UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _____________________
Commission file number 33-27399
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
New Jersey 22-2469174
__________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Indiana Avenue & the Boardwalk, Atlantic City, New Jersey 08401
(Address of principal executive offices) (Zip Code)
(609) 340-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [ ]
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
INDEX
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Introductory Note to Financial Statements 2
Balance Sheets As of September 30, 1996 and
December 31, 1995 3
Statements of Operations For the Three-Month
and Nine-Month Periods Ended September 30, 1996
and 1995 4
Statements of Changes in Partners' Capital
Accounts (Deficit) For the Nine Months Ended
September 30, 1996 and the Year Ended
December 31, 1995 5
Statements of Cash Flows For the Nine Months
Ended September 30, 1996 and 1995 6
Notes to Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 16
PART II OTHER INFORMATION
Items 1-5 No information is provided as the answers to
Items 1 through 5 are inapplicable.
Item 6. Exhibits and reports on Form 8-K 16
PART I
Item 1. Financial Statements
Introductory Note to Financial Statements
The accompanying financial statements have been prepared by Atlantic City
Boardwalk Associates, L.P. ("Partnership") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, these financial statements contain all adjustments necessary to
present fairly the financial position of the Partnership as of September 30,
1996 and December 31, 1995, the results of operations for the three and nine
months ended September 30, 1996 and 1995, and the cash flows for the nine months
ended September 30, 1996 and 1995.
Although management believes that the disclosures included herein are adequate
to make the information contained herein not misleading, certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles are omitted herein and
are incorporated by reference to the Partnership's Annual Report on Form 10-K
for the year ended December 31, 1995 filed with the Securities and Exchange
Commission.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Balance Sheets
September 30, 1996 and December 31, 1995
(Unaudited)
Assets 1996 1995
______ __________ ________
Current assets:
Cash and cash equivalents $1,366,000 1,535,000
Rent due from New Claridge 236,000 298,000
Interest receivable from partners 55,000 28,000
Prepaid expenses 362,000 313,000
Other assets 224,000 199,000
--------- ---------
Total current assets 2,243,000 2,373,000
--------- ---------
Hotel Assets 183,519,000 180,298,000
Less: Accumulated depreciation
and amortization 98,891,000 94,057,000
---------- ----------
Net Hotel Assets 84,628,000 86,241,000
---------- ----------
Note receivable from New Claridge, including
accrued interest of $3,150,000 and $2,826,000
in 1996 and 1995, respectively 6,750,000 6,426,000
Deferred rent from New Claridge 38,356,000 39,856,000
Intangibles, net of accumulated
amortization of $3,621,000 and
$3,526,000 in 1996 and 1995,
respectively 184,000 279,000
---------- --------
$132,161,000 135,175,000
============ ===========
Liabilities and Partners' Capital Accounts
Current liabilities:
Accounts payable $1,454,000 1,400,000
Accrued interest due New Claridge 1,186,000 1,274,000
Current portion of long-term debt
due principally to New Claridge 16,143,000 14,051,000
---------- ----------
Total current liabilities 18,783,000 16,725,000
---------- ----------
Long-term debt due principally to New Claridge,
including accrued interest of $20,000,000
in 1996 and 1995 96,155,000 104,315,000
---------- -----------
Partners' capital accounts (deficit):
New general partners 88,000 57,000
Former general partners 162,000 144,000
Special limited partners (203,000) (234,000)
Investor limited partners 17,176,000 14,168,000
---------- ----------
Total partners' capital
accounts (deficit) 17,223,000 14,135,000
Commitments and contingencies ---------- ----------
$132,161,000 135,175,000
============ ===========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ----- ----
Revenues:
Rent from New Claridge for
the lease of Hotel Assets $ 9,756,000 9,543,000 29,498,000 28,829,000
Interest from New Claridge 108,000 108,000 324,000 324,000
Interest from Special Limited Partners 9,000 9,000 27,000 27,000
Investment 23,000 32,000 78,000 98,000
----------- -------- ---------- ----------
9,896,000 9,692,000 29,927,000 29,278,000
----------- --------- ---------- ----------
Expenses:
Cost of maintaining and repairing
Hotel Assets, paid to
New Claridge 3,071,000 2,968,000 9,219,000 8,720,000
Interest, principally on mortgages to
New Claridge 4,005,000 4,167,000 12,138,000 12,918,000
General and administrative 123,000 104,000 455,000 462,000
General Partners' management fee 33,000 33,000 98,000 98,000
Depreciation and amortization 1,518,000 1,671,000 4,929,000 4,996,000
--------- --------- --------- ----------
8,750,000 8,943,000 26,839,000 27,194,000
--------- --------- ---------- ----------
Net income $ 1,146,000 749,000 3,088,000 2,084,000
========= ========= ========= ==========
Net income per limited partnership unit
(450 units outstanding at the end
of each period) $ 2,506 1,636 6,753 4,556
============= ========== ======== ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Partners' Capital Accounts (Deficit)
For the Nine Months Ended September 30, 1996
and the Year Ended December 31, 1995
Class A Class B Class A Class B Total
New Former Special Special Investor Investor Partners'
General General Limited Limited Limited Limited Capital
Partners Partners Partners Partners Partners Partners Accounts
-------- -------- -------- -------- -------- -------- --------
Partners' Capital
Accounts (Deficit),
December 31, 1994 $ 30,000 127,000 (17,000) (244,000) 2,806,000 8,710,000 11,412,000
Net income 27,000 17,000 2,000 25,000 651,000 2,001,000 2,723,000
---------- -------- -------- --------- --------- ---------- ----------
Partners' Capital
Accounts (Deficit),
December 31, 1995 57,000 144,000 (15,000) (219,000) 3,457,000 10,711,000 14,135,000
Net income
(unaudited) 31,000 18,000 2,000 29,000 738,000 2,270,000 3,088,000
------------ ------------ --------- ------------ --------- ----------- -----------
Partners' Capital
Accounts (Deficit),
September 30, 1996
(unaudited) $ 88,000 162,000 (13,000) (190,000) 4,195,000 12,981,000 17,223,000
====== ============ ====== ======= ========= ========== ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 1996 and 1995
1996 1995
------- ------
Cash flows from operating activities:
Net income $3,088,000 2,084,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,929,000 4,996,000
Accretion of discount on mortgage note 1,123,000 863,000
Loss on disposal of assets - 47,000
Deferred rent 1,500,000 1,021,000
Deferred interest on receivable from New Claridge (324,000) (324,000)
Change in current assets and liabilities:
(Increase) in rent due from New Claridge,
interest receivable from partners,
prepaid expenses and other assets (39,000) (315,000)
(Decrease) increase in accounts payable and
accrued interest due New Claridge (34,000) 309,000
---------- ----------
Net cash provided by operating activities 10,243,000 8,681,000
---------- ----------
Cash flows from investing activities:
Purchase of Hotel Assets (3,221,000) (1,682,000)
Proceeds from sale of Hotel Assets - 22,000
----------- -----------
Net cash used in investing activities (3,221,000) (1,660,000)
----------- -----------
Cash flows from financing activities:
Proceeds of borrowings from New Claridge 3,312,000 1,983,000
Principal payments of debt, principally to New Claridge (10,503,000) (9,202,000)
---------- ---------
Net cash used in financing activities (7,191,000) (7,219,000)
---------- ---------
Net decrease in cash and cash equivalents (169,000) (198,000)
Cash and cash equivalents, beginning of period 1,535,000 1,664,000
--------- ---------
Cash and cash equivalents, end of period $ 1,366,000 1,466,000
=========== =========
Supplemental cash flow information:
Interest paid $11,584,000 12,466,000
========== ==========
Supplemental noncash investing and financing activities:
Capital lease obligation incurred to acquire Hotel Asset $ - 557,000
=========== ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Notes to Financial Statements
(Unaudited)
(1) The Partnership
Atlantic City Boardwalk Associates, L.P. ("Partnership") was formed on
October 31, 1983 to acquire the buildings, parking facility and
non-gaming depreciable, tangible property (collectively, "Hotel
Assets") of The Claridge Hotel and Casino ("Claridge") located in
Atlantic City, New Jersey; to hold a leasehold interest in the land on
which the Claridge is located ("Land"), which Land was subsequently
acquired by the Partnership as part of a financial restructuring
("Restructuring Agreement"); and to engage in activities related or
incidental thereto. The Partnership leases the Land and Hotel Assets to
The Claridge at Park Place, Incorporated ("New Claridge"), a
wholly-owned subsidiary of The Claridge Hotel and Casino Corporation
("Corporation"), under operating leases.
(2) Financial Condition of the Partnership and New Claridge
The ability of the Partnership to fulfill its obligations is dependent
upon the ability of New Claridge to pay rental payments when due.
Accordingly, the financial stability of the Partnership is dependent
upon the financial condition of New Claridge.
The Corporation had a net loss of $8,967,000 net of income tax benefit
of $5,398,000, for the nine months ended September 30, 1996 compared to
a net loss of $166,000, net of income tax expense of $604,000, for the
same period in 1995. Revenues during the first quarter of 1996 were
adversely affected by several winter storms, most notably the "Blizzard
of the Century" in January, which blanketed the Northeastern United
States with a record amount of snow. In addition, citywide casino
capacity has continued to increase over the total capacity available in
1995, reflected in a 7.8% increase in the average casino square
footage, and a 9.6% increase in the average number of slot machines,
including the opening of the Trump World's Fair Casino in May 1996.
These expansions have resulted in heightened efforts among the Atlantic
City casinos to compete for market share.
On July 10, 1996, the Claridge's $28 million self-parking garage, which
had been opened on June 28, 1996, was closed due to a fatal accident;
the self-parking garage 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 fully take advantage of certain
promotional programs designed to capture the more profitable drive-in
casino patron. Competition for casino patrons remained heightened
during the nine months ended September 30, 1996, as the many recently
expanded casinos and the newly-opened Trump World's Fair Casino,
strived to acquire and maintain their "fair share" of the casino
revenue market. In addition, major infrastructure improvements in
Atlantic City have commenced in connection with the construction of the
new Convention Center and the corridor project linking the center to
the boardwalk; as a result, there was considerable traffic congestion
on roads leading into and around Atlantic City during the third
quarter, contributing to the relatively disappointing citywide casino
results.
Competition for attracting the bus passenger market continued citywide
during the nine months ended September 30, 1996, in the form of
increased coin incentives offered to passengers arriving by bus. Due to
its dependency on the bus market, the Claridge has had to remain
competitive with the incentives offered by other Atlantic City casinos
in order to maintain its share of this market. During the nine months
ended September 30, 1996, bus coin incentives averaged $19 per
passenger, compared to approximately $12 per passenger in the first
nine months of 1995. In total $15,313,000 of coin incentives were
issued to 803,000 bus passengers during the nine months ended September
30, 1996, compared to $8,729,000 issued to 718,000 passengers in the
same period of 1995.
On January 31, 1994, the Corporation completed an offering of $85
million of First Mortgage Notes due in 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. Interest on the Notes is
payable semiannually on February 1 and August 1 of each year,
commencing August 1, 1994, with the Notes coming due on February 1,
2002.
As discussed below in the Form 10-Q under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," there is considerable
doubt as to whether the Corporation will be able to meet its obligation
to pay interest due on February 1, 1997 on its 11 3/4% Notes due 2002.
As a result, the Corporation is in the process of formulating a
proposal to the holders of the Notes to restructure the Corporation's
obligations under the Notes.
At September 30, 1996, the Corporation had a working capital deficit of
$6,161,000 as compared to working capital of $15,122,000 at December
31, 1995. This decrease in working capital is principally attributable
to a decrease in cash and cash equivalents of $25,142,000 (primarily
due to payments for the construction of the self-parking garage and
interest due on the First Mortgage Notes) and an increase in accounts
payable of $1,214,000 (primarily due to accruals related to the
construction of the self-parking garage), offset by an increase in
accounts receivable of $1,583,000 (principally the current portion of
the Expandable Wraparound Mortgages due from the Partnership), a
decrease in accrued payroll and related benefits of $614,000, and a
decrease in interest payable on the First Mortgage Notes of $2,496,000.
(3) Licensing
The ownership and operation of casino-hotel facilities in Atlantic City
are subject to extensive state regulation under the Casino Control Act
under the direction of the New Jersey Casino Control Commission. The
Casino Control Act provides that various categories of entities must
hold appropriate casino licenses. The Partnership currently operates
under a four-year casino service industry license effective October 31,
1995, while New Claridge operates under a four-year casino operator's
license effective September 30, 1995.
(4) Contingencies
The Restructuring Agreement provided for Del Webb Corporation ("Webb")
to retain an interest equal to $20 million plus interest from December
1, 1988 accruing at the rate of 15% per annum compounded quarterly
("Contingent Payment") in any proceeds ultimately recovered from the
operations and/or the sale or refinancing of the Claridge facility in
excess of the First Mortgage loan and other liabilities. To give effect
to this Contingent Payment, the Corporation and the Partnership agreed
not to make any distributions to the holders of their equity
securities, whether derived from operations or from sale or refinancing
proceeds, until Webb had received the Contingent Payment.
In connection with the restructuring, Webb agreed to permit those
partners/investors in the Partnership and Corporation ("Releasing
Partners/Investors") from whom Webb had received written releases from
all liabilities, rights ("Contingent Payment Rights") to receive
certain amounts to the extent available for application to the
Contingent Payment. Approximately 84% in interest of the
partners/investors provided releases and became Releasing
Partners/Investors. Payments to Releasing Partners/Investors are to be
made in accordance with a schedule of priorities, as defined in the
Restructuring Agreement.
On April 2, 1990, Webb transferred its interest in the Contingent
Payment to an irrevocable trust for the benefit of the Valley of the
Sun United Way, and upon such transfer Webb was no longer required to
be qualified or licensed by the 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 may be exercised any time prior
to December 31, 1997. Upon exercise of the option, the purchase price
of the Contingent Payment would be $10 million, plus interest at 10%
per annum for the period from January 1, 1997 to the date of payment of
the purchase price if the purchase occurs after December 31, 1996. The
purchase price may also increase in an amount not to exceed $10 million
if future distributions to Releasing Partners/Investors exceed $20
million. Due to the Corporation's recent financial situation (see Note
2, Financial Condition of the Partnership and New Claridge), it
currently appears unlikely that this option will be exercised. It is
estimated that at September 30, 1996, the aggregate amount owing in
respect of the Contingent Payment was $63.4 million.
Upon exercise of the option, it is anticipated that the Contingent
Payment will be canceled so that neither the Corporation or the
Partnership will have any obligation to make any payment in respect of
the Contingent Payment before making a distribution to limited partners
or shareholders. Upon the purchase and cancellation, however, the
Corporation and the Partnership will remain obligated to make payments
to the Releasing Partners/Investors, in respect of the Contingent
Payment Rights, before any distribution may be made to limited partners
or shareholders. These payments would be required to be in the same
amounts as if the Contingent Payment had not been purchased and
canceled. As a result, it is not likely that limited partners or
shareholders who are not Releasing Partners/Investors will receive any
distribution from the Partnership or the Corporation. In the aggregate,
Releasing Partners/Investors are entitled to receive an amount equal to
approximately 72% of the Contingent Payment.
Under the terms of the option, upon purchase of the Contingent Payment,
the Partnership and/or the Corporation are required to make
distributions in excess of $7 million to the Releasing
Partners/Investors. The Partnership and the Corporation have agreed to
cooperate in the purchase of the option and the Contingent Payment,
with each contributing one-half of the purchase price of the option and
each anticipated to contribute one-half of the purchase price of the
Contingent Payment. A portion of the Partnership's contribution will be
contributed through additional abatements of basic rent payments due
under the Operating Lease and the Expansion Operating Lease.
(5) Recently Adopted Accounting Pronouncements
During the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121"). SFAS 121 requires that a review for impairment be
performed whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable. In
performing the review for recoverability, the Partnership should
evaluate the future undiscounted cash flows expected to result from the
use of the asset and its eventual disposition. The adoption of SFAS 121
on January 1, 1996 did not require any impairment to be recognized
during the first nine months of 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three-Month and Nine-Month Periods Ended September
30, 1996 as Compared to the Three-Month and Nine-Month Periods Ended September
30, 1995
Rental income for the three months ended September 30, 1996 increased $213,000
as compared to the three months ended September 30, 1995, and $669,000 for the
nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995. New Claridge pays as additional rent, certain expenses and
debt service relating to furniture, fixture and equipment replacements and
building improvements ("FF&E"). The Partnership's debt service relating to FF&E
was higher in 1996 than in 1995, resulting in increased rents in 1996.
The Partnership has an agreement with New Claridge whereby New Claridge provides
facility and maintenance and engineering services for the Claridge. The
agreement calls for the reimbursement of the actual facilities and maintenance
costs incurred on the Partnership's behalf. The cost of maintaining and
repairing Hotel Assets increased $103,000 and $499,000, respectively, during the
three- and nine-month periods ended September 30, 1996 as compared to the same
periods in 1995. These increases are due to an increase in New Claridge's
maintenance and engineering salaries and wages and payroll related expenses,
along with a general overall increase in the cost of maintaining the facilities.
For the three- and nine-month periods ended September 30, 1996, interest expense
decreased $162,000 and $780,000, respectively, as compared to the same periods
ended September 30, 1995. These decreases are due to principal payments made
during 1995 and 1996 that reduced the average outstanding balance of the
wraparound and expansion mortgages.
General and administrative expenses for the three months ended September 30,
1996 increased $19,000 as compared to the three months ended September 30, 1995
and decreased $7,000 for the nine months ended September 30, 1996 as compared to
the nine months ended September 30, 1996. During the nine months ended September
30, 1995 a $47,000 loss on the disposal of assets was recorded and included in
general and administrative expenses. By removing the effect of this loss,
general and administrative expenses actually increased $40,000 for the nine
months ended September 30, 1996. These increases of $19,000 for the three months
ended September 30, 1996 and $40,000 for the nine months ended September 30,
1996 are due to higher insurance premiums being paid by the Partnership during
1996 when compared to 1995.
Liquidity and Capital Resources
Current lease payments from New Claridge are sufficient to pay the Partnership's
debt service and operating expenses. As part of the Restructuring Agreement,
rental payments in excess of monthly cash flow requirements are deferred or
abated so that excess cash does not accumulate in the Partnership. At the
Closing of the restructuring the Partnership loaned New Claridge $3.6 million.
The note, including interest, along with those rentals deferred under the
amendment to the operating leases, will be repaid to the Partnership upon (i)
the 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.
Per the terms of an amendment to the Operating Lease Agreement executed as of
August 1, 1991, during the years 1991 to 1998 contractual rents in excess of
debt service and Partnership expenses can be abated up to $38,820,000 in the
aggregate but not in excess of $10,000,000 in any one calendar year. Cumulative
abated rents as of September 30, 1996 total approximately $34,947,000, leaving
$3,873,000 still to be abated in the future. The amount which will be abated in
future periods cannot be determined until the Partnership incurs expenses and
debt service in those periods. However, it is anticipated by the general
partners as well as the management of New Claridge that the remaining abatement
of $3,873,000 will be fully utilized by the first quarter of 1997.
Under the terms of the option to purchase the Contingent Payment (see
"Contingencies" - Note 4 to the financial statements), upon purchase of the
Contingent Payment, the Partnership and/or the Corporation are required to make
distributions in excess of $7 million to the Releasing Partners/Investors. The
Partnership and the Corporation have agreed to cooperate in the purchase of the
option and the Contingent Payment, with each contributing one-half of the
purchase price of the option and each anticipated to contribute one-half of the
purchase price of the Contingent Payment. A portion of the Partnership's
contribution will be contributed through additional abatements of basic rent
payments due under the Operating Lease and the Expansion Operating Lease as
follows. Additional abatements of rent totaling $500,000 are available as a
result of the acquisition of the option to purchase the Contingent Payment, and
further abatements will become available upon exercising the Contingent Payment
option. These additional abatements will be utilized after the original rent
abatement of $38,820,000 (as discussed above) has been fully utilized.
The Partnership funds the purchase of additional Hotel Assets by borrowing
funds, at a 14% interest rate, from New Claridge. The ensuing notes are secured
under the Expandable Wraparound Mortgage up to $25 million. Principal and
interest on these notes are then reimbursed to the Partnership through
additional rentals from New Claridge. Under the Operating Lease, New Claridge is
required to reimburse the Partnership for all taxes, assessments, insurance and
general and administrative costs of the Partnership.
The ownership and operation of casino-hotel facilities in Atlantic City are
subject to extensive state regulation under the Casino Control Act under the
direction of the New Jersey Casino Control Commission. The Casino Control Act
provides that various categories of entities must hold appropriate casino
licenses. The Partnership currently operates under a four-year casino service
industry license effective October 31, 1995, while New Claridge operates under a
four-year casino operator's license effective September 30, 1995.
The Partnership had a working capital deficiency of approximately $16,540,000 as
of September 30, 1996 and $14,352,000 as of December 31, 1995. The working
capital deficiency primarily results from the consummation of the Restructuring
Agreement. As part of the restructuring, the Partnership's cash flow was reduced
to an amount no greater than what the Partnership needs to pay Partnership
expenses, including debt service. Thus, so long as the Claridge is financially
viable and continues to make all payments under the operating leases, the
Partnership expects to be able to pay its current liabilities.
The Financial Condition of the Claridge
As is evident from above, the ability of the Partnership to continue to ful-
fill its obligations is dependent upon the ability of New Claridge to
continue to make rental payments when due. As disclosed by the Claridge in a
press release dated November 7, 1996, the Claridge has recently experienced
severe financial difficulty. It reported a $2.7 million loss for the third
quarter of 1996 and announced that it is in the process of formulating a
proposal to restructure its obligation under its 11 3/4% Notes due 2002. It also
announced that it believes it is unlikely that it will be able to meet its
obligation to pay interest due on these Notes on February 1, 1997, absent a
restructuring. Due to the serious financial condition facing the Claridge and
the Partnership's dependence on rental income from the Claridge, the Partnership
is repeating herein the Claridge's discussion of liquidity and capital resources
from its Form 10-Q for the quarter ended September 30, 1996.
On January 31, 1994, the Corporation completed an offering of $85 million of
Notes due in 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. Interest on the Notes is payable semiannually on February 1
and August 1 of each year, commencing August 1, 1994.
A portion of the net proceeds of $82.2 million, after deducting fees and
expenses, was used as follows:
(i) to repay in full 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 the First Mortgage. In conjunction
with the full satisfaction of the Loan Agreement, the Corporation's
$7.5 million revolving credit line arrangement was terminated. The
Corporation has been seeking to obtain a new line of credit
arrangement, however, to date such attempts have been unsuccessful;
(ii) to fund the cost of a 12,000 square foot expansion of the Claridge's
casino capacity, the addition of approximately 500 slot machines,
and the relocation of two restaurants and their related kitchen
areas. The total cost of this expansion, which became fully
operational on June 30, 1994, was approximately $12.7 million; and
(iii) the acquisition of land, at a cost of $7.5 million, adjacent to New
Claridge's existing valet-parking facility, which was used for the
construction of a self-parking facility. Through September 30, 1996,
approximately $19.1 million had been expended to fund the cost of
the garage, which opened on June 28, 1996; the total cost of the
garage is expected to be approximately $20 million, excluding the
cost of interest capitalized during the construction period.
In addition, on February 23, 1996, the Corporation acquired an option to pur-
chase, at a discount from the carrying value, the Contingent Payment, which
was granted in 1989 and now held in a trust for the benefit of the Valley of the
Sun United Way. The purchase price of the option was $1 million, and the option
may be exercised any time prior to December 31, 1997. Upon exercise of the
option, the purchase price of the Contingent Payment would be $10 million, plus
interest at 10% per annum for the period January 1, 1997 to the date of the
payment of the purchase price, if the purchase occurs after December 31, 1996.
The purchase price may also increase if future distributions to Releasing
Partners/Investors exceed certain amounts.
At September 30, 1996, the Corporation had a working capital deficit of
$6,161,000 as compared to working capital of $15,122,000 at December 31, 1995.
This decrease in working capital is principally attributable to a decrease in
cash and cash equivalents of $25,142,000 (primarily due to payments for the
construction of the self-parking garage and interest due on the First Mortgage
Notes) and an increase in accounts payable of $1,214,000 (primarily due to
accruals related to the construction of the self-parking garage), offset by an
increase in accounts receivable of $1,583,000 (principally the current portion
of the Expandable Wraparound Mortgages due from the Partnership), a decrease in
accrued payroll and related benefits of $614,000, and a decrease in interest
payable on the First Mortgage Notes of $2,496,000. Working capital at September
30, 1995 was $20,456,000. Current liabilities at September 30, 1996 and December
31, 1995 included deferred rental payments of $15,078,000, and a $3.6 million
loan from the Partnership plus accrued interest thereon of $3,150,000 at
September 30, 1996 and $2,826,000 at December 31, 1995. These amounts will only
be payable upon (i) a sale or refinancing of the Claridge; (ii) full or partial
satisfaction of the Expandable Wraparound Mortgage; and (iii) full satisfaction
of any first mortgage then in place. If these amounts were not included in
current liabilities, the Corporation's working capital at September 30, 1996 and
December 31, 1995 would have been $15,667,000 and $36,626,000, respectively.
During the first nine months of 1996, the Corporation's working capital was
reduced substantially as a result of significant operating losses during that
period, as well as significant capital expenditures for construction of the
self-parking garage, with cash flows used in operating activities (i.e.,
negative cash flow) amounting to $17,531,000, and cash flows used in investment
activities during that period amounting to $7,611,000. During the same period,
the Corporation's Adjusted EBITDA (as defined below) was only $2,338,000
compared to $17,431,000 for the first nine months of 1995. While expenditures
for construction of the self-parking garage have largely been completed, the
factors that contributed to the negative cash flow and substantially reduced
Adjusted EBITDA for the first nine months of 1996, including increased and new
competition in the Atlantic City casino market, appear to be continuing.
While the Corporation's operating results have improved somewhat and could
continue to improve over the remainder of the year with the reopening of its
self-parking garage in mid-September, the Corporation anticipates that it is
more likely for there to be a continuation of the current level of operating
results for the foreseeable future. Although the Corporation has taken steps to
conserve its cash by reducing various operating expenses, it is unlikely that
the Corporation will be able to meet its obligation to pay interest due on
February 1, 1997 on its 11 3/4% Notes due 2002. As a result, the Corporation, in
consultation with its financial advisor, Dillon, Read & Co., Inc., is in the
process of formulating a proposal to the holders of the Notes to restructure the
Corporation's obligations under the Notes as outlined in Exhibit A to this [the
Claridge's] Form 10-Q. In broad terms, the proposed restructuring may include a
reduction in the debt obligations of the Corporation, together with
restructuring of certain of the Corporation's arrangements with the Partnership,
including abating rent payable under the Operating Lease with the Partnership
and extending the term of the Expandable Wraparound Mortgage. Any such
restructuring may be accomplished in connection with a "prepackaged" bankruptcy
proceeding involving the Corporation and its subsidiaries to which the principal
creditors of the Corporation and its subsidiaries have agreed. If the
Corporation is unable to reach agreement with the holders of the Notes and other
significant creditors and with the Partnership regarding restructuring of the
Corporation's obligations, it is likely that the Corporation will need to seek
protection from its creditors in a reorganization proceeding under Chapter 11.
In addition, the Corporation, together with Dillon, Read & Co., is pursuing
other strategic alternatives, including a possible sale of the company.
Assuming that the Corporation does not pay interest due on its 11 3/4% notes due
2002, management of the Corporation believes that the Corporation has sufficient
liquidity to meet its other obligations in the ordinary course of its business.
Similarly, if the Corporation's obligations to the holders of the Notes and to
the Partnership are restructured as discussed above, management of the
Corporation believes that the Corporation will have sufficient liquidity to meet
its obligations on any restructured debt that replaces the Notes and to the
Partnership in the ordinary course of its operations. There can, however, be no
assurance that this outcome will result.
For the nine months ended September 30, 1996, cash flows used in operating
activities were $17,531,000, compared to cash flows provided by operating
activities of $4,708,000 for the same period of 1995; the increase in cash used
in operating activities was principally due to the increase in pre-tax net loss.
Cash flows used in investment activities for the nine months ended September 30,
1996 and 1995 were $7,611,000 and $3,988,000, respectively. Cash flows used in
investment activities in the first nine months of 1996 for additions to property
and equipment include expenditures for the construction of the self-parking
garage facility; in the first nine months of 1995, additions to property and
equipment included the cost of the acquisition of the land on which the garage
facility is being constructed.
For the nine months ended September 30, 1996, the Corporation's "Adjusted
EBITDA" was $2,338,000, compared to $17,431,000 for the same period of 1995.
"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.
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. At September 30, 1996 the Corporation had accrued
the maximum amount of $15.1 million of deferred rent liability under the lease
arrangements. The deferred rent liability will become payable (i) upon a sale or
refinancing of the Claridge; (ii) upon full or partial satisfaction of the
Expandable Wraparound Mortgage; and (iii) upon full satisfaction of any first
mortgage then in place. Also as of September 30, 1996, $35.0 million of basic
rent had been abated. The remaining $3.8 million of available abatement is
expected to be fully utilized by the first quarter of 1997. Because the initial
term of the Operating Lease continues through September 30, 1998, rental
payments after the $38.8 million abatement is fully utilized will increase
substantially to approximately $39.5 million in 1997, as compared to $31.7
million (net of projected abatement) in 1996. Additional abatements of rent
totaling $500,000 are available as a result of the acquisition of the option to
purchase the Contingent Payment, and further abatements could become available
upon exercising the Contingent Payment option.
If New Claridge exercises its option to extend the term of the Operating Lease,
basic rent during the renewal term 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. If New Claridge exercises its option to
extend the term of the Expansion Operating Lease, basic rent also will 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 term
of both leases is extended under their renewal options, the aggregate basic rent
payable during the initial years of renewal term will be significantly below the
1997 level.
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 is obligated under its Operating Lease with the Partnership to lend
the Partnership, at an annual interest rate of 14%, any amounts necessary to
fund the cost of furniture, fixtures and equipment replacements. The Expandable
Wraparound Mortgage, granted by the Partnership to New Claridge, by its terms
may secure up to $25 million of additional loans to the Partnership from New
Claridge to finance the replacements of furniture, fixtures and equipment and
facility maintenance and engineering shortfalls. The advances to the Partnership
are in the form of FF&E Loans and are secured by the Hotel Assets. One half of
the FF&E Loan principal is due in the 48th month following the advance, with the
remaining balance due in the 60th month following the date of issuance. In
connection with the offering of $85 million of the Notes on January 31, 1994,
the Corporation agreed to use not less than $8 million from the net proceeds of
the offering to finance internal improvements to the Claridge, which were funded
through additional FF&E Loans. In connection therewith, the Expandable
Wraparound Mortgage Loan agreement as well as the Operating Lease, and the
Expansion Operating Lease were amended to provide that the principal on these
additional FF&E Loans will be payable at final maturity of the Expandable
Wraparound Mortgage. New Claridge is obligated to pay as additional rent to the
Partnership the debt service on the FF&E Loans.
The Expandable Wraparound Mortgage requires monthly principal payments to be
made by the Partnership to New Claridge, commencing in the year 1988 and
continuing through the year 1998, in escalating amounts totaling $80 million.
The Expandable Wraparound Mortgage, which will mature on September 30, 2000,
bears interest at an annual rate equal to 14% with the deferral until maturity
of $20 million of certain interest payments which accrued between 1983 and 1988.
In addition, in 1986 the principal amount secured by the Expandable Wraparound
Mortgage was increased to provide the Partnership with funding for the
construction of an expansion improvement, which resulted in approximately 10,000
square feet of additional casino space and a 3,600 square foot lounge. Effective
August 28, 1986, the Partnership commenced making level monthly payments of
principal and interest calculated to provide for the repayment in full of the
principal balance of this increase in the Expandable Wraparound Mortgage by
September 30, 1998. Under the terms of the Expandable Wraparound Mortgage, New
Claridge is not permitted to foreclose on the Expandable Wraparound Mortgage and
take ownership of the Hotel Assets so long as a senior mortgage is outstanding.
The face amount outstanding of the Expandable Wraparound Mortgage at September
30, 1996 (including the outstanding FF&E Loans and the $20 million of deferred
interest) was $120.8 million.
PART II
Item 6. Exhibits and reports on Form 8-K
(a) Not applicable.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atlantic City Boardwalk Associates, L.P.
Registrant
Date November 13, 1996 /s/ Anthony C. Atchley
------------------------- --------------------------------------
by Anthony C. Atchley, General Partner
Date November 13, 1996 /s/ Gerald C. Heetland
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by Gerald C. Heetland, General Partner
Date November 13, 1996 /s/ Anthony C. Atchley
---------------------------- --------------------------------------
by AC Boardwalk Partners Corporation,
General Partner
by Anthony C. Atchley, President