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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 33-27399
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2469174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Indiana Avenue & the Boardwalk, Atlantic City, New Jersey 08401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 340-3400
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, 1998 was 450
units.
PART I
Item 1. Business.
THE FOLLOWING DISCUSSION CONTAINS INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
OF THE OPERATIONS OF ATLANTIC CITY BOARDWALK ASSOCIATES, L.P. COULD DIFFER
MATERIALLY FROM HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED BELOW IN THE
DISCUSSION ENTITLED "CURRENT FINANCIAL SITUATION OF THE CLARIDGE HOTEL AND
CASINO CORPORATION" AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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.
Relationship with the Claridge
Substantially all of the revenues of the Partnership are derived from leases
with New Claridge. Accordingly, the ability of the Partnership to fulfill its
obligations is dependent upon the ability of New Claridge to pay rental payments
when due. The financial stability of the Partnership is therefore dependent upon
the financial condition of New Claridge. The following discussions entitled
"Current Developments at New Claridge," "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." While the Partnership was formed to own and
to lease to the Corporation and its affiliates, certain real estate and related
assets, the Partnership is separate and distinct from the Corporation. Any
person or entity seeking information regarding the Corporation or its debt or
equity securities should review the reports, statements and other information
filed by the Corporation with the Securities and Exchange Commission, and should
not rely upon the Partnership's discussion of the Corporation.
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 93% of the Corporation's common stock is owned by
persons who also own limited partnership interests in the Partnership. The
Partnership does not currently engage in any significant business activities
other than those relating to the Claridge.
In October 1988, the 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.
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 a first mortgage; (ii)
to expand New Claridge's casino capacity by 12,000 square feet in 1994,
including the addition of approximately 500 slot machines and the relocation of
two restaurants and their related kitchens; (iii) to purchase property in 1995
and construct on that property a self-parking garage, which opened in mid-1996;
and (iv) to acquire the Contingent Payment Option (described below). With the
completion of the construction of the self-parking garage, the proceeds of the
offering of the Notes had largely been expended.
Current Developments at New Claridge
The Claridge has reported as follows:
During 1995, the cash provided by operations of the Claridge was sufficient
to meet the Corporation's obligations to pay interest on the Notes, as well
as to make at least some moderate capital improvements. Commencing in the
latter part of 1995, however, competition in the Atlantic City casino
market for bus customers, a principal source of customers for the Claridge
at the time, increased; this competition intensified even more during 1996
as additional casino square footage was added, principally due to the
opening of the Trump World's Fair casino. During 1996, the average coin
incentive issued per bus patron at the Claridge increased to approximately
$19, from approximately $13 in 1995. Total cash incentives issued to
Claridge's casino patrons (in the form of coin to play slot machines and
gaming chips to play table games) increased to approximately $30.5 million
in 1996, from approximately $25.2 million in 1995. While the Corporation's
promotional costs have increased significantly, total casino revenues in
1996 actually decreased from 1995 levels. It had been the expectation of
the Corporation that, upon the opening of its new self-parking garage, the
Corporation would be able to reduce its reliance on the bus patron market;
however, the Corporation was forced to close the garage facility on July
10, 1996, only ten days after its opening following a fatal accident.
Because the facility was not able to reopen until the end of September
1996, the Corporation lost any possible benefit of the facility during the
normally busy summer season. In addition, severe winter weather in the
first quarter of 1996 adversely affected revenues. As a result, the
Corporation experienced a net loss for 1996 of $15.4 million, compared to a
net loss of $1.9 million in 1995.
The Corporation has experienced recurring losses and serious deterioration
in its cash flow since 1996. Since the Corporation does not have
substantial cash reserves or access to a line of credit, the Corporation
needed to experience significant improvements in operating results in 1997
over 1996 levels in order to meet its on-going obligations, including the
interest due on the Notes. Operating results in 1997 did improve over 1996
levels, due primarily to the positive impact of the availability of the
self-parking garage, lower bus package pricing, and other cost containment
initiatives. However, operating results in 1998 fell below 1997 levels due
to increased competition for casino customers. In 1998, the Corporation
experienced a net loss of $9.4 million, compared to a net loss of $6.0
million in 1997. In the fall of 1998, New Claridge redirected its bus
program to reduce the number of customers who arrive by bus, and, thereby,
related costs. Total coin issued to bus passengers in 1998 was $13.5
million, compared to $15.0 million of coin issued to bus passengers in
1997. Marketing efforts are being directed toward the mid-level slot
customer through the use of promotions and advertising. Additionally,
management continues to conserve cash through various cost containment
measures. Management will also consider various refinancing alternatives,
including a sale of the Corporation, or a restructuring of its financial
obligations.
In view of the operating results of New Claridge in 1998, and in order to
meet its obligations, management of the Corporation took several steps to
enhance its cash position, through both operational changes, including the
previously mentioned redirection of the bus program, and certain
transactions with PDS Financial Corporation ("PDS") and the New Jersey
Casino Reinvestment Development Authority ("CRDA"), as further discussed
below.
In December 1997, New Claridge obtained a commitment from PDS for a sale
lease-back facility ("Facility"). Under the terms of the Facility, New
Claridge could sell certain of its slot machines to PDS under a sale
lease-back arrangement, for a specified amount per slot machine, for up to
$1.8 million. In February 1998, New Claridge sold 370 slot machines to PDS
for approximately $1 million under this Facility. The machines will be
leased back to New Claridge under an operating lease arrangement for two
years. After two years, New Claridge has an option to either purchase the
machines, renew the lease arrangement for twelve months, or return the
equipment to PDS. In December 1998, New Claridge completed the sale of an
additional 379 slot machines to PDS for approximately $776,000, under terms
similar to those described above. No additional financing is available
under this Facility.
In October 1998, the CRDA approved the direct investment of New Claridge
funds, already on deposit with the CRDA, and the completion of certain
donations of New Claridge funds also already on deposit. These transactions
resulted in the receipt by New Claridge of approximately $930,000 from the
CRDA in December 1998.
In addition, in February 1999, the Corporation and New Claridge agreed to a
settlement of approximately $2.3 million in the arbitration proceedings
concerning the accident which took place in New Claridge's self-parking
garage in July 1996. The settlement proceeds were received by New Claridge
in late February 1999.
As a result of these transactions, on March 2, 1999, New Claridge was able
to pay the interest due on the Notes on February 1, 1999, under the 30-day
grace period allowed in accordance with the terms of the indenture
governing the Notes.
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. The initial terms of both leases expired on September 30,
1998; each lease provides for three ten-year renewal options at the
election of New Claridge. In connection with the March 1, 1997
restructuring agreement (discussed below), New Claridge agreed to exercise
the first of the ten-year renewal options, extending the term of the
Operating Lease and Expansion Operating Lease through September 30, 2008.
Operating Lease and Expansion Operating Lease
Basic rent during the renewal term of each lease is calculated pursuant to
a defined formula, with such rent for the lease year commencing October 1,
1998 through September 30, 1999 not to be more than $29.5 million nor less
than $24 million for the Operating Lease, and not to be more than $3
million nor less than $2.5 million for the Expansion Operating Lease. In
addition, in each subsequent year, rent will be calculated pursuant to a
defined formula, but may not exceed 10% more than the basic rent for the
immediately preceding lease year. Basic rent, as calculated pursuant to the
defined formula, for the lease year commencing October 1, 1998, will be $24
million for the Operating Lease and $2.5 million for the Expansion
Operating Lease.
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 at final maturity
of the Expandable Wraparound Mortgage. 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.
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
could not exceed $10 million in any one calendar year, nor $38,820,000 in
the aggregate. All of the $38,820,000 of available rent abatements was
fully utilized by the end of the first quarter of 1997.
The Fifth Amendment to the Operating Lease and the Fourth Amendment to the
Expansion Operating Lease, which were effective on March 1, 1997, provided
for the abatement of $867,953 of basic rent and for the deferral of
$1,300,000 of basic rent on March 1, 1997, and provides 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).
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).
Under the terms of the Operating Lease, as amended effective March 1, 1997,
New Claridge had an option to purchase (the "Purchase Option"), on
September 30, 1998, the Hotel Assets and the underlying land. To exercise
the Purchase Option, New Claridge was required to give notice to the
Partnership, at least nine months prior to the option date, of its election
to do so. Based on the current financial situation, New Claridge did not
give such notice to the Partnership in respect of the September 30, 1998
option date. However, New Claridge may also exercise an option, on
September 30, 2003, to purchase the Hotel Assets and the underlying land on
January 1, 2004, for their fair market value at the time the option is
exercised.
Effective September 30, 1998, the Operating Lease and Expansion Operating
Lease were further amended, pursuant to a Sixth Amendment to the Operating
Lease and Fifth Amendment to the Expansion Operating Lease (the "Sixth
Amendment"), to allow for the deferral of $1.1 million of rent in either
February 1999 or March 1999, dependent upon certain conditions being met.
These conditions, which must have occurred prior to March 2, 1999, include
(i) New Claridge having received the proceeds in connection with its
settlement of the parking garage litigation, and (ii) the Corporation or
New Claridge having paid the interest due on the Notes on February 1, 1999.
New Claridge received the proceeds from the settlement of the Parking
garage litigation in February 1999, and paid the interest due on the Notes
on March 2, 1999, within the 30-day grace period allowed in accordance with
the terms of the Indenture. The $1.1 million of basic rent deferred in 1999
is to be paid to the partnership in monthly installments of $25,000
commencing January 1, 2000 until paid in full. This amendment also provides
for additional abatements of rent, through December 31, 2004, as necessary
to reduce the Partnership's cash flow to an amount necessary only to meet
the Partnership's cash requirements; these abatements, however, are to be
reduced by specified amounts for each period commencing January 1, 2000 and
ending December 31, 2004 ($83,333 per month in 2000, $130,000 per month in
2001, $180,000 per month in 2002 and 2003, and $130,000 per month in 2004).
In addition to the deferral and abatements of rent provided for in the
Sixth Amendment, the amendment provides for the payment of $3.5 million of
additional basic rent on the earlier of (i) the maturity date of the
Expandable Wraparound Mortgage Note (see below), (ii) such earlier date, if
any, as the entire principal amount of the Expandable Wraparound Mortgage
becomes due and payable, or (iii) the date on which any merger,
consolidation, or similar transaction to which the Corporation or New
Claridge is a party, or any sale of all or substantially all of the assets
of the Corporation or New Claridge is consummated, or any change in control
of the Corporation or New Claridge occurs.
If the Partnership should fail to make any payment due under the Expandable
Wraparound Mortgage (see below), 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 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.
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.
Effective September 30, 1998, the Corporation, New Claridge, and the
Partnership agreed to amend the March 1997 restructuring agreement to
provide for an extension of the maturity date of the Expandable Wraparound
Mortgage to January 1, 2005. In addition, the Expandable Wraparound
Mortgage Agreement and Note were amended to defer the principal payments
which were payable during the fourth quarter of 1998 (totaling $3.5
million) to the earlier of (i) the maturity date of the Expandable
Wraparound Mortgage Agreement and Note, (ii) such earlier date, if any, as
the entire principal amount of the Expandable Wraparound Mortgage Note
becomes due and payable, of (iii) the date on which any merger,
consolidation, or similar transaction to which the Corporation or New
Claridge is a party, or any sale of all or substantially all of the assets
of the Corporation or New Claridge is consummated, or any change of control
of the Corporation or New Claridge occurs.
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) full or partial satisfaction of the
Expandable Wraparound Mortgage; and (iii) 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. It is
estimated that at December 31, 1998, the aggregate amount owing in respect
of the Contingent Payment was approximately $88.3 million.
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 New Jersey Casino Control Commission.
On February 23, 1996, the Corporation acquired an option to purchase, at a
discount from the carrying value, the Contingent Payment. The purchase
price of the option was $1 million, and the option could have been
exercised any time prior to December 31, 1997. Given the recent operating
results at New Claridge (see Item 1. Business - "Recent Developments at New
Claridge"), the Corporation was not able to exercise this Contingent
Payment Option, and it expired in accordance with its terms on December 31,
1997.
Current Financial Situation of The Claridge Hotel and Casino Corporation
The Claridge has reported as follows:
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 1,752 slot
machines and sixty-four table games, including thirty-six blackjack tables,
eight craps tables, five roulette tables, three Caribbean stud poker
tables, two mini-baccarat tables and two baccarat tables, and eight 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, 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 (the "Act") and regulations thereunder which affect virtually
all aspects of casino operations.
Results of Operations for the Year Ended December 31, 1998 as Compared to
the Year Ended December 31, 1997
The Corporation had a net loss of $9,415,000 for the year ended December
31, 1998, as compared to a net loss of $5,979,000 for the year ended
December 31, 1997. The overall increase in net loss was due mainly to an
increase in Casino operating expenses offset by a decrease in rent expense
to the Partnership. Casino operating expenses increased approximately $5.4
million, resulting from higher payroll costs and marketing costs related to
the initiatives to increase table games business, higher costs of providing
promotional allowances, and higher equipment rental costs as a result of
the limited capital expenditure funding available and certain popular
varieties of slots being available for lease only. Rent expense to the
Partnership decreased primarily from increased abatements of rent, which
are recorded as a reduction to rent expense. During 1998 approximately
$11.1 million of rent was abated, compared to approximately $9.0 million in
1997.
Liquidity and Capital Resources
At December 31, 1998, the Corporation had a working capital deficiency of
$23,685,000, as compared to a working capital deficiency of $4,138,000 at
December 31, 1997. The increase in the working capital deficiency is
principally attributable to decreases in cash and cash equivalents of
$2,626,000, a decrease in receivables of $15,906,000 (primarily due to a
decrease in the current portion of the Expandable Wraparound Mortgage due
from the Partnership resulting from principal payments received), a
decrease in prepaid expenses and other current assets of $200,000, an
increase in other current liabilities of $209,000, an increase in accounts
payable of $333,000, and an increase in the current portion of long term
debt (which represents capital lease obligations) of $312,000. Current
liabilities at December 31, 1998 and 1997 included deferred rental payments
of $15,078,000, and the $3,600,000 loan from the Partnership plus accrued
interest thereon of $4,122,000 and $3,690,000 at December 31, 1998 and
1997, respectively. The deferred rental payments and the $3,600,000 loan
will only be payable upon (i) a sale or refinancing of the Claridge; (ii)
full or partial satisfaction of the Expandable Wraparound Mortgage; and
(iii) full satisfaction of any first mortgage then in place. If these
amounts were not included in current liabilities, the Corporation's working
capital deficiency at December 31, 1998 would have been $885,000 and the
Corporation would have had working capital of $18,230,000 at December 31,
1997.
Competition
Competition in the Atlantic City casino-hotel market is intense. As of
December 31, 1998, the twelve existing casino facilities offered
approximately 1,212,000 square feet of gaming space, a 3.3% increase over
the casino square footage as of December 31, 1997 of approximately
1,173,000 square feet. This increase was primarily due to a casino
expansion at Caesars Atlantic City Casino, which added approximately 800
slot machines to its existing casino in the second quarter of 1998. The
increase in casino square footage in 1997 over 1996 was approximately 8.6%,
resulting from the opening of Bally's Wild Wild West Casino in July 1997.
However, for the years ended December 31, 1998 and 1997, citywide gaming
revenues, as reported, increased only 3.6% and 2.4%, respectively, over
prior year levels.
The Atlantic City gaming market is not expected to experience significant
growth over the next several years until Atlantic City transforms itself
from a "day-trip" market to a "destination resort." As a result of current
high room occupancy rates, a more favorable regulatory climate, the reduced
threat of competition from potential new gaming jurisdictions, and
significant infrastructure developments making Atlantic City more
accessible, over $4.6 billion of new investment has been announced or
recently completed in the Atlantic City gaming market. In addition to
recent increases in casino space and hotel rooms at the existing casinos,
several Las Vegas casino operators have announced plans to construct new
casinos in Atlantic City.
In addition to the major casino expansions and the announced new casinos,
major infrastructure improvements have begun. A new $268 million convention
center, which was completed in May 1997, contains approximately 500,000
square feet of exhibition space, 45 meeting rooms, food service facilities
and a 1,600-car underground parking garage. The new convention center is
the largest exhibition space between Boston and Atlanta. A 500-room
non-casino hotel which is linked to the new convention center by an
elevated walkway, opened in November 1997. The development of the corridor
which links the convention center to the boardwalk area is complete, and
features a wide, landscaped boulevard with a reflecting pool, an expanded
park area, and a 60-foot lighthouse which is illuminated each night by a
light show. In February 1997, construction of the new $7.5 million bus
terminal, which is a major component of this corridor, was completed. The
State of New Jersey is also implementing a capital plan of approximately
$125 million to upgrade and expand the Atlantic City International Airport.
Construction of a $300 million tunnel, which will provide access from the
Atlantic City Expressway to the marina casino district, began in late 1998.
All casinos in Atlantic City are part of hotels which offer dining,
entertainment, and other guest facilities. As the size of the gaming
facilities continue to grow, the need for additional hotel rooms has become
evident. During 1996, the number of hotel rooms available citywide
increased with the opening of the Trump World's Fair casino (approximately
500 rooms) and the Tropicana's new 600-room hotel tower. Several existing
Atlantic City casinos also increased their hotel space in 1997, including
Harrah's (approximately 400 rooms), Hilton (approximately 300 rooms), and
Caesars (approximately 600 rooms), for a total increase in 1997 of
approximately 1,500 hotel rooms. Competition among the existing
casino-hotels is based on factors such as promotional allowances and
incentives; the attractiveness of the casino area; advertising; customer
service; the availability, quality and price of rooms, food, and beverage;
ease and availability of parking and accessing the facility; and
entertainment.
The Atlantic City business is seasonal, with the highest level of activity
occurring during the summer months, and the lowest level of activity during
the winter months. The primary markets for Atlantic City casino patrons are
Philadelphia, New Jersey and New York City, together with the secondary
markets of central Pennsylvania, Delaware, Baltimore and Washington, D.C.
Casinos offer incentives, in the form of cash and complimentaries for
rooms, food and beverages, to their customers based on their casino play.
In recent years, competition for, and as a result, incentives offered to,
customers has increased significantly. Many Atlantic City casino patrons
arrive by bus and stay for approximately six hours. Competitive factors in
Atlantic City require the payment of cash incentives and coupons for use
towards the price of meals to patrons arriving under bus programs sponsored
by the casino operators. Competition for bus patrons intensified in 1996,
in the form of higher coin incentives; New Claridge was forced to match the
citywide increases, thus increasing its per patron average coin cost to
approximately $19 in 1996 from approximately $13 in 1995. New Claridge
relied heavily on attracting patrons who travel to Atlantic City by bus
because the Claridge previously lacked a self-parking facility, and
therefore had to remain competitive with other casino operators in regards
to the incentives offered. Even with its 1,200-space parking facility, New
Claridge continued to rely on its bus customers as a significant source of
business in 1997 and 1998. In 1997, citywide bus package pricing
competition eased somewhat; the average coin cost per patron arriving by
bus to the Claridge decreased to $16 in 1997. However, in 1998, bus package
pricing competition began to increase again, fueled by the expansion at
Caesars Atlantic City Casino (which added approximately 800 slot machines
in early 1998), as well as the opening of Bally Park Place's bus
transportation center in the third quarter of 1998. In response to
increasing bus package pricing, New Claridge redirected its marketing
efforts to reduce the number of customers who arrive by bus, and, thereby,
related costs. In the fourth quarter of 1998, 130,000 passengers were
brought to the Claridge by bus, compared to 207,000 bus passengers in the
same period of 1997, a reduction of approximately 37%. Instead, efforts are
being directed toward the mid-level slot customer through the use of direct
marketing promotions and advertising, as well as the continued efforts to
increase the table games segment of the 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 table game "hold" percentages
(the ratio of win to the amount of gaming chips purchased by patrons). The
majority of the Claridge's casino revenue is generated by slot machine
play, although efforts have been taken in recent years to increase table
games play. In 1997, 76% of the Claridge's casino revenue came from slot
play as compared to 69% reported for all Atlantic City properties. In 1998,
74% of the Claridge's casino revenue generated from slot play, compared to
70% for all Atlantic City casinos.
The key elements of New Claridge's marketing plan include the use of
complimentaries, promotional activities, entertainment events, player
development hosts, a bus program, and the use of commissioned agents to
attract groups from outside the company's traditional market areas. New
Claridge also operates a direct marketing program to attract and retain
customers. New Claridge's Compcard Gold Program, which allows patrons to
earn various complimentaries, including coins for slot machine play and
gaming chips for table play, based on their levels of gaming activity,
provides a valuable database of information on playing preferences,
frequency and denominations of play, and the amount of gaming revenues
produced by gaming patrons. Because of the expanded facilities and
amenities now offered at the Claridge, the "Because Smaller is Friendlier"
positioning statement was changed to "Smaller, Friendlier and So Much
More." This position retains the equity in the intimacy-seeking patron, but
extends it to communicate that the Claridge now has a facility capable of
comfortably servicing a larger customer base, and offering the same
amenities and entertainment found at larger Atlantic City casino hotels.
Competition in Atlantic City also extends to the employment market. The
Commission has promulgated regulations which require staffing levels at
Atlantic City casinos which are higher than those for casino-hotels in
Nevada. In addition, although the January 1995 amendments to the Act have
eased the licensing requirements for some employees, all of New Claridge's
casino employees must be licensed. Partly as a result of the licensing
requirements, there has been intense competition for experienced casino
employees in Atlantic City. Difficulties in hiring personnel licensed by
the Commission have elevated labor costs, and licensed personnel frequently
leave their current positions for higher paying jobs in other casinos. In
addition, the expansion of casino gaming into other jurisdictions has
increased the competition for experienced casino management personnel.
Casino competition outside of New Jersey includes land-based casinos, river
boat gaming, slot machines at racetracks, and Indian gaming. By far, the
most competitive threat to Atlantic City has been the Indian gaming
operations at Foxwoods and the Mohegan Sun casinos in Connecticut, and the
slot machine facilities at the Delaware racetracks. The two Indian gaming
casinos in Connecticut, with a combined total of approximately 8,700 slot
machines as of December 31, 1998, reported total slot win of $1.1 billion
for 1998, an 18% increase over 1997 slot revenue of $945 million. In
Delaware, the three tracks that are currently authorized to offer slot
machine gaming had a combined total of approximately 3,000 slot machines as
of the end of 1998. These machines generated $350.8 million of slot revenue
during the year, an increase of 17% over 1997 revenue. The Pennsylvania
Senate recently voted against a bill, which would have allowed the state's
voters to consider the authorization of riverboat casinos, slot machines at
racetracks, and video poker in drinking establishments. It is unlikely that
Pennsylvania's Legislature will consider another gambling bill while the
current Governor, whose term ends in January 2003, is in office. However,
the effect of any future legalization of casino gaming in Pennsylvania on
the Atlantic City market would depend on the form and scope of such gaming.
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. 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.
The Partnership is not involved in any material litigation.
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 1998.
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 481 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, 1998.
As of or for the year ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(not covered by Independent Auditors' Report) (a)
(in thousands)
Net income (loss)................... $ (1,754) 2,937 4,753 2,723 1,782
Net income (loss) per limited
partnership unit (b).................. $ (3.83) 6.42 10.39 5.95 3.90
Total assets ........................ $ 104,713 118,244 130,417 135,175 140,309
Long term obligations,
net of current portion ........... $ 79,622 75,465 92,120 104,315 114,268
Partners' capital accounts (deficit) $ 20,401 21,825 18,888 14,135 11,412
(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, 1998
as Compared to the Year Ended December 31, 1997
Rental income for the year ended December 31, 1998 decreased $7,086,000 as
compared to the year ended December 31, 1997. This decrease is primarily due to
the abatement of rent pursuant to the March 1, 1997 and September 30, 1998
amendments to the Operating Lease and Expansion Operating Lease (see "Liquidity
and Capital Resources"). Prior to these amendments, rental income (including the
effect of the $38.8 million of rent abatements provided in accordance with the
1989 Restructuring Agreement) was recognized on a leveled basis over the initial
lease term (ending September 30, 1998), in accordance with Statement of
Financial Accounting Standards No. 13. Since the amount of abatements permitted
in accordance with these amendments will vary depending on the Partnership's
cash flow, leveling of these abatements over the lease term is not possible; the
actual amount abated on a monthly basis is recorded as a reduction of rental
income. For the year ended December 31, 1997 the amount of rent abated in
accordance with the March 1997 amendments was $9,048,000, compared to
$11,145,000 in 1998 in accordance with the March 1997 and September 1998
amendments. In connection with the March 1, 1997 restructuring agreement, New
Claridge agreed to exercise the first of the ten-year renewal options, extending
the term of the Operating Lease and Expansion Operating Lease through September
30, 2008. The renewal rates were for an amount significantly lower than the
original lease amounts. Basic rent for the lease year commencing October 1, 1998
is $24 million for the Operating Lease and $2.5 million for the Expansion
Operating Lease. In addition to the basic rent, New Claridge pays as additional
rent, certain expenses and debt service relating to furniture, fixture and
equipment replacements and building improvements ("FF&E"). During 1997, FF&E
note principal and interest payments were higher than in 1998 resulting in
decreased additional rents in 1998. The overall decrease in rents is due to the
abatement of rents, the renewal of the Operating Lease and Expansion Operating
Lease at significantly lower rent amounts, as well as the decrease in additional
rents.
For the year ended December 31, 1998, interest expense decreased $2,070,000 from
the prior year due to principal payments made during 1997 and 1998 that reduced
the average outstanding balance of the wraparound and expansion mortgages and
FF&E notes.
General and administrative expenses for the year ended December 31, 1998
decreased $105,000 when compared to the same period in 1997. Professional fees
during 1997 were significant due to the Corporation's attempted reorganization
last year, resulting in reduced fees in 1998. Also, insurance expense decreased
due to a decrease in the insurance premium.
Results of Operations for the Year Ended December 31, 1997
as Compared to the Year Ended December 31, 1996
Rental income for the year ended December 31, 1997 decreased $4,838,000 as
compared to the year ended December 31, 1996. This decrease is primarily due to
the abatement of rent pursuant to the March 1, 1997 amendments to the Operating
Lease and Expansion Operating Lease (see "Liquidity and Capital Resources").
Prior to these amendments, rental income (including the effect of the $38.8
million of rent abatements provided in accordance with the 1989 Restructuring
Agreement) was recognized on a leveled basis over the initial lease term (ending
September 30, 1998), in accordance with Statement of Financial Accounting
Standards No. 13. Since the amount of abatements permitted in accordance with
the March 1997 amendments will vary depending on the Partnership's cash flow,
leveling of these abatements over the lease term is not possible; the actual
amount abated on a monthly basis is recorded as a reduction of rental income.
For the year ended December 31, 1997 the amount of rent abated in accordance
with the March 1997 amendments was $9,048,000. In addition to the basic rent,
New Claridge pays as additional rent, certain expenses and debt service relating
to furniture, fixture and equipment replacements and building improvements
("FF&E"). During 1997, FF&E note principal and interest payments were higher
than in 1996 resulting in increased additional rents in 1997. The overall
decrease in rents is due to the abatement of rents offset by the increase in
additional rents.
Investment income earned on repurchase agreements decreased $66,000 for the year
ended December 31, 1997 as compared to the year ended December 31, 1996.
Investment income decreased due to a reduction in cash available to invest. On
March 1, 1997 the Partnership's cash flow was reduced $1.3 million as a result
of deferred rent from New Claridge which is to be paid to the Partnership on a
monthly basis through October 1999.
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 decreased $479,000 during the year ended December 31,
1997 as compared to the same period in 1996. This decrease is due to an overall
decrease in New Claridge's repairs and maintenance expenditures in an effort to
conserve cash.
For the year ended December 31, 1997, interest expense decreased $1,792,000 from
the prior year due to principal payments made during 1996 and 1997 that reduced
the average outstanding balance of the wraparound and expansion mortgages and
FF&E notes.
Depreciation and amortization expense for the year ended December 31, 1997
decreased $817,000 as compared to the same period in 1996. Assets purchased
during the 1986 expansion became fully depreciated in mid-1996. Therefore,
depreciation expense taken on these assets during the first half of 1996 was not
available during 1997, resulting in decreased depreciation expense in 1997.
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 were deferred or abated so that excess cash did not accumulate
in the Partnership. The 1997 restructuring and 1998 amendment to the
restructuring continue this deferral or abatement of excess cash flow through
2004. 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) full or
partial satisfaction of the Expandable Wraparound Mortgage; and (iii) 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 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 could not exceed $10 million in any one calendar
year, nor $38,820,000 in the aggregate. All of the $38,820,000 of available rent
abatements was fully utilized by the end of the first quarter of 1997.
The Fifth Amendment to the Operating Lease and the Fourth Amendment to the
Expansion Operating Lease, which were effective on March 1, 1997, provided for
the abatement of $867,953 of basic rent and for the deferral of $1,300,000 of
basic rent on March 1, 1997, and provides 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).
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).
Under the terms of the Operating Lease, as amended effective March 1, 1997, New
Claridge had an option to purchase, on September 30, 1998, the Hotel Assets and
the underlying land. To exercise this option, New Claridge was required to give
notice to the Partnership, at least nine months prior to the option date, of its
election to do so. Based on the current financial situation, New Claridge did
not give such notice to the Partnership in respect of the September 30, 1998
option date. However, New Claridge may also exercise an option, on September 30,
2003, to purchase the Hotel Assets and the underlying land on January 1, 2004,
for their fair market value at the time the option is exercised.
Effective September 30, 1998, the Operating Lease and Expansion Operating Lease
were further amended, pursuant to a Sixth Amendment to the Operating Lease and
Fifth Amendment to the Expansion Operating Lease (the "Sixth Amendment"), to
allow for the deferral of $1.1 million of rent in either February 1999 or March
1999, dependent upon certain conditions being met. These conditions, which must
have occurred prior to March 2, 1999, include (i) New Claridge having received
the proceeds in connection with its settlement of the parking garage litigation,
and (ii) the Corporation or New Claridge having paid the interest due on the
Notes on February 1, 1999. New Claridge received the proceeds from the
settlement of the Parking garage litigation in February 1999, and paid the
interest due on the Notes on March 2, 1999, within the 30-day grace period
allowed in accordance with the terms of the Indenture. The $1.1 million of basic
rent deferred in 1999 is to be paid to the partnership in monthly installments
of $25,000 commencing January 1, 2000 until paid in full. This amendment also
provides for additional abatements of rent, through December 31, 2004, as
necessary to reduce the Partnership's cash flow to an amount necessary only to
meet the Partnership's cash requirements; these abatements, however, are to be
reduced by specified amounts for each period commencing January 1, 2000 and
ending December 31, 2004 ($83,333 per month in 2000, $130,000 per month in 2001,
$180,000 per month in 2002 and 2003, and $130,000 per month in 2004).
In addition to the deferral and abatements of rent provided for in the Sixth
Amendments, the amendment provides for the
payment of $3.5 million of additional basic rent on the earlier of (i) the
maturity date of the Expandable Wraparound Mortgage Note (see below), (ii) such
earlier date, if any, as the entire principal amount of the Expandable
Wraparound Mortgage becomes due and payable, or (iii) the date on which any
merger, consolidation, or similar transaction to which the Corporation or New
Claridge is a party, or any sale of all or substantially all of the assets of
the Corporation or New Claridge is consummated, or any change in control of the
Corporation or New Claridge occurs.
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 $1,973,000 as of December
31, 1998 and $19,147,000 as of December 31, 1997. The decrease in the deficiency
is primarily the result of the maturity of the Expansion Mortgage on September
30, 1998, in addition to a change in the Wraparound Mortgage payment schedule
from principal and interest payments in 1998 to interest only payments for 1999
through 2004. 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 2004 in the September 1998 amendment
to 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.
The Partnership is aware of the issue associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000" problem
is the result of computer programs which were written using two digits rather
than four to define the applicable year, which could cause certain systems to
recognize the year 2000 as the year 1900. The Partnership has addressed this
issue and does not anticipate any significant costs associated with these system
changes. The Partnership has also updated its computer accounting system and
software with confirmation from the vendors of their year 2000 compliance.
Substantially all of the Partnership's revenues are derived from the New
Claridge, therefore any year 2000 issues impacting on New Claridge could also
impact the Partnership's financial condition. The New Claridge has reported in
its Annual Report that it has addressed this issue and does not expect the
amounts required to be expensed related to correcting this problem to have a
material effect on its financial position or results of operations. Although
management of the Corporation anticipates completion of this project by the end
of 1999, there can be no assurances of this. If the modifications are not
complete timely, the year 2000 problem could have a material impact on the
Corporation's and the Partnership's ability to conduct business. The Partnership
does not have a contingency plan, but is currently discussing such a plan.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership has no exposure to market risks as all debt instruments have
fixed interest rates and the Partnership does not have any investment portfolios
that may be exposed to market risk due to interest changes.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedules are set forth at
pages F-1 to F-20 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 57
Gerald C. Heetland General Partner 58
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., and its wholly owned subsidiaries,
including Arizona Charlie's, Inc., from January 1997 to January 1999, at which
time he ceased to represent Becker Gaming, Inc. due to change in ownership at
Arizona Charlie's, Inc., which he continues to serve as General Counsel to the
present time. 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, 1998, 1997 and 1996.
Other Annual
Individual Capacity Year Compensation
Anthony C. Atchley General Partner 1998 $65,000
1997 $65,000
1996 $65,000
Gerald C. Heetland General Partner 1998 $65,000
1997 $65,000
1996 $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 93% 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.
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*****
10 (p) Form of Sixth Amendment to Operating Lease Agreement and Fifth
Amendment to Expansion Operating Lease Agreement
10 (q) Form of Amendment to Restructuring Agreement
10 (r) Form of Amendment to Wraparound Mortgage Agreement and Note
*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.
*****Exhibits are incorporated by reference to the Exhibits filed with Form 10-K
for the fiscal year ended December 31, 1996 filed with the Securities and
Exchange Commission on April 14, 1997.
(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: March 30, 1999 /s/ ANTHONY C. ATCHLEY
___________________________________
by Anthony C. Atchley, General Partner
Date: March 30, 1999 /s/ GERALD C. HEETLAND
___________________________________
by Gerald C. Heetland, General Partner
Date: March 30, 1999 /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: March 30, 1999 /s/ GERALD C. HEETLAND
by Gerald C. Heetland, General Partner and
Chief Financial Officer
Date: March 30, 1999 /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, 1997 and 1998 ............. F-3
Statements of Operations For the Years Ended
December 31, 1996, 1997 and 1998 ....................... F-4
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1996, 1997 and 1998 ... F-5
Statements of Cash Flows For the Years Ended
December 31, 1996, 1997 and 1998......................... F-6
Notes to Financial Statements For the Years Ended
December 31, 1996, 1997 and 1998......................... F-7
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation... F-20
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 of December 31, 1997 and 1998, and the related statements of
operations, partners' capital accounts (deficit) and cash flows for the
three-year period ended December 31, 1998. 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, 1997 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
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 experienced diminishing liquidity as a result of a deterioration in its
cash flow and limited availability of working capital sources. 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
Schedule III is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada
March 9, 1999
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Balance Sheets
December 31, 1997 and 1998
1997 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 552,000 1,527,000
Rent due from New Claridge 810,000 786,000
Interest receivable from partners 41,000 35,000
Prepaid expenses 254,000 210,000
Other assets 150,000 159,000
--------- ---------
Total current assets 1,807,000 2,717,000
----------- -----------
Hotel Assets (notes 4 and 5) 183,707,000 184,318,000
Less: Accumulated depreciation and amortization (105,660,000) (110,952,000)
----------- -----------
Net Hotel Assets 78,047,000 73,366,000
----------- -----------
Note receivable from New Claridge, including accrued interest of
$3,690,000 and $4,122,000 in 1997 and 1998, respectively 7,290,000 7,722,000
Deferred rent from New Claridge (notes 3 and 6) 31,022,000 20,905,000
Intangibles, net of accumulated amortization of
$3,727,000 and $3,802,000 in 1997 and 1998, respectively 78,000 3,000
----------- -----------
$ 118,244,000 104,713,000
=========== ===========
Liabilities and Partners' Capital Accounts
Current liabilities:
Accounts payable $ 1,391,000 1,764,000
Accrued interest due to New Claridge 948,000 861,000
Current portion of long-term debt due principally to
New Claridge (note 5) 18,615,000 2,065,000
---------- ----------
Total current liabilities 20,954,000 4,690,000
Long-term debt due principally to New Claridge, including
accrued interest of $20,000,000 in 1997 and 1998 (note 5) 75,465,000 79,622,000
---------- ----------
Total liabilities 96,419,000 84,312,000
---------- ----------
Partners' capital accounts (deficit):
New general partners 134,000 116,000
Former general partners 191,000 180,000
Special limited partners (158,000) 155,000
Investor limited partners 21,658,000 19,950,000
---------- ----------
Total partners' capital accounts (deficit) 21,825,000 20,401,000
Commitments and contingencies (notes 5, 6, 7 and 9) ----------- ----------
$ 118,244,000 104,713,000
================ ===========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Operations
For the Years Ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Revenues:
Rent from New Claridge for the
lease of Hotel Assets (notes 3 and 6) $ 39,398,000 34,560,000 27,474,000
Interest from New Claridge 432,000 432,000 432,000
Interest from Special Limited Partners 36,000 36,000 27,000
Investment 100,000 34,000 52,000
Other - 2,000 1,000
---------- ---------- ----------
39,966,000 35,064,000 27,986,000
---------- ---------- ----------
Expenses:
Cost of maintaining and repairing
Hotel Assets paid to New Claridge 12,116,000 11,637,000 11,565,000
Interest, principally on mortgages to
New Claridge (note 5) 16,034,000 14,242,000 12,172,000
General and administrative 609,000 611,000 506,000
General Partners' management fee 130,000 130,000 130,000
Depreciation and amortization 6,324,000 5,507,000 5,367,000
---------- --------- ----------
35,213,000 32,127,000 29,740,000
---------- ---------- ----------
Net income (loss) $ 4,753,000 2,937,000 (1,754,000)
========== ========== ===========
Net income (loss) per limited partnership unit
- basic and diluted (note 1)
(450 units outstanding at the end of each year) $ 10,391 6,422 (3,833)
========== ========== ==========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Partners' Capital Accounts (Deficit)
For the Years Ended December 31, 1996, 1997 and 1998
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, 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
Net income 29,000 18,000 2,000 27,000 702,000 2,159,000 2,937,000
------- ------- ------- ------- --------- ---------- ---------
Partners' Capital
Accounts (Deficit),
December 31, 1997 134,000 191,000 (10,000) (148,000) 5,295,000 16,363,000 21,825,000
Capital contributions - - 26,000 304,000 - - 330,000
Net loss (18,000) (11,000) (1,000) (16,000) (419,000) (1,289,000) (1,754,000)
-------- -------- ------- -------- --------- ----------- -----------
Partners' Capital
Accounts (Deficit),
December 31, 1998 $ 116,000 180,000 15,000 140,000 4,876,000 15,074,000 20,401,000
======== ======= ====== ======= ========= ========== ===========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Statements of Cash Flows
For the Years Ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- -----
Cash flows from operating activities:
Net income (loss) $ 4,753,000 2,937,000 (1,754,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 6,324,000 5,507,000 5,367,000
Accretion of discount on mortgage note 1,524,000 1,752,000 2,014,000
Loss on disposal of assets - 3,000 -
Decrease in deferred rent 2,049,000 6,785,000 10,117,000
Deferred interest on receivable from New Claridge (432,000) (432,000) (432,000)
Changes in current assets and liabilities:
(Increase) decrease in rent due from New
Claridge, interest receivable from partners,
prepaid expenses and other assets (41,000) (376,000) 65,000
Increase (decrease) in accounts payable and
accrued interest due New Claridge (492,000) 157,000 286,000
----------- ---------- -----------
Net cash provided by operating activities 13,685,000 16,333,000 15,663,000
----------- ---------- -----------
Cash flows from investing activities:
Purchase of Hotel Assets (3,231,000) (208,000) (544,000)
----------- ---------- -----------
Cash flows from financing activities:
Capital contributions - - 330,000
Proceeds from borrowings from New Claridge 3,508,000 208,000 660,000
Principal payments of debt, principally to New Claridge (14,051,000) (17,227,000) (15,134,000)
------------ ------------ ------------
Net cash used in financing activities (10,543,000) (17,019,000) (14,144,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (89,000) (894,000) 975,000
Cash and cash equivalents, beginning of period 1,535,000 1,446,000 552,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,446,000 552,000 1,527,000
============ ============ ============
Supplemental cash flow information:
Interest paid $ 14,637,000 12,688,000 10,245,000
============ ============ ===========
Supplemental noncash investing and financing activities:
Capital lease obligation incurred to acquire Hotel Assets $ - - 67,000
============ ============ ===========
See accompanying notes to financial statements.
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Notes to Financial Statements
December 31, 1996, 1997, and 1998
(1) The Partnership
(a) General / Segments
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 operates in one segment as its
only operation is to 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) Relationship with the Claridge
Substantially all of the revenues of the Partnership are derived from
leases with New Claridge. Accordingly, the ability of the Partnership
to fulfill its obligations is dependent upon the ability of New
Claridge to pay rental payments when due. The financial stability of
the Partnership is therefore dependent upon the financial condition of
New Claridge. While the Partnership was formed to own and to lease to
the Corporation and its affiliates, certain real estate and related
assets, the Partnership is separate and distinct from the Corporation.
Any person or entity seeking information regarding the Corporation or
its debt or equity securities should review the reports, statements
and other information filed by the Corporation with the Securities and
Exchange Commission, and should not rely upon the Partnership's
discussion of the Corporation.
(c) 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. 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.
(d) 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.
(e) 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. Payments
received by the Partnership are reflected as contributions 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.
(f) 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 and 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:
Certain property and equipment are depreciated on a different
basis and over different lives for GAAP than those used for Tax
Basis;
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, while for Tax Basis the interest was
expensed in full in 1994;
The Expandable Wraparound Mortgage was discounted for GAAP as a
result of the effect on the obligation of $20 million of deferred
interest;
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.
Following are the Partnership's assets and liabilities as
determined in accordance with GAAP and for federal income tax
reporting purposes at December 31:
1997 1998
----------------------- -----------------------
GAAP Tax GAAP Tax
Basis Basis Basis Basis
----- ----- ----- -----
(in thousands)
Total assets $ 118,244 50,766 $ 104,713 46,899
Total liabilities $ 96,419 98,946 $ 84,312 86,054
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
Capital lease asset 7 years
b. Long-lived assets and certain identifiable intangibles are
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 (undiscounted and without interest)
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.
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 and not the Partnership.
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. For other
financial instruments, their carrying value approximates their
fair value. The carrying amount of cash and 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, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(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.
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.
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) full or partial satisfaction of the Expandable
Wraparound Mortgage; and (iii) 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.
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.
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, 1997 and 1998 is as follows:
Accumulated
Depreciation and Net
December 31, 1997 Cost Amortization Hotel Assets
----------------- ---- ----------------- -------------
Building $ 101,353,000 $ 35,896,000 $ 65,457,000
Building improvements 28,391,000 21,214,000 7,177,000
Furniture, fixtures and
equipment 52,810,000 47,749,000 5,061,000
Capital lease asset 1,153,000 801,000 352,000
----------- ----------- -----------
$ 183,707,000 $ 105,660,000 $ 78,047,000
=========== =========== ===========
Accumulated
Depreciation and Net
December 31, 1998 Cost Amortization Hotel Assets
----------------- ---- ---------------- ------------
Building $ 101,353,000 $ 38,430,000 $ 62,923,000
Building improvements 28,572,000 22,327,000 6,245,000
Furniture, fixtures and
equipment 53,173,000 49,288,000 3,885,000
Capital lease asset 1,220,000 907,000 313,000
---------------- ----------------- ----------------
$ 184,318,000 $ 110,952,000 $ 73,366,000
================ ================= ================
(5) Long-term Debt
At December 31, 1997 and 1998, long-term debt consisted of the following:
1997 1998
---- ----
14% Wraparound mortgage, net of $ 74,461,000 $ 65,975,000
unaccreted discount of $6,539,000
and $4,525,000, respectively
14% Expansion mortgage 2,167,000 -
14% FF&E notes 17,452,000 15,665,000
Capital lease obligations - 47,000
---------- -----------
94,080,000 81,687,000
Less: Current portion of long-term debt (18,615,000) ( 2,065,000)
---------- -----------
$ 75,465,000 $ 79,622,000
========== ===========
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. The expansion
mortgage had principal and interest payments of $234,000 due monthly
through September 30, 1998.
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. Scheduled principal and
interest payments were made monthly from January 1988 through
September 1998. Effective September 30, 1998, the Partnership, the
Corporation and New Claridge agreed to amend the Wraparound Mortgage
Agreement and Note to provide for an extension of the maturity date of
the Expandable Wraparound Mortgage to January 1, 2005. In addition,
principal payments which were payable during the fourth quarter of
1998 (totaling $3.5 million) were deferred to the earlier of (i) the
maturity date of the Expandable Wraparound Mortgage Agreement and
Note, (ii) such earlier date, if any, as the entire principal amount
of the Expandable Wraparound Mortgage Note becomes due and payable, or
(iii) the date on which any merger, consolidation or similar
transaction to which the Corporation or New Claridge is a party, or
any sale of all or substantially all of the assets of the Corporation
or New Claridge is consummated, or any change of control of the
Corporation or New Claridge occurs. As a result of this amendment,
interest only is payable from January 1999 until January 2005, at
which time a balloon principal payment of $50.5 million and the $20
million of deferred interest is due.
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 be payable at final maturity of the Expandable
Wraparound Mortgage. All FF&E notes are secured under the wraparound
mortgage up to $25 million.
During 1998 the Partnership financed the purchase of a building alarm
system through a 11.3% capital lease. This thirty-six month lease
requires monthly principal and interest payments of approximately
$2,000 until its maturity in March 2001. 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.
Aggregate maturities of debt for each of the next five years are as
follows:
1999 $ 2,065,000
2000 3,018,000
2001 1,864,000
2002 435,000
2003 330,000
Thereafter 78,500,000
----------
86,212,000
Less: Discount ( 4,525,000)
----------
$ 81,687,000
==========
(6) Leases
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. 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, as
amended, 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 January 1, 2004.
Minimum future rental receipts for each of the next five years under
leases to New Claridge are as follows:
1999 $ 30,596,000
2000 31,192,000
2001 29,716,000
2002 28,131,000
2003 27,973,000
Thereafter 133,745,000
-----------
Minimum future rentals $ 281,353,000
===========
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.
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 provides
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).
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).
Under the terms of the Operating Lease, as amended effective March 1,
1997, New Claridge had an option to purchase, on September 30, 1998,
the Hotel Assets and the underlying land. To exercise this option, New
Claridge was required to give notice to the Partnership, at least nine
months prior to the option date, of its election to do so. Based on
the current financial situation, New Claridge did not give such notice
to the Partnership in respect of the September 30, 1998 option date.
However, New Claridge may also exercise an option, on September 30,
2003, to purchase the Hotel Assets and the underlying land on January
1, 2004, for their fair market value at the time the option is
exercised.
Effective September 30, 1998, the Operating Lease and Expansion
Operating Lease were further amended, pursuant to a Sixth Amendment to
the Operating Lease and Fifth Amendment to the Expansion Operating
Lease (the "Sixth Amendment"), to allow for the deferral of $1.1
million of rent in either February 1999 or March 1999, dependent upon
certain conditions being met. These conditions, which must have
occurred prior to March 2, 1999, include (i) New Claridge having
received the proceeds in connection with its settlement of the parking
garage litigation, and (ii) the Corporation or New Claridge having
paid the interest due on the Notes on February 1, 1999. New Claridge
received the proceeds from the settlement of the Parking garage
litigation in February 1999, and paid the interest due on the Notes on
March 2, 1999, within the 30-day grace period allowed in accordance
with the terms of the Indenture. The $1.1 million of basic rent
deferred in 1999 is to be paid to the partnership in monthly
installments of $25,000 commencing January 1, 2000 until paid in full.
This amendment also provides for additional abatements of rent,
through December 31, 2004, as necessary to reduce the Partnership's
cash flow to an amount necessary only to meet the Partnership's cash
requirements; these abatements, however, are to be reduced by
specified amounts for each period commencing January 1, 2000 and
ending December 31, 2004 ($83,333 per month in 2000, $130,000 per
month in 2001, $180,000 per month in 2002 and 2003, and $130,000 per
month in 2004). GAAP Basis rents abated during the years ended
December 31, 1997 and 1998 amounted to $10,802,000 and $11,145,000,
respectively. Cumulative abated GAAP Basis rents as of December 31,
1998 total $59,013,000.
In addition to the deferral and abatements of rent provided for in the
Sixth Amendment, the amendment provides for the payment of $3.5
million of additional basic rent on the earlier of (i) the maturity
date of the Expandable Wraparound Mortgage Note (see below), (ii) such
earlier date, if any, as the entire principal amount of the Expandable
Wraparound Mortgage becomes due and payable, or (iii) the date on
which any merger, consolidation, or similar transaction to which the
Corporation or New Claridge is a party, or any sale of all or
substantially all of the assets of the Corporation or New Claridge is
consummated, or any change in control of the Corporation or New
Claridge occurs.
(7) Current 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. The recurring losses and
diminishing liquidity of the Corporation has resulted in the
Corporation's auditors' report for fiscal year end to include a going
concern paragraph. The General Partners of the Partnership are
continually in contact with the management of the Corporation
concerning various refinancing efforts, including a sale of the
Corporation and Partnership assets, or a restructuring of their
related financial obligations.
The Claridge has reported as follows:
During 1995, the cash provided by operations of the Claridge was
sufficient to meet the Corporation's obligations to pay interest on
the Notes, as well as to make at least some moderate capital
improvements. Commencing in the latter part of 1995, however,
competition in the Atlantic City casino market for bus customers, a
principal source of customers for the Claridge at the time, increased;
this competition intensified even more during 1996 as additional
casino square footage was added, principally due to the opening of the
Trump World's Fair casino. During 1996, the average coin incentive
issued per bus patron at the Claridge increased to approximately $19,
from approximately $13 in 1995. Total cash incentives issued to
Claridge's casino patrons (in the form of coin to play slot machines
and gaming chips to play table games) increased to approximately $30.5
million in 1996, from approximately $25.2 million in 1995. While the
Corporation's promotional costs have increased significantly, total
casino revenues in 1996 actually decreased from 1995 levels. It had
been the expectation of the Corporation that, upon the opening of its
new self-parking garage, the Corporation would be able to reduce its
reliance on the bus patron market; however, the Corporation was forced
to close the garage facility on July 10, 1996, only ten days after its
opening following a fatal accident. Because the facility was not able
to reopen until the end of September 1996, the Corporation lost any
possible benefit of the facility during the normally busy summer
season. In addition, severe winter weather in the first quarter of
1996 adversely affected revenues. As a result, the Corporation
experienced a net loss for 1996 of $15.4 million, compared to a net
loss of $1.9 million in 1995.
The Corporation has experienced recurring losses and serious
deterioration in its cash flow since 1996. Since the Corporation does
not have substantial cash reserves or access to a line of credit, the
Corporation needed to experience significant improvements in operating
results in 1997 over 1996 levels in order to meet its on-going
obligations, including the interest due on the Notes. Operating
results in 1997 did improve over 1996 levels, due primarily to the
positive impact of the availability of the self-parking garage, lower
bus package pricing, and other cost containment initiatives. However,
operating results in 1998 fell below 1997 levels due to increased
competition for casino customers. In 1998, the Corporation experienced
a net loss of $9.4 million, compared to a net loss of $6.0 million in
1997. In the fall of 1998, New Claridge redirected its bus program to
reduce the number of customers who arrive by bus, and, thereby,
related costs. Total coin issued to bus passengers in 1998 was $13.5
million, compared to $15.0 million of coin issued to bus passengers in
1997. Marketing efforts are being directed toward the mid-level slot
customer through the use of promotions and advertising. Additionally,
management continues to conserve cash through various cost containment
measures. Management will also consider various refinancing
alternatives, including a sale of the Corporation, or a restructuring
of its financial obligations.
In view of the operating results of New Claridge in 1998, and in order
to meet its obligations, management of the Corporation took several
steps to enhance its cash position, through both operational changes,
including the previously mentioned redirection of the bus program, and
certain transactions with PDS Financial Corporation ("PDS") and the
New Jersey Casino Reinvestment Development Authority ("CRDA"), as
further discussed below.
In December 1997, New Claridge obtained a commitment from PDS for a
sale lease-back facility ("Facility"). Under the terms of the
Facility, New Claridge could sell certain of its slot machines to PDS
under a sale lease-back arrangement, for a specified amount per slot
machine, for up to $1.8 million. In February 1998, New Claridge sold
370 slot machines to PDS for approximately $1 million under this
Facility. The machines will be leased back to New Claridge under an
operating lease arrangement for two years. After two years, New
Claridge has an option to either purchase the machines, renew the
lease arrangement for twelve months, or return the equipment to PDS.
In December 1998, New Claridge completed the sale of an additional 379
slot machines to PDS for approximately $776,000, under terms similar
to those described above. No additional financing is available under
this Facility.
In October 1998, the CRDA approved the direct investment of New
Claridge funds, already on deposit with the CRDA, and the completion
of certain donations of New Claridge funds also already on deposit.
These transactions resulted in the receipt by New Claridge of
approximately $930,000 from the CRDA in December 1998.
In addition, in February 1999, the Corporation and New Claridge agreed
to a settlement of approximately $2.3 million in the arbitration
proceedings concerning the accident which took place in New Claridge's
self-parking garage in July 1996. The settlement proceeds were
received by New Claridge in late February 1999.
As a result of these transactions, on March 2, 1999, New Claridge was
able to pay the interest due on the Notes on February 1, 1999, under
the 30-day grace period allowed in accordance with the terms of the
indenture governing the Notes.
(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 93% 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 is
in effect during the entire term of the Operating Lease including any
subsequent renewal terms.
(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. It is estimated that at
December 31, 1998, the aggregate amount owing in respect of the
Contingent Payment was approximately $88.3 million.
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 New Jersey Casino Control Commission.
On February 23, 1996, the Corporation acquired an option to purchase,
at a discount from the carrying value, the Contingent Payment. The
purchase price of the option was $1 million, and the option could have
been exercised any time prior to December 31, 1997. Given the recent
operating results at New Claridge (see Note 7, "Current Developments
at New Claridge"), the Corporation was not able to exercise this
Contingent Payment Option, and it expired in accordance with its terms
on December 31, 1997.
SCHEDULE III
ATLANTIC CITY BOARDWALK ASSOCIATES, L.P.
Real Estate and Accumulated Depreciation
Years Ended December 31, 1996, 1997 and 1998
Life on
Which
Depreciation
Date in 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.$28,572,000 Impr. 28,572,000 1998 N/A 10 yrs
(11,147,000) Mortgage FF&E 54,393,000 FF&E 54,393,000 N/A 1983-1998 7 yrs
------------ ---------- ----------
Hotel &
Casino
Atlantic
City, NJ $81,687,000 - $101,353,000 $ 82,965,000 $ 184,318,000 $110,952,000
----------- ------- ------------ ---------- ----------- -----------
NOTES:
(A) Encumbrances represents the amount owed at December 31, 1998 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, 1998 for Federal
income tax purposes is $196,970,000.
(D) Reconciliation of Real Estate Carrying Costs:
1996 1997 1998
---- ---- ----
Balance at beginning of year $ 180,298,000 $183,529,000 $183,707,000
Building improvements 2,376,000 104,000 181,000
Furniture, fixtures and
equipment (FF&E) acquired 855,000 104,000 430,000
FF&E retired - (30,000) -
----------- ----------- ------------
Balance at end of year $ 183,529,000 $183,707,000 $184,318,000
=========== =========== ===========
(E) Reconciliation of Accumulated Depreciation:
1996 1997 1998
---- ---- ----
Balance at beginning of year $94,057,000 $100,281,000 $105,660,000
Provision for depreciation 6,224,000 5,407,000 5,292,000
Accumulated depreciation
of FF&E retired - (28,000) -
---------- ----------- -----------
Balance at end of year $100,281,000 $105,660,000 $110,952,000
========== =========== ===========