon, Read & Co., Inc., to assist in formulating a proposal to the
holders of the Notes to restructure the Corporation's obligations under the
Notes. At the same time, the Corporation was working with Dillon, Read & Co.,
Inc. to attempt to find a buyer of the Corporation or an investor that would
be in a position to inject additional capital into the Corporation to enable
the Corporation to meet its ongoing obligations. The Corporation did not
receive any acceptable proposals in regards to the possible sale of the
Corporation.
In November 1996, while the sales efforts were continuing, the
Corporation announced that there was a strong likelihood that the Corporation
would be unable to pay the interest due on the Notes on February
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3, 1997. Accordingly, management, working together with financial and legal
advisors, formulated a plan for restructuring the Corporation's obligations.
The terms of the proposed plan were presented to the noteholders at a meeting
held on December 3, 1996.
On January 12, 1997, management of the Corporation was contacted,
through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a possible
sale of the Corporation to Hilton, and shortly thereafter, the Corporation
began negotiations with Hilton. On January 30, 1997, the Corporation issued a
press release indicating that the Corporation would not make the interest
payment due on the Notes on February 3, 1997, and that the Corporation had
entered negotiations with Hilton regarding acquisition of the Corporation by
Hilton through a prepackaged bankruptcy plan. At that time, a representative
of Hilton indicated that Hilton had acquired approximately 35% to 40% of the
Notes. On February 5, 1997, three holders of the Notes, who were members of
the unofficial committee which they had formed, filed a petition for
involuntary bankruptcy against the Corporation in the bankruptcy court for the
District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related
state court lawsuit against the Corporation, New Claridge, the Partnership,
certain officers and directors of the Corporation, and the general partners of
the Partnership. On March 4, 1997, contrary to earlier expectations, the
Corporation was able to pay the interest that was due on the Notes on February
3, 1997, under the 30-day grace period allowed in accordance with the terms of
the indenture governing the Notes (the "Indenture"). In addition, the
Corporation reached agreement with the unofficial committee of noteholders, as
well as the three holders of the Notes, providing for the joint dismissal of
the involuntary bankruptcy petition and the related state court lawsuit. On
March 19, 1997, an order was entered dismissing the involuntary bankruptcy
petition; as part of that order, a settlement agreement was entered whereby
the state court lawsuit was also dismissed. Negotiations with Hilton regarding
acquisition of the Corporation terminated in April 1997. Management of the
Corporation believes that Hilton subsequently disposed of its ownership in the
Notes, and that a portion or all of these Notes are now owned by an entity or
entities which are controlled by Carl Icahn.
The Corporation had sufficient cash to pay the interest on the Notes on
March 4, 1997 due to several events: (i) cash flow from operations for January
and February 1997 improved significantly over what had been expected; (ii)
effective March 1, 1997, the Operating Lease and Expansion Operating Lease
(defined below) were amended to provide for the deferral of basic rent of $1.3
million on March 1, 1997 (see Item 1. Business - "Certain Agreements between
the Corporation, New Claridge and the Partnership"); and (iii) on February 28,
1997, New Claridge entered into an agreement with Thermal Energy Limited
Partnership I ("Atlantic Thermal"), pursuant to which Atlantic Thermal was
granted an exclusive license for a period of twenty years to use, operate and
maintain certain steam and chilled water production facilities at the
Claridge. In consideration for this license agreement, Atlantic Thermal paid
New Claridge $1.5 million.
In December 1997, New Claridge obtained a 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.
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Certain Agreements between the Corporation, New Claridge and the Partnership
The current relationships and agreements between the Corporation, New
Claridge and the Partnership are described below:
Operating Lease/Expansion Operating Lease. The Casino Assets are owned
by New Claridge. In addition, the new self-parking garage and the land
on which it is located are owned by New Claridge. The Hotel Assets and
underlying land are owned by the Partnership and leased by the
Partnership to New Claridge. The lease obligations are set forth in a
lease (the "Operating Lease"), originally entered into on October 31,
1983, and an expansion operating lease (the "Expansion Operating
Lease"), covering additions to the Claridge made in 1986.
The Operating Lease has an initial term of 15 years with three 10-year
renewal options. Basic annual rent payable during the initial term of
the Operating Lease in equal monthly installments was $38,055,000 in
1994, $39,030,000 in 1995, $39,906,000 in 1996, $41,775,000 in 1997 and
will be $32,531,000 for the nine month period ending September 30, 1998.
Basic rent during the renewal term will be calculated pursuant to a
formula, with such rent not to be more than $29,500,000 nor less than
$24,000,000 for the lease year commencing October 1, 1998 through
September 30, 1999, and, subsequently, not to be greater than 10% more
than the basic rent for the immediately preceding lease year in each
lease year thereafter.
New Claridge is also required to pay as additional rent amounts
including certain taxes, insurance and other charges relating to the
occupancy of the land and Hotel Assets, certain expenses and debt
service relating to furniture, fixture and equipment replacements and
building improvements (collectively, "FF&E Replacements") and the
general and administrative costs of the Partnership. The Partnership is
required during the entire term of the Operating Lease, and any
subsequent renewal terms, to provide FF&E Replacements to New Claridge
and to provide facility maintenance and engineering services to New
Claridge. New Claridge is required to lend the Partnership any amounts
("FF&E Loans") necessary to fund the cost of FF&E Replacements, and if
the Partnership's cash flow, after allowance for certain distributions,
is insufficient to provide the facility maintenance and engineering
services required of it, New Claridge is also required to lend the
Partnership the funds required to provide those services. Any advances
by New Claridge for either of the foregoing will be secured under the
Expandable Wraparound Mortgage in an amount up to $25,000,000.
Thereafter, such advances shall be secured under separate security
agreements.
On March 17, 1986, New Claridge entered into the Expansion Operating
Lease Agreement with the Partnership under which New Claridge leased
certain improvements (the "Expansion Improvements") made to the Claridge
in 1986, for an initial term beginning March 17, 1986 and ending on
September 30, 1998 with three 10-year renewal options. Basic annual rent
payable during the initial term of the Expansion Operating Lease was
$3,870,000 in 1986 (prorated based on the day that the Expansion
Improvements opened to the public) and determined based on the cost of
the construction of the Expansion Improvements. Annually thereafter the
rental amount will be adjusted based on the Consumer Price Index with
any increase not to exceed two percent per annum. Basic annual rent for
1997 was $4,812,000. Basic rent during the renewal term will be
calculated pursuant to a formula, with annual basic rent not to be more
than $3 million nor less than $2.5 million and, subsequently, not to be
greater than 10% more than the basic annual rent for the immediately
preceding lease year in each lease year thereafter.
New Claridge is also required under the Expansion Operating Lease to pay
as additional rent amounts
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equal to certain expenses and the debt service relating to furniture,
fixture and equipment replacements and building improvements
(collectively "Expansion FF&E Replacements") for the Expansion
Improvements. The Partnership will be required during the entire term of
the Expansion Operating Lease, and any subsequent renewal terms, to
provide New Claridge with Expansion FF&E Replacements and to provide
facility maintenance and engineering services to New Claridge. New
Claridge will be obligated to lend the Partnership any amounts necessary
to fund the cost of Expansion FF&E Replacements. Any advances by New
Claridge for the foregoing will be secured under the Expandable
Wraparound Mortgage in an amount up to $25,000,000. Thereafter, such
advances shall be secured under separate security agreements.
Effective with the consummation of the restructuring in June 1989, the
Operating Lease and the Expansion Operating Lease were amended to
provide for the deferral of up to $15.1 million of rental payments
during the period July 1, 1988 through the beginning of 1992, and to
provide for the abatement of $38.8 million of basic rent through 1998,
thereby reducing the Partnership's cash flow to an amount estimated to
be necessary only to meet the Partnership's cash requirements. During
the third quarter of 1991, the maximum deferral of rent was reached. On
August 1, 1991, the Operating Lease and Expansion Operating Lease were
amended further to revise the abatement provisions so that, commencing
January 1, 1991, for each calendar year through 1998, the lease
abatements may not exceed $10 million in any one calendar year, and
$38,820,000 in the aggregate. All of the $38.8 million of available rent
abatements were fully utilized by the end of the first quarter of 1997.
The Fifth Amendment to the Operating Lease and the Fourth Amendment to
the Expansion Operating Lease, which were effective on March 1, 1997,
provided for the abatement of $867,953 of basic rent and for the
deferral of $1,300,000 of basic rent on March 1, 1997, and 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).
In conjunction with the Fifth Amendment to the Operating Lease and the
Fourth Amendment to the Expansion Operating Lease, as discussed above,
the Corporation, New Claridge and the Partnership entered into a
restructuring agreement, effective March 1, 1997, to modify certain
terms of the Expandable Wraparound Mortgage (see below). In addition,
under the March 1, 1997 restructuring agreement, New Claridge agreed to
exercise the first of three ten-year renewal options extending the term
of the Operating Lease and Expansion Operating Lease through September
30, 2008.
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge has an option to purchase, on September 30, 1998, the
Hotel Assets and the underlying land for their fair market value at the
time the option is exercised, which in no event may be less than an
amount equal to the amount then outstanding under the Expandable
Wraparound Mortgage (see below) plus $2.5 million, plus any amount of
the $1.3 million of rent deferred on March 1, 1997 not then paid. If New
Claridge does not exercise this option on September 30, 1998, it may
exercise an option, on September 30, 2003, to purchase the Hotel Assets
and the underlying land on January 1, 2004, for their fair market value
at the time the option is exercised.
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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.
Expandable Wraparound Mortgage. On October 31, 1983, the Partnership
executed and delivered to New Claridge the Expandable Wraparound
Mortgage, which was subordinate to an $80 million first mortgage granted
by the Partnership to a group of banks, and a $47 million purchase money
second mortgage ("Purchase Money Second Mortgage"), granted by the
Partnership to DEWNJ. The Purchase Money Second Mortgage, which was due
on September 30, 2000, was cancelled upon satisfaction of certain
conditions set forth in an agreement entered into at the time of the
1989 restructuring. In conjunction with the offering of $85 million of
Notes on January 31, 1994, the outstanding debt under the Loan
Agreement, which included a first mortgage and the revolving credit
line, was satisfied in full. By its terms, the Expandable Wraparound
Mortgage may secure up to $25 million of additional loans to the
Partnership from New Claridge to finance FF&E Replacements and facility
maintenance and engineering shortfalls. The Expandable Wraparound
Mortgage provides that, so long as the Partnership is not in default on
its obligations under the Expandable Wraparound Mortgage, New Claridge
is obligated to make payments required under any senior mortgage
indebtedness. The indebtedness secured by the Expandable Wraparound
Mortgage bears interest at an annual rate equal to 14%, with certain
interest installments that accrued in 1983 through 1988 totalling $20
million being deferred until maturity. In addition, the Partnership is
required under the Expandable Wraparound Mortgage to make payments of
principal and interest in respect of any FF&E Loans made to finance FF&E
Replacements or facility maintenance or engineering costs as described
above. To the extent these FF&E Loans exceed $25 million in the
aggregate outstanding at any time, they will be secured under separate
security agreements and not by the lien of the Expandable Wraparound
Mortgage.
On March 17, 1986, the first mortgage was amended and assumed by New
Claridge. The amount of the amended and assumed first mortgage was
increased to secure up to $96.5 million to provide financing for the
Expansion Improvements. Indebtedness secured by the Expandable
Wraparound Mortgage was increased by an amount up to $17 million to
provide the Partnership with the necessary funding.
Effective August 28, 1986, the Partnership commenced making level
monthly payments of principal and interest so as to repay on September
30, 1998, in full, the principal balance of this $17 million increase in
the Expandable Wraparound Mortgage. On March 17, 1986, the Expandable
Wraparound Mortgage was amended to require that the $127 million
aggregate principal amount secured by it would be repayable in
installments during the years 1988 through 1998 in escalating amounts
totalling $80 million, with a balloon payment of $47 million and the $20
million of deferred interest due on September 30, 2000.
Effective March 1, 1997, the Corporation, New Claridge, and the
Partnership entered into a restructuring agreement, pursuant to which
New Claridge agreed to use its best efforts to cause a modification of
the Expandable Wraparound Mortgage (the "Wraparound Modification") that
is permitted by, or is in compliance with, the terms of the Indenture.
The Wraparound Modification, if so permitted, will provide for an
extension of the maturity date of the Expandable Wraparound Mortgage
from September 30, 2000 to January 1, 2004. If the Wraparound
Modification is not permitted by or in compliance with the terms of the
Indenture, New Claridge has agreed to effect the Wraparound Modification
at such time as the Notes are no longer outstanding.
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In connection with the offering of the Notes on January 31, 1994, the
Corporation agreed to use not less than $8 million from the net proceeds
of the offering to finance certain internal improvements to the Claridge
which were funded through additional FF&E 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.
Contingent Payment
Following the 1983 transactions, Webb and its affiliates retained
significant interests in the Claridge. Effective with the closing of the
restructuring in June 1989, all or substantially all of the financial,
contractual, ownership, guarantee and other relationships of the Corporation
and New Claridge with Webb were terminated. The Restructuring Agreement
provided that Webb would retain an interest equal to $20 million plus interest
from December 1, 1988 at the rate of 15% per annum compounded quarterly (the
"Contingent Payment") in any proceeds ultimately recovered from the operations
and/or the sale or refinancing of the Claridge facility in excess of the first
mortgage loan and other liabilities. To give effect to this Contingent
Payment, the Corporation and the Partnership agreed not to make any
distributions to their shareholders or partners, respectively, whether derived
from operations or from sale or refinancing proceeds, until Webb had received
the Contingent Payment.
In connection with the 1989 restructuring, Webb agreed to 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 to Releasing Investors are to be made in accordance with a schedule
of priorities, as defined in the Restructuring Agreement.
On April 2, 1990, Webb transferred its interest in the Contingent
Payment to an irrevocable trust for the benefit of the Valley of the Sun
United Way, and upon such transfer Webb was no longer required to be qualified
or licensed by the New Jersey Casino Control Commission (the "Commission").
On February 23, 1996, the Corporation acquired an option to purchase, at
a discount from the carrying value, the Contingent Payment. The purchase price
of the option was $1 million, and the option could have been exercised any
time prior to December 31, 1997. Upon exercise of the option, the purchase
price of the Contingent Payment would have been $10 million, plus interest at
10% per annum for the period from January 1, 1997 to the date of payment of
the purchase price if the purchase occurred after December 31, 1996. The
purchase price may also have increased in an amount not to exceed $10 million
if future distributions to Releasing Investors exceeded $20 million. It is
estimated that at December 31, 1997, the aggregate amount payable in respect
of the Contingent Payment was $76.2 million.
Given the recent operating results (see Item 1. Business - "Current
Developments"), the Corporation was not able to exercise this Contingent
Payment option, and it expired in accordance with its terms on December 31,
1997.
The Claridge
The Claridge, located in the Boardwalk casino section of Atlantic City,
New Jersey, is a 26-story building that contains the Corporation's casino and
hotel facilities. Built in 1929 as a hotel, the Claridge was remodeled at a
cost of approximately $138 million prior to its reopening as a casino hotel in
1981. The
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Expansion Improvements, which were completed in 1986 at a cost of
approximately $20 million, provided approximately 10,000 additional square
feet of casino space, together with a 3,600 square foot lounge. In 1994,
approximately $12.7 million was expended to expand the Claridge's casino
square footage by approximately 12,000 feet. In 1996, New Claridge constructed
a self-parking garage facility connected to its existing valet-parking garage,
at a cost of approximately $28 million. The combined garage facility provides
parking for approximately 1,200 vehicles.
The Claridge's casino consists of approximately 59,000 square feet of
casino space on three main levels with various adjacent mezzanine levels. The
casino currently contains approximately 1,767 slot machines and sixty-four
table games, including thirty-two blackjack tables, eight craps tables, five
roulette tables, four Caribbean stud poker tables, four Pai Gow poker tables,
two mini-baccarat and two baccarat tables, and seven other specialty games.
The hotel with related amenities consists of 502 guest rooms (including 28
corner suites, 26 specialty suites and five tower penthouse suites), four
restaurants, a buffet area, three lounges, a private players club, a 600-seat
theater, limited meeting rooms, a gift shop, a beauty salon, and a health club
with an indoor swimming pool.
New Claridge experiences a seasonal fluctuation in demand, which is
typical of casino-hotel operations in Atlantic City. Historically, peak demand
has occurred during the summer season. New Claridge's principal market is the
mid-Atlantic area of the United States. The casino gaming business in Atlantic
City is highly competitive and is strictly regulated under the New Jersey
Casino Control Act (the "Act") and regulations thereunder which affect
virtually all aspects of casino operations. (See Item 1. Business --
"Competition" and "Gaming Regulation and Licensing").
Competition
Competition in the Atlantic City casino-hotel market is intense. As of
December 31, 1997, the twelve existing casino facilities offered approximately
1,173,000 square feet of gaming space, an 8.6% increase over the casino square
footage as of December 31, 1996 of approximately 1,080,000 square feet. In
July 1997, Bally's Wild Wild West Casino (located at the existing Bally's at
Park Place Casino) commenced operations, adding approximately 74,000 square
feet of gaming space to the existing market. The increase in casino square
footage in 1996 over 1995 was approximately 12.5%, resulting from the opening
of the Trump World's Fair casino and minor casino expansions at several other
properties. However, for the years ended December 31, 1997 and 1996, citywide
gaming revenues, as reported, increased only 2.4% and 1.8%, respectively, over
prior year levels.
The Atlantic City gaming market is expected to experience significant
growth over the next several years as Atlantic City transforms itself from a
"day-trip" market to a "destination resort." As a result of current high room
occupancy rates, a more favorable regulatory climate, the reduced threat of
competition from potential new gaming jurisdictions, and significant
infrastructure developments making Atlantic City more accessible, over $4.6
billion of new investment has been announced or recently completed in the
Atlantic City gaming market. In addition to recent increases in casino space
and hotel rooms at the existing casinos, several Las Vegas casino operators
have announced plans to construct new casinos in Atlantic City.
In addition to the major casino expansions and the announced new
casinos, major infrastructure improvements have begun. A new $268 million
convention center, which was completed in May 1997, contains approximately
500,000 square feet of exhibition space, 45 meeting rooms, food service
facilities, and a 1,600-car underground parking garage. The new convention
center is the largest exhibition space between Boston and Atlanta. A 500-room
non-casino hotel, which is linked to the new convention center by an elevated
walkway, opened in November 1997. The development of the corridor which links
the
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convention center to the boardwalk area is nearing completion, and features a
wide, landscaped boulevard with a reflecting pool, an expanded park area, and
a 60-foot lighthouse which is intended to be illuminated each night by a light
show. In February 1997, construction of the new $7.5 million bus terminal,
which is a major component of this corridor, was completed. The State of New
Jersey is also implementing a capital plan of approximately $125 million to
upgrade and expand the Atlantic City International Airport.
All casinos in Atlantic City are part of hotels which offer dining,
entertainment, and other guest facilities. As the size of the gaming
facilities continue to grow, the need for additional hotel rooms has become
evident. During 1996, the number of hotel rooms available citywide increased
with the opening of the Trump World's Fair casino (approximately 500 rooms)
and the Tropicana's new 600-room hotel tower. Several existing Atlantic City
casinos also increased their hotel space in 1997, including Harrah's
(approximately 400 rooms), Hilton (approximately 300 rooms), and Caesars
(approximately 600 rooms), for a total increase in 1997 of approximately 1,500
hotel rooms. Competition among the existing casino-hotels is based on factors
such as promotional allowances and incentives; the attractiveness of the
casino area; advertising; customer service; the availability, quality, and
price of rooms, food, and beverage; ease and availability of parking and
accessing the facility; and entertainment.
The Atlantic City business is seasonal, with the highest level of
activity occurring during the summer months, and the lowest level of activity
during the winter months. The primary markets for Atlantic City casino patrons
are Philadelphia, New Jersey and New York City, together with the secondary
markets of central Pennsylvania, Delaware, Baltimore and Washington, D.C.
Casinos offer incentives, in the form of cash and complimentaries for rooms,
food and beverages, to their customers based on their casino play. In recent
years, competition for, and as a result, incentives offered to, customers has
increased significantly. Many Atlantic City casino patrons arrive by bus and
stay for approximately six hours. Competitive factors in Atlantic City require
the payment of cash incentives and coupons for use towards the price of meals
to patrons arriving under bus programs sponsored by the casino operators.
Competition for bus patrons intensified in 1996. During 1996, 9.8 million
casino patrons arrived in Atlantic City by bus, an 11% increase over 1995
levels. The increased competition took the form of higher coin incentives,
which New Claridge matched, thus increasing its per patron average coin cost
to approximately $19 in 1996 from approximately $13 in 1995. New Claridge has
relied heavily on attracting patrons who travel to Atlantic City by bus
because the Claridge previously lacked a self-parking facility, and has
therefore had to remain competitive with other casino operators in regards to
the incentives offered. Even with its 1,200-space parking facility, New
Claridge will continue to rely on its bus customers as a significant source of
business. In 1997, the total number of patrons arriving in Atlantic City by
bus decreased slightly, to approximately 9.4 million. In addition, bus package
pricing competition eased somewhat; the average coin cost per patron arriving
by bus to the Claridge decreased to $16 in 1997.
The Claridge has positioned itself as the "smaller, friendlier"
alternative to the other Atlantic City casinos. This strategy, implemented in
1989, is designed to capitalize on the Claridge's unique physical facility,
which the Corporation believes retains the atmosphere of a grand hotel, and on
the Claridge's smaller, more intimate size relative to the larger Atlantic
City casinos. By emphasizing an environment that is intimate, friendly and
service-oriented, the Claridge targets a market niche different than that of a
majority of its competitors. The Claridge seeks to attract and retain a
customer base whose wagering spans the same market segments serviced by other
casino hotels, but primarily targets the middle, leaving the high-end business
to its competitors. New Claridge believes it is uneconomical to pursue the
high-end market as its core business because of the high maintenance cost and
potential volatility in table games "hold" percentages (the ratio of win to
the amount of gaming chips purchased by patrons). The majority of the
Claridge's casino revenue is generated by slot machine play, the fastest
growing segment of gaming play. In 1996, 75% of the Claridge's casino revenue
came from slot play as compared to 69% reported for all
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Atlantic City properties. The trend has continued in 1997 with 76% of the
Claridge's casino revenue generated from slot play, compared to 69% for all
Atlantic City casinos.
The key elements of New Claridge's marketing plan include the use of
complimentaries, promotional activities, entertainment events, player
development hosts, a bus program, and the use of commissioned agents to
attract groups from outside the company's traditional market areas. New
Claridge also operates a direct marketing program to attract and retain
customers. New Claridge's Compcard Gold program, which allows patrons to earn
various complimentaries, including coins for slot machine play and gaming
chips for table play, based on their levels of gaming activity, provides a
valuable database of information on playing preferences, frequency and
denominations of play, and the amount of gaming revenues produced by gaming
patrons. Because of the expanded facilities and amenities now offered at the
Claridge, the "Because Smaller is Friendlier" positioning statement was
changed to "Smaller, Friendlier and So Much More." This position retains the
equity in the intimacy-seeking patron, but extends it to communicate that the
Claridge now has a facility capable of comfortably servicing a larger customer
base, and offering the same amenities and entertainment found at larger
Atlantic City casino hotels.
Competition in Atlantic City also extends to the employment market. The
Commission has promulgated regulations which require staffing levels at
Atlantic City casinos which are higher than those for casino-hotels in Nevada.
In addition, although the January 1995 amendments to the Act (see Item 1.
Business - "Gaming Regulation and Licensing" below) have eased the licensing
requirements for some employees, all of New Claridge's casino employees must
be licensed. Partly as a result of the licensing requirements, there has been
intense competition for experienced casino employees in Atlantic City.
Difficulties in hiring personnel licensed by the Commission have elevated
labor costs, and licensed personnel frequently leave their current positions
for higher paying jobs in other casinos. In addition, the expansion of casino
gaming into other jurisdictions has increased the competition for experienced
casino management personnel.
Beginning in the fall of 1988, three events occurred that accelerated
the presence of casino gaming in the United States: (i) a statewide ballot
issue in South Dakota approved limited-stakes gaming in Deadwood; (ii) the
state legislature approved river boat gaming in Iowa in early 1989; and (iii)
Congress passed the Indian Gaming Regulatory Act of 1988, which permits
unrestricted gaming on Indian land in any state that already allows similar
gaming (for example, if the state allows charitable gaming for non-profit
organizations, then federally-recognized Indian tribes can run similar
operations on their land). Since these events occurred, the gaming industry
rapidly expanded; during 1996 and 1997, however, the expansion of gaming
slowed considerably. In 1996, although voters in Michigan approved casino
gaming for the city of Detroit, gambling measures were defeated in several
other states. In January 1997, the New York State Senate voted to deny a
statewide referendum to legalize casino gaming in that state. However, in 1997
the New York City Gambling Control Commission was established to regulate the
operation of cruises leaving out of New York harbor, which offer gambling once
the boat is beyond the three-mile limit of city jurisdiction and in
international waters ("cruises to nowhere"). Currently one company is
operating an overnight gambling cruise under these regulations, and several
more have applied to the New York City Gambling Control Commission for
licenses. Legislation to put the issue before Pennsylvania voters has been
introduced several times in the past few years, but none has so far succeeded.
The current Pennsylvania Governor, Tom Ridge, has indicated that he will
require a statewide vote on gaming, as well as local referendum; the
requirement for a statewide vote would make the legalization of casino gaming
in Pennsylvania a more difficult and expensive possibility than previously
anticipated. Management believes that, should casino gaming be legalized in
the future in Philadelphia, the effects on Atlantic City casinos and on the
Claridge would depend upon the form and scope of such gaming. In 1995, two
racetracks in Delaware began offering slot machines at their facilities, with
a third racetrack opening a slot machine
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facility in August 1996. Total combined revenues for these three facilities in
1996 was reported to be $184.4 million, and in 1997 increased to a reported
$298.9 million. A bill is currently pending in the Delaware State Legislature
which proposes increasing the number of slot machines authorized at any of the
three licensed facilities from the current maximum of 1,000 machines to a new
maximum of 2,000 machines per facility.
Indian gaming is currently authorized in many states including New York,
Michigan, Minnesota, California, and most notably, Connecticut. In February
1992, the Foxwoods High Stakes Casino and Bingo Hall ("Foxwoods"), operated by
the Mashantucket Pequot Indian tribe in Ledyard, Connecticut commenced
operations, offering the table games found in Atlantic City as well as bingo
rooms. In January 1993, approval was granted by the Connecticut government for
Foxwoods to offer slot machines; as of December 31, 1997, approximately 5,600
slot machines were reported to be operational at Foxwoods. In October 1996,
the Mohegan Sun Resort opened in Uncasville, Connecticut, near the Foxwoods
operation. As of December 31, 1997, this facility, owned by the Mohegan
Indians, had approximately 3,000 slot machines, as well as table games. In
1997, these two properties reported an average win per slot machine per day of
$326, compared to the Atlantic City average win per slot machine per day of
$220.
The continued expansion of casino gaming, lotteries, including video
lottery terminals (VLTs), and offtrack betting in other nearby states could
also have a negative effect on the Atlantic City market.
Gaming Regulation and Licensing
a. The New Jersey Casino Control Commission and Division of Gaming
Enforcement. The ownership and operation of casino-hotel facilities in
Atlantic City are subject to extensive state regulation under the Act. No
casino-hotel may operate in Atlantic City unless necessary corporate and
individual officer, director and employee licenses are obtained from the
Commission. The Commission is authorized under the Act to adopt regulations
covering a broad spectrum of gaming-related activities.
The Act also establishes a Division of Gaming Enforcement (the
"Division") to investigate all applications for licenses, enforce the
provisions of the Act and the regulations thereunder, and prosecute before the
Commission all proceedings for violations of the Act or any regulations
thereunder. The Division conducts audits and continually reviews casino
operations, maintains information with respect to any changes in ownership of
the casino-hotel and conducts investigations of casino owners and investors
when appropriate.
Since 1991, changes to the Act have been enacted which have reduced
regulation of the casino industry; such changes have included the
implementation of 24-hour gaming, the introduction of new types of games, and
the introduction of simulcast wagering. In January 1995, significant
amendments to the Act were signed into law, which were intended to further
reduce the regulation of the Atlantic City casino industry. These amendments
included changes regarding (i) the authority and responsibilities of the
Commission and the Division; (ii) the licensing requirements of employees,
casinos, and employees of industries which service the casinos; (iii) the
operation of the casinos; and (iv) the operation of the Casino Reinvestment
Development Authority (the "CRDA").
b. Licensing Requirements. The Act provides that various categories of
persons or entities must hold casino licenses. The Act also provides that each
officer, director and person who directly or indirectly holds any beneficial
interest or ownership in a casino licensee; or any person who, in the opinion
of the Commission, has the ability to control a casino licensee or elect a
majority of the board of directors; or each principal employee or any other
employee of a casino licensee (and any lender to or underwriter, agent or
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employee of the licensee) whom the Commission may consider appropriate for
approval or qualification, be qualified for approval pursuant to the
provisions of the Act. In addition, all contracts and leases entered into by
the licensee may, upon request of the Commission, have to be submitted to the
Commission, are subject to its review, and, if found unacceptable, are
voidable. All enterprises which provide gaming-related services to the
licensee must be licensed. All other enterprises dealing with the licensee
must register with the Commission, which may require that they be licensed if
they do $75,000 or more per year in business with a single licensee, and
$225,000 or more per year if with more than one licensee.
New Claridge holds a casino license because it carries on the casino
business of the Claridge and owns the Casino Assets. As a result, New
Claridge's officers and directors are subject to Commission qualification. The
Corporation, as the sole owner of the stock of New Claridge, is also required
to be qualified. As a part of its determination of the Corporation's
qualification, the Commission will require the qualification of each officer,
each director, and each person who directly or indirectly holds any beneficial
interest or ownership in the Corporation, and who the Commission requires to
be qualified, or any person who, in the opinion of the Commission, has the
ability to control the Corporation or elect a majority of its Board of
Directors; or each principal employee or any other employee whom the
Commission may consider appropriate for approval or qualification. The
Commission has determined that no stockholder of the Corporation owning less
than 5% of its stock will be required to be qualified unless the Commission
determines that such stockholder has the ability to control the Corporation or
elect a majority of its Board of Directors. The names and addresses of all
stockholders have been supplied to the Commission and any changes known to the
Corporation are reported when they occur.
c. Licensing Status. The Commission issues casino licenses, which, as
amended January 1995, are renewable every four years, subject to a series of
requirements including a requirement of demonstrating financial viability. On
September 22, 1995, New Claridge was issued a four-year casino license by the
Commission for the period commencing September 30, 1995.
d. Investigations and Disqualifications. The Commission may find any
holder of any amount of securities of the Corporation not qualified to own
securities of the Corporation. Further, as required by New Jersey, the charter
and the by-laws of the Corporation and New Claridge provide that securities of
the Corporation and New Claridge are held subject to the condition that if a
holder is found to be disqualified by the Commission the holder must dispose
of the securities of the Corporation or New Claridge, as the case may be. The
Corporation will periodically report the names and addresses of owners of
record of Class A Stock to the Commission as is required for all publicly
traded holding companies that have wholly-owned subsidiaries holding casino
licenses.
e. Casino Fees and Taxes. The Act provides for a casino license issue
fee of not less than $200,000, based upon the cost of the investigation and
consideration of the license application, and renewal fee of not less than
$200,000, as amended in January 1995, based upon the cost of maintaining
control and regulatory activities. The renewal fee is charged to the casino
licensee on a monthly basis, based on the cost of actual investigatory time
spent monitoring activities at the casino hotel. In addition, a licensee is
subject to (i) a tax of eight percent (8%) of gaming revenues, less the
provision for uncollectible accounts, (ii) an annual license fee of $500 on
each slot machine, and (iii) an alcoholic beverage fee computed on the basis
of the cost of investigatory time spent monitoring each beverage outlet.
The Act as amended in December 1984 further provides for the imposition
of an investment obligation pursuant to criteria set forth in the Act, or the
payment of an alternative tax. The investment obligation is 1.25% of the total
gaming revenues (which are defined as the total revenues derived from gaming
operations less the provision for uncollectible accounts) for each calendar
year. If the casino licensee opts
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not to make an investment, it is assessed an alternative tax of 2.5% of total
gaming revenues less the provision for uncollectible accounts. The licensee
has two options in satisfying its investment obligation; it can make a direct
investment in a project approved by the CRDA, which is the agency responsible
for administering this portion of the Act, or it can buy bonds issued by the
CRDA which will, if tax exempt, bear interest at the rate of 66 and 2/3% of
the average rate of the Bond Buyer Weekly 25 Revenue Bond Index for the 26
weeks preceding the issue of the bonds. If the bonds are not tax exempt they
will bear interest at the rate of 66 and 2/3% of the average rate of Moody's A
Rated Utility Index for the 26 weeks preceding the issue of the CRDA bonds.
The investment obligation must be paid on the fifteenth day of the first,
fourth, seventh, and tenth months of each year based on the estimated gaming
revenues for the three month period immediately preceding the first day of
those months. The alternative tax must be paid not later than April 30 of the
following year.
New laws and regulations as well as amendments to existing laws and
regulations relating to gaming activities in Atlantic City are adopted from
time to time. Effective July 1, 1993, the New Jersey state legislature passed
a law requiring the payment of parking fees by casinos in New Jersey in the
amount of $2.00 per day for each motor vehicle parked in a casino parking
space. In 1992 the New Jersey state legislature passed a law requiring the
payment of a tourism marketing fee of $2.00 per occupied room by casino hotels
in Atlantic City. While the Corporation believes that these fees have not had
a significant impact on its operations, there is no assurance that future laws
or changes in existing laws will not have an adverse effect.
Employees
As of December 31, 1997, New Claridge employed approximately 2,200
persons, of whom approximately 850 are represented by labor unions.
Approximately 700 of the 850 are represented by the Hotel, Restaurant
Employees and Bartender International Union, AFL-CIO, Local 54. In September
1994, the Corporation's collective bargaining agreement covering the employees
represented by Local 54 was renewed, together with the collective bargaining
agreements of all Atlantic City casinos with respect to Local 54, for a period
of five years. During the past three years, local unions have been active in
their efforts to organize non-union employees in Atlantic City.
The management of the Claridge believes that its employee relations are
generally satisfactory. All of the employees represented by labor unions are
covered by collective bargaining agreements which prohibit work stoppages
during their terms.
Item 2. PROPERTIES
The Claridge hotel was constructed in 1929 at the northeastern end of
Absecon Island, on which Atlantic City is located. After remodeling,
modernization and expansion at a cost of approximately $138 million, the
Claridge opened as a casino-hotel in July 1981. Located in the Boardwalk
Casino section of Atlantic City on Brighton Park, approximately 550 feet north
of the Boardwalk, the Claridge occupies three parcels of property.
The casino-hotel, situated on the main parcel (41,408 square feet with
138 feet fronting the park and 300 feet deep), is a concrete steel frame
structure, 26 stories high at its highest point. The valet-parking garage,
situated on an adjacent parcel of land (21,840 square feet) west of the
casino-hotel site, is an eight-level reinforced concrete ramp structure, built
in 1981. Including the bus drive-through area, a bus patron waiting room and
an electrical room, it totals an area of 197,100 square feet and provides
parking for approximately 475 vehicles. In 1996, New Claridge completed the
construction of a self-parking garage,
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located on a parcel of land (29,120 square feet) connected to the existing
valet-parking garage. The combined garage facility provides parking for
approximately 1,200 vehicles. The office building, situated on an adjacent
parcel of land (7,766 square feet), is a two-story reinforced concrete and
brick structure with a flat roof. Constructed about 50 years ago, its interior
has been modernized. The building is utilized as an administration facility,
and totals an area of 14,020 square feet. With the exception of the
self-parking garage, all of the facilities discussed are owned by the
Partnership and are leased to New Claridge under the Operating Lease and the
Expansion Operating Lease. The self-parking garage and the property on which
it is located are owned by New Claridge.
Item 3. LEGAL PROCEEDINGS
On July 10, 1996, ten days after its opening, a fatal accident occurred
at New Claridge's self-parking garage, in which the vehicle of two patrons
breached a cable restraint system, permitting their vehicle to drive through
the side wall of the self-parking garage. The vehicle fell four stories to the
sidewalk and street below, killing both occupants. As a result, New Claridge's
self-parking garage was closed until the end of September 1996, while various
investigations sought to determine the cause of the accident. At the same
time, New Claridge determined to remove the exterior wall cable restraint
system and replace it with a rigid I-beam barrier system.
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. 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
garage, alleging negligence, breach of warranty and breach of contract in the
design and construction of the garage. This proceeding is currently pending,
with arbitration scheduled to be held in April 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 consolidated 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 has set a trial date for this case of June 1, 1998. The Corporation
believes the ultimate resolution of the case will not result in a material
impact on the Corporation's consolidated financial statements.
The Corporation and its subsidiaries are not parties to any other
material litigation other than ordinary routine litigation which is incidental
to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All issued and outstanding shares of the Corporation have been offered
and sold in reliance on exemptions from the registration requirements of the
Securities Act of 1933 as amended (the "Securities Act"). Therefore, there is
no established trading market for any class of shares of the Corporation. In
October 1983, 562,500 shares of Class A Stock were sold to Oppenheimer
Holdings, Inc., and certain officers and employees of Oppenheimer & Co., Inc.,
(placement agent for the Partnership and the Corporation) at their par value,
$.001 per share, and 4,500,000 shares of Class A Stock were privately offered
and sold at $1.2336306 per share. At the same time, 562,500 shares of Class B
Stock were sold to Webb at their par value, $.001 per share. On March 24,
1989, Oppenheimer Holdings, Inc. returned to the Corporation all of its shares
(273,938) of the Corporation's Class A Stock. On June 16, 1989, all of the
outstanding shares of the Corporation's Class B Stock, all of which was owned
by Webb, was returned to the Corporation and cancelled. As of March 12, 1998,
there were approximately 489 holders of record of the Class A Stock. The
Contingent Payment Rights (see Item 1. Business - "Contingent Payment")
received by Releasing Investors may or may not be securities. The Corporation,
the Partnership and Webb filed a registration statement under the Securities
Act with respect to the Contingent Payment Rights as if they were securities
and each of the Corporation, the Partnership and Webb were an issuer of such
securities. However, by such action none of the Corporation, the Partnership
or Webb admitted that the Contingent Payment Rights are securities or that any
of them is the issuer of any such securities. There is no market for the
Contingent Payment Rights.
The Indenture restricts the declaration or payment of dividends or
distributions or redemptions of capital stock by the Corporation and its
subsidiaries, other than (i) dividends or distributions payable in equity
interests of the Corporation or such subsidiaries, (ii) dividends or
distributions payable to the Corporation or any wholly-owned subsidiary, or
(iii) dividends by a subsidiary on its common stock if such dividends are paid
pro-rata to all holders of such common stock.
In addition, the Corporation and the Partnership have agreed not to make
any distributions to the holders of their equity securities, whether derived
from operations or from sale or refinancing proceeds, until the Contingent
Payment has been satisfied (see Item 1. Business - "Contingent Payment").
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Item 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data for the years ended December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Net revenues $ 192,753 193,311 203,348 190,755 189,672
Net (loss) income $ (5,979) (15,389) (1,908) (6,901) 5,132
Net (loss) income per share $ (1.20) (3.05) (.38) (1.37) 1.02
Balance Sheet Data at Year End
Total assets $ 150,380 164,163 189,074 190,484 146,338
Current assets $ 37,096 31,753 55,542 59,426 22,736
Current liabilities $ 41,234 39,027 40,420 37,003 34,270
Long-term debt, net of
note payable and
current installments
of long-term debt $ 85,023 85,000 85,000 85,000 35,259
Stockholders' (deficiency) equity $ (15,813) (9,834) 5,555 7,463 14,364
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations for the Year Ended December 31, 1997
The Corporation had a net loss of $5,979,000 for the year ended
December 31, 1997, compared to a loss of $20,787,000 before an income tax
benefit of $5,398,000 for the year ended December 31, 1996. For the year ended
December 31, 1997, the Corporation recorded an income tax benefit of
$2,311,000, offset by an increase in the valuation allowance of $2,311,000.
During 1997, New Claridge's casino revenues were $165,371,000, an
increase of 1.2% over total 1996 casino revenues of $163,369,000. Citywide
casino revenues, as reported, for the year ended December 31, 1997, increased
2.4% over 1996 revenues. As of December 31, 1997, the twelve existing casino
facilities offered approximately 1,173,000 square feet of gaming space
(including the addition of Bally's Wild Wild West Casino on July 1, 1997), an
8.6% increase over the casino square footage as of December 31, 1996 of
approximately 1,080,000. In addition, the number of hotel rooms available
citywide increased, resulting from additions at Harrah's (approximately 400
rooms), Caesars (approximately 600 rooms), and the Hilton (approximately 300
rooms), as well as the 500-room non-casino hotel linked to the new convention
center.
New Claridge's table games revenue for 1997 was $39,256,000, a
decrease of 2.8% from 1996 table games revenue of $40,374,000. Although table
games drop (the amount of gaming chips purchased by patrons) during 1997
increased 1.2% over 1996 levels, the hold percentage (the percentage of win to
drop) decreased to 14.2% in 1997 from 14.8% in 1996. Citywide table games
drop, as reported, increased 3.0% during 1997 over 1996 levels, while citywide
table games revenue decreased slightly from 1996 revenues, resulting from a
reduction in the citywide hold percentage, to 15.5% in 1997, from 15.9% in
1996.
New Claridge's slot machine revenue during 1997 was $126,115,000,
reflecting an increase of 2.5% over 1996 revenues of $122,995,000. Citywide
slot machine revenue during 1997, as reported, increased 3.6% over 1996
revenues. The number of slot machines available citywide increased 7.3%,
primarily as a result of the opening of Bally's Wild Wild West Casino on July
1, 1997, while the average number of slot machines available at the Claridge
decreased 6.0% from 1996 as a result of a reconfiguration of the casino floor
in early 1997 which provided a more comfortable atmosphere for casino patrons.
As a result, New Claridge's average win per slot machine per day was $197 in
1997, an increase of 8.8% over 1996, compared to a 3.1% decline in the 1997
citywide average win per slot machine per day, to $220.
During 1997, competition for attracting bus passengers in Atlantic
City eased somewhat, as evidenced by reductions in the average coin packages
offered to patrons. In 1997, approximately 955,000 casino patrons arrived at
the Claridge by bus and were issued $15,023,000 in coin incentives, resulting
in an average coin incentive per passenger of $16. This compares to 1,015,000
bus passengers arriving at the Claridge in 1996, at an average coin incentive
per passenger of $19, for a total of $19,495,000 of coin incentives. 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 in 1997 totalled $11,366,000, compared to $11,031,000 in 1996.
Hotel revenues earned in 1997 of $9,456,000 were 3.3% higher than 1996
revenues of $9,150,000. Hotel occupancy in both 1997 and 1996 was 91%, while
the average room rate was $58 and $56, respectively. Food and beverage
revenues earned during 1997 were $19,609,000, reflecting a 4.8% decline from
1996 revenues. This decrease was due primarily to a reduction in the number of
covers (meals served) in 1997 to 1,364,000 from
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1,735,000 covers in 1996, offset somewhat by an increase in the average price
per cover to $9.56 in 1997 from $8.08 in 1996. The decrease in volume was due
primarily to a decline in buffet business, as well as the outsourcing of New
Claridge's "fast food" restaurant in late 1996. Promotional allowances, which
represent the value of goods and services provided free of charge to casino
customers under various marketing programs, increased slightly during 1997 to
$19,272,000, from $19,241,000 in 1996.
Total costs and expenses for the year ended December 31, 1997 were
$198,732,000, reflecting a 7.2% decrease from 1996 expenses. Casino expenses
of $96,760,000 were 3.5% lower than 1996 expenses as a result of the lower bus
program coin incentives paid, as well as lower payroll costs resulting from
reduced staffing levels initiated as part of New Claridge's cost containment
efforts. Food and beverage expenses of $9,811,000 were 10.3% lower than 1996
expenses, due to lower payroll and other operating costs as a result of the
reduced volume in the restaurants and cost containment efforts. General and
administrative expenses of $27,157,000 decreased 11.1% from 1996 levels, due
to lower advertising expenditures and decreased payroll costs resulting from
lower staffing levels; 1997 expenses included approximately $1.3 million for
financial and legal services related to the Corporation's attempted
reorganization early in the year. Interest expense in 1997 was higher than
1996 due to the capitalization of interest during the construction of the
self-parking garage facility in 1996.
Rent expense to the Partnership in 1997 of $30,554,000 was lower than
1996 expense due to the abatement of rent pursuant to the March 1, 1997
amendments to the Operating Lease and Expansion Operating Lease (see
"Liquidity and Capital Resources"). Prior to these amendments, lease expense
(including the effect of the $38.8 million of rent abatements provided in
accordance with the 1989 Restructuring Agreement) was recognized on a leveled
basis over the initial lease term ending September 30, 1998. Since the amount
of abatements permitted in accordance with the March 1997 amendments will vary
depending on the Partnership's cash flow, the actual amount abated on a
monthly basis is recorded as a reduction to lease expense. For the year ended
December 31, 1997, the reduction to lease expense resulting from the abatement
of rent was approximately $9 million.
For the year ended December 31, 1997, the Corporation recorded an
income tax benefit of $2,311,000,which represents the tax benefit likely to be
realized as a result of the carry forward of Federal net operating losses,
offset by an increase in the valuation allowance of $2,311,000. For the year
ended December 31, 1996, the Corporation recorded an income tax benefit of
$5,398,000, which represents the tax benefit likely to be realized as a result
of the carry forward of Federal net operating losses, net of an increase in
the valuation allowance of $2,460,000 and increased deferred tax credits.
Results of Operations for the Year Ended December 31, 1996
The Corporation had a loss of $20,787,000 before an income tax benefit
of $5,398,000 for the year ended December 31, 1996, as compared to a loss of
$2,278,000 before an income tax benefit of $370,000 for the year ended
December 31, 1995.
For the year ended December 31, 1996, casino revenue was $163,369,000,
a decrease of 3.7% from 1995 casino revenue of $169,607,000, and an increase
of 4.6% over 1994 casino revenue. Citywide casino revenues, as reported for
the year ended December 31, 1996, increased 1.8% over 1995 revenues. Citywide
casino revenues in the first quarter of 1996 were adversely affected by
several severe winter storms, most notably the January blizzard, which
blanketed the Northeastern United States with a record amount of snow, as
compared to the milder weather conditions experienced in the first quarter of
1995. In the second quarter of 1996, the Trump World's Fair casino commenced
operations, contributing to the 12.5% increase in citywide casino square
footage in 1996. In addition, the number of hotel rooms available citywide
increased in the second quarter of 1996 with the opening of the Trump World's
Fair casino (approximately 500 rooms) and the Tropicana's new
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600-room hotel tower, adding to the already intense competition for casino
patrons. On July 10, 1996, the Claridge's self-parking garage, which had
opened on June 28, 1996, was closed due to a fatal accident, and was not
reopened until September 20, 1996, when certain structural enhancements were
completed. As a result of not having the use of the self-parking garage during
the busy summer season, the Claridge was unable to take full advantage of
certain promotional programs designed to capture the more profitable drive-in
casino patron. In addition, major infrastructure improvements in Atlantic City
related to the construction of the new convention center and the corridor
project linking the center to the boardwalk resulted in considerable traffic
congestion on roads leading into and around Atlantic City.
New Claridge's table games revenue for 1996 was $40,374,000, an
increase of 2.9% over table games revenue earned during 1995. Although table
games drop during 1996 increased 6.5% over 1995, the hold percentage decreased
to 14.8% in 1996, from 15.3% in 1995. The increase in table games drop
activity in 1996 was a result of the introduction of several new player
development programs, including a junket/splinter program, and the offering of
gaming chip coupons, as well as the introduction of certain specialty table
games, such as "Caribbean Stud Poker" and "Let It Ride Poker". Citywide table
games revenue, as reported for 1996, increased 1.1% over 1995 revenue.
New Claridge's slot machine revenue in 1996 totalled $122,995,000,
reflecting a 5.6% decrease from 1995 slot machine revenue. Citywide slot
machine revenue as reported for 1996 increased 2.1% over 1995 slot machine
revenue. The decrease experienced by the Claridge, and many of the other
Atlantic City casinos, resulted from the increased competition as a result of,
most notably, the opening of the Trump World's Fair casino in May 1996, as
well as minor expansions of existing casino space at other properties. The
average number of slot machines available citywide in 1996 increased 10.5%
over 1995, while the average number of slot machines available at the Claridge
in 1996 was consistent with 1995.
Beginning in the latter part of 1995, competition for bus customers
began to increase, in the form of increased coin incentives offered to these
customers. Because of its lack of a self-parking garage at that time, and
therefore its dependency on the bus market, New Claridge had to remain
competitive with the incentives offered by other Atlantic City casinos in
order to maintain its share of this market. In 1996, the competition for bus
customers became even more intense, as the average cost of coin incentives
issued to patrons arriving by bus to the Claridge increased to approximately
$19 in 1996, from approximately $13 in 1995. In total, during 1996, New
Claridge issued $19,495,000 in coin incentives to 1,015,000 bus patrons,
compared to $12,502,000 of coin incentives issued to 976,000 bus patrons in
1995. Promotional incentives issued through the direct marketing programs in
1996 totalled $11,031,000, compared to $12,667,000 in 1995. Promotional
incentives in 1995 included incentives offered to new customers who were
identified based on demographic models; analysis of the results of this
program resulted in a reduction of these prospecting efforts, starting in late
1995.
Hotel revenues earned in 1996 of $9,150,000 were in line with hotel
revenues earned during 1995. Hotel occupancy during 1996 was 91%, with an
average room rate of $56, comparable to the 92% occupancy in 1995, with an
average room rate of $55. For the year ended December 31, 1996, New Claridge
earned food and beverage revenues of $20,602,000, a 4.2% increase over 1995
revenues. The increase in food and beverage revenues was due to an increase in
the average price per cover to $8.08 in 1996, from $7.40 in 1995, primarily in
banquet functions. The total number of covers served during 1996 was
1,735,000, a decrease from the 1,775,000 covers in 1995. The decrease in
covers was primarily due to the closing of New Claridge's "fast food" outlet
in September 1996; this outlet was reopened later in the year as a "fast food"
Chinese restaurant, managed by an independent operator. Other revenues earned
during 1996 of $2,671,000 increased over 1995 other revenues of $2,136,000,
primarily due to an increase in showroom revenues resulting from a more
aggressive entertainment policy in 1996. Promotional allowances increased to
$19,241,000 in 1996, from $16,326,000 in 1995, due to the increased efforts to
maintain casino revenue market share. As a result, hotel,
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food and beverage, and other revenues, net of promotional allowances, for the
year ended December 31, 1996 were $13,182,000, a decrease from those revenues
net of promotional allowances for the year ended December 31, 1995 of
$14,774,000.
Total costs and expenses for the year ended December 31, 1996 of
$214,098,000 were 4.1% higher than 1995 expenses of $205,626,000, primarily as
a result of the increase in coin incentives issued through the bus program,
which are included in casino expenses. In addition, the increase in casino
expenses over 1995 was also due to the increase in the cost of providing
promotional allowances to casino patrons; these costs are allocated from the
hotel, food and beverage, and other expenses. General and administrative costs
in 1996 increased 6.6% over 1995 costs, primarily as a result of increased
advertising expenditures during the year. Depreciation and amortization
expense for 1996 increased over 1995 as a result of the opening of the
self-parking garage; the cost of the garage will be depreciated over 39 years.
Interest expense in 1996 was slightly lower than interest expense in 1995 due
to the capitalization of interest during the construction of the self-parking
garage.
The Corporation recorded an income tax benefit of $5,398,000 for the
year ended December 31, 1996, which represents the tax benefit likely to be
realized as a result of the carry foward of Federal net operating losses, net
of an increase in the valuation allowance of $2,460,000 and increased deferred
tax credits. For the year ended December 31, 1995, the Corporation recorded an
income tax benefit of $370,000, which represented the tax refund likely to be
realized as a result of the carry forward of Federal net operating losses, net
of increased deferred tax credits.
Liquidity and Capital Resources
On January 31, 1994, the Corporation completed an offering of $85
million of Notes (see Item 1. Business - "Corporate Structure"). The Notes are
secured by (i) a non-recourse mortgage granted by the Partnership representing
a first lien on the Hotel Assets, (ii) a pledge granted by the Corporation of
all outstanding shares of capital stock of New Claridge, and (iii) a guarantee
by New Claridge. New Claridge's guarantee of the Notes is secured by a
collateral assignment of the second lien Expandable Wraparound Mortgage, and
by a lien on the Claridge's gaming and other assets, which lien will be
subordinated to liens that may be placed on those gaming and other assets to
secure any future revolving credit line arrangement. On January 28, 1997, New
Claridge entered into an agreement to subject the new self-parking garage to
the lien of the mortgage; such lien will not be subordinated to any 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 costs attributable to building the
garage facility); and (iv) to acquire the Contingent Payment Option (see Item
1. Business - "Contingent Payment") 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.
Beginning in 1995, and annually thereafter, the Corporation is required
to make an offer ("Excess Cash
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Offer") to all holders of Notes, to purchase at 100% of par (plus accrued and
unpaid interest, if any, to the purchase date), the maximum amount of Notes
that may be purchased with 50% of the Corporation's "Excess Cash" (as defined
in the Indenture), from the preceding year. If less than $5 million is
available to make such payments (i.e. if Excess Cash is less than $10
million), no such offer needs to be made. The commencement date of any
required Excess Cash Offer must be not later than 30 days after the
publication of the Corporation's audited financial statements for the
immediately preceding fiscal year. For the year ended December 31, 1997, the
Corporation's Excess Cash was less than $10 million, and therefore the
Corporation is not required to make an Excess Cash Offer in 1998.
At December 31, 1997, the Corporation had a working capital deficiency
of $4,138,000, as compared to a working capital deficiency of $7,274,000 at
December 31, 1996. The decrease in the working capital deficiency is
principally attributable to increases in cash and cash equivalents of
$3,892,000, an increase in receivables of $1,723,000 (primarily due to an
increase in the current portion of the Expandable Wraparound Mortgage due from
the Partnership), offset by an increase in other current liabilities of
$1,963,000 (primarily due to the deferral of basic rent on March 1, 1997), an
increase in accounts payable of $205,000, and a decrease in prepaid expenses
and other current assets of $264,000. Current liabilities at December 31, 1997
and 1996 included deferred rental payments of $15,078,000, and the $3.6
million loan from the Partnership plus accrued interest thereon of $3,690,000
and $3,258,000 at December 31, 1997 and 1996, respectively. The deferred
rental payments and $3.6 million loan 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 December 31, 1997 and 1996
would have been $18,230,000 and $14,662,000, respectively.
For the year ended December 31, 1997, cash flows used in operating
activities were $11,543,000, compared to cash flows used in operating
activities of $22,650,000 for the year ended December 31, 1996. The decrease
in cash used in operating activities was primarily due to the decrease in
pre-tax net loss. Cash flows provided by investment activities for the year
ended December 31, 1997 were $15,451,000, compared to cash flows used in
investment activities of $4,565,000 for the year ended December 31, 1996. Cash
flows used in investment activities for 1996 for additions to property and
equipment included expenditures for the construction of the self-parking
facility, while 1997 expenditures for property and equipment were minimal.
Expenditures for property and equipment in 1997 and 1996 were offset by
Expandable Wraparound Mortgage principal payments of $17,120,000 and
$13,845,000, respectively. Cash flows used by financing activities in 1997
represent payments of a capital lease obligation for certain gaming equipment.
For the year ended December 31, 1997, the Corporation's "Adjusted
EBITDA" was $12,432,000, compared to $2,222,000 for the year ended December
31, 1996. "EBITDA" represents earnings before interest expense, income taxes,
depreciation, amortization, and other non-cash items. "Adjusted EBITDA" is
equal to "EBITDA" plus rent expense to the Partnership, less interest income
from the Partnership, less "Net Partnership Payments", which represent the
Corporation's net cash outflow to the Partnership. Adjusted EBITDA is used by
the Corporation to evaluate its financial performance in comparison to other
gaming companies with more traditional financial structures. Adjusted EBITDA
may be used as one measure of the Corporation's historical ability to service
its debt, but should not be considered as an alternative to operating income
(as determined in accordance with generally accepted accounting principles) as
an indicator of operating performance, or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity, or to other consolidated income or cash
flow statement data, as are determined in accordance with generally accepted
accounting principles. For the year ended December 31, 1997, the ratio of
earnings (defined as pre-tax income (loss) from continuing operations,
adjusted to exclude fixed charges consisting of interest expense, interest
capitalized, and such portion of rental expense as can be demonstrated to be
representative of the interest factor) to fixed charges increased to .71, from
.06 in 1996, and compared to .85
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in 1995. The deficiency of earnings to fixed charges in 1997, 1996 and 1995
was $5,922,000, $21,828,000, and $3,416,000, respectively.
During 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's obligations to pay interest on the Notes,
as well as to make at least some moderate capital improvements. Commencing in
the latter part of 1995, however, competition in the Atlantic City casino
market for bus customers, a principal source of customers for the Claridge at
the time, increased; this competition intensified even more during 1996 as
additional casino square footage was added, principally due to the opening of
the Trump World's Fair casino. During 1996, the average coin incentive issued
per bus patron at the Claridge increased to approximately $19, from
approximately $13 in 1995. Total cash incentives issued to Claridge's casino
patrons (in the form of coin to play slot machines and gaming chips to play
table games) increased to approximately $30.5 million in 1996, from
approximately $25.2 million in 1995. While the Corporation's promotional costs
increased significantly, total casino revenues in 1996 actually decreased from
1995 levels. It had been the expectation of the Corporation that, upon the
opening of its new self-parking garage, the Corporation would be able to
reduce its reliance on the bus patron market; however, the Corporation was
forced to close the garage facility on July 10, 1996, only ten days after its
opening, following a fatal accident. Because the facility was not able to
reopen until the end of September 1996, the Corporation lost any possible
benefit of the facility during the normally busy summer season. In addition,
severe winter weather in the first quarter of 1996 adversely affected
revenues. As a result, the Corporation experienced a net loss for 1996 of
$15.4 million, compared to a net loss of $1.9 million in 1995.
In late July 1996, management of the Corporation determined that due
to the serious deterioration in the Corporation's cash flow, without a
significant improvement in its operating results, it was unlikely that the
Corporation would be able to meet its obligations to pay interest on the Notes
beyond the August 1996 payment. In addition to taking steps to conserve cash
by reducing various operating expenses, the Corporation engaged a financial
advisor, Dillon, Read & Co., Inc., to assist in formulating a proposal to the
holders of the Notes to restructure the Corporation's obligations under the
Notes. At the same time, the Corporation was working with Dillon, Read & Co.,
Inc. to attempt to find a buyer of the Corporation, or an investor that would
be in a position to inject additional capital into the Corporation to enable
the Corporation to meet its ongoing obligations. The Corporation did not
receive any acceptable proposals in regards to the possible sale of the
Corporation.
In November 1996, while the sales efforts were continuing, the
Corporation announced that there was a strong likelihood that the Corporation
would be unable to pay the interest due on the Notes on February 3, 1997.
Accordingly, management, working together with financial and legal advisors,
formulated a plan for restructuring the Corporation's obligations. The terms
of the proposed plan were presented to the noteholders at a meeting held on
December 3, 1996.
On January 12, 1997, management of the Corporation was contacted,
through an agent, by Hilton, regarding a possible sale of the Corporation to
Hilton, and shortly thereafter, the Corporation began negotiations with
Hilton. On January 30, 1997, the Corporation issued a press release indicating
that the Corporation would not make the interest payment due on the Notes on
February 3, 1997, and that the Corporation had entered negotiations with
Hilton regarding acquisition of the Corporation by Hilton through a
prepackaged bankruptcy plan. At that time, a representative of Hilton
indicated that Hilton had acquired approximately 35% to 40% of the Notes. On
February 5, 1997, three holders of the Notes, who were members of the
unofficial committee which they had formed, filed a petition for involuntary
bankruptcy against the Corporation in the bankruptcy court for the District of
New Jersey.
Contemporaneously, the same three holders of the Notes filed a related
state court lawsuit against the Corporation, New Claridge, the Partnership,
certain officers and directors of the Corporation, and the general
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partners of the Partnership. On March 4, 1997, contrary to earlier
expectations, the Corporation was able to pay the interest that was due on the
Notes on February 3, 1997, under the 30-day grace period allowed in accordance
with the terms of the Indenture. In addition, the Corporation reached
agreement with the unofficial committee of noteholders, as well as the three
holders of the Notes, providing for the joint dismissal of the involuntary
bankruptcy petition and the related state court lawsuit. On March 19, 1997, an
order was entered dismissing the involuntary bankruptcy petition; as part of
that order, a settlement agreement was entered whereby the state court lawsuit
was also dismissed. Negotiations with Hilton regarding acquisition of the
Corporation terminated in April 1997. Management of the Corporation believes
that Hilton subsequently disposed of its ownership in the Notes, and that a
part or all of these Notes are now owned by an entity or entities which are
controlled by Carl Icahn.
The Corporation had sufficient cash to pay the interest on the Notes
on March 4, 1997 due to several events: (i) cash flow from operations for
January and February 1997 improved significantly over what had been expected;
(ii) effective March 1, 1997, the Operating Lease and Expansion Operating
Lease were amended to provide for the deferral of basic rent of $1.3 million
on March 1, 1997 (see Item 1. Business - "Certain Agreements between the
Corporation, New Claridge and the Partnership"); and (iii) on February 28,
1997, New Claridge entered into an agreement with Thermal Energy Limited
Partnership I ("Atlantic Thermal"), pursuant to which Atlantic Thermal was
granted an exclusive license for a period of twenty years to use, operate and
maintain certain steam and chilled water production facilities at the
Claridge. In consideration for this license agreement, Atlantic Thermal paid
New Claridge $1.5 million.
As discussed, the Corporation experienced recurring losses and serious
deterioration in its cash flow in 1996. Since the Corporation does not have
substantial cash reserves or access to a line of credit, the Corporation
needed to experience significant improvement in operating results in 1997 over
1996 levels in order to meet its on-going obligations, including the interest
due on the Notes. Operating results in 1997 did improve over 1996 levels, due
primarily to the positive impact of the availability of the self-parking
garage, lower bus package pricing, limited capital expenditures, and other
cost containment initiatives. Although management of the Corporation believes
that operating results will continue to improve over 1996 levels, no
assurances as to the continuation of this improvement can be given. Management
will continue to conserve cash through various cost containment measures,
including limiting capital expenditures in 1998 to approximately $2 million.
Given the various improvements made to the property in recent years, including
the casino expansion in 1994, and the construction of the self-parking garage,
the current condition of the property is such that the above-mentioned level
of capital expenditures is deemed adequate. Management will also consider
various refinancing efforts, including a sale of the Corporation. In addition,
New Claridge has retained the law firm of Zelle and Larson LLP of Minneapolis,
Minnesota to assist in the recovery of certain expenses incurred in reopening
the self-parking garage and potential lost profit claims as a result of the
accident which occurred in the self-parking garage on July 10, 1996. On July
22, 1997, New Claridge filed a Complaint and Demand for Arbitration in the
amount of $10 million against the general contractor and the architect for the
self-parking garage; recovery of these claims would have a positive impact on
New Claridge's financial results and liquidity. However, there is no assurance
that the Corporation will be successful in realizing any recovery.
New Claridge is obligated under the Operating Lease 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,
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 First Mortgage
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
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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 totalling $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 December 31,
1997 (including the outstanding FF&E Loans and the $20 million of deferred
interest) was $100.6 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 the Wraparound Modification,
that is permitted by, or is in compliance with, the terms of the Indenture.
The Wraparound Modification, if so permitted, will provide for an extension of
the maturity date of the Expandable Wraparound Mortgage from September 30,
2000 to January 1, 2004. If the Wraparound Modification is not permitted by or
in compliance with the terms of the Indenture, New Claridge has agreed to
effect the Wraparound Modification at such time as the Notes are no longer
outstanding. In addition to the modification to the Expandable Wraparound
Mortgage, the Corporation, New Claridge, and the Partnership agreed to modify
certain terms of the Operating Lease and Expansion Operating Lease agreements,
as discussed below.
The Hotel Assets are owned by the Partnership and leased by the
Partnership to New Claridge under the terms of the Operating Lease originally
entered into on October 31, 1983, and the Expansion Operating Lease, which
covered the expansion improvements made to the Claridge in 1986. The initial
terms of both leases are scheduled to expire on September 30, 1998 and each
lease provides for three 10-year renewal options at the election of New
Claridge. The Operating Lease requires basic rental payments to be made in
equal monthly installments escalating annually up to $41,775,000 in 1997, and
$32,531,000 for the remainder of the initial lease term. Prior to the
Corporation's 1989 restructuring, basic rent expense (recognized on a leveled
basis in accordance with Statement of Financial Accounting Standards No. 13),
was $31,902,000 per year. Therefore, in the early years of the lease term,
required cash payments under the Operating Lease (not including the Expansion
Operating Lease) were significantly lower than the related expense recognized
for financial reporting purposes. Rental payments under the Expansion
Operating Lease are adjusted annually based on a Consumer Price Index with any
increase not to exceed two percent per year. Pursuant to the 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
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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 available 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 $1,300,000
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 was
allowed in accordance with the 1989 restructuring will be recognized as a
reduction to lease expense as abated.
In addition, under the March 1, 1997 restructuring agreement between
the Corporation, New Claridge, and the Partnership, New Claridge agreed to
exercise the first of three ten-year renewal options extending the term of the
Operating Lease and Expansion Operating Lease through September 30, 2008.
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge has an option to purchase, on September 30, 1998, the Hotel
Assets and the underlying land for their fair market value at the time the
option is exercised, which in no event may be less than an amount equal to the
amount then outstanding under the Expandable Wraparound Mortgage plus $2.5
million, plus any amount of the $1.3 million of rent deferred on March 1, 1997
not then paid. If New Claridge does not exercise this option on September 30,
1998, it may exercise an option, on September 30, 2003, to purchase the Hotel
Assets and the underlying land on January 1, 2004, for their fair market value
at the time the option is exercised.
Basic rent during the renewal term of the Operating Lease will be
calculated pursuant to a formula with annual basic rent not to be more than
$29.5 million or less than $24 million for the twelve months commencing
October 1, 1998, and subsequently, not to be greater than 10% more than the
basic rent for the immediately preceding lease year in each lease year
thereafter. Basic rent during the renewal term of the Expansion Operating
Lease will also be calculated pursuant to a formula with annual basic rent not
to be more than $3 million or less than $2.5 million for the twelve months
commencing October 1, 1998, and subsequently, not to be greater than 10% more
than the basic rent for the immediately preceding lease year in each lease
year thereafter.
If the Partnership should fail to make any payment due under the
Expandable Wraparound Mortgage, New Claridge may exercise a right of offset
against rent or other payments due under the Operating Lease and Expansion
Operating Lease to the extent of any such deficiency.
In December 1997, New Claridge obtained a committment from PDS for a
$2 million sale lease-back 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
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equipment to PDS.
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'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 information technology resources.
Therefore, the Corporation does not expect the amounts required to be expensed
related to correcting this problem over the next two years to have a material
effect on its financial position or results of operations. Although managment
of the Corporation anticipates completion of this project by the end of 1999,
there can be no assurances of this, and 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.
No tax benefit was recorded for the year ended December 31 1997, due
to an increase in the valuation allowance provided, resulting from the
uncertainty of realizing any tax benefit in future periods as a result of the
current financial condition of the Corporation (see Item 1. Business "Current
Developments"). The components of income tax expense did not change
significantly from the prior year except for the increase in the valuation
allowance of $2,311,000 which was provided against deferred tax assets as of
December 31, 1997. The effective tax rate for the year ended December 31, 1996
was (26%), caused by the ratio of the increased loss over disallowed
deductions and the increase in valuation allowance as compared to the prior
year loss and disallowed deductions. The increase in the valuation allowance
for the year ended December 31, 1996 was $2,460,000.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128, which is effective for financial statements for annual
and interim periods ending after December 15, 1997, changes the calculation of
earnings per share, and requires dual presentation of "basic" and "diluted"
earnings per share. The adoption of SFAS 128 did not have a material effect on
the Corporation's earnings per share.
Statement of Financial Accounting Standards No. 130, "Comprehensive
Income" (SFAS 130), was issued in June 1997. SFAS 130 becomes effective for
the Corporation's fiscal year 1998, and requires reclassification of earlier
financial statements for comparative purposes. SFAS 130 requires that all
items defined as comprehensive income, including changes in the amounts of
certain items, foreign currency translation adjustments, and gains and losses
on certain securities, be shown in a financial statement. SFAS 130 does not
require a specific format for the financial statements in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement. Management of the
Corporation believes that the adoption of SFAS 130 will not have a material
effect on the consolidated financial statements.
Factors Which May Influence the Corporation's Future Operating Results
The Atlantic City gaming market is expected to experience significant
growth beginning over the next several years, as Atlantic City transforms
itself from a "day-trip" market to a "destination resort." As a result of
current high room occupancy rates, a more favorable regulatory climate, the
reduced threat of competition from potential new gaming jurisdictions, and
significant infrastructure developments making Atlantic City more accessible,
significant new investments are planned, including the expansion of existing
casinos and the construction of several new casinos. As more of these
facilities are opened, it is possible that the increased casino
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capacity will not be absorbed as quickly as it is opened, and competition for
gaming patrons will heighten.
In addition to the expansion of the Atlantic City gaming market,
casino activity outside of Atlantic City could have an impact on the
Corporation's future operating results. Although the expansion of legalized
gaming throughout the United States slowed somewhat during 1996 and 1997,
current operations in certain markets, most notably Indian gaming in
Connecticut and slot machine facilities at the Delaware racetracks, may have
had, and may continue to have, an impact on the Atlantic City casino industry.
In 1997, the three racetracks in Delaware which offer slot machines reported
revenues of $298.9 million. A bill is currently pending in the Delaware State
Legislature which proposes increasing the number of slot machines authorized
at any of the three licensed facilities from the current maximum of 1,000
machines to a new maximum of 2,000 machines. This would allow the Delaware
facilities to rival the slot capacity of many of the casinos in Atlantic City.
The Foxwoods Casino and the Mohegan Sun Resort in Connecticut reported an
average win per slot machine per day of $326, compared to the Atlantic City
average win per slot machine per day of $220 in 1997. In 1997, the New York
City Gambling Control Commission was established to regulate the "cruises to
nowhere", which include gaming in international waters; currently one such
vessel is operating out of New York Harbor. In addition, although New York and
Pennsylvania have not, to date, been successful in legalizing casino gaming,
management believes that, should casino gaming be legalized in the future in
those states, the effects on Atlantic City casinos and on the Claridge would
depend on the form and scope of such gaming.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules are set
forth at pages F-1 to F-29 of this report.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THIS REGISTRANT
Name Office Age
- ---- ------ ---
David W. Brenner Chairman, Director 62
Robert M. Renneisen President, Director 51
Shannon L. Bybee Director 60
A. Bruce Crawley Director 52
Ned P. DeWitt Director 58
James M. Montgomery Director 58
Mark H. Sayers Director 48
Jean I. Abbott Executive Vice President 42
Frank A. Bellis, Jr. Senior Vice President, Secretary 44
Albert T. Britton Executive Vice President 41
Glenn S. Lillie Vice President 49
Business Experience
Mr. Brenner has served as a member of the Board of Directors of the
Corporation since February 1991, and became Chairman of the Board of Directors
in August 1993. He served as President of the Philadelphia Sports Congress
from January 1987 through June 1994. Mr. Brenner served as Chairman of the
Hospital and Higher Education Facilities Authority of Philadelphia from
January 1986 to June 1992, as Director of Commerce of the City of Philadelphia
from January 1984 to September 1986, and as Director of Finance from April
1991 through December 1991. He was with the accounting firm of Arthur Young &
Company from 1957 to September 1983. He was managing partner of the
Philadelphia office of Arthur Young from November 1969 until March 1980.
Mr. Renneisen has served as President of the Corporation since June
1992, as Chief Executive Officer of the Corporation and New Claridge since
July 1993, and as Vice Chairman of New Claridge since June 1994. Mr. Renneisen
was Executive Vice President of the Corporation from June 1991 to June 1992.
He served as President of New Claridge from January 1991 to January 1996. He
was Chief Operating Officer of New Claridge from January 1991 to July 1993.
Mr. Renneisen was Executive Vice President of New Claridge, responsible for
marketing and later casino operations from February 1988 to January 1991.
Prior to joining New Claridge, Mr. Renneisen served from January 1987 to
December 1987 as Vice President of Marketing of Treasure Island Hotel and
Casino in St. Maarten. From June 1986 to May 1987, he served as President of
Renneisen, Kincade & Associates, Inc. of Las Vegas, Nevada, a marketing
consulting firm. He was Senior Vice President of Marketing of the Tropicana
Hotel and Casino in Atlantic City from May 1982 to August 1984.
Mr. Bybee has served as a member of the Board of Directors of the
Corporation since July 1988. He currently is Associate Professor for Gaming
Management, Law & Regulation, at University of Nevada Las Vegas. From July
1993 to August 1994 Mr. Bybee served as President and Chief Operating Officer
for United Gaming, Inc. Mr. Bybee was the Corporation's Chairman of the Board
from November 1988 to July 1993, and from August 1988 to October 1988. In June
1989, Mr. Bybee was appointed to serve as the Chief Executive Officer of the
Corporation and New Claridge, a position he held through July 1993. From 1983
to 1987, he was Senior Vice President of Golden Nugget, Incorporated which
operated the Golden Nugget Casino Hotel in Atlantic City. From 1981 to 1983,
Mr. Bybee was President of GNAC Corporation, which operated the Golden Nugget
Casino Hotel in Atlantic City.
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Mr. Crawley has served as a member of the Board of Directors of the
Corporation since February 1995. He currently serves as President and Director
of Public Relations and Marketing Services for Crawley, Haskins & Rodgers, a
Philadelphia based public relations and advertising firm. Prior to
establishing his own firm in May 1989, Mr. Crawley was employed at First
Pennsylvania Bank and First Pennsylvania Corporation, where he served as
Senior Vice President and Director of Public and Investor Relations. He also
served, from 1976 to 1979, as Vice President and Director of Advertising for
First Pennsylvania Bank and First Pennsylvania Corporation.
Mr. DeWitt has served as a member of the Board of Directors of the
Corporation since May 1995. Since July 1997, Mr. DeWitt has been Chairman and
Chief Executive Officer of U'Race Corporation. Mr. DeWitt served as President,
Chief Executive Officer, and a member of the Board of Directors of LBE
Technologies, Incorporated, in Saratoga, California, from November 1994 to
February 1997. From November 1993 to August 1994, he served as President of
SEGA Enterprises, (USA) in Redwood City, California. Mr. DeWitt also served as
President of the Entertainment Group of Madison Square Garden from July 1990
to August 1991, and as President of Source Service Corporation from December
1986 to April 1989. He also served, from 1973 through 1982, as President and
Chief Executive Officer of Six Flags Corporation.
Mr. Montgomery has served as a member of the Board of Directors of the
Corporation since March 1995. Since 1978, he has served as President of Houze,
Shourds, and Montgomery, Inc., a management consulting firm located in Long
Beach, California. Prior to 1978, Mr. Montgomery held various managerial
positions with Rohr Industries, Inc. and Rockwell International.
Mr. Sayers has served as a member of the Board of Directors of the
Corporation since February 1990. Mr. Sayers has served as Vice President of
EMES Management Corporation, a real estate management and development company,
of New York, New York, since February 1976.
Ms. Abbott served as a member of the Board of Directors of the
Corporation from August 1989 to June 1994, and served as a consultant to the
Corporation until March 26, 1994, at which time she became a Vice President of
New Claridge. Currently, Ms. Abbott serves as Executive Vice President of
Finance and Corporate Development of New Claridge, a position she has held
since September 1997. From September 1996 to August 1997, she served as
Executive Vice President of Operations, and from July 1995 to August 1996, she
was Executive Vice President of Marketing and Casino Operations. From October
1992 to July 1993, Ms. Abbott was Finance Director for the United Way of
Atlantic County. She was Assistant Professor at Stockton State College from
September 1989 to June 1991. She served as Senior Vice President, Treasurer of
the Corporation and Senior Vice President, Controller of New Claridge from May
1987 to September 1989. She was Vice President, Controller of New Claridge
from October 1985 to May 1987 and she was Director of Finance of New Claridge
from April 1984 to October 1985. From October 1980 through April 1984, Ms.
Abbott held various executive positions with New Claridge and its corporate
predecessor.
Mr. Bellis has served as Vice President, General Counsel and Secretary
to the Corporation since August 1993. He also has served as Senior Vice
President and General Counsel of New Claridge since February 1994, as Vice
President and General Counsel of New Claridge from September 1992 to February
1994, and as Secretary of New Claridge since August 1993. Previously, from May
1985 to August 1992, Mr. Bellis was Corporate Counsel and Secretary to
Inductotherm Industries, Inc., Rancocas, New Jersey. During 1984 and 1985, Mr.
Bellis was Associate General Counsel for New Claridge. Prior to joining New
Claridge, he was a Deputy Attorney General in the New Jersey Division of
Criminal Justice in the State Attorney General's office.
Mr. Britton has served as Executive Vice President of the Corporation
since June 1994 and as President and Chief Operating Officer of New Claridge
since January 1996. He served as Executive Vice President and
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General Manager of New Claridge from February 1994 through July 1995, and as
Executive Vice President from August 1995 through December 1995. He served as
a Vice President of the Corporation from June 1992 to June 1994, and as
Executive Vice President of Operations of New Claridge from December 1992 to
February 1994. He was Senior Vice President of Operations of New Claridge from
December 1991 to December 1992, and Vice President of Casino Operations from
June 1990 to November 1991. From July 1981 through June 1990, Mr. Britton has
held various positions in both accounting and casino operations with New
Claridge and its corporate predecessor.
Mr. Lillie has served as Vice President of the Corporation from June
1992 and as Vice President of Marketing Communications of New Claridge since
December 1995. He served as Vice President of Public Affairs of New Claridge
from February 1990 to December 1995. He was Vice President of Marketing
Communications of New Claridge from April 1985 to February 1990, Director of
Public Relations from March 1982 to January 1983, and Training Manager from
November 1980 to February 1982. From February 1983 to April 1985, Mr. Lillie
was employed as the Director of Public Relations of the Tropicana Hotel and
Casino in Atlantic City.
Further information regarding the directors and certain executive
officers of the Corporation and/or New Claridge is incorporated by reference
to the information contained under the caption "Voting" in the Corporation's
Proxy Statement for the Annual Meeting of Shareholders to be held on June 16,
1998.
Item 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in
the Corporation's Proxy Statement for the Annual Meeting of Shareholders to be
held on June 16, 1998 is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1997, there were no beneficial owners of more than
5% of the Corporation's Class A Stock.
On February 12, 1992, the Corporation's Board of Directors approved a
Long Term Incentive Plan which provided for the grant to certain key officers
of the Corporation and/or New Claridge of the 273,938 shares which were held
as treasury shares by the Corporation. These shares were issued to the key
employees upon approval by the Commission on April 15, 1992, and upon receipt
the transfer of, and right to continue to hold the shares, are subject to
certain vesting restrictions.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership has a direct material interest in the Expandable
Wraparound Mortgage Loan Agreement, the Operating Lease and the Expansion
Operating Lease together with amendments thereto. See Item 1.
Business - "Corporate Structure."
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2): The response to this portion of Item 14 is submitted
as a separate section of this report beginning on page
F-1. All other schedules have been omitted as
inapplicable, or not required, or because the required
information is included in the Consolidated Financial
Statements or notes thereto.
(a)(3) Exhibits. The exhibits required to be filed as part of this
annual report on Form 10-K are listed in the attached Index
to Exhibits.
(b) Reports on Form 8-K. The Corporation filed no reports on
Form 8-K during the last quarter of the period covered by
this report.
(c) Index to Exhibits and Exhibits filed as a part of this report.
3(a) Certificate of Incorporation of the Corporation.
Incorporated by reference to Exhibit 3(a) to Form 10-K
for the year ended December 31, 1995.
3(b) By-Laws of the Corporation as amended. Incorporated by
reference to Exhibit 3(b) to Form 10-K for the year
ended December 31, 1995.
3(c) Certificate of Amendment of The Certificate of
Incorporation of the Corporation dated June 15, 1989.
Incorporated by reference to Exhibit 3(c) to Form 10-K
for the year ended December 31, 1995.
3(d) Certificate of Amendment of The Certificate of
Incorporation dated June 26, 1991. Incorporated by
reference to Exhibit 3(d) to Form 10-K for the year
ended December 31, 1995.
4(a) Form of Indenture (including the Guarantee of The
Claridge at Park Place, Incorporated). Incorporated by
reference to Exhibit 4.1 to Pre-Effective Amendment
No. 2 to Form S-1 Registration Statement (file number
33-71550) dated January 18, 1994.
4(b) Form of 11 3/4% First Mortgage Note due 2002
certificate. Incorporated by reference to Exhibit 4.2
to Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(a) Operating Lease Agreement between New Claridge and
Atlantic City Boardwalk Associates, L.P. Incorporated
by reference to Exhibit 10(a) to Form 10-K for the
year ended December 31, 1995.
10(b) Expandable Wraparound Mortgage and Security Agreement
between New Claridge and Atlantic City Boardwalk
Associates, L.P. Incorporated by reference to Exhibit
10(b) to Form 10-K for the year ended December 31,
1995.
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10(c) Expandable Wraparound Mortgage Loan Agreement between
New Claridge and Atlantic City Boardwalk Associates,
L.P. Incorporated by reference to Exhibit 10(c) to
Form 10-K for the year ended December 31, 1995.
10(h) Expansion Operating Lease Agreement between New
Claridge and Atlantic City Boardwalk Associates, L.P.
Incorporated by reference to Exhibit 10(h) to Form
10-K for the year ended December 31, 1995.
10(i) First Supplemental Amendment to Expandable Wraparound
Mortgage and Security Agreement between New Claridge
and Atlantic City Boardwalk Associates, L.P.
Incorporated by reference to Exhibit 10(i) to Form
10-K for the year ended December 31, 1995.
10(j) First Supplemental Amendment to Expandable Wraparound
Mortgage Loan Agreement between New Claridge and
Atlantic City Boardwalk Associates, L.P. Incorporated
by reference to Exhibit 10(j) to Form 10-K for the
year ended December 31, 1995.
10(n) Restructuring Agreement, among The Claridge Hotel and
Casino Corporation, The Claridge at Park Place,
Incorporated, Del Webb Corporation, Del E. Webb New
Jersey, Inc., Atlantic City Boardwalk Associates,
L.P. and First Fidelity Bank, National Association,
New Jersey, dated October 27, 1988. Incorporated by
reference to Exhibit 10(n) to Form 10-K for the year
ended December 31, 1995.
10(x) Long Term Management Incentive Plan of The Claridge
Hotel and Casino Corporation effective January 1,
1992. Incorporated by reference to Exhibit 10(x) to
Form 10-K for the year ended December 31, 1995.
10(ab) Amendment to Operating Lease Agreement and Expansion
Operating Lease Agreement between New Claridge and
Atlantic City Boardwalk Associates, L.P., dated June
15, 1989. Incorporated by reference to Exhibit 10.5
to Form S-1 Registration Statement (file number
33-71550) dated November 12, 1993.
10(ac) Second Amendment to Operating Lease Agreement and
Expansion Operating Lease Agreement between New
Claridge and Atlantic City Boardwalk Associates,
L.P., dated March 27, 1990. Incorporated by reference
to Exhibit 10.6 to Form S-1 Registration Statement
(file number 33-71550) dated November 12, 1993.
10(ad) Third Amendment to Operating Lease Agreement and
Expansion Operating Lease Agreement between New
Claridge and Atlantic City Boardwalk Associates,
L.P., dated August 1, 1991. Incorporated by reference
to Exhibit 10.7 to Form S-1 Registration Statement
(file number 33-71550) dated November 12, 1993.
10(ae) First Amendment to Expandable Wraparound Mortgage
Loan Agreement between New Claridge and Atlantic City
Boardwalk Associates, L.P., dated March 17, 1986.
Incorporated by reference to Exhibit 10.8 to Form S-1
Registration Statement (file number 33-71550) dated
November 12, 1993.
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10(af) Second Amendment to Expandable Wraparound Mortgage
Loan Agreement between New Claridge and Atlantic City
Boardwalk Associates, L.P., dated June 15, 1989.
Incorporated by reference to Exhibit 10.9 to Form S-1
Registration Statement (file number 33-71550) dated
November 12, 1993.
10(ag) Second Amendment to Expandable Wraparound Mortgage
and Security Agreement between New Claridge and
Atlantic City Boardwalk Associates, L.P., dated June
15, 1989. Incorporated by reference to Exhibit 10.11
to Form S-1 Registration Statement (file number
33-71550) dated November 12, 1993.
10(ah) The 1992 Claridge Management Incentive Plan.
Incorporated by reference to Exhibit 10.18 to Form
S-1 Registration Statement (file number 33-71550)
dated November 12, 1993.
10(ai) The 1993 Claridge Management Incentive Plan.
Incorporated by reference to Exhibit 10.19 to Form
S-1 Registration Statement (file number 33-71550)
dated November 12, 1993.
10(aj) Form of Mortgage, Assignment of Leases and Rents,
Security Agreement and Financing Statement.
Incorporated by reference to Exhibit 4.3 to
Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(ak) Form of Collateral Trust Agreement among the
Corporation, New Claridge, the Partnership and the
Collateral Trustee. Incorporated by reference to
Exhibit 4.4 to Pre-Effective Amendment No. 2 to Form
S-1 Registration Statement (file number 33-71550)
dated January 18, 1994.
10(al) Form of Corporation Pledge Agreement between the
Corporation and the Collateral Trustee. Incorporated
by reference to Exhibit 4.5 to Pre-Effective
Amendment No. 2 to Form S-1 Registration Statement
(file number 33-71550) dated January 18, 1994.
10(am) Form of New Claridge Pledge Agreement between New
Claridge and the Collateral Trustee. Incorporated by
reference to Exhibit 4.6 to Pre-Effective Amendment
No. 2 to Form S-1 Registration Statement (file number
33-71550) dated January 18, 1994.
10(an) Form of New Claridge Cash Collateral Pledge Agreement
between New Claridge and the Collateral Trustee.
Incorporated by reference to Exhibit 4.7 to
Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(ao) Form of New Claridge Security Agreement between New
Claridge and the Collateral Trustee. Incorporated by
reference to Exhibit 4.8 to Pre-Effective Amendment
No. 2 to Form S-1 Registration Statement (file number
33-71550) dated January 18, 1994.
10(ap) Form of New Claridge Trademark Security Agreement
between New Claridge and the Collateral Trustee.
Incorporated by reference to Exhibit 4.9 to
Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
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10(aq) Form of Collateral Assignment of Expandable
Wraparound Mortgage and Security Agreement.
Incorporated by reference to Exhibit 4.10 to
Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(ar) Form of Collateral Assignment of Lessor's Interest in
Operating Leases. Incorporated by reference to
Exhibit 4.13 to Pre-Effective Amendment No. 2 to Form
S-1 Registration Statement (file number 33-71550)
dated January 18, 1994.
10(as) Form of Subordination Agreement among the
Partnership, New Claridge and the Collateral Trustee.
Incorporated by reference to Exhibit 4.14 to
Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(at) Form of Assignment of Leases and Rents and Other
Contract Rights. Incorporated by reference to Exhibit
4.15 to Pre-Effective Amendment No. 2 to Form S-1
Registration Statement (file number 33-71550) dated
January 18, 1994.
10(bb) Supplemental Executive Retirement Plan of The
Claridge at Park Place, Incorporated effective
January 1, 1994. Incorporated by referenece to
Exhibit 10(bb) to Form 10-K for the year ended
December 31, 1994.
10(bc) Amendment to Long-Term Management Incentive Plan of
The Claridge Hotel and Casino Corporation effective
June 5, 1995. Incorporated by reference to Exhibit
10(bc) to Form 10-K for the year ended December 31,
1995.
10(bd) Option Agreement between The Claridge Hotel and
Casino Corporation, Philip J. Dion, as Trustee for
the Valley of the Sun United Way, and Atlantic City
Boardwalk Associates, L.P., dated November 29, 1995.
Incorporated by reference to Exhibit 10(bd) to Form
10-K for the year ended December 31, 1995.
10(be) Escrow Agreement between The Claridge Hotel and
Casino Corporation, Philip J. Dion, as Trustee for
the Valley of the Sun United Way, and IBJ Schroder
Bank & Trust Company dated November 29, 1995.
Incorporated by reference to Exhibit 10(be) to Form
10-K for the year ended December 31, 1995.
10(bf) Side Agreement between The Claridge Hotel and Casino
Corporation, The Claridge at Park Place,
Incorporated, and Atlantic City Boardwalk Associates,
L.P. dated November 29, 1995. Incorporated by
reference to Exhibit 10(bf) to Form 10-K for the year
ended December 31, 1995.
10(bg) First Amendment to the Option Agreement between The
Claridge Hotel and Casino Corporation, Philip J.
Dion, as Trustee for the Valley of the Sun United
Way, and Atlantic City Boardwalk Associates, L.P.
dated January 30, 1996. Incorporated by reference to
Exhibit 10(bg) to Form 10-K for the year ended
December 31, 1995.
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10(bh) First Amendment to the Side Agreement between The
Claridge Hotel and Casino Corporation, The Claridge
at Park Place, Incorporated, and Atlantic City
Boardwalk Associates, L.P. dated February 21, 1996.
Incorporated by reference to Exhibit 10(bh) to Form
10-K for the year ended December 31, 1995.
10(bj) Amended Employment Agreement between Robert M.
Renneisen and The Claridge at Park Place,
Incorporated effective January 1, 1997. Incorporated
by reference to Exhibit 10(bj) to Form 10-K for the
year ended December 31, 1996.
10(bk) Amended Employment Agreement between Albert T.
Britton and The Claridge at Park Place, Incorporated
effective January 1, 1997. Incorporated by reference
to Exhibit 10(bk) to Form 10-K for the year ended
December 31, 1996.
10(bm) Amended Employment Agreement between Jean I. Abbott
and The Claridge at Park Place, Incorporated
effective November 1, 1996. Incorporated by reference
to Exhibit 10(bm) to Form 10-K for the year ended
December 31, 1996.
10(bn) Employment Agreement between Frank A. Bellis, Jr. and
The Claridge at Park Place, Incorporated effective
November 1, 1996. Incorporated by reference to
Exhibit 10(bn) to Form 10-K for the year ended
December 31, 1996.
10(bo) Employment Agreement between Glenn Lillie and The
Claridge at Park Place, Incorporated effective
February 1, 1997. Incorporated by reference to
Exhibit 10(bo) to Form 10-K for the year ended
December 31, 1996.
10(bp) Spreader Agreement of a Certain Mortgage, Assignment
of Leases and Rents, Security Agreement and Financing
Statement by The Claridge at Park Place, Incorporated
in favor of IBJ Schroder Bank & Trust Company, as
Collateral Trustee, dated January 28, 1997.
Incorporated by reference to Exhibit 10(bp) to Form
10-K for the year ended December 31, 1996.
10(bq) Spreader Agreement and Modification of Spreader
Agreement of a Certain Mortgage, Assignment of Leases
and Rents, Security Agreement and Financing Statement
by The Claridge at Park Place, Incorporated in favor
of IBJ Schroder Bank & Trust Company, as Collateral
Trustee, dated February 18, 1997. Incorporated by
reference to Exhibit 10(bq) to Form 10-K for the year
ended December 31, 1996.
10(br) Fifth Amendment to Operating Lease Agreement and
Fourth Amendment to Expansion Operating Lease
Agreement between The Claridge at Park Place,
Incorporated and Atlantic City Boardwalk Associates,
L.P. effective March 1, 1997. Incorporated by
reference to Exhibit 10(br) to Form 10-K for the year
ended December 31, 1996.
10(bs) Restructuring Agreement between The Claridge Hotel
and Casino Corporation, The Claridge at Park Place,
Incorporated and Atlantic City Boardwalk Associates,
L.P. effective March 1, 1997. Incorporated by
reference to Exhibit 10(bs) to Form 10-K for the year
ended December 31, 1996.
35
<PAGE>
12(a) Statement of Computation of Ratio of Earnings to
Fixed Charges. Incorporated by reference to Exhibit
12.1 to Form S-1 Registration Statement (file number
33-71550) dated November 12, 1993.
12(b) Statement of Computation of Ratio of Earnings to
Fixed Charges.
22(a) Subsidiaries of the Corporation. Incorporated by
reference to Exhibit 22(a) to Form 10-K for the year
ended December 31, 1995.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLARIDGE HOTEL AND CASINO CORPORATION
<TABLE>
<CAPTION>
<S> <C> <C>
Dated: March 30, 1998 By:/s/ ROBERT M. RENNEISEN By:/s/ JEAN I. ABBOTT
- ---------------------- -------------------------- ---------------------
Robert M. Renneisen Jean I. Abbott
Chief Executive Officer Chief Financial Officer and
Principal Accounting Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ DAVID W. BRENNER Chairman, Director March 30, 1998
- ---------------------
David W. Brenner
/s/ ROBERT M. RENNEISEN President, Director March 30, 1998
- ------------------------ (Chief Executive Officer)
Robert M. Renneisen
/s/ SHANNON L. BYBEE Director March 30, 1998
- --------------------
Shannon L. Bybee
/s/ A. BRUCE CRAWLEY Director March 30, 1998
- ---------------------
A. Bruce Crawley
/s/ NED P. DEWITT Director March 30, 1998
- -----------------
Ned P. DeWitt
/s/ JAMES M. MONTGOMERY Director March 30, 1998
- ------------------------
James M. Montgomery
/s/ MARK H. SAYERS Director March 30, 1998
- -------------------
Mark H. Sayers
/s/ JEAN I ABBOTT Executive Vice President March 30, 1998
- ------------------ (Chief Financial Officer/
Jean I. Abbott Treasurer/Principal
Accounting Officer)
37
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Reference In
Report on
Form 10-K
-------------
Independent Auditors' Report........................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1996........... F-3
Consolidated Statements of Operations and Accumulated (Deficit)
Earnings for the Years Ended December 31, 1997, 1996 and 1995...... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.................................. F-5
Notes to Consolidated Financial Statements.......................... F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............ F-29
All other schedules for which provision is made in the applicable
accounting regulations promulgated by the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
The Claridge Hotel and Casino Corporation:
We have audited the consolidated financial statements of The Claridge Hotel
and Casino Corporation and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Claridge Hotel and Casino Corporation and subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Corporation will continue as a
going concern. As discussed in Note 2 to the consolidated financial
statements, the Corporation has suffered recurring losses from operations and
has experienced diminishing liquidity as a result of a deterioration in its
cash flow and limited availability of working capital sources that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are discussed in Note 2. The
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 4, 1998
F-2
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 12,424 8,532
Receivables, net (including $19,878 and $18,392 in 1997
and 1996, respectively, due from Partnership) (note 4) 21,467 19,744
Inventories 270 278
Prepaid expenses and other current assets 2,935 3,199
-------- -------
Total current assets 37,096 31,753
-------- -------
Property and equipment (note 5) 47,579 48,818
Less accumulated depreciation and amortization (15,485) (13,630)
-------- -------
Net property and equipment 32,094 35,188
-------- -------
Long-term receivables due from Partnership (note 4) 75,465 92,120
Deferred charges at cost, less accumulated amortization 2,020 2,575
Other assets (note 6) 3,705 2,527
-------- -------
$150,380 164,163
======== =======
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (note 9) $ 39 -0-
Accounts payable 3,202 2,997
Loan from the Partnership (note 7) 3,600 3,600
Other current liabilities (note 8) 34,393 32,430
-------- -------
Total current liabilities 41,234 39,027
-------- -------
Long-term debt (note 9) 85,023 85,000
Deferred rent due to Partnership (note 13) 16,506 28,010
Deferred income taxes (note 12) 2,580 2,581
Other noncurrent liabilities (note 10) 20,850 19,379
Commitments and contingent liabilities (notes 13 and 15)
Stockholders' equity (notes 16 and 17):
Common stock
Class A, par value $.001, authorized and
issued 5,062,500 shares 5 5
Additional paid-in capital 5,048 5,048
Accumulated (deficit) earnings (20,866) (14,887)
Treasury stock, 91,770 and 16,436 Class A
shares at cost in 1997 and 1996, respectively -0- -0-
-------- -------
Total stockholders' (deficiency) equity (15,813) (9,834)
-------- -------
$150,380 164,163
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Accumulated (Deficit) Earnings
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Revenue:
Casino $165,371 163,369 169,607
Hotel 9,456 9,150 9,195
Food and beverage 19,609 20,602 19,769
Interest from the Partnership 14,230 16,007 17,195
Interest, other 439 753 1,772
Other 2,920 2,671 2,136
-------- -------- --------
212,025 212,552 219,674
Less promotional allowances (note 11) 19,272 19,241 16,326
-------- -------- --------
Net revenues 192,753 193,311 203,348
-------- -------- --------
Costs and expenses:
Casino 96,760 100,220 92,571
Hotel 2,570 2,673 3,224
Food and beverage 9,811 10,938 11,783
Other 2,617 2,967 2,961
Rent expense to the Partnership (note 13) 30,554 38,561 37,638
Rent expense, other (note 13) 1,283 1,484 1,512
General and administrative 27,157 30,539 28,641
Gaming taxes 13,215 13,053 13,583
Reinvestment obligation expenses (note 6) 684 836 1,442
Provision for uncollectible accounts 218 238 (160)
Depreciation and amortization 3,296 3,239 2,915
Interest expense, other 10,567 9,350 9,516
-------- -------- --------
Total costs and expenses 198,732 214,098 205,626
-------- -------- --------
Loss before income taxes (5,979) (20,787) (2,278)
Income tax benefit (note 12) -0- (5,398) (370)
-------- -------- --------
Net loss (5,979) (15,389) (1,908)
-------- -------- --------
Accumulated (deficit) earnings at beginning of period (14,887) 502 2,410
-------- -------- --------
Accumulated (deficit) earnings at end of period $(20,866) (14,887) 502
======== ======== ========
Net loss per share - basic (note 3(i)) $ (1.20) (3.05) (.38)
======== ======== ========
</TABLE>
See accompanying notes to consolidatedfinancial statements.
F-4
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,979) (15,389) (1,908)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,296 3,239 2,915
Deferred rent to the Partnership (11,504) (2,737) (2,386)
Deferred interest receivable and
discount from the Partnership (1,752) (1,524) (1,326)
Reinvestment obligation expenses 684 836 1,442
Loss (gain) on disposal of assets 30 (138) (33)
Deferred income taxes - noncurrent (1) (4,542) (762)
Change in assets and liabilities:
Receivables, net, excluding current portion
of long-term receivables (228) 338 (629)
Inventories 8 1 45
Prepaid expenses and other current
assets excluding current portion of
reinvestment obligation credit 264 (491) 3,888
Accounts payable 205 (883) 1,098
Other current liabilities 1,963 (510) 2,319
Other noncurrent liabilities 1,471 (850) 229
------- ------- ------
Net cash flows (used in) provided by
operating activities (11,543) (22,650) 4,892
------- ------- ------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements
F-5
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont'd.)
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from investment activities:
Increase in deferred charges $ (7) (195) (59)
Additions to property and equipment, net (136) (13,455) (17,493)
Additions to other assets (1,905) (1,436) 1,557
Proceeds from disposition of property 587 184 75
Increase in long-term receivables (208) (3,508) (2,483)
Receipt of long-term receivables 17,120 13,845 12,014
-------- ------- -------
Net cash flows provided by (used in) investment activities 15,451 (4,565) (6,389)
-------- ------- -------
Cash flows from financing activities:
Payment of long-term debt (16) -0- -0-
-------- ------- -------
Net cash flows used by financing activities (16) -0- -0-
-------- ------- -------
Increase (decrease) in cash and cash equivalents 3,892 (27,215) (1,497)
Cash and cash equivalents at beginning of period 8,532 35,747 37,244
-------- ------- -------
Cash and cash equivalents at end of period $ 12,424 8,532 35,747
======== ======== =======
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized $ 10,135 8,918 9,084
======== ======== ========
Income taxes paid $ -0- -0- 677
======== ======== ========
Non-cash financing and investing activities:
Capital lease obligation incurred to acquire
Casino Assets $ 78 -0- -0-
======== ======== ========
</TABLE>
See accompanying notes to consolidatedfinancial statements.
F-6
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. THE CORPORATION
The Claridge Hotel and Casino Corporation (the "Corporation"), was
formed on August 26, 1983 to hold all of the shares of capital stock
of The Claridge at Park Place, Incorporated ("New Claridge"), which
was formed on August 29, 1983. On October 31, 1983, New Claridge
acquired certain assets of The Claridge Hotel and Casino (the
"Claridge"), including gaming equipment (the "Casino Assets"), from
Del E. Webb New Jersey, Inc. ("DEWNJ"), a wholly-owned subsidiary of
Del Webb Corporation ("Webb"); leased certain other of the Claridge's
assets, including the buildings, parking facility and non-gaming,
depreciable, tangible property of the Claridge (the "Hotel Assets"),
from Atlantic City Boardwalk Associates, L.P. (the "Partnership");
subleased the land on which the Claridge is located from the
Partnership; assumed certain liabilities related to the acquired
assets; and undertook to carry on the business of the Claridge Casino
Hotel, a facility operating in Atlantic City, New Jersey.
In October 1988, the Corporation and New Claridge entered into an
agreement to restructure the financial obligations of the Corporation
and New Claridge (the "Restructuring Agreement"). The restructuring,
which was consummated in June 1989, resulted in (i) a reorganization
of the ownership interests in the Claridge; (ii) modifications of the
rights and obligations of certain lenders; (iii) satisfaction and
termination of the obligations and commitments of Webb and DEWNJ under
the original structure; (iv) modifications of the lease agreements
between New Claridge and the Partnership; and (v) the forgiveness by
Webb of substantial indebtedness.
On January 31, 1994, the Corporation completed an offering of $85
million of First Mortgage Notes (the "Notes") due 2002, bearing
interest at 11 3/4%. The Notes are secured by (i) a non-recourse
mortgage granted by the Partnership representing a first lien on the
Hotel Assets, (ii) a pledge granted by the Corporation of all
outstanding shares of capital stock of New Claridge, and (iii) a
guarantee by New Claridge. New Claridge's guarantee of the Notes is
secured by a collateral assignment of the second lien Expandable
Wraparound Mortgage, and by a lien on the Claridge's gaming and other
assets, which lien will be subordinated to liens that may be placed on
those gaming and other assets to secure any future revolving credit
line arrangement. On January 28, 1997, New Claridge entered into an
agreement to subject the new self-parking garage to the lien of the
mortgage; such lien will not be subordinated to any lien which may be
placed on New Claridge's gaming and other assets to secure any future
revolving credit line arrangement. Interest on the Notes is payable
semiannually on February 1 and August 1 of each year. (See Note 9,
"Long-Term Debt".)
The net proceeds of the Notes, totalling $82.2 million net of fees and
expenses, were used as follows: (i) to repay in full on January 31,
1994, the Corporation's 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; (ii) to expand New Claridge's casino
capacity by 12,000 square feet in 1994, including the addition of
approximately 500 slot machines and the relocation of two restaurants
and their related kitchens; (iii) to purchase property in 1995, and
construct on that property a self-parking garage, which opened in
mid-1996; and (iv) to acquire the Contingent Payment option in 1996
(see Note 10, "Other Noncurrent Liabilities").
F-7
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
2. CURRENT DEVELOPMENTS
During 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's obligations to pay interest on
the Notes, as well as to make at least some moderate capital
improvements. Commencing in the latter part of 1995, however,
competition in the Atlantic City casino market for bus customers, a
principal source of customers for the Claridge at the time, increased;
this competition intensified even more during 1996 as additional
casino square footage was added, principally due to the opening of the
Trump World's Fair casino. During 1996, the average coin incentive
issued per bus patron at the Claridge increased to approximately $19,
from approximately $13 in 1995. Total cash incentives issued to
Claridge's casino patrons (in the form of coin to play slot machines
and gaming chips to play table games) increased to approximately $30.5
million in 1996, from approximately $25.2 million in 1995. While the
Corporation's promotional costs increased significantly, total casino
revenues in 1996 actually decreased from 1995 levels. It had been the
expectation of the Corporation that, upon opening of its new
self-parking garage, the Corporation would be able to reduce its
reliance on the bus patron market; however, the Corporation was forced
to close the garage facility on July 10, 1996, only ten days after its
opening, following a fatal accident. Because the facility was not able
to reopen until the end of September 1996, the Corporation lost any
possible benefit of the facility during the normally busy summer
season. In addition, severe winter weather in the first quarter of
1996 adversely affected revenues. As a result, the Corporation
experienced a net loss for 1996 of $15.4 million, compared to a net
loss of $1.9 million in 1995.
In late July 1996, management of the Corporation determined that due
to the serious deterioration in the Corporation's cash flow, that
without a significant improvement in its operating results, it was
unlikely that the Corporation would be able to meet its obligations to
pay interest on the Notes beyond the August 1996 payment. In addition
to taking steps to conserve cash by reducing various operating
expenses, the Corporation engaged a financial advisor, Dillon, Read &
Co., Inc., to assist in formulating a proposal to the holders of the
Notes to restructure the Corporation's obligations under the Notes. At
the same time, the Corporation was working with Dillon, Read & Co.,
Inc. to attempt to find a buyer of the Corporation, or an investor
that would be in a position to inject additional capital into the
Corporation to enable the Corporation to meet its ongoing obligations.
The Corporation did not receive any acceptable proposals in regards to
the possible sale of the Corporation.
In November 1996, while the sales efforts were continuing, the
Corporation announced that there was a strong likelihood that the
Corporation would be unable to pay the interest due on the Notes on
February 3, 1997. Accordingly, management, working together with
financial and legal advisors, formulated a plan for restructuring the
Corporation's obligations. The terms of the proposed plan were
presented to the noteholders at a meeting held on December 3, 1996.
On January 12, 1997, management of the Corporation was contacted,
through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a
possible sale of the Corporation to Hilton, and shortly thereafter,
the Corporation began negotiations with Hilton. On January 30, 1997,
the Corporation issued a press release indicating that the Corporation
would not make the interest payment due on the Notes on February 3,
1997, and that the Corporation had entered
F-8
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
2. CURRENT DEVELOPMENTS (cont'd.)
negotiations with Hilton regarding acquisition of the Corporation by
Hilton through a prepackaged bankruptcy plan. At that time, a
representative of Hilton indicated that Hilton had acquired
approximately 35% to 40% of the Notes. On February 5, 1997, three
holders of the Notes, who were members of the unofficial committee
which they had formed, filed a petition for involuntary bankruptcy
against the Corporation in the bankruptcy court for the District of
New Jersey.
Contemporaneously, the same three holders of the Notes filed a related
state court lawsuit against the Corporation, New Claridge, the
Partnership, certain officers and directors of the Corporation, and
the general partners of the Partnership. On March 4, 1997, contrary to
earlier expectations, the Corporation was able to pay the interest
that was due on the Notes on February 3, 1997, under the 30-day grace
period allowed in accordance with the terms of the indenture governing
the Notes (the "Indenture"). In addition, the Corporation reached
agreement with the unofficial committee of noteholders, as well as the
three holders of the Notes, providing for the joint dismissal of the
involuntary bankruptcy petition and the related state court lawsuit.
On March 19, 1997, an order was entered dismissing the involuntary
bankruptcy petition; as part of that order, a settlement agreement was
entered whereby the state court lawsuit was also dismissed.
Negotiations with Hilton regarding acquisition of the Corporation
terminated in April 1997. Management of the Corporation believes that
Hilton subsequently disposed of its ownership in the Notes, and that a
part or all of these Notes are now owned by an entity or entities
which are controlled by Carl Icahn.
The Corporation had sufficient cash to pay the interest on the Notes
on March 4, 1997 due to several events: (i) cash flow from operations
for January and February 1997 improved significantly over what had
been expected; (ii) effective March 1, 1997, the Operating Lease and
Expansion Operating Lease were amended to provide for the deferral of
basic rent of $1.3 million on March 1, 1997 (see Note 13, "Operating
Lease"); and (iii) on February 28, 1997, New Claridge entered into an
agreement with Thermal Energy Limited Partnership I ("Atlantic
Thermal"), pursuant to which Atlantic Thermal was granted an exclusive
license for a period of twenty years to use, operate and maintain
certain steam and chilled water production facilities at the Claridge.
In consideration for this license agreement, Atlantic Thermal paid New
Claridge $1.5 million.
As discussed, the Corporation experienced recurring losses and serious
deterioration in its cash flow in 1996. Since the Corporation does not
have substantial cash reserves or access to a line of credit, the
Corporation needed to experience significant improvement in operating
results in 1997 over 1996 levels in order to meet its on-going
obligations, including the interest due on the Notes. Operating
results in 1997 did improve over 1996 levels, due primarily to the
positive impact of the availability of the self-parking garage, lower
bus package pricing, 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,
and will continue to consider various refinancing alternatives,
including
F-9
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
2. CURRENT DEVELOPMENTS (cont'd.)
a sale of the Corporation. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Corporation be unable
to continue in existence.
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) 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
Claridge Gaming Incorporated ("CGI"), which was formed in March
1994 for the purpose of developing gaming opportunities in
other jurisdictions. All material intercompany accounts and
transactions have been eliminated in consolidation.
The separate financial statements of New Claridge, which is a
guarantor of the Notes, are not included because the aggregate
assets, liabilities, operations and equity of New Claridge are
substantially equivalent to the assets, liabilities, operations
and equity of the Corporation on a consolidated basis, and
because the separate financial statements and other disclosures
concerning New Claridge are not deemed material to holders of
Notes. There are no separate financial statements for CGI,
which is the only other subsidiary of the Corporation and is
not a guarantor of the Notes.
b) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-10
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
c) Cash and Cash Equivalents
Cash and cash equivalents include investments in interest
bearing repurchase agreements in government securities and
other investments as permitted in accordance with the terms of
the indenture governing the Notes, with maturities of three
months or less when purchased. Interest income is recorded as
earned.
d) Casino Receivables and Revenues
Credit is issued to certain casino customers and the
Corporation records all unpaid credit as casino receivables on
the date the credit was issued. Allowances for estimated
uncollectible casino receivables are provided to reduce these
receivables to amounts anticipated to be collected. The
Corporation recognizes as casino revenue, the net win (which is
the difference between amounts wagered and amounts paid to
winning patrons) from gaming activity.
e) Inventories
Inventories are stated at the lower of cost or market, cost
being determined principally on a first-in, first-out basis.
f) Property and Equipment
Property and equipment are recorded at cost, and are
depreciated using the straight-line method over the following
estimated useful lives:
Buildings and improvements 39 years
Gaming equipment 5 years
Other equipment 7 years
Interest costs related to the construction of the garage
facility were capitalized, and are being amortized over the
estimated useful life of the garage.
g) Deferred Charges
Deferred charges primarily relate to the January 31, 1994
issuance of the Notes. These charges, which totaled
approximately $3.7 million, are being amortized over the term
of the Notes. Accumulated amortization of these charges as of
December 31, 1997 and 1996 was $1,831,000 and $1,364,000,
respectively.
F-11
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
h) Income Taxes
Deferred income taxes are provided for temporary differences
between financial statement reporting and income tax reporting
for rent leveling provisions, asset basis differences, and
various other expenses recorded for financial statement
purposes.
i) Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net loss by
the weighted average shares outstanding (4,995,219 for the year
ended December 31, 1997, 5,046,064 for the year ended December
31, 1996, and 5,050,792 for the year ended December 31, 1995).
Basic and diluted net loss per share are the same for the years
ended December 31, 1997, 1996, and 1995.
F-12
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
4. RECEIVABLES
Receivables at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
Current Receivables 1997 1996
---- ----
(in thousands)
<S> <C> <C>
Casino, less allowance for uncollectible accounts
of $717,000 and $846,000 at
December 31, 1997 and 1996, respectively $ 1,312 1,097
Hotel, less allowance for uncollectible accounts
of $31,000 and $39,000 at December 31,
1997 and 1996, respectively 102 133
Interest receivable due from the Partnership 1,014 1,212
Current portion Expandable Wraparound
Mortgage due from the Partnership 14,000 12,000
Current portion of FF&E Promissory notes 2,448 2,791
Current portion of Expansion/Construction
promissory note 2,167 2,329
Other, less allowance for uncollectible accounts
of $10,000 and $14,000 at December 31,
1997 and 1996, respectively 424 182
-------- -------
$ 21,467 19,744
======== =======
Long-Term Receivables
$127,000,000 Expandable Wraparound Mortgage 14%, maturities
through September 30, 2000 (net of $6,539,000 discount and
$8,291,000 discount at
December 31, 1997 and 1996, respectively) $ 40,461 52,709
Deferred interest receivable, due
September 30, 2000 20,000 20,000
FF&E promissory notes, 14% 15,004 17,244
Expansion/Construction promissory note, 14% -0- 2,167
-------- -------
$ 75,465 92,120
======== =======
</TABLE>
The Expandable Wraparound Mortgage Loan Agreement ("Expandable
Wraparound Mortgage") was executed and delivered by the Partnership
to New Claridge and is secured by all property of the Partnership. As
part of the agreement, New Claridge is obligated to make payments
required under any senior mortgage indebtedness, so long as the
Partnership is not in default on its obligations under the Expandable
Wraparound Mortgage. $20 million in interest was deferred between
1983 and 1988 and will be due upon maturity. Principal payments
required under the Expandable Wraparound Mortgage commenced in 1988.
F-13
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
4. RECEIVABLES (cont'd.)
The Expandable Wraparound Mortgage also includes a provision whereby
New Claridge will loan the Partnership up to $25 million in the form
of FF&E promissory notes ("FF&E Loans"), secured under the Expandable
Wraparound Mortgage, for the purchase of property and equipment
("FF&E Replacements"). One half of the FF&E Loan principal is due in
48 months and the remaining balance is due 60 months from the date of
issuance of the respective FF&E Loan. During the year ended December
31, 1998, $2,448,000 of principal payments will become due. In
connection with the offering of $85 million of Notes on January 31,
1994, the Corporation agreed to use not less than $8 million from the
net proceeds of the offering to finance certain internal improvements
to the Claridge which were funded through additional FF&E 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.
In 1986, the Expandable Wraparound Mortgage was increased up to $17
million to provide the Partnership with funding for the construction
of an expansion. Effective on the date that the expansion opened to
the public (August 28, 1986), the Partnership commenced making level
monthly payments of principal and interest so as to repay on
September 30, 1998, in full, the principal balance of this increase
in the Expandable Wraparound Mortgage. The Expandable Wraparound
Mortgage was amended to require, in addition to the above, principal
payments (in equal monthly installments) due during the years 1988
through 1998 in escalating amounts totalling $80 million and on
September 30, 2000 a balloon payment of $67 million which includes
$20 million of deferred interest.
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. 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.
F-14
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of the
following:
1997 1996
------- ------
(in thousands)
Gaming equipment $18,366 19,153
Land and land improvements 7,598 8,100
Building 20,070 20,100
Leasehold improvements 745 745
Capital lease asset 693 613
Other equipment 107 107
------- -------
47,579 48,818
Less accumulated depreciation
and amortization 15,485 13,630
------- -------
Net property and equipment $32,094 35,188
------- -------
6. OTHER ASSETS
The Casino Control Act (the "Act") provides for the imposition of an
investment obligation, calculated at 1.25% of the total revenues from
gaming operations, less the provision for uncollectible accounts. If
a casino licensee opts not to make the investment as required, it is
assessed an alternative tax of 2.5% of total gaming revenues less the
provision for uncollectible accounts. The licensee can satisfy its
obligation by making a direct investment in a project approved by the
Casino Reinvestment Development Authority ("CRDA"), the agency
responsible for administering this portion of the Act, or it can buy
bonds issued by the CRDA. These bonds bear interest at two-thirds of
market rates, as set forth in the Act.
New Claridge has opted to deposit its reinvestment obligation funds
with the State Treasurer. Through December 31, 1997, the Corporation
has deposited $18,531,000 of which $3,026,000 has been used to
purchase bonds issued by the CRDA. Since interest on these bonds and
funds deposited is paid at a discounted rate, New Claridge records a
valuation allowance of approximately one-third of the reinvestment
obligation. In addition, in January 1990, it was determined that
certain bonds issued by the CRDA had become impaired, and that the
payment of principal and interest was uncertain. As a result, New
Claridge has recorded a valuation allowance for the full amount of
its investment in these bonds, totalling $1,654,000.
From time to time, New Claridge has made donations to the CRDA of
funds which had previously been deposited with the State Treasurer.
In exchange for these donations, which have totaled $12,025,000
through December 31, 1997, New Claridge received credits towards
future obligations or cash credits, from the CRDA equal to 51% of the
donations. As of December 31, 1997, all of these credits had been
used.
F-15
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
7. 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 is not due and payable until such
time as the full or partial satisfaction of the Expandable Wraparound
Mortgage and the First Mortgage has been made in connection with a
refinancing or sale of all or a partial interest in the Claridge.
Interest which accrues at 12% per annum is payable in full upon
maturity. As of December 31, 1997, such interest, which is included
in other current liabilities, amounted to $3,690,000.
8. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 1997 and 1996 consist of
the following:
1997 1996
---- -----
(in thousands)
Deferred rent, current $15,078 15,078
Deferred rent, 03/01/97 1,075 -0-
Accrued payroll and related benefits 6,508 6,187
Accrued interest, Notes 4,161 4,161
Auto/General insurance reserves 1,488 1,228
Accrued interest due to Partnership 3,690 3,258
Other current liabilities 2,393 2,518
------- ------
$34,393 32,430
======= ======
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. The deferred rent liability
will become payable (i) upon a sale or refinancing of the Claridge;
(ii) upon full or partial satisfaction of the Expandable Wraparound
Mortgage; and (iii) upon full satisfaction of any first mortgage then
in place.
The Fifth Amendment to the Operating Lease and the Fourth Amendment
to the Expansion Operating Lease, which were effective on March 1,
1997 provided for the abatement of $867,953 of basic rent and for the
deferral of $1.3 million of basic rent on March 1, 1997, and for
additional monthly abatements of rent beginning April 1, 1997. The
$1.3 million of basic rent deferred on March 1, 1997 is to be paid to
the Partnership as additional rent of $25,000 per month for the
period April 1, 1997 through December 31, 1997, and of $50,000 per
month for the year 1998 and thereafter until paid in full (subject to
acceleration under certain circumstances).
F-16
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
9. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the
following:
1997 1996
---- -----
(in thousands)
11 3/4% Notes due 2002 $ 85,000 85,000
Capital lease obligation 62 -0-
-------- ------
85,062 85,000
Less current installments 39 -0-
-------- ------
$ 85,023 85,000
======== ======
On January 31, 1994, the Corporation completed an offering of $85
million of Notes due 2002, bearing interest at 11 3/4%. The Notes are
secured by (i) a non-recourse mortgage granted by the Partnership
representing a first lien on the Hotel Assets, (ii) a pledge granted
by the Corporation of all outstanding shares of capital stock of New
Claridge, and (iii) a guarantee by New Claridge. New Claridge's
guarantee of the Notes is secured by a collateral assignment of the
second lien Expandable Wraparound Mortgage, and by a lien on the
Claridge's gaming and other assets, which lien will be subordinated
to liens that may be placed on those gaming and other assets to
secure any future revolving credit line arrangement. On January 28,
1997, New Claridge entered into an agreement to subject the new
self-parking garage to the lien of the mortgage; such lien will not
be subordinated to any lien which may be placed on New Claridge's
gaming and other assets to secure any future revolving credit line
arrangement. Interest on the Notes is payable semiannually on
February 1 and August 1 of each year. A portion of the net proceeds
of $82.2 million was used to repay in full the Corporation's
outstanding debt under 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.
Beginning in 1995, and annually thereafter, the Corporation is
required to make an offer ("Excess Cash Offer"), to all holders of
Notes, to purchase at 100% of par (plus accrued and unpaid interest,
if any, to the purchase date), the maximum amount of Notes that may
be purchased with 50% of the Corporation's "Excess Cash" (as defined
in the Indenture), from the preceding year. If less than $5 million
is available to make such purchases (i.e., if Excess Cash is less
than $10 million), no such offer needs to be made. The commencement
date of any required Excess Cash Offer must be not later than 30 days
after the publication of the Corporation's audited financial
statements for the immediately preceding fiscal year. For the year
ended December 31, 1997, the Corporation's Excess Cash was less than
$10 million, and therefore the Corporation is not required to make an
Excess Cash Offer in 1998.
The Indenture restricts the declaration or payment of dividends or
distributions or redemptions of capital stock by the Corporation and
its subsidiaries, other than (i) dividends or distributions payable
in equity interests of the Corporation or such subsidiaries, (ii)
dividends or distributions payable to the Corporation or any
wholly-owned subsidiary, or (iii) dividends by a subsidiary on its
common stock if such dividends are paid pro-rata to all holders of
such common stock.
F-17
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
10. OTHER NONCURRENT LIABILITIES
Pursuant to the Restructuring Agreement, Webb retained an interest,
which was assigned to 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 December 31,
1997, accrued interest would have amounted to approximately $56.2
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 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. Upon exercise of the option, the purchase price of
the Contingent Payment would have been $10 million, plus interest at
10% per annum for the period from January 1, 1997 to the date of
payment of the purchase price if the purchase occurred after December
31, 1996. As a result, if the option was exercised, any obligation to
pay the accrued interest, as discussed above, would have been
eliminated, except in respect of the obligation to the Releasing
Investors. The purchase price may have also increased in an amount
not to exceed $10 million if future distributions to Releasing
Investors exceeded $20 million.
Given the recent operating results (see Note 2, "Current
Developments"), the Corporation was not able to exercise this
Contingent Payment option, and it expired in accordance with its
terms on December 31, 1997.
11. PROMOTIONAL ALLOWANCES
The retail value of complimentary rooms, food and beverages and other
complimentaries furnished to patrons is included in gross revenue and
then deducted as promotional allowances. The estimated cost of
providing such promotional allowances for the years ended December
31, 1997, 1996 and 1995 has been allocated to casino expenses as
follows (in thousands):
F-18
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
11. PROMOTIONAL ALLOWANCES (cont'd.)
1997 1996 1995
---- ---- ----
Hotel $ 3,828 3,339 2,944
Food and beverage 11,815 12,001 9,655
Entertainment 1,134 1,725 784
------- ------ ------
Total $16,777 17,065 13,383
======= ====== ======
12. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis.
The benefit for income taxes is comprised of the following (in
thousands):
1997 1996 1995
---- ---- ----
Current:
Federal $ -0- -0- (285)
State -0- -0- -0-
Deferred -0- (5,398) (85)
-------- ------ ------
$ -0- (5,398) (370)
======== ====== ======
The benefit for income taxes differs from the amount computed at the
statutory rate as follows (in thousands):
1997 1996 1995
---- ---- ----
Computed "expected" tax benefit $(2,033) (7,068) (775)
Increase (reduction) in income taxes
resulting from:
Change in the valuation allowance 2,311 2,460 -0-
State income tax, net of federal
income tax benefit (359) (1,247) (137)
Meals and entertainment 454 550 550
Contingent Payment option (400) -0- -0-
Other 27 (93) (8)
-------- ------ ------
$ -0- (5,398) (370)
======== ====== =====
F-19
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
12. INCOME TAXES (cont'd.)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below (in
thousands):
1997 1996
---- ----
Deferred tax assets:
Net operating loss $ 14,915 9,525
Rent leveling 7,476 11,980
Accrued expenses 1,460 1,413
Deferred revenue 578 -0-
Tax credit 940 940
Other 1,922 1,323
-------- -------
Total gross deferred tax assets 27,291 25,181
Less valuation allowance (5,193) (2,882)
-------- --------
Net deferred tax assets 22,098 22,299
-------- -------
Deferred tax liabilities:
Gaming equipment, due to differences in
depreciation (1,019) (1,178)
Difference between book and tax basis of
Expandable Wraparound Mortgage receivable (22,745) (22,832)
Difference between book and tax basis of
receivables (912) (868)
Other (2) (2)
-------- -------
Total gross deferred tax liabilities (24,678) (24,880)
-------- -------
Net deferred tax liability $ (2,580) (2,581)
======== =======
The valuation allowance for deferred tax assets as of December 31,
1996 was $2,882,000. The net change in the total valuation allowance
for the year ended December 31, 1997 was an increase of $2,311,000.
The Corporation recorded an income tax benefit of $-0-, $5,398,000,
and $370,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, which represents the tax benefit expected from the
carryforward of Federal net operating losses net of increased
deferred tax credits.
At December 31, 1997, the Corporation had net operating loss
carryforwards for federal income tax purposes of approximately $35.2
million. These net operating loss carryforwards are available to
offset future federal taxable income, if any, in the amounts of $21.7
million through 2016 and $13.5 million through 2017. The Corporation
also has tax credit carryforwards for
F-20
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
12. INCOME TAXES (cont'd.)
income tax purposes of approximately $940,000, which are available
to reduce future federal income taxes, if any, through 2002.
As a result of the restructuring in 1989, the amount of debt forgiven
resulted in the loss or reduction of various tax attributes including
tax operating loss carry forwards of $30,400,000, unused tax credits
of $1,041,000 and reduction in tax basis of assets by $89,178,000. As
a result of the reduction in tax basis of assets, cash payments for
income taxes will significantly exceed income tax expense for
financial statement purposes in future years. The above amounts have
been adjusted to reflect settlements of the Internal Revenue Service
("IRS") audits of the years 1983 through 1987. During 1995 the
Corporation received notice from the 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 has set a trial date for this
case of June 1, 1998. The Corporation believes the ultimate
resolution of the case will not result in a material impact on the
Corporation's consolidated financial statements.
13. OPERATING LEASE
New Claridge leases the Hotel Assets and the land on which the
Claridge is located from the Partnership under an Operating Lease for
an initial lease term of 15 years with three 10-year renewal options.
As of December 31, 1997, basic rent for the remainder of the initial
lease term, which ends September 30, 1998, is $32,531,000 (before any
abatements, as discussed below). Basic rent during the renewal term
will be calculated pursuant to a formula, with such rent not to be
more than $29,500,000 nor less than $24,000,000 for the lease year
commencing October 1, 1998 through September 30, 1999 and,
subsequently, not to be greater than 10% more than the basic rent for
the immediately preceding lease year in each lease year thereafter.
New Claridge is also required to pay as additional rent amounts
including certain taxes, insurance and other charges relating to the
occupancy of the land and Hotel Assets, certain expenses and debt
service relating to furniture, fixture and equipment replacements and
building improvements, and the general and administrative costs of
the Partnership. Also, additional rent payments are required based
upon fixed assets purchased by the Partnership (the FF&E
Replacements, Note 4) and then leased to New Claridge.
New Claridge entered into an Expansion Operating Lease Agreement with
the Partnership whereby New Claridge leased the expansion facility
for an initial term beginning March 17, 1986 and ending on September
30, 1998 with three 10-year renewal options. Basic annual rent
payable during the initial term of the Expansion Operating Lease was
$3,870,000 in 1986 (prorated based on the day that the Expansion
Improvements opened to the public) and
F-21
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
13. OPERATING LEASE (cont'd.)
determined based on the cost of the construction of the Expansion
Improvements. Annually thereafter the rental amount is adjusted based
on the Consumer Price Index but any increase may not exceed two
percent per annum. Basic annual rent for 1997, 1996 and 1995 amounted
to $4,812,000, $4,718,000, and $4,625,000, respectively. Basic annual
rent during the renewal term will be calculated pursuant to a
formula, with such rent not to be more than $3,000,000 nor less than
$2,500,000 and not to be greater than 10% more than the basic annual
rent for the immediately preceding lease year in each lease year
thereafter.
New Claridge is also required to pay as additional rent certain
expenses and the debt service relating to Furniture, Fixture and
Equipment Replacements and building improvements (collectively
"Expansion FF&E Replacements") for the expanded facility. The
Partnership will be required during the entire term of the Expansion
Operating Lease, and any subsequent renewal terms, to provide New
Claridge with Expansion FF&E Replacements and to provide facility
maintenance and engineering services to New Claridge. New Claridge is
obligated to lend the Partnership any amounts necessary to fund the
cost of Expansion FF&E Replacements. Any advances by New Claridge for
the foregoing will be secured under the Expandable Wraparound
Mortgage, in an amount up to $25,000,000. Thereafter, such advances
will be secured under separate security agreements.
For the years ended December 31, 1997, 1996 and 1995, total expense
resulting from the Operating Lease and Expansion Operating Lease
amounted to $30,554,000, $38,561,000, and $37,638,000, respectively,
of which ($11,504,000), ($2,737,000), and ($2,386,000), respectively,
of rental expense is attributable to the requirement under Statement
of Financial Accounting Standards No. 13 to provide a level rent
expense for those leases with escalating payments.
Effective with the consummation of the restructuring in June 1989,
the Operating Lease Agreement and the Expansion Operating Lease
Agreement were amended to provide for the deferral of $15,078,000 of
rental payments during the period July 1, 1988 through the beginning
of 1992, and to provide for the abatement of $38.8 million of basic
rent payable through 1998, thereby reducing the Partnership's cash
flow to an amount estimated to be necessary to meet the Partnership's
cash requirements. 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. On August 1, 1991, the
Operating Lease Agreement and Expansion Operating Lease Agreement
were further amended to revise the abatement provisions so that,
commencing January 1, 1991, for each calendar year through 1998, the
lease abatements may not exceed $10 million in any one calendar year,
and $38,820,000 in the aggregate. All of the $38.8 million of
available abatements had been fully utilized by the end of the first
quarter of 1997. Effective with the closing of the Restructuring on
June 16, 1989, lease expense recognized on a level basis was reduced
prospectively, from the use of a revised schedule of rent leveling
relative to the abatement of certain rents beginning in 1992.
The Fifth Amendment to the Operating Lease and the Fourth Amendment
to the Expansion
F-22
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
13. OPERATING LEASE (cont'd.)
Operating Lease, which were effective on March 1, 1997, provided for
the abatement of $867,953 of basic rent and for the deferral of
$1,300,000 of basic rent on March 1, 1997, and 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 was allowed in accordance with the 1989
restructuring will be recognized as a reduction to lease expense as
abated. In 1997, $9.0 million of rent in excess of the $38.8 million
was abated.
In conjunction with the Fifth Amendment to the Operating Lease and
the Fourth Amendment to the Expansion Operating Lease, as discussed
above, the Corporation, New Claridge and the Partnership entered into
a restructuring agreement, effective March 1, 1997, to modify certain
terms of the Expandable Wraparound Mortgage (see Note 4,
"Receivables"). In addition, under the March 1, 1997 restructuring
agreement, New Claridge agreed to exercise the first of three
ten-year renewal options extending the term of the Operating Lease
and Expansion Operating Lease through September 30, 2008.
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge has an option to purchase, on September 30, 1998,
the Hotel Assets and the underlying land for their fair market value
at the time the option is exercised, which in no event may be less
than an amount equal to the amount then outstanding under the
Expandable Wraparound Mortgage plus $2.5 million, plus any amount of
the $1.3 million of rent deferred on March 1, 1997 not then paid. If
New Claridge does not exercise this option on September 30, 1998, it
may exercise an option, on September 30, 2003, to purchase the Hotel
Assets and the underlying land on January 1, 2004, for their fair
market value at the time the option is exercised.
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.
New Claridge also leases supplemental office, warehouse, and surface
parking spaces in nearby lots. For the years ended December 31, 1997,
1996, and 1995, operating lease expense for these facilities amounted
to $1,283,000, $1,484,000, and $1,512,000, respectively. The minimum
future lease payments due under these leases total $757,000 in 1998,
$736,000 in 1999, $612,000 in 2000, $600,000 in 2001, and $600,000 in
2002.
F-23
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures about Fair Value of Financial Instruments" requires the
Corporation to disclose estimated fair value for its financial
instruments. The estimates of fair value are subjective in nature and
involve uncertainties and matters of significant judgement, and
therefore cannot be determined with precision; changes in these
assumptions could significantly affect the estimates.
The carrying amounts and estimated fair values of the Corporation's
financial instruments as of December 31, 1997 and 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 12,424 12,424 8,532 8,532
Long-term receivables
due from the Partnership (including
current portion) 94,080 n/a 109,240 n/a
Reinvestment obligation funds 3,619 3,619 2,263 2,263
Financial Liabilities:
Loan from the Partnership 3,600 n/a 3,600 n/a
Long term debt 85,023 83,323 85,000 68,000
Deferred rent due to the Partnership 16,506 n/a 28,010 n/a
Contingent payment 19,000 n/a 19,000 n/a
</TABLE>
The following assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents
The carrying amounts reflected on the Corporation's Consolidated
Balance Sheet approximate the fair value because of the short
maturity (90 days or less) of these instruments.
Reinvestment obligation funds
The reinvestment obligation funds, which are included in Other assets
on the Corporation's Consolidated Balance Sheet, consist of required
investments imposed by the Casino Control Act. The reinvestment
obligation funds are stated net of a valuation allowance reflecting
the below market interest rates associated with the investments. As a
result, the carrying values of these investments approximate their
fair values.
F-24
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (cont'd.)
Long-term debt
The fair value of the Corporation's long-term debt is estimated based
on the quoted market price of the Notes as of December 31, 1997 and
1996, respectively.
Long-term receivables due from Partnership, Loan from the
Partnership, Deferred rent due to the Partnership
Due to the nature of the relationship between the Corporation and the
Partnership, estimation of the fair value of the financial
instruments due to and due from the Partnership is not practical as
there is no trading market for these financial instruments. (See Note
4, "Receivables", Note 7, "Loan from the Partnership" and Note 13,
"Operating Lease", for a description of the terms of these
instruments.)
Contingent Payment
There is no market for the Contingent Payment; therefore, estimation
of the fair value of the Contingent Payment is not practical. (See
Note 10, "Other Noncurrent Liabilities" for a description of the
Contingent Payment and the option to purchase the Contingent
Payment.)
15. CONTINGENCIES
a) Licensing
On September 22, 1995, New Claridge was issued a four-year
casino license by the Commission for the period commencing
September 30, 1995.
b) Legal Proceedings
On July 10, 1996, ten days after its opening, a fatal
accident occurred at New Claridge's self-parking garage, in
which the vehicle of two patrons breached a cable restraint
system, permitting their vehicle to drive through the side
wall of the self-parking garage. The vehicle fell four
stories to the sidewalk and street below, killing both
occupants. As a result, New Claridge's self-parking garage
was closed until the end of September 1996, while various
investigations sought to determine the cause of the
accident. At the same time, New Claridge determined to
remove the exterior wall cable restraint system and replace
it with a rigid I-beam barrier system.
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. 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 garage, alleging negligence, breach of
warranty and
F-25
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
15. CONTINGENCIES (cont'd.)
breach of contract in the design and construction of the
garage. This proceeding is currently pending, with
arbitration scheduled to be held in April 1998.
The Corporation and New Claridge are also defendants in
various legal proceedings arising in the normal course of
business. In the opinion of management, it is not reasonably
likely that any such matters individually or collectively
would result in an outcome having a material adverse effect
on the consolidated financial statements.
16. RELATED PARTY TRANSACTIONS
a. The Restructuring Agreement provided for Webb to retain an
interest, which was assigned to the United Way of Arizona 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 in the sale or refinancing of the Claridge
facility in excess of the first mortgage loan. Webb was also
entitled to retain a seat on the Board of Directors of the
Corporation and New Claridge (a right it subsequently
relinquished). Effective with the closing of the
Restructuring on June 16, 1989, all or substantially all of
the financial, contractual, ownership, guarantee and other
relationships of the Corporation and New Claridge with Webb
were terminated.
b. The Partnership has a direct material interest in the
Expandable Wraparound Mortgage Loan Agreement, the Operating
Lease and the Expansion Operating Lease together with the
amendments thereto as described in the preceding notes.
Approximately 93% of the Corporation's common stock is owned
by persons who also own over 90% of the limited partnership
interests in the Partnership.
c. In February 1992, the Corporation's Board of Directors
adopted a Long-Term Incentive Plan (the "Plan") in which
certain key employees of the Corporation and/or New Claridge
participate. The Plan provides for the grant of the 273,938
shares of the Corporation's Class A stock, which were held
as treasury shares of the Corporation, and for the issuance
of 100 Equity Units. The aggregate value of the 100 Equity
Units is equal to 5.41 percent of certain amounts as further
defined in the Plan. Specified portions of the awarded
treasury shares and Equity Units held by participants vest
upon the attainment of specific goals as described in the
Plan. The treasury shares and Equity Units fully vest upon a
further restructuring or a change in control as defined in
the Plan. Payment with respect to the Equity Units will only
be made (a) upon the occurrence of a transaction in which
substantially all of the assets and business operations of
the Claridge entities are transferred to one or more
entities in a merger, sale of assets or other
acquisition-type transaction, (b) upon termination of
employment of any participant in the Plan within one year
after any change in control of the Corporation occurs, as
defined in the Plan, or (c) if the Corporation pays
dividends to its stockholders, if the Partnership makes
distributions to its partners, or if the
F-26
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
16. RELATED PARTY TRANSACTIONS (cont'd.)
Corporation or the Partnership makes certain distributions
under the Restructuring Agreement. On April 15, 1992, the
Commission approved the Plan and the treasury shares were
delivered to the participants. Upon the issuance of the
Notes and the repayment in full of the Corporation's
outstanding debt under the Loan Agreement, 25% of the shares
and Equity Units awarded under the Plan vested. A
participant is entitled to vote all awarded treasury shares
whether or not vested in such shares.
On June 5, 1995, the Corporation's Board of Directors
amended the Plan by creating 100 Additional Equity Units to
be issued to certain key employees and 100 Director Equity
Units to be issued to the individual members of the Board of
Directors (the "Directors"). The aggregate value of the
Additional Equity Units is 5.59 percent and the aggregate
value of the Director Equity Units is 4 percent of certain
amounts as further defined in the Plan. Vesting of the
Additional Equity Units occurs if a Transaction results in
the Claimholders of the Claridge receiving cash or
marketable securities having a certain value all as further
defined and described in the Plan. Vesting of the Director
Equity Units occurs according to a vesting schedule stated
in the Plan and also is tied to the occurrence of a
Transaction having a certain value.
17. PARENT COMPANY INFORMATION
The Corporation owns all of the outstanding common stock of New
Claridge, which it purchased for $5,000,000. The balance sheet
accounts of the Corporation as of December 31, 1997 and 1996 include
the following:
1997 1996
---- ----
(in thousands)
Cash $ -0- -0-
Investment in New Claridge 87,206 87,206
Other assets 12,631 10,404
-------- -------
Total assets $ 99,837 97,610
======= =======
Long-term debt $ 85,000 85,000
Other liabilities 12,932 10,871
Stockholders' equity 1,905 1,739
-------- -------
Total liabilities and
stockholders' equity $ 99,837 97,610
======== =======
For the years ended December 31, 1997, 1996, and 1995 the Corporation
recorded income of $10,070,000, $9,987,500 and $15,009,000,
respectively, representing dividends received from New Claridge to
fund the payment of interest on the Notes; this income is eliminated
in the consolidation with the financial statements of New Claridge.
In addition, in 1997 the Corporation recorded interest income of
$4,200 on a short-term investment. The Corporation's
F-27
<PAGE>
THE CLARIDGE HOTEL AND CASINO CORPORATION
Notes to Consolidated Financial Statements (Cont'd.)
17. PARENT COMPANY INFORMATION (cont'd.)
expenses for the years ended December 31, 1997, 1996 and 1995 amounted
to $9,909,000, $8,943,000, and $6,225,000, respectively, including
income tax benefit of $2,751,000, $1,868,000, and $4,235,000,
respectively. These amounts represent the results of operations of the
Corporation for the respective periods before equity in the results of
New Claridge. For the year ended December 31, 1997, New Claridge had
net income of $3,925,000, as compared to a net loss of $6,446,000 for
the year ended December 31, 1996 and net income of $4,317,000 for the
year ended December 31, 1995.
Changes in the Corporation's financial position for the years ended
December 31, 1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 166 1,045 8,784
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Amortization 524 496 468
Change in assets and liabilities:
Other assets (2,751) (2,683) (1,466)
Other liabilities 2,061 1,142 (7,788)
-------- ------ --------
Net cash flows used in operating activities -0- -0- (2)
-------- ------ --------
Decrease in cash and cash equivalents -0- -0- (2)
Cash and cash equivalents at
beginning of period -0- -0- 2
-------- ------ --------
Cash and cash equivalents at
end of period $ -0- -0- -0-
======== ======= =======
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized $ 10,075 8,918 8,850
======== ======= =======
Income taxes paid $ -0- -0- -0-
======== ======= =======
</TABLE>
F-28
<PAGE>
SCHEDULE II
THE CLARIDGE HOTEL AND CASINO CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Balance Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1997
Allowance for
Uncollectible Accounts $ 899 218 -0- 359 (a) 758
Year ended
December 31, 1996
Allowance for
Uncollectible Accounts $ 987 238 -0- 326 (a) 899
Year ended
December 31, 1995
Allowance for
Uncollectible Accounts $1,445 (160) -0- 298 (a) 987
</TABLE>
(a) Accounts written-off.
F-29
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
EX12(b) Statement of Computation of Ratio of Earnings to Fixed Charges.
<PAGE>
EXHIBIT 12(b)
THE CLARIDGE HOTEL AND CASINO CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Loss) income before income
taxes and extraordinary items $ (5,979) (20,787) (2,278) (9,294) 8,554
Add:
One-third of rent expense to
Partnership deemed
representative of interest 10,185 12,854 12,546 12,073 11,527
Interest expense 10,567 9,350 9,516 9,956 4,173
Amortization of capitalized
interest 57 28 -0- -0- -0-
-------- ------- ------ ------ ------
Income as adjusted $ 14,830 1,445 19,784 12,735 24,254
======== ======= ====== ====== ======
Fixed charges:
One-third of rent expense to
Partnership deemed
representative of interest $10,185 12,854 12,546 12,073 11,527
Interest expense 10,567 9,350 9,516 9,956 4,173
Capitalized interest -0- 1,069 1,138 -0- -0-
-------- ------- ------ ------ ------
Fixed charges $ 20,752 23,273 23,200 22,029 15,700
======== ======= ====== ====== ======
Ratio of earnings to fixed charges .71 .06 .85 .58 1.54
======== ======= ====== ====== ======
</TABLE>
Earnings in 1997, 1996, 1995, and 1994 were insufficient to cover fixed
charges by $5,922,000, $21,828,000, $3,416,000, and $9,294,000, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CLARIDGE
HOTEL AND CASINO CORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000730409
<NAME> CLARIDGE HOTEL AND CASINO CORPORATION
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,424,000
<SECURITIES> 0
<RECEIVABLES> 22,225,000
<ALLOWANCES> 758,000
<INVENTORY> 270,000
<CURRENT-ASSETS> 37,096,000
<PP&E> 47,579,000
<DEPRECIATION> 15,485,000
<TOTAL-ASSETS> 150,380,000
<CURRENT-LIABILITIES> 41,234,000
<BONDS> 85,023,000
0
0
<COMMON> 5,000
<OTHER-SE> (15,818,000)
<TOTAL-LIABILITY-AND-EQUITY> 150,380,000
<SALES> 0
<TOTAL-REVENUES> 192,753,000
<CGS> 0
<TOTAL-COSTS> 111,758,000
<OTHER-EXPENSES> 76,189,000
<LOSS-PROVISION> 218,000
<INTEREST-EXPENSE> 10,567,000
<INCOME-PRETAX> (5,979,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,979,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,979,000)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> 0
</TABLE>
