UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(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, 1996
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 33-27399
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
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(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)
Registrant's telephone number, including area code (609) 340-3400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 and 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 partnership units of the Partnership 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 partnership units of the Partnership. The
Partnership did, in 1989, jointly with the Claridge Hotel and Casino Corporation
("Corporation") and Del Webb Corporation ("Webb"), register certain Contingent
Payment Units. As stated in the Prospectus dated May 5, 1989, the Contingent
Payment Rights may or may not be securities. None of the Partnership, the
Corporation or Webb has admitted that the Contingent Payment Rights are
securities or that any of them is the issuer of any such securities.
Registrant's Partnership Units outstanding on December 31, 1996 was 450
units.
PART I
Item 1. Business.
General Development of the Business
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 ("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; and to engage in activities related or
incidental thereto. On June 16, 1989, as part of a financial restructuring
("Restructuring Agreement"), the Partnership acquired all of the rights to the
land underlying the Hotel Assets, the air rights and related easement. The
Partnership's principal business is to lease the Hotel Assets, land and air
rights to The Claridge at Park Place, Incorporated ("New Claridge"), a
wholly-owned subsidiary of The Claridge Hotel and Casino Corporation
("Corporation"), under operating leases. All revenues of the Partnership, other
than immaterial investment income, are derived from those leases.
The Partnership maintains offices at The Claridge Hotel and Casino, Indiana
Avenue and the Boardwalk, Atlantic City, New Jersey 08401, telephone number
(609) 340-3400; and at 2880 West Meade Avenue, Suite 204, Las Vegas, Nevada
89102, telephone number (702) 253-7662.
New Claridge's Corporate Structure
In 1983, New Claridge acquired the Claridge's casino license and its gaming
equipment (collectively, "Casino Assets") from Del E. Webb New Jersey, Inc.
("DEWNJ"), a wholly-owned subsidiary of Del Webb Corporation ("Webb"); leased
the Hotel Assets and subleased the land on which the Claridge is located from
the Partnership; and assumed certain liabilities related to the acquired assets.
In connection with those transactions, the Partnership granted the Expandable
Wraparound Mortgage (defined below) to New Claridge. These transactions were
entered into in connection with the private placement of equity interests in the
Partnership and the Corporation. Following the 1983 transactions, Webb and its
affiliates retained significant interest in the Claridge. The common stock of
the Corporation and the limited partnership interests of the Partnership were
sold together in a private placement as units, and because there has been
relatively little trading in the stock or partnership interest, there is a
substantial similarity between the equity ownership of the Corporation and the
Partnership. Although the Partnership and the Corporation are independent
entities, approximately 95% 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 Partnership, the Corporation and New Claridge entered into
the Restructuring Agreement. The restructuring, which was consummated in June
1989 (the "Closing"), resulted in (i) a reorganization of the ownership interest
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 ("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 and the underlying land, (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 (described below), 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, commencing August 1, 1994.
The net proceeds of the Notes, totaling $82.2 million net of fees and expenses,
were used as follows: (i) to repay in full on January 31, 1994, the
Corporation's then outstanding debt under the Revolving Credit and Term Loan
Agreement ("Loan Agreement"), including the outstanding balance of the
Corporation's revolving credit line, which was secured by the 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 (described below).
Recent Developments at New Claridge
During 1994 and 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's obligations to pay interest on the Notes,
as well as to make at least some moderate capital improvements. Commencing in
the latter part of 1995, however, competition in the Atlantic City casino market
for bus customers, a principal source of customers for the Claridge at the time,
increased; this competition intensified even more during 1996 as additional
casino square footage was added, principally due to the opening of the Trump
World's Fair casino. During 1996, the average coin incentive issued per bus
patron at the Claridge increased to approximately $19, from approximately $13 in
1995. Total cash incentives issued to Claridge's casino patrons (in the form of
coin to play slot machines and gaming chips to play table games) increased to
approximately $30.5 million in 1996, from approximately $25.2 million in 1995.
While the Corporation's promotional costs have 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. To date, the Corporation has not received any acceptable
proposals in regards to the possible sale of the Corporation.
In November 1996, while the sales efforts were continuing, the Corporation
announced that there was a strong likelihood that the Corporation would be
unable to pay the interest due on the Notes on February 3, 1997. Accordingly,
management, working together with financial and legal advisors, formulated a
plan for restructuring the Corporation's obligations. The terms of the proposed
plan were presented to the noteholders at a meeting held on December 3, 1996, at
which time the noteholders were urged to form a steering committee or other
representative body to conduct negotiations. Although a group of noteholders
formed and met with the management of the Corporation on a few occasions, by the
time the committee formally organized itself on January 7, 1997, it consisted of
six members representing ownership of less than 5% of the total amount of Notes
outstanding. At that time, the Corporation determined that the committee did not
represent a sufficient portion of the noteholders to negotiate on behalf of the
noteholders generally. As a result, the Corporation did not formally recognize
the committee and did not engage in any negotiation with the committee or its
members, although it did encourage the members of the committee to continue to
attempt to obtain broader representation of the noteholders.
On January 12, 1997, management of the Corporation was contacted, through an
agent, by Hilton Hotel Corporation ("Hilton"), regarding a possible sale of the
Corporation to Hilton, and shortly thereafter, the Corporation began
negotiations with Hilton. On January 30, 1997, the Corporation issued a press
release indicating that the Corporation would not make the interest payment due
on the Notes on February 3, 1997, and that the Corporation had entered
negotiations with Hilton regarding acquisition of the Corporation by Hilton
through a prepackaged bankruptcy plan. At that time, a representative of Hilton
indicated that Hilton had acquired approximately 35% to 40% of the Notes. On
February 5, 1997, three holders of the Notes, who were members of the unofficial
committee which they had formed, filed a petition for involuntary bankruptcy
against the Corporation in the bankruptcy court for the District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related state
court lawsuit against the Corporation, New Claridge, the Partnership, certain
officers and directors of the Corporation, and the general partners of the
Partnership. On March 4, 1997, contrary to earlier expectations, the Corporation
was able to pay the interest that was due on the Notes on February 3, 1997,
under the 30-day grace period allowed in accordance with the terms of the
indenture governing the Notes ("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. The Corporation expects the negotiations with Hilton to
continue.
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 further discussion
below); 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.
Certain Agreements between the Partnership, the Corporation and New Claridge
The current relationships and agreements between the Partnership, the
Corporation and New Claridge are described below:
Property Ownership and Related Leases and Mortgage
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, the underlying land and air rights are owned by
the Partnership and leased by the Partnership to New Claridge. The lease
obligations are set forth in an operating lease ("Operating Lease"),
originally entered into on October 31, 1983, and an expansion operating
lease ("Expansion Operating Lease"), covering additions to the Claridge
made in 1986.
Operating Lease and Expansion Operating Lease
New Claridge leases from the Partnership the Hotel Assets and the land on
which the Claridge is located for an initial term of 15 years with three
10-year renewal options. Basic annual rent 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, and escalates thereafter to
$41,775,000 in 1997 and $32,531,000 for the nine month period ending
September 30, 1998. If the terms of the lease are extended, basic rent will
be calculated pursuant to a formula, with such rent not to be more than
$29.5 million nor less than $24 million in the lease year October 1, 1998
through September 30, 1999, and not to be greater than 10% more than the
basic rent for the preceding lease year in each lease year thereafter.
Under the terms of the Operating Lease, New Claridge has an option to
purchase, on September 30, 1998 and, if it renews the Operating Lease, on
September 30, 2003, the Hotel Assets and the underlying land for their fair
market value at the time the option is exercised.
New Claridge is also required to pay, as additional rent, 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 certain 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 New Claridge
with 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 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 such
necessary funds (collectively, "FF&E Notes"). The FF&E Notes are secured
under the Expandable Wraparound Mortgage (see discussion below), and are
payable as follows. Generally, one half of the principal is due in 48
months and the remainder is due 60 months from the issue date of the
individual notes, with the
following exception. As required by the offering of $85 million of Notes on
January 31, 1994, $8 million was used to finance internal improvements at
the Claridge. In connection therewith, the Expandable Wraparound Mortgage
as well as the Operating Lease and the Expansion Operating Lease were
amended to provide that the $8 million principal on these additional FF&E
Notes will be payable on September 30, 2000, or at final maturity of the
Expandable Wraparound Mortgage, as amended. All FF&E notes are secured
under the Wraparound Mortgage up to $25 million. Thereafter, such advances
shall be secured under separate security agreements. New Claridge is
obligated to pay as additional rent to the Partnership the debt service on
all FF&E Notes.
On March 17, 1986, New Claridge entered into a lease with the Partnership
whereby New Claridge leases from the Partnership the Claridge expansion
improvements for an initial term beginning March 17, 1986 and ending on
September 30, 1998 with three 10-year renewal options. Basic annual rent
during the initial term of the Expansion Operating Lease was $3,870,000 in
1986 (prorated based on the number of days that the expansion improvements
were open to the public) and was based on the cost of the construction of
the expansion improvements. Annually thereafter the rental amount is
adjusted based on the Consumer Price Index with any increase not to exceed
two percent per annum. Basic annual rent for 1996, 1995, and 1994 amounted
to $4,718,000, $4,625,000, and $4,534,000, respectively. If the terms of
the lease are extended, basic rent will be calculated pursuant to a
formula, with such rent not to be more than $3 million nor less than $2.5
million in the lease year October 1, 1998 through September 30, 1999, and
not to be greater than 10% more than the basic rent for the preceding lease
year in each lease year thereafter.
New Claridge is also required under the Expansion Operating Lease to pay as
additional rent certain expenses and debt service relating to furniture,
fixture and equipment replacements and building improvements (collectively,
"Expansion FF&E Replacements") for the expanded facility. The Partnership
is 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 to the Partnership, in
the form of FF&E Notes, any amounts necessary to fund the Expansion FF&E
Replacements. Any advances by New Claridge for the foregoing will be
secured under the Expandable Wraparound Mortgage (see discussion below) in
an amount up to $25,000,000. Thereafter, such advances shall be secured
under separate security agreements.
The Operating Lease and the Expansion Operating Lease were amended as part
of the Restructuring Agreement 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 $38,820,000 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 the 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. Cumulative abated rents as of December 31, 1996 total
$37,066,000 leaving $1,754,000 to be abated in the future period.
Additional abatements of rent totaling $500,000 became available as a
result of the acquisition of the option to purchase the Contingent Payment.
All available rent abatements were fully utilized in the first quarter of
1997. Further abatements would become available in the event that the
Contingent Payment option is exercised (see Item 1. Business - "Contingent
Payment Rights").
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 to meet the
Partnership's cash requirements through December 31, 1998 (determined
without regard to the repayment of the deferred rent). 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.
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 turn, if the
Claridge should fail to make any lease payment due under the Operating
Lease and Expansion Operating Lease, the Partnership is not required to
make mortgage payments due under the Expandable Wraparound Mortgage.
Expandable Wraparound Mortgage
On October 31, 1983, the Partnership executed and delivered to New Claridge
a mortgage on the Hotel Assets ("Expandable Wraparound Mortgage") which was
subordinate to an $80 million first mortgage ("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 canceled 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 the First
Mortgage and a revolving credit line, was satisfied in full.
By its terms, the Expandable Wraparound Mortgage may secure up to $25
million of additional borrowings by 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, which matures on September 30, 2000, bears
interest at an annual rate equal to 14% with certain interest installments
that accrued in 1983 through 1988 totaling $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 loans made to finance FF&E Replacements or facility maintenance or
engineering costs as described above. To the extent those borrowings 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. 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 totaling $80 million, with a balloon principal 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 ("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, and to forbear from taking any action to foreclose on the
Expandable Wraparound Mortgage until February 2002.
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 certain internal improvements to the
Claridge which were funded through additional FF&E Notes. 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 Notes will be payable at final
maturity of the Expandable Wraparound Mortgage.
Note Receivable from New Claridge
Pursuant to the Restructuring Agreement the Partnership lent to New
Claridge $3.6 million representing, at the Closing, substantially all of
the Partnership's cash and cash equivalents in excess of amounts required
to pay Partnership expenses. The loan bears interest at 12% per annum and
is due and payable, along with the principal, 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.
Contingent Payment Rights
The Restructuring Agreement provided for 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 1989 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. It is
estimated that at December 31, 1996, the aggregate amount owing in respect
of the Contingent Payment was $65.8 million.
Given the recent operating results at New Claridge (see Item 1. Business -
"Recent Developments at New Claridge"), it is unlikely that the Corporation
would be able to exercise this Contingent Payment Option using available
working capital, or absent a refinancing or sale transaction.
In the event that the option is exercised, it is anticipated that the
Contingent Payment would be canceled so that neither the Corporation nor
the Partnership would have any obligation to make any payment in respect
of the Contingent Payment before making a distribution to limited partners
or shareholders. Upon the purchase and cancellation, however, the
Corporation and the Partnership would 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 if the option is exercised.
Under the terms of the option, upon purchase of the Contingent Payment, the
Partnership and/or the Corporation would be 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 would be contributed through additional
abatements of basic rent payments due under the Operating Lease and the
Expansion Operating Lease.
Current Financial Condition of The Partnership
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 previous discussion entitled "Recent Developments at New
Claridge," the following discussion entitled "Current Financial Situation of The
Claridge Hotel and Casino Corporation" and the discussion concerning New
Claridge in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are taken from the Annual Report on Form 10-K of the
Corporation, and the Partnership disclaims any responsibility for the content
thereof, except for the information also included in Item 8, "Financial
Statements and Supplementary Data."
Current Financial Situation of The Claridge Hotel and Casino Corporation
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. 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 1,750 slot
machines and sixty-five table games, including forty-one blackjack tables,
ten craps tables, five roulette tables, three Caribbean stud poker tables,
one mini-baccarat table, and five 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 player's club, a 600-seat theater,
limited meeting rooms, a gift shop, a beauty salon and a health club with
an indoor swimming pool.
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 Claridge was further renovated and expanded in 1986 at a cost of
approximately $20 million, which provided approximately 10,000 square feet
of casino space together with a 3,600 square foot lounge ("Expansion
Improvements"). 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.
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. Casino gaming in Atlantic City is
highly competitive and is strictly regulated under the New Jersey Casino
Control Act and regulations thereunder which affect virtually all aspects
of casino operations.
Results of Operations for the Year Ended December 31, 1996
as Compared to the Year Ended December 31, 1995
The Corporation had a net loss of $15,389,000 for the year ended December
31, 1996, as compared to a net loss of $1,908,000 for the year ended
December 31, 1995. Casino revenue in 1996 decreased $6,238,000 or 3.8% from
the prior year. Casino revenues were adversely affected by several severe
winter storms during the first quarter of 1996, most notably the January
blizzard, which blanketed the Northeastern United States with a record
amount of snow; this compared to the mild 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 9.1% 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 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 fully take advantage of certain promotional programs
designed to capture the more profitable drive-in casino patron.
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.
Total costs and expenses for the year ended December 31, 1996 increased
$8,472,000 or 4.1% over the same period in 1995. The increase was primarily
a result of the increase in casino and general and administrative expenses.
The increase in casino expenses was primarily a result of the increase in
coin incentives issued through the bus program as well as the increase in
the cost of providing promotional allowances to casino
patrons. The increase in general and administrative expenses was primarily
a result of increased advertising expenditures during the year.
Factors Which May Influence New Claridge's Future Operating Results
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
will need to experience a significant improvement in operating results in
1997 over 1996 levels in order to meet its on-going obligations, including
the interest due on the Notes. Operating results in 1997 have improved over
1996 levels, due primarily to the positive impact of the availability of
the self-parking garage. Although management of the Corporation believes
that operating results will continue to improve over prior year levels, no
assurances as to the continuation of this improvement can be given.
Management will continue to conserve cash through various cost containment
measures, including limiting capital expenditures in 1997 to approximately
$1 million. Given the various improvements made to the property in recent
years, including the casino expansion in 1994, the construction of the
self-parking garage, and other projects such as the refurbishment of all of
its guest rooms, the current condition of the property is such that the
above-mentioned level of capital expenditures is deemed adequate.
Management, together with the Corporation's Board of Directors, will also
continue to work with Dillon, Read & Co., Inc. to pursue a sale of the
Corporation or some other plan for a significant infusion of capital into
the Corporation. In addition, New Claridge has retained the law firm of
Zelle and Larson LLP of Minneapolis, Minnesota to assist in evaluating the
recovery of certain expenses incurred in reopening the self-parking garage
and in evaluating potential lost profit claims as a result of the accident
which occurred in the self-parking garage on July 10, 1996. Management of
the Corporation intends to file a claim to recover these expenses and lost
profits; recovery of these claims would have a positive impact on New
Claridge's financial results and liquidity. No formal claims have been
filed to date, and there is no assurance that the Corporation will be
successful in realizing any recovery.
Competition in the Atlantic City casino-hotel market is intense. As of
December 31, 1996, the twelve existing casino facilities offered
approximately 1,080,000 square feet of gaming space, a 12.5% increase over
the casino square footage as of December 31, 1995 of approximately 960,000
square feet. In May 1996, the 49,000 square foot Trump World's Fair casino
opened, and minor casino expansions occurred at several other properties in
1996. For the years ended December 31, 1996 and 1995, citywide gaming
revenues, as reported, increased 1.8% and 9.5%, respectively, over prior
year levels.
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, over $4.6 billion of new investment has been announced or
recently completed in the Atlantic City gaming market. As currently
scheduled, the planned expansion of existing casinos alone will increase
total Atlantic City casino space by over 34%, and hotel rooms by almost
145%. In addition, several Las Vegas casino operators have recently
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, scheduled for completion in May 1997,
is expected to contain 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 will be the largest
exhibition space between Boston and Atlanta. A 500-room non-casino hotel is
currently being constructed, and is expected to be completed in the Fall of
1997; it will be linked to the new convention center by an elevated
walkway. The development of a corridor which will link the convention
center to the boardwalk area is currently underway, and will feature a
wide, landscaped boulevard with a reflecting pool, and expanded park
area, and a 60-foot lighthouse which will be illuminated each night by
a spectacular light show. In February 1997, construction of a 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 in the second quarter of 1996 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 have plans to
increase their hotel space in 1997 and 1998, including Harrah's, Trump Taj
Mahal, Hilton, and Caesars, for a total expected increase of approximately
2,100 hotel rooms. In addition, a 500-room non-casino hotel is expected to
be constructed adjacent to the new convention center, which is scheduled to
open in 1997. 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 the
1,200-space parking facility, New Claridge will continue to rely on its bus
customers as a significant source of business.
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 "hold" percentages (the ratio of win to
the amount of gaming chips purchased by patrons). The typical Claridge
patron has a lesser need for credit as well as a lower average
complimentary cost. The majority of the Claridge's casino revenue is
generated by slot machine play, the fastest growing segment of gaming play.
In 1995, 77% of the Claridge's casino revenue came from slot play as
compared to 68% reported for all Atlantic City properties. The trend has
continued in 1996 with 75% 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.
Beginning in the Fall of 1988, several events occurred that accelerated the
presence of casino gaming in the United States. Since then there has been a
continued expansion of casino gaming, lotteries, including video lottery
terminals, and off-track betting in other nearby states. This could have a
negative effect on the Atlantic City market.
Current Licensing Status of the Partnership and New Claridge
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 ("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 license effective September 30, 1995.
Employees
The Partnership has one part-time employee who assists the General Partners
with investor-related matters. The General Partners are paid management fees
pursuant to the Partnership Agreement, as amended. See Items 10 and 11,
"Directors and Executive Officers of the Registrant" and "Executive
Compensation."
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. In October 1983 the Partnership
acquired the building, parking facility and non-gaming depreciable, tangible
property of the Claridge casino-hotel. On June 16, 1989, as part of the
Restructuring Agreement, the Partnership acquired all of the rights to the land
underlying the Hotel Assets, the air rights and related easement.
The casino-hotel, situated on the main parcel of land (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
electrical room, it totals an area of 197,100 square feet and provides parking
for approximately 475 automobiles. In 1996, New Claridge completed the
construction of a self-parking garage, located on a parcel of land (29,120
square feet) connected to its 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 over 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 existing facilities 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 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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No partnership interests in the Partnership have been registered under the
Securities Act of 1933, as amended ("Securities Act"). All outstanding
partnership interests have been offered and sold in reliance on exemptions from
the registration requirements of the Securities Act. Therefore, there is no
established trading market for any class of partnership interests of the
Partnership. Two partnership interests equal one partnership unit, and there are
approximately 479 holders of partnership interests.
The Contingent Payment Rights received by Releasing Partners/Investors may or
may not be securities. The Partnership, the Corporation 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
actions, none of the Partnership, the Corporation 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.
Item 6. Selected Financial Data.
Set forth below is selected financial data regarding the Partnership as of or
for each of the years in the five-year period ended December 31, 1996.
As of or for the year ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(not covered by Independent Auditors' Report) (a)
(in thousands)
Net income ......................... $ 4,753 2,723 1,782 309 512
Net income per limited
partnership unit (b)................ $ 10.39 5.95 3.90 0.68 1.12
Total assets ...................... $130,417 135,175 140,309 138,524 143,410
Long term obligations,
net of current portion .............$ 92,120 104,315 114,268 115,563 121,820
Partners' capital accounts (deficit) $ 18,888 14,135 11,412 9,630 9,321
(a) The above selected financial data should be read in conjunction with the
consolidated financial statements and the related notes appearing
elsewhere in this annual report.
(b) 450 limited partnership units were outstanding at the end of each period.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations for the Year Ended December 31, 1996
as Compared to the Year Ended December 31, 1995
Rental income for the year ended December 31, 1996 increased $881,000 as
compared to the year ended December 31, 1995 . New Claridge pays as additional
rent, certain expenses and debt service relating to furniture, fixture and
equipment replacements and building improvements ("FF&E"). During 1996, FF&E
note principal and interest payments were higher than in 1995, resulting in
increased rents in 1996.
Investment income earned on repurchase agreements for the year ended December
31, 1996 decreased $30,000 as compared to the year ended December 31, 1995. This
decrease reflects the decrease in the interest rate offered for these
investments during 1996 as compared to 1995.
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 $400,000 for the year ended December 31, 1996
as compared to 1995 due primarily to an increase in New Claridge's maintenance
and engineering salaries and wages and payroll related expenses.
For the year ended December 31, 1996, interest expense decreased $1,205,000 from
the prior year due to principal payments made during 1995 and 1996 that reduced
the average outstanding balance of the wraparound and expansion mortgages and
FF&E notes.
General and administrative expenses decreased $21,000 during the year ended
December 31, 1996 as compared to 1995. Insurance expense increased approximately
$44,000 due to an increase in the insurance premium. The decrease in general and
administrative expense is primarily due to a $46,000 loss on the disposal of
assets that was recognized in 1995 and classified as a general and
administrative expense, as well as a decrease in professional fees. Professional
fees during 1995 included additional fees incurred with regard to the Contingent
Payment.
Refer to the "Liquidity and Capital Resources" section below for further
discussion on the Partnership's operations.
Results of Operations for the Year Ended December 31, 1995
as Compared to the Year Ended December 31, 1994
Rental income for the year ended December 31, 1995 increased $1,281,000 as
compared to the year ended December 31, 1994 . New Claridge pays as additional
rent, certain expenses and debt service relating to furniture, fixture and
equipment replacements and building improvements ("FF&E"). During 1994 the
Claridge
expanded its casino. The expansion (as well as the related debt) was occurring
throughout 1994 and had been completed prior to the beginning of 1995. This
caused the Partnership's debt service relating to FF&E to be higher in 1995 when
compared to 1994, resulting in increased rents in 1995.
Investment income earned on repurchase agreements for the year ended December
31, 1995 increased $47,000 as compared to the year ended December 31, 1994. This
increase reflects the increase in the interest rate offered for these
investments during 1995 as compared to 1994.
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 $399,000 for the year ended December 31, 1995
as compared to 1994 due primarily to an increase in New Claridge's maintenance
and engineering salaries and wages and payroll related expenses.
For the year ended December 31, 1995, interest expense decreased $490,000 from
the prior year due to principal payments made during 1994 and 1995 that reduced
the average outstanding balance of the wraparound and expansion mortgages and
FF&E notes.
General and administrative expenses decreased $54,000 during the year ended
December 31, 1995 as compared to 1994. Insurance and professional fees increased
approximately $67,000 due to an increase in insurance premium as well as
professional fees incurred with regard to the Contingent Payment. The decrease
is primarily due to a $46,000 loss on the disposal of assets that was recognized
in 1995 compared to a similar loss of $170,000 in 1994. Both of these losses
were classified as a general and administrative expense.
During 1994, in connection with the Claridge's casino expansion project, a
significant amount of Hotel Assets were placed into service. A full year's
depreciation was taken on these assets during 1995. As a result, depreciation
and amortization for the year ended December 31, 1995 increased $532,000 as
compared to 1994.
Liquidity and Capital Resources
The ability of the Partnership to continue to fulfill its obligations is
dependent upon the ability of New Claridge to continue to make rental payments
when due. Current lease payments from New Claridge, as recently amended, are
sufficient to pay the Partnership's debt service and operating expenses. As part
of the 1989 Restructuring Agreement, rental payments in excess of monthly cash
flow requirements are deferred or abated so that excess cash does not currently
accumulate in the Partnership. The 1997 restructuring continued this deferral or
abatement of excess cash flow through 1998. At the Closing of the 1989
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, are to 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. The deferral of $1.3 million of rental obligation as
part of the 1997 restructuring leaves the Partnership with minimal liquidity.
The Operating Lease, together with the Expansion Operating Lease, was amended as
part of the Restructuring Agreement 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 $38,820,000 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 the 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. Rents abated during the years
ended December 31, 1995 and 1996 amounted to $7,858,000 and $8,307,000,
respectively. Cumulative abated rents as of December 31, 1996 total $37,066,000.
The remaining $1,754,000 of available abatement was fully utilized in the first
quarter of 1997. 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 would become available upon exercising the Contingent
Payment option (see Item 1. Business - "Contingent Payment Rights"). Because the
initial term of the Operating Lease continues through September 30, 1998, rental
payments after the $38,820,000 abatement is fully utilized will increase
substantially to $39.7 million in 1997, as compared to $31.5 million (net of
abatement) in 1996.
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 to meet the Partnership's cash requirements through
December 31, 1998 (determined without regard to the repayment of the deferred
rent). 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. 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.
Basic rent during the renewal term of the Operating Lease will be calculated
pursuant to a formula, with such rent not to be more than $29.5 million nor less
than $24 million in the lease year October 1, 1998 through September 30, 1999,
and subsequently, not to be greater than 10% more than the basic rent for the
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 such rent not to be more than $3 million nor less than $2.5 million in the
lease year October 1, 1998 through September 30, 1999, and subsequently,
not to be greater than 10% more than the basic rent for the preceding lease
year in each lease year thereafter. Therefore, the aggregate basic rent payable
during the initial years of the renewal term of the leases will be significantly
below the 1997 level.
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 Partnership had a working capital deficiency of approximately $14,352,000 as
of December 31, 1995 and $17,084,000 as of December 31, 1996. The working
capital deficiency primarily results from the consummation of the 1989
Restructuring Agreement. As part of the 1989 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. Such concept was continued
through 1998 in the 1997 restructuring (see Item 1. Business - "Recent
Developments at New Claridge"). Thus, so long as the Claridge is financially
viable and New Claridge continues to make all payments under the operating
leases, the Partnership expects to be able to pay its current liabilities.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedules are set forth at
pages F-1 to F-21 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Name Position Age
Anthony C. Atchley General Partner 55
Gerald C. Heetland General Partner 56
Mr. Atchley has served as General Partner since June 16, 1989. He served as
President and Chief Executive Officer of Consolidated Casinos Corp., a
subsidiary of Webb, and of the Del Webb Hotel Group from November 1985 to
September 1989. He served as Executive Vice President of Sahara Nevada
Corporation, a subsidiary of Webb, from October 1982 to November 1985 and as
President and General Manager of the High
Sierra Casino and Hotel from October 1983 to November 1985. Mr. Atchley served
as President and General Manager of the Claridge from April 1982 to November
1982, as well as Vice Chairman and a member of the Board of Directors of the
Corporation from November 1986 to July 1989.
Mr. Heetland has served as General Partner since June 16, 1989. He has served as
General Counsel of Becker Gaming, Inc., from January 1997 to present and served
as a private consultant and attorney from December 1995 to January 1997. He
served as Vice President General Counsel and Secretary of Fitzgeralds Casino &
Hotel in Las Vegas, Nevada and Fitzgeralds Casino & Hotel, Harolds Club and
Nevada Club in Reno, Nevada from September 1990 to November 1995. He served as
Vice President, Secretary and General Counsel of Del Webb Hotels and all
affiliated hotel group subsidiaries from March 1986 to June 1989. He served as
Vice President, General Counsel-Casino/Hotels and Assistant Secretary of Webb
and Vice President and Secretary of all Webb hotel group subsidiaries from April
1985 to March 1986, as Vice President, Associate General Counsel and Assistant
Secretary of Webb from November 1983 to March 1985, and as Associate General
Counsel and Assistant Secretary of Webb from July 1981 to November 1983. He
served in similar capacities in all Webb hotel group subsidiaries during the
1981 to 1985 periods noted. From June 1984 through March 1986, Mr. Heetland was
the Secretary of the Corporation, and from March 1986 through May 1987 he was
Assistant Secretary of the Corporation.
Item 11. Executive Compensation.
The following table shows the general partners' management fee which is all of
the compensation paid by the Partnership to all of its executive officers for
the years ended December 31, 1996, 1995 and 1994.
Other Annual
Individual Capacity Year Compensation
Anthony C. Atchley General Partner 1996 $65,000
1995 $65,000
1994 $65,000
Gerald C. Heetland General Partner 1996 $65,000
1995 $65,000
1994 $65,000
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Security ownership of certain beneficial owners
Not applicable.
Security ownership of management
Per the terms of the Partnership agreement, the General Partners, as a group,
are entitled to a 1% general partnership interest in the Partnership as
described below:
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership
Anthony C. Atchley
2880 W. Meade Avenue Suite 204
Las Vegas, NV 89102 0.5% Partnership Interest
Gerald C. Heetland
2880 W. Meade Avenue Suite 204
Las Vegas, NV 89102 0.5% Partnership Interest
Changes in Control
Not applicable.
Item 13. Certain Relationships and Related Transactions.
The Partnership does not currently engage in any significant business activities
other than those relating to the Claridge. New Claridge has a direct material
interest in the Expandable Wraparound Mortgage and Operating Leases. See Item 1.
Business - "Current Financial Condition of The Partnership."
The common stock of the Corporation and the limited partnership interests of the
Partnership were sold together in a private placement as units, and because
there has been relatively little trading in the stock or partnership interest,
there is a substantial similarity between the equity ownership of the
Corporation and the Partnership. Although the Partnership and the Corporation
are independent entities, approximately 95% of the Corporation's common stock is
owned by persons who also own limited partnership interests in the Partnership.
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, as well as an annual fee equal to
10% of such facility and maintenance costs, but not to exceed $530,000 per
annum. The agreement is in effect during the entire term of the Operating Lease
including any subsequent renewal terms.
Under the terms of the option to purchase the Contingent Payment, 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 would be contributed through additional abatements of
basic rent payments due under the Operating Lease and the Expansion Operating
Lease (see Item 1. Business - "Contingent Payment Rights").
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 because the required information is
included in the financial statements or notes thereto.
(a) (3) Exhibits
3 (a) Agreement of Limited Partnership of the Partnership, as amended*
10 (a) Form of Amended and Restated Loan Agreement*
10 (b) Form of Amendment to Operating Lease and Expansion Operating Lease*
10 (c) Form of Amendment to Wraparound Mortgage Loan and Wraparound
Mortgage*
10 (d) Form of Note from New Claridge to the Partnership*
10 (e) Form of Restructuring Agreement*
10 (f) Form of Second Amendment to Operating Lease and Expansion Operating
Lease**
10 (g) Form of Third Amendment to Operating Lease and Expansion Operating
Lease**
10 (h) Form of Fourth Amendment to Operating Lease and Expansion Operating
Lease***
10 (i) Form of Mortgage, Assignment of Leases and Rents, Security Agreement
and Financing Statement***
10 (j) Form of Option Agreement****
10 (k) Form of Side Agreement****
10 (l) Form of First Amendment to the Option Agreement****
10 (m) Form of First Amendment to the Side Agreement****
10 (n) Form of Fifth Amendment to Operating Lease Agreement and Fourth
Amendment to Expansion Operating Lease Agreement
10 (o) Form of Restructuring Agreement
*Exhibits are incorporated by reference to the Exhibits filed with a
Registration Statement filed with the Securities and Exchange Commission on
March 13, 1989 (Registration #33-27399)
**Exhibits are incorporated by reference to the Exhibits filed with Form 10-K
for the fiscal year ended December 31, 1991 filed with the Securities and
Exchange Commission on March 26, 1992.
***Exhibits are incorporated by reference to the Exhibits filed with Form 10-K
for the fiscal year ended December 31, 1993 filed with the Securities and
Exchange Commission on March 30, 1994.
****Exhibits are incorporated by reference to the Exhibits filed with Form 10-K
for the fiscal year ended December 31, 1995 filed with the Securities and
Exchange Commission on March 29, 1996.
(b) Reports on Form 8-K
The Partnership filed no reports on Form 8-K during the last quarter of the
period covered by this report.
Supplemental Information
No proxy materials are being or have been sent to the Limited Partners.
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.
Atlantic City Boardwalk Associates, L.P.
Registrant
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY
-------------- ---------------------------------------
by Anthony C. Atchley, General Partner
Date: April 14, 1997 /s/ GERALD C. HEETLAND
-------------- ---------------------------------------
by Gerald C. Heetland, General Partner
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY
-------------- ---------------------------------------
by AC Boardwalk Partners Corporation,
General Partner
by Anthony C. Atchley, President
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.
Date: April 14, 1997 /s/ GERALD C. HEETLAND
-------------- --------------------------------------
by Gerald C. Heetland, General
Partner and Chief Financial
Officer
Date: April 14, 1997 /s/ ANTHONY C. ATCHLEY
-------------- --------------------------------------
by Anthony C. Atchley, General
Partner
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference in
Report on
Form 10-K
Independent Auditors' Report .................................. F-2
Balance Sheets as of December 31, 1995 and 1996 ................ F-3
Statements of Operations For the Years Ended
December 31, 1994, 1995 and 1996 .......................... F-4
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1994, 1995 and 1996 ....... F-5
Statements of Cash Flows For the Years Ended
December 31, 1994, 1995 and 1996 ........................... F-6
Notes to Financial Statements For the Years Ended
December 31, 1994, 1995 and 1996 ........................... F-7
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation..... F-21
All other schedules have been omitted as inapplicable or not required because
the required information is included in the financial statements or notes
thereto.
INDEPENDENT AUDITORS' REPORT
The General Partners
Atlantic City Boardwalk Associates, L.P.
We have audited the accompanying financial statements of Atlantic City Boardwalk
Associates, L.P. as listed in the accompanying index. In connection with our
audits of the financial statements, we also have audited the financial statement
schedule listed in the accompanying index. These financial statements and the
financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic City Boardwalk
Associates, L.P. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 7 to the
financial statements, the Partnership has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 7. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada
March 21, 1997
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Balance Sheets
December 31, 1995 and 1996
1995 1996
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 1,535,000 1,446,000
Rent due from New Claridge 298,000 408,000
Interest receivable from partners 28,000 35,000
Prepaid expenses 313,000 264,000
Other assets 199,000 172,000
---------- -------------
Total current assets 2,373,000 2,325,000
---------- -------------
Hotel Assets (notes 4 and 5) 180,298,000 183,529,000
Less: Accumulated depreciation and amortization 94,057,000 100,281,000
------------ -------------
Net Hotel Assets 86,241,000 83,248,000
------------ -------------
Note receivable from New Claridge, including
accrued interest of $2,826,000 and
$3,258,000 in 1995 and 1996, respectively 6,426,000 6,858,000
Deferred rent from New Claridge (notes 3 and 6) 39,856,000 37,807,000
Intangibles, net of accumulated amortization of
$3,526,000 and $3,626,000 in 1995 and 1996,
respectively 279,000 179,000
----------- -------------
$ 135,175,000 130,417,000
=========== =============
Liabilities and Partners' Capital Accounts
Current liabilities:
Accounts payable $ 1,400,000 1,035,000
Accrued interest due New Claridge 1,274,000 1,147,000
Current portion of long-term debt due
principally to New Claridge (note 5) 14,051,000 17,227,000
----------- ---------------
Total current liabilities 16,725,000 19,409,000
----------- ---------------
Long-term debt due principally to New Claridge,
including accrued interest of $20,000,000 104,315,000 92,120,000
in 1995 and 1996 (note 5) ----------- ------------
Partners' capital accounts (deficit):
New general partners 57,000 105,000
Former general partners 144,000 173,000
Special limited partners (234,000) (187,000)
Investor limited partners 14,168,000 18,797,000
----------- ---------------
Total partners' capital accounts (deficit) 14,135,000 18,888,000
Commitments and contingencies (notes 5, 6, 7 and 9)
$ 135,175,000 130,417,000
=========== ==============
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Operations
For the Years Ended December 31, 1994, 1995, and 1996
1994 1995 1996
----------- ---------- ---------
Revenues:
Rent from New Claridge for the
lease of Hotel Assets
(notes 3 and 6) $ 37,236,000 38,517,000 39,398,000
Interest from New Claridge 432,000 432,000 432,000
Interest from Special Limited Partners 36,000 36,000 36,000
Investment 83,000 130,000 100,000
----------- ---------- ----------
37,787,000 39,115,000 39,966,000
----------- ---------- ----------
Expenses:
Cost of maintaining and repairing
Hotel Assets paid to New Claridge 11,317,000 11,716,000 12,116,000
Interest, principally on mortgages to
New Claridge (note 5) 17,729,000 17,239,000 16,034,000
General and administrative 684,000 630,000 609,000
General Partners' management fee 130,000 130,000 130,000
Depreciation and amortization 6,145,000 6,677,000 6,324,000
----------- ---------- ----------
36,005,000 36,392,000 35,213,000
----------- ---------- ----------
Net income $ 1,782,000 2,723,000 4,753,000
=============== ========== ==========
Net income per limited partnership
unit (note 1)(450 units outstanding
at the end of each year) $ 3,896 5,953 10,391
=============== ========= ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1994, 1995 and 1996
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, 1993 $ 12,000 116,000 (18,000) (260,000) 2,380,000 7,400,000 9,630,000
Net income 18,000 11,000 1,000 16,000 426,000 1,310,000 1,782,000
-------- -------- ------- -------- ---------- ----------- ----------
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 48,000 29,000 3,000 44,000 1,136,000 3,493,000 4,753,000
-------- -------- ------- -------- --------- ----------- -----------
Partners' Capital
Accounts (Deficit),
December 31, 1996 $ 105,000 173,000 (12,000) (175,000) 4,593,000 14,204,000 18,888,000
======= ======= ====== ======= ========= ========== ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Cash Flows
For the Years Ended December 31, 1994, 1995, and 1996
1994 1995 1996
------------ ------------- ----------
Cash flows from operating activities:
Net income $ 1,782,000 2,723,000 4,753,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,145,000 6,677,000 6,324,000
Accretion of discount on mortgage note 1,153,000 1,327,000 1,524,000
Loss on disposal of assets 170,000 46,000 -
Decrease in deferred rent 2,164,000 1,598,000 2,049,000
Deferred interest on receivable
from New Claridge (432,000) (432,000) (432,000)
Changes in current assets and liabilities:
Increase in rent due from New Claridge,
interest receivable from partners,
prepaid expenses and other assets (41,000) (188,000) (41,000)
(Decrease) increase in accounts payable and
accrued interest due New Claridge (212,000) 100,000 (492,000)
------------ ----------- -----------
Net cash provided by
operating activities 10,729,000 11,851,000 13,685,000
------------ ---------- ------------
Cash flows from investing activities:
Purchase of Hotel Assets (9,620,000) (2,160,000) (3,231,000)
Proceeds from sale of Hotel Assets 12,000 21,000 -
------------ ----------- ------------
Net cash used in investing activities (9,608,000) (2,139,000) (3,231,000)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds of borrowings from New Claridge 9,610,000 2,483,000 3,508,000
Principal payments of debt, principally
to New Claridge (10,548,000) (12,324,000) (14,051,000)
----------- ----------- -----------
Net cash used in financing activities (938,000) (9,841,000) (10,543,000)
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 183,000 (129,000) (89,000)
Cash and cash equivalents, beginning of period 1,481,000 1,664,000 1,535,000
------------ ----------- -----------
Cash and cash equivalents, end of period $ 1,664,000 1,535,000 1,446,000
=========== =========== ===========
Supplemental cash flow information:
Interest paid (net of amount capitalized) $ 16,570,000 16,022,000 14,637,000
========== ========== ==========
Supplemental noncash investing and financing activities:
Trade-in value on purchase of Hotel Assets $ 68,000 1,000 -
=========== ============== ===========
Capital lease obligation incurred
to acquire Hotel Assets $ - 557,000 -
============ ============= ===========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Notes to Financial Statements
For the Years Ended December 31, 1994, 1995, and 1996
(1) The Partnership
(a) General
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.
(b) Current Licensing Status
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
("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 license effective September 30, 1995.
(c) General Partners
The General Partners of the Partnership are Anthony C. Atchley, Gerald
C. Heetland and AC Boardwalk Partners Corporation, a New Jersey
corporation formed on August 26, 1983, all of whose shares of capital
stock are owned by Messrs. Atchley and Heetland. The General Partners
receive, in the aggregate, an annual compensation of $130,000 from the
Partnership as well as a 1% interest in the Partnership's income,
gains, losses and deductions for periods subsequent to the
restructuring. The Partnership maintains insurance to protect the
General Partners against certain liabilities arising from their actions
as General Partners. Del Webb Corporation ("Webb"), formerly affiliated
with the Claridge, has agreed to indemnify the General Partners for
claims and liabilities resulting from acts or omissions occurring as a
result of or prior to the restructuring.
The general partners prior to the Restructuring Agreement executed on
June 16, 1989 were Robert K. Swanson, Everett L. Mangam and T. Edward
Plant ("Former General Partners"). The Former General Partners were
entitled to receive, in the aggregate, a 1% interest in the
Partnership's income, gains, losses and deductions for the periods
prior to the restructuring, and now are entitled to receive a 0.6%
interest for periods subsequent to the restructuring, as limited
partners. The Partnership and Del E. Webb New Jersey, Inc. ("DEWNJ"), a
wholly-owned subsidiary of Webb, have agreed to indemnify the Former
General Partners against certain liabilities arising from their actions
as general partners.
(d) Special Limited Partners
Oppenheimer Holdings, Inc. and officers and employees of affiliated
Oppenheimer & Co., Inc. ("Special Limited Partners") committed to
contribute $400,000 by issuing 9% notes maturing in 1998. This
contribution entitles them to an aggregate of 1% interest in the
Partnership's income, gains, losses and deductions until the Limited
Partners, as described below, receive aggregate cash distributions
equal to their capital contributions. Thereafter, the Special Limited
Partners are entitled to an aggregate of 10% of each item. Upon receipt
of the cash, the Partnership will reflect this contribution in its
financial statements.
Subsequent to the Restructuring Agreement, the Special Limited Partners
were classified into two categories, those not consenting to the
restructuring ("Class A Special Limited Partners") and those consenting
to the restructuring ("Class B Special Limited Partners"). Class A
Special Limited Partners' interest after the restructuring is .065%, in
the aggregate, representing their same proportionate share as before
the restructuring. Class B Special Limited Partners' interest
subsequent to the restructuring was reduced by a portion of the 0.6%
interest issued to the Former General Partners, thereby entitling the
Class B Special Limited Partners to a .927% interest, in the aggregate.
(e) Investor Limited Partners
Investor Limited Partners contributed $37,151,000 in cash to the
Partnership for a 98% interest in the Partnership's income, gains,
losses and deductions, to be reduced to 89% upon receipt of cash
distributions equal to their capital contributions. Subsequent to the
restructuring the Investor Limited Partners were classified into two
categories, those not consenting to the restructuring ("Class A
Investor Limited Partners") and those consenting to the restructuring
("Class B Investor Limited Partners"). Class A Investor Limited
Partners' interest after the restructuring is 23.912%, in the
aggregate, representing their same proportionate share as before the
restructuring. Class B Investor Limited Partners' interest subsequent
to the restructuring was reduced by a portion of the 0.6% interest
issued to the Former General Partners, thereby entitling the Class B
Investor Limited Partners to a 73.496% interest, in the aggregate.
(2) Basis of Presentation and Summary of Significant Accounting Policies
The Partnership's policy is to maintain its books of records and
prepare its income tax returns on the accrual basis of accounting
("Tax Basis"). The accompanying financial statements are prepared in
accordance with generally accepted accounting principles ("GAAP")
and differ from Tax Basis as follows:
o Certain property and equipment are depreciated on a different
basis and over different lives for GAAP than those used for Tax
Basis;
o In 1994 the Claridge facilities were remodeled and expanded.
During the construction period interest was incurred on the debt
related to this project. This interest was capitalized for GAAP
and is being amortized on a straight-line basis over 10 years,
while for Tax Basis the interest was expensed in full in 1994;
o The Expandable Wraparound Mortgage was discounted for GAAP
as a result of the effect on the obligation of $20 million of
deferred interest;
o Tax Basis rental income is recognized according to the terms of
the Operating Lease, whereas for GAAP rental payments are
leveled so that each period reflects the same basic rent.
The significant accounting policies used to prepare the accompanying
GAAP financial statements are as follows:
a. Hotel Assets are stated at cost and are depreciated or amortized
on a straight-line basis over the following estimated useful
lives:
Building 40 years
Building improvements 10 years
Furniture, fixtures and equipment 7 years
b. The Partnership adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on January 1, 1996. This
Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Partnership's financial position, results of operations, or
liquidity.
c. Deferred financing costs are being amortized on a straight-line
basis over 5 to 17 years.
d. The Expandable Wraparound Mortgage Note has been discounted
utilizing a 14% interest rate. The resulting discount is
reflected in the basis of the Hotel Assets.
e. The accompanying financial statements do not reflect federal
income tax expense or benefit since such liability or benefit is
that of the individual partners.
f. Cash equivalents are composed of investments in interest-bearing
repurchase agreements with initial or remaining maturities of
less than three months at the time the investment is made.
g. Due to the nature of the relationships between the Partnership
and New Claridge and the Partnership and the partners, estimation
of the fair value of the financial instruments due from and due
to these related parties is not practical as there is no trading
market for these financial instruments. See Notes 3 and 5 for a
description of the terms of these instruments. All other
financial instruments are stated at their carrying value which
approximates their fair value. The carrying amount of cash
equivalents, interest receivable from partners and current
liabilities approximates fair value because of the short-term
maturity of these instruments.
h. Management of the Partnership has made estimates and assumptions
relating to the reporting of assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
Following are the Partnership's assets and liabilities as determined in
accordance with GAAP and for federal income tax reporting purposes at
December 31:
1995 1996
------------------------------- ------------------------
GAAP Tax GAAP Tax
Basis Basis Basis Basis
(in thousands)
Total assets $ 135,175 69,741 $ 130,417 61,521
Total liabilities $ 121,040 125,300 $ 111,529 114,906
(3) Restructuring Agreement
On October 27, 1988, the Partnership, the Corporation, New Claridge,
Webb and the mortgage lenders entered into the Restructuring Agreement.
On June 13, 1989 the required majority of the partners approved the
Restructuring Agreement and on June 16, 1989 the restructuring was
concluded (the "Closing"). The following paragraphs are an overview of
the events that took place as a result of the restructuring.
o Webb transferred all of its rights to the land underlying the
Hotel Assets, the air rights and the related easement to the
Partnership. The Partnership's book value of the Hotel Assets was
not affected due to the uncertainty of the incremental value, if
any, of the land.
o The operating and expansion operating leases were amended to add
the land and air rights, defer portions of rent through 1992
totaling $15,078,000 otherwise payable to the Partnership by New
Claridge, and to abate approximately $39,820,000 of future rents
commencing in 1992. In addition, the Partnership lent to New
Claridge $3.6 million representing, at the Closing, substantially
all of the Partnership's cash and cash equivalents in excess of
amounts required to pay Partnership expenses. The loan bears
interest at 12% per annum that becomes payable at the time the
principal is paid. The
deferred rent and the $3,600,000 loan become due 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.
The Restructuring Agreement requires that the Partnership
maintain cash flows in amounts necessary to pay Partnership
expenses, including debt service, only, and prohibits the
Partnership from making distributions to partners for an
indefinite period of time.
o The Partnership (as successor in interest to DEWNJ) and New
Claridge terminated the Land Option Agreement which gave New
Claridge the option to purchase from the Partnership certain
parcels and tracts of land in Atlantic City, New Jersey. This
termination resulted in payment of $100,000 by the Partnership to
New Claridge.
o New General Partners were admitted to the Partnership. The Former
General Partners became limited partners with an aggregate
limited partnership interest of 0.6%. This limited partnership
interest was made available by reducing proportionately the
limited partnership interests of those limited partners
consenting to the restructuring. In addition, for nominal
consideration, the Former General Partners transferred to the
General Partners all of the outstanding shares of the common
stock of AC Boardwalk Partners Corporation, the corporate general
partner of the Partnership.
(4) Hotel Assets
A summary of Hotel Assets at December 31, 1995 and 1996 is as follows:
Accumulated
Depreciation and Net
December 31, 1995 Cost Amortization Hotel Assets
- ----------------- --------------- --------------- ------------
Building $ 101,353,000 $ 30,828,000 $ 70,525,000
Building improvements 25,911,000 18,223,000 7,688,000
Furniture, fixtures and
equipment 51,881,000 44,432,000 7,449,000
Capital lease asset 1,153,000 574,000 579,000
------------- ------------ ------------
$ 180,298,000 $ 94,057,000 $ 86,241,000
============== ============= =============
Accumulated
Depreciation and Net
December 31, 1996 Cost Amortization Hotel Assets
- ----------------- --------------- ---------------- ------------
Building $ 101,353,000 $ 33,362,000 $ 67,991,000
Building improvements 28,287,000 20,071,000 8,216,000
Furniture, fixtures and
equipment 52,736,000 46,160,000 6,576,000
Capital lease asset 1,153,000 688,000 465,000
------------- -------------- ------------
$ 183,529,000 $ 100,281,000 $ 83,248,000
============== ============== ===============
(5) Long-term Debt
At December 31, 1995 and 1996, long-term debt consisted of the
following:
1995 1996
---- ----
14% Wraparound mortgage, net of $ 93,185,000 $ 84,709,000
unaccreted discount of $9,815,000
and $8,291,000, respectively
14% Expansion mortgage 6,522,000 4,496,000
14% FF&E notes 18,346,000 20,035,000
Capital lease obligations 313,000 107,000
------------- --------------
118,366,000 109,347,000
Less: Current portion of long-term debt 14,051,000 17,227,000
------------- ------------
$ 104,315,000 $ 92,120,000
============= ==============
The wraparound and expansion mortgages are non-recourse obligations as
neither the Partnership nor its partners are personally liable to New
Claridge for non-payment of any principal of, or interest on, the
notes. Various restrictions are placed upon the Partnership's ability
to sell assets and incur additional obligations. Included in the
wraparound mortgage is $20 million of accrued interest, discounted at
14%, which accrued from 1983 to 1988 and has been deferred without
interest until maturity. Monthly principal and interest payments
continue through 1998 with interest only payments from January 1999
until October 2000 at which time a balloon principal payment of $47
million and the $20 million of deferred interest is due. The expansion
mortgage has principal and interest payments of $234,000 due monthly
through September 30, 1998.
The Partnership funds the purchase of additional furniture, fixtures
and equipment ("FF&E") by borrowing from New Claridge at a 14% interest
rate. In addition, during the term of the Expansion Operating Lease,
the Partnership is required to provide New Claridge with expansion FF&E
replacements under the same borrowing arrangement. Generally, one half
of the principal is due in 48 months and the remainder is due 60 months
from the issue date of the individual notes, with the following
exception. As required by the terms of the Claridge's $85 million debt
offering, $8 million was used to finance internal improvements at the
Claridge. The $8 million principal on these notes will come due on
September 30, 2000. All FF&E notes are secured under the wraparound
mortgage up to $25 million.
During 1995 the Partnership financed the purchase of some computer
equipment through a 6.5% capital lease. This thirty-six month lease
required the final six month's payments be made at its inception and
that principal and interest payments of approximately $17,000 be made
monthly until its maturity in July 1997. During 1991 the Partnership
financed the purchase of a Hotel Asset through a 14% capital lease.
This five year lease required monthly principal and interest payments
of approximately $4,000 until its maturity in June 1996.
Aggregate maturities of debt for each of the next five years are as
follows:
1997 $ 17,227,000
1998 18,615,000
1999 2,046,000
2000 77,996,000
2001 1,754,000
-------------
117,638,000
Less: Discount 8,291,000
--------------
$ 109,347,000
=============
(6) Leases
The Partnership leases the Land and the Hotel Assets, excluding the
FF&E, to New Claridge under an operating lease expiring September 30,
1998, with three 10-year renewal options. The Partnership also leases
the FF&E to New Claridge for an amount sufficient to fund payment of
principal and interest on the FF&E notes. The operating leases provide
that New Claridge will have the option to purchase the Hotel Assets and
the leasehold interest in the land and air rights at their fair market
value on September 30, 1998.
Minimum future rental receipts for each of the next five years under
leases to New Claridge are as follows:
1997 $ 50,233,000
1998 42,034,000
1999 7,583,000
2000 12,010,000
2001 1,877,000
-------------
Minimum future rentals $ 113,737,000
===========
Future Partnership activities including anticipated purchases of Hotel
Assets and payments of related debt may cause actual future rentals to
differ from those presented above. Rents are used to fund debt
service, facilities and maintenance costs and fees, general partners'
management fees and
general and administrative expenses of the Partnership. The
Restructuring Agreement requires that the Partnership maintain cash
flows in amounts necessary to pay Partnership expenses including debt
service, only, and is prohibited from making distributions to partners
for an indefinite period of time. Any rents not required for the cash
flow needs of the Partnership are to be deferred up to $15,078,000. As
of December 31, 1991, $15,078,000 in rents had been deferred, and
excess rents are now being abated, as described below. The deferred
rent becomes payable 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. Prior to this amendment,
scheduled rents totaling $39,820,000 were to be abated beginning in
1992 through the end of 1999. Rents abated during the years ended
December 31, 1995 and 1996 amounted to $7,858,000 and $8,307,000,
respectively. Cumulative abated rents as of December 31, 1996 total
$37,066,000, leaving $1,754,000 still to be abated. 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 would become available upon exercising the
Contingent Payment option (see Note 9, "Contingencies"). As of March
1997 the abatement remaining as of December 31, 1996 has been fully
utilized.
The Partnership accounts for leases in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 13, Accounting for Leases, whereby rental income is
recognized on a straight-line basis over the life of the lease. As of
December 31, 1995 and December 31, 1996, deferred rent from New
Claridge included rental income of $24,778,000 and $22,729,000,
respectively, that was earned in excess of actual rent receipts.
(7) Recent Developments at 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.
During 1994 and 1995, the cash provided by operations of the Claridge
was sufficient to meet the Corporation's obligations to pay interest
on the Notes, as well as to make at least some moderate capital
improvements. Commencing in the latter part of 1995, however,
competition in the Atlantic City casino market for bus customers, a
principal source of customers for the Claridge at the time, increased;
this competition intensified even more during 1996 as additional
casino square footage was added, principally due to the opening of the
Trump World's Fair casino. During 1996, the average coin incentive
issued per bus patron at the Claridge increased to approximately $19,
from approximately $13 in 1995. Total cash incentives issued to
Claridge's casino patrons (in the form of coin to play slot machines
and gaming chips to play table games) increased to approximately $30.5
million in 1996, from approximately $25.2 million in 1995. While the
Corporation's promotional costs have 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. To date, the
Corporation has not received any acceptable proposals in regards to the
possible sale of the Corporation.
In November 1996, while the sales efforts were continuing, the
Corporation announced that there was a strong likelihood that the
Corporation would be unable to pay the interest due on the Notes on
February 3, 1997. Accordingly, management, working together with
financial and legal advisors, formulated a plan for restructuring the
Corporation's obligations. The terms of the proposed plan were
presented to the noteholders at a meeting held on December 3, 1996, at
which time the noteholders were urged to form a steering committee or
other representative body to conduct negotiations. Although a group of
noteholders formed and met with the management of the Corporation on a
few occasions, by the time the committee formally organized itself on
January 7, 1997, it consisted of six members representing ownership of
less than 5% of the total amount of Notes outstanding. At that time,
the Corporation determined that the committee did not represent a
sufficient portion of the noteholders to negotiate on behalf of the
noteholders generally. As a result, the Corporation did not formally
recognize the committee and did not engage in any negotiation with the
committee or its members, although it did encourage the members of the
committee to continue to attempt to obtain broader representation of
the noteholders.
On January 12, 1997, management of the Corporation was contacted,
through an agent, by Hilton Hotel Corporation ("Hilton"), regarding a
possible sale of the Corporation to Hilton, and shortly thereafter,
the Corporation began negotiations with Hilton. On January 30, 1997,
the Corporation issued a press release indicating that the Corporation
would not make the interest payment due on the Notes on February 3,
1997, and that the Corporation had entered negotiations with Hilton
regarding acquisition of the Corporation by Hilton through a
prepackaged bankruptcy plan. At that time, a representative of Hilton
indicated that Hilton had acquired approximately 35% to 40% of the
Notes. On February 5, 1997, three holders of the Notes, who were
members of the unofficial committee which they had formed, filed a
petition for involuntary bankruptcy against the Corporation in the
bankruptcy court for the District of New Jersey.
Contemporaneously, the same three holders of the Notes filed a related
state court lawsuit against the Corporation, New Claridge, the
Partnership, certain officers and directors of the Corporation, and
the general partners of the Partnership. On March 4, 1997, contrary to
earlier expectations, the Corporation was able to pay the interest
that was due on the Notes on February 3, 1997, under the 30-day grace
period allowed in accordance with the terms of the indenture governing
the Notes ("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. The
Corporation expects the negotiations with Hilton to continue.
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 further discussion
below); 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.
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
to meet the Partnership's cash requirements through December 31, 1998
(determined without regard to the repayment of the deferred rent). 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).
Also 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 ("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, and
to forbear from taking any action to foreclose on the Expandable
Wraparound Mortgage until February 2002.
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 will need to experience a significant improvement in
operating results in 1997 in order to meet its on-going obligations,
including the interest due on the Notes. Operating results in 1997
have improved over 1996 levels, due primarily to the positive impact
of the availability of the self-parking garage. Although management of
the Corporation believes that operating results will continue to
improve over prior year levels, no assurances as to the continuation
of this improvement can be given. Management will continue to conserve
cash through various cost containment measures, including limiting
capital expenditures in 1997 to approximately $1 million. Given the
various improvements made to the property in recent years, including
the casino expansion in 1994, the construction of the self-parking
garage, and other projects such as the refurbishment of all of its
guest rooms, the current condition of the property is such that the
above-mentioned level of capital expenditures is deemed adequate.
Management will also continue to work with Dillon, Read & Co., Inc. to
pursue a sale of the Corporation or some other plan for a significant
infusion of capital into the Corporation. In addition, New Claridge
has retained the law firm of Zelle and Larson LLP of Minneapolis,
Minnesota to assist in evaluating the recovery of certain expenses
incurred in reopening the self-parking garage and in evaluating
potential lost profit claims as a result of the accident which
occurred in the self-parking garage on July 10, 1996. Management of
the Corporation intends to file a claim to recover these expenses and
lost profits; recovery of these claims would have a positive impact on
New Claridge's financial results and liquidity. No formal claims have
been filed to date, and there is no assurance that the Corporation
will be successful in realizing any recovery.
(8) Related Party Transactions
The common stock of the Corporation and the limited partnership
interests of the Partnership were sold together in a 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 Partnership and the Corporation are independent entities,
approximately 95% of the Corporation's common stock is owned by
persons who also own limited partnership interests in the Partnership.
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, as well as an annual fee equal to 10% of such facility and
maintenance costs not to exceed $530,000 per annum. The agreement
expires on September 30, 1998.
Under the terms of the option to purchase the Contingent Payment (see
Note 9, "Contingencies"), upon purchase of the Contingent Payment, the
Partnership and/or the Corporation would be 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 or the Partnership's contribution
would be contributed through additional abatements of basic rent
payments due under the Operating Lease and the Expansion Operating
Lease. Given the recent operating results at New Claridge (see Note 7,
"Recent
Developments at New Claridge"), it is unlikely that the Corporation
would be able to exercise this Contingent Payment Option using
available working capital, or absent a refinancing or sale
transaction.
(9) Contingencies
The Restructuring Agreement provided for 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 1989 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. The purchase price
may also increase in an amount not to exceed $10 million if future
distributions to Releasing Partners/Investors exceed $20 million. It
is estimated that at December 31, 1996, the aggregate amount owing in
respect of the Contingent Payment was $65.8 million.
Given the recent operating results at New Claridge (see Note 7,
"Recent Developments at New Claridge"), it is unlikely that the
Corporation would be able to exercise this Contingent Payment Option
using available working capital, or absent a refinancing or sale
transaction.
In the event that the option is exercised, it is anticipated that the
Contingent Payment would be canceled so that neither the Corporation
nor the Partnership would have any obligation to make any payment in
respect of the Contingent Payment before making a distribution to
limited partners or shareholders. Upon the purchase and cancellation,
however, the Corporation and the Partnership would 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 if the option is exercised.
Under the terms of the option, upon purchase of the Contingent
Payment, the Partnership and/or the Corporation would be 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
would be contributed through additional abatements of basic rent
payments due under the Operating Lease and the Expansion Operating
Lease.
SCHEDULE III
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. Life
Real Estate and Accumulated Depreciation on
which
Years Ended December 31, 1994, 1995 and 1996 Deprec.
in
Date latest
Gross Amount of Statement of
Initial Cost Cost Capitalized at which Accumu- Con Operations
to Partnership Subsequent to Carried at Close lated struc- Date is
Description Encumbrances(A) Land(B) Building Acquisition of Period (C)(D) Deprec.(E) tion Acq. Computed
- -----------------------------------------------------------------------------------------------------------------------------------
Initial
112,500,000 Cost
Less:
Original Bldg. 101,353,000 N/A 10/31/83 40 yrs
Discount Bldg. Bldg. 1983-
on Impr. 28,287,000 Impr. 25,287,000 1996 N/A 10 yrs
(11,147,000) Mortgage FF&E 53,889,000 FF&E 53,889,000 N/A 1983-1996 7 yrs
------------ ---------- ----------
Hotel &
Casino
Atlantic
City, NJ 109,347,000 - 101,353,000 82,176,000 183,529,000 100,281,000
----------- ------- ----------- ---------- ----------- -----------
NOTES:
(A) Encumbrances represents the amount owed at December 31, 1996
on the Wraparound Mortgage, Expansion Mortgage, FF&E Notes and
Capital lease obligations.
(B) The land under the building was acquired from DEWNJ, at no
cost to the Partnership, as part of the 1989 Restructuring.
(C) The aggregate cost of real estate owned at December 31, 1996
for Federal income tax purposes is $196,181,000.
(D) Reconciliation of Real Estate Carrying Costs:
1994 1995 1996
Balance at beginning of year 168,303,000 177,682,000 180,298,000
Building improvements 6,299,000 259,000 2,376,000
Furniture, fixtures and
equipment (FF&E) acquired 4,384,000 2,459,000 855,000
FF&E retired (311,000) (102,000) -
Construction completed (993,000) - -
------------ ----------- -----------
Balance at end of year 177,682,000 180,298,000 183,529,000
=========== =========== ===========
(E) Reconciliation of Accumulated Depreciation:
1994 1995 1996
Balance at beginning of year 81,583,000 87,541,000 94,057,000
Provision for depreciation 6,017,000 6,550,000 6,224,000
Accumulated depreciation
of FF&E retired (59,000) (34,000) -
---------- ---------- -----------
Balance at end of year 87,541,000 94,057,000 100,281,000
========== ========== ===========
INDEPENDENT AUDITORS' REPORT
The General Partners
Atlantic City Boardwalk Associates, L.P.
We have audited the accompanying financial statements of Atlantic City Boardwalk
Associates, L.P. as listed in the accompanying index. In connection with our
audits of the financial statements, we also have audited the financial
statements scheduled listed in the accompanying index. These financial
statements and the financial statement schedule are the responsibility of the
Partnership's management. Out responsibility is to express an opinion on these
financial statements and the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic City Boardwalk
Associates, L.P. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statements schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth herein.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 7 to the
financial statements, New Claridge has suffered recurring losses from operations
and has a net capital deficiency as of December 31, 1996. The Partnership is
dependent upon New Claridge making its contractual lease payments to provide the
Partnership the ability to make its contractual debt service payments and other
obligations. These circumstances raise substantial doubt about the Partnership's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 7. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick L.L.P.
Las Vegas, Nevada
March 21, 1997