U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-64236
Alpha Hospitality Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3714474
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
----------
12 East 49th Street, New York, NY 10017
(Address of principal executive offices)
----------
(212) 750-3500
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act during the past 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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: November 14, 1996.
Class
Common Stock, $0.01 par value 13,478,325 shares
<PAGE>
ALPHA HOSPITALITY CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 1996
(Unaudited) and December 31, 1995 ............................ 1
Consolidated Statements of Operations Nine Months Ended
September 30, 1996 and 1995 (Unaudited) ...................... 2
Consolidated Statements of Operations Three Months Ended
September 30, 1996 and 1995 (Unaudited) ...................... 3
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1996 and 1995 (Unaudited) ...................... 4-5
Notes to Consolidated Financial Statements ..................... 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 14-20
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings .............................................. 21
Item 3. Default upon Senior Securities ................................. 21
Signatures ..................................................... 22
All items which are not applicable or to which the answer is negative have
been omitted from this report.
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1996 1995
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash, including restricted cash of $272 and
$330 in 1996 and 1995, respectively ............ $ 1,361 $ 2,316
Accounts receivable, less allowance for
doubtful accounts of $432 and $354 in
1996 and 1995, respectively .................... 220 703
Inventories ...................................... 320 536
Prepaid insurance ................................ 307 1,977
Other current assets ............................. 83 984
-------- --------
Total current assets ......................... 2,291 6,516
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization of $16,227 and
$13,385 in 1996 and 1995, respectively ........... 40,932 59,255
OTHER ASSETS, deposits and other ................... 1,624 831
-------- --------
$ 44,847 $ 66,602
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............. $ 10,573 $ 27,319
Notes payable .................................... 2,178 3,816
Accounts payable and other accrued expenses ...... 9,262 10,525
Accrued payroll and related liabilities .......... 3,999 2,862
Preferred dividend payable ....................... 535
Due to affiliate, current maturity ............... 1,416 2,000
-------- --------
Total current liabilities ...................... 27,963 46,522
-------- --------
LONG-TERM DEBT, less current maturities ............ 13,598 2,312
-------- --------
DUE TO AFFILIATE, less current maturity,
including accrued interest of $503 ............... 503 15,864
-------- --------
AMOUNT DUE UNDER REDEMPTION AGREEMENT,
including accrued interest of $235 ............... 1,024 --
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
1,000 shares, 738 issued ....................... 7 --
Common stock, $.01 par value, authorized
17,000 shares, 13,478 and 12,354 shares
issued in 1996 and 1995, respectively .......... 135 124
Capital in excess of par value ................... 57,432 32,779
Common stock subscribed .......................... -- 1,600
Accumulated deficit .............................. (55,815) (32,599)
-------- --------
Total stockholders' equity ................... 1,759 1,904
-------- --------
$ 44,847 $ 66,602
======== ========
See accompanying notes to consolidated financial statements
1
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Nine Months Ended
September 30,
-----------------------
1996 1995
-------- --------
REVENUES:
Casino ....................................... $ 34,814 $ 19,312
Food and beverage ............................ 853 863
Hotel management fees ........................ 1,489 2,035
Retail and other ............................. 244 103
-------- --------
Total revenues ........................... 37,400 22,313
-------- --------
COSTS AND EXPENSES:
Casino ....................................... 13,329 10,321
Food and beverage ............................ 1,434 1,286
Hotel management costs ....................... 934 1,092
Selling, general and administration .......... 20,324 11,333
Interest ..................................... 3,529 2,034
Buyout of marketing agreement ................ 1,500
Depreciation and amortization ................ 4,788 2,963
Development costs ............................ 217 172
Debt conversion fee .......................... 1,019
Write-off of Lakeshore leasehold and
improvements ............................... 14,507
Write-off of unamortized discount on
mortgage note payable ...................... 931
Write-off of capitalized costs related
to Indiana ................................. 858
-------- --------
Total costs and expenses ................. 60,081 32,490
-------- --------
NET LOSS ....................................... $(22,681) $(10,177)
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING .................................. 13,292 10,321
======== ========
LOSS PER COMMON SHARE .......................... $ (1.71) $ (0.99)
======== ========
See accompanying notes to consolidated financial statements
2
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
September 30,
------------------------
1996 1995
-------- --------
REVENUES:
Casino ..................................... $ 9,493 $ 6,665
Food and beverage .......................... 212 283
Hotel management fees ...................... 440 697
Retail and other ........................... 80 45
-------- --------
Total revenues ......................... 10,225 7,690
-------- --------
COSTS AND EXPENSES:
Casino ..................................... 3,255 3,473
Food and beverage .......................... 325 424
Hotel management costs ..................... 315 351
Selling, general and administration ........ 5,797 4,155
Interest ................................... 886 694
Depreciation and amortization .............. 1,344 1,008
Development costs .......................... 60 84
Buyout of marketing agreement .............. 1,500
Write-off of unamortized discount on
mortgage note payable .................... 931
-------- --------
Total costs and expenses ............... 11,982 12,620
-------- --------
NET LOSS ..................................... $ (1,757) $ (4,930)
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ................................ 13,478 10,321
======== ========
LOSS PER COMMON SHARE ........................ $ (0.13) $ (0.48)
======== ========
See accompanying notes to consolidated financial statements
3
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-----------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ....................................... $(22,681) $(10,177)
-------- --------
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Depreciation and amortization ................ 4,788 2,963
Capital lease restructuring .................. (268)
Debt conversion fee .......................... 1,019
Write-off of Lakeshore leasehold and
improvements ............................... 14,507
Bad debt expense ............................. 113
Amortization of deferred finance costs ....... 52
Imputed interest on long-term debt ........... 214
Gains on sales of property and equipment ..... (7)
Write-off unamortized discount on mortgage
note payable ............................... 931
Write-off of capitalized costs related
to Indiana ................................. 592
Changes in operating assets and
liabilities:
Decrease in accounts receivable ............ 370 125
(Increase) decrease in inventories ......... 216 (23)
Decrease in prepaid insurance .............. 1,670 694
(Increase) decrease in other
current assets ........................... 901 (34)
Increase (decrease) in accounts
payable and other accrued expenses ....... (913) 599
Increase in accrued payroll and
related liabilities ...................... 1,137 281
-------- --------
Total adjustments ...................... 23,540 6,387
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ..................................... 859 (3,790)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............ (1,421) (690)
Proceeds from sales of property and
equipment .................................... 24
Payments for deposits and other assets ......... (869) (204)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............ (2,290) (870)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate ........................ 3,220 5,561
Proceeds from notes payable .................... 62
Proceeds from long-term debt ................... 44
Payments on notes payable ...................... (1,250) (418)
Payments on long-term debt ..................... (1,600) (667)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 476 4,476
-------- --------
NET DECREASE IN CASH ............................. (955) (184)
CASH, beginning of period ........................ 2,316 1,180
-------- --------
CASH, end of period .............................. $ 1,361 $ 996
======== ========
See accompanying notes to consolidated financial statements
4
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
------------------------
1996 1995
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash paid for interest during
the period ..................................... $ 2,187 $ 618
========= =========
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Amount due under redemption agreement,
includes accrued interest of $235 ............ $ 1,024 $ --
========= =========
Capital lease restructuring, includes $74
of accrued interest .......................... $ 268 $ --
========= =========
Common stock issued for payment of
long-term debt ............................... $ 2,454 $ --
========= =========
Preferred stock issued in settlement
of long-term debt, includes $41 of
accrued interest and a $61 transaction fee ... $ 1,283 $ --
========= =========
Preferred stock issued in settlement
of amount due to affiliate, includes a
transaction fee of $958 ...................... $ 20,123 $ --
========= =========
Write-off of Indiana capitalized costs ......... $ -- $ 592
========= =========
Write-off of unamortized discount on
mortgage note payable ........................ $ -- $ 931
========= =========
Accounts payable and accrued interest
capitalized to long-term debt ................ $ -- $ 1,708
========= =========
Note payable capitalized to long-term debt ..... $ -- $ 153
========= =========
See accompanying notes to consolidated financial statements
5
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 1 - NATURE OF BUSINESS
Alpha Hospitality Corporation (the "Company") was incorporated in Delaware
on March 19, 1993 and has adopted a December 31 year end. The Company owns and
operates a dockside casino located in Greenville, Mississippi. The Company is
also pursuing casino development and management opportunities in Missouri and
New York. In addition, the Company provides services for the management of
hotels and motels located in ten states.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF
SELECTED SIGNIFICANT ACCOUNTING POLICIES
Financial Statements - The accompanying unaudited consolidated financial
statements of Alpha Hospitality Corporation and subsidiaries have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principals.
All adjustments which are of a normal and recurring nature and, in the opinion
of management, necessary for a fair presentation have been included. The
unaudited financial statements should be read in conjunction with the audited
financial statements of December 31, 1995, included in the 10-K.
Operations and Principles of Consolidation - The accompanying statements
include the accounts of the Company and all of its wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated in
consolidation.
Loss Per Common Share - Loss per common share is based on the weighted
average number of shares outstanding. The Company's outstanding stock options
and warrants are excluded in the computation since they would have an
antidilutive effect on loss per common share. Certain shares (701) being held in
escrow are included in this calculation (See Note 8).
Promotional Allowances - Revenues do not include the retail amount of food
and beverage of approximately $2,942, $2,788, $790 and $1,002 provided
gratuitously to customers, for the nine months and three months ended
September 30, 1996 and 1995, respectively.
Newly Issued Accounting Standards - In March 1995, Statement of Financial
Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of
Long-lived Assets and for the Long-lived Assets to be Disposed of" was issued.
The Company has adopted SFAS 121 in the first quarter of 1996.
Statement No. 121 requires that long-lived assets (and certain intangibles)
to be held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
The Company periodically reviews the carrying value of certain of its
assets in relation to historical results, as well as management's best estimate
of future trends, events and overall business climate on the respective location
of each operation. If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would then estimate the future cash
flows (undiscounted and without interest charges). If such future cash flows are
insufficient to recover the carrying amount of the assets, then impairment is
triggered and the carrying value of any impaired assets would then be reduced to
fair value.
6
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES - (Continued)
Reclassifications - Certain amounts have been reclassified in 1995 to
conform to the 1996 presentation.
NOTE 3 - PROPERTY AND EQUIPMENT
Details of property and equipment at September 30, 1996 and December 31,
1995 are as follows:
1996 1995
------- -------
Land and building .......................... $ 214 $ 214
Boat, barge and improvements ............... 23,892 23,590
Leasehold and improvements ................. 14,541 30,001
Gaming equipment ........................... 10,218 10,042
Furniture, fixtures and equipment .......... 7,422 7,264
Transportation equipment ................... 835 1,034
Construction in progress ................... 37 495
------- -------
57,159 72,640
Less accumulated depreciation
and amortization ........................... 16,227 13,385
------- -------
$40,932 $59,255
======= =======
Included in property and equipment at September 30, 1996 and December 31, 1995
was approximately $1,223 and $1,319, respectively, related to assets recorded
under capital leases. Included in accumulated depreciation and amortization at
September 30, 1996 and December 31, 1995 was approximately $461 and $422,
respectively, of amortization related to assets recorded under capital leases.
In accordance with its policy on impaired long-lived assets, effective June
30, 1996, the Company recorded an impairment loss of $14,507, representing the
leasehold and improvements from the Company's Lakeshore casino of $16,284 and
accumulated amortization of $1,777.
NOTE 4 - NOTES PAYABLE
Notes payable at September 30, 1996 and December 31, 1995 are comprised of
the following:
Interest
Rate 1996 1995
--------- ------ ------
Revolving line of credit with payments
of principal and interest due
monthly, collateralized by funds
held at the Company's casino and
guaranteed by an affiliate ................. Prime +2% $ -- $ 145
Notes payable to Bryanston (purchased
and assigned from former Cotton Club
stockholders) .............................. 10% 1,897 3,293
Revolving line of credit of $500 with
payments of principal and interest
due December 2, 1996, collateralized
by cash advances ........................... 262 200
7
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 4 - NOTES PAYABLE - (Continued)
Interest
Rate 1996 1995
--------- ------ ------
Note payable to third party with payments
of principal and interest due monthly,
collateralized by certain vehicles ......... 11% 103
Unsecured note payable ....................... 53
Employee loans ............................... Various 19 22
------ ------
$2,178 $3,816
====== ======
On August 30, 1996, the Company extended its $500 revolving line of credit
through December 2, 1996.
At September 30, 1996, the Company was in default of its note payable to
Bryanston. The Company received a waiver of the default through December 31,
1997.
NOTE 5 - LONG-TERM DEBT
Long-term debt at September 30, 1996 and December 31, 1995 are comprised of the
following:
Interest
Rate 1996 1995
--------- ------ ------
Mortgage note payable, Bryanston,
principal and interest due monthly
through November 1998, collateralized by
the barge located in Greenville,
Mississippi, and certain other assets ...... 10% $ 7,800 $ 7,800
Mortgage note payable in monthly
installments of $70 plus interest at
30-day commercial paper rate (5.44% at
September 30, 1996) plus 3.5% adjusted
quarterly, funded with weekly deposits
of $25 into a restricted cash account,
collateralized by the barge and
improvements located in Lakeshore,
Mississippi ................................ 9% 3,656 3,736
Equipment notes payable monthly through
November 1999 and collateralized by
certain assets ............................. 11-14% 9,740 13,432
Capitalized lease obligations, payable
monthly, expiring in various years
through 2001 ............................... 10-15% 418 925
Loans payable in equal quarterly
installments of principal and interest
over 10 years, commenced in January
1996. Loans are subordinated to the
Bryanston mortgage note payable and will
be repaid only if the Company maintains
certain financial ratios. Approximately
$2,474 is owed to Bryanston at September
30, 1996 and December 31, 1995,
respectively ............................... 9% $ 2,474 $ 3,655
Line of credit of $49, principal and
interest due monthly through April 1999,
collateralized by certain equipment ........ 10.75% 37 --
Bank notes, payable monthly through 1997,
collateralized by certain equipment ........ 8-10% 46 83
------- -------
24,171 29,631
Less current portion ......................... 10,573 27,319
------- -------
$13,598 $ 2,312
======= =======
8
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 5 - LONG-TERM DEBT - (Continued)
Aggregate future required principal payments are approximately as follows:
Year ending September 30:
1997 ........................................................ $10,573
1998 ........................................................ 3,134
1999 ........................................................ 8,157
2000 ........................................................ 724
2001 ........................................................ 284
Thereafter .................................................. 1,299
-------
$24,171
=======
Effective April 12, 1996, the Company restructured its capital sign lease
of approximately $745 with an unrelated party. The terms of the restructure
reduces the lease principal amount to $475 and forgives approximately $74 of
accrued interest. The effective interest rate of the restructured lease is 10%
per annum, with a four-year term.
Effective June 26, 1996, the Company issued 44 shares of its preferred
stock in settlement of a certain loan payable of $1,181, accrued interest of $41
and a five percent transaction fee of $61.
At September 30, 1996, the Company was in default of (i) its mortgage notes
payable aggregating approximately $11,456 for non-payment, (ii) the Lakeshore
equipment notes aggregating approximately $3,433 for the breach of several loan
covenants and a loan payable to Bryanston of approximately $2,474 for
non-payment. The Company received a waiver of the defaults of the loan payable
and, relating to the Jubilation Casino, mortgage note payable to Bryanston
through December 31, 1997. Accordingly, the mortgage note payable in the amount
of $3,656 and the equipment notes payable ($3,433), relating to the Jubilation
Casino, are reflected in current liabilities at September 30, 1996.
At December 31, 1995, the Company was in default of (i) its mortgage notes
payable for non-payment, (ii) the equipment notes aggregating approximately
$13,432 for the breach of several loan covenants (iii) a capital lease of
approximately $745 for non-payment and certain loans payable aggregating
approximately $3,655 went into default in 1996 due to non-payment. The Company
received a waiver of the default of the loan payable to Bryanston. Accordingly,
the mortgage notes payable ($11,536), equipment notes payable ($13,432), capital
lease ($745) and a certain loan payable ($1,181) were reflected in current
liabilities at December 31, 1995.
NOTE 6 - ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses are comprised of the following:
September 30 December 31
1996 1995
------- -------
Construction ........................... $ 1,345 $ 1,218
Insurance financing .................... 30 1,585
Accrued professional fees .............. 760 851
Accrued property taxes ................. 809 843
Accrued interest ....................... 1,977 974
Other .................................. 4,341 5,054
------- -------
$ 9,262 $10,525
======= =======
9
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company is obligated under a $20,000 non-revolving promissory note with
Bryanston. Effective June 26, 1996, the Company issued 694 shares of its
preferred stock in settlement of $19,165 of its note and a five percent
transaction fee of $958. The outstanding principal balance at September 30, 1996
and December 31, 1995 is $1,416 and $17,361, respectively. The note, which bears
interest at prime rate (8.25% at September 30, 1996) plus 2%, is payable at the
lesser of the outstanding principal amount or $2,000 per annum through December
31, 1999. Beginning 1996, accrued interest is due and payable by the end of the
following month. All remaining principal and accrued interest (approximately
$503) shall be due on December 31, 2000. Additionally, commencing May 1, 1996
and for each of the next succeeding three years thereafter, the Company is
required to make additional principal payments equal to "Available Cash Flow of
Maker" as defined in the note.
At September 30, 1996, the Company was in default of the non-revolving
promissory note with Bryanston for failure to make the required monthly interest
payments. The Company received a waiver of the default through December 31,
1997.
In accordance with Mississippi law, the Company's casino licenses have
initial terms of two years and will be subject to periodic renewal. In October
1995, the Company received renewals of their casino licenses through October
1997.
In July 1996 the Company closed its Lakeshore casino and surrendered its
casino license for that location. Failure to retain the Greenville license could
have a material adverse effect on the Company's operations.
In October 1994, Alpha Gulf was named as a defendant in an action brought
in the United States District Court for the Southern District of Mississippi
(Susan E. Wolff, et al. v. James C. Zamecnik, et al.) on the theory of "liquor
liability" for the service of alcohol to a customer, who subsequently was
involved in an automobile collision. The principle theory of liability against
Alpha Gulf is based on its service of alcohol to a customer when it knew, or
should have known, he was intoxicated and then allowed him to drive his
automobile from the casino. The Company was named as an additional defendant in
May 1995 based primarily on the allegation that it is the alter-ego of its
subsidiary, and secondarily on the theory of liquor liability. The Plaintiff
initially sought $20,000. Early in the litigation, Plaintiff sought a default
judgment against Alpha Gulf relating to evidence that was destroyed. The court
denied the action, but granted Plaintiff's attorney fees in an amount to be
determined, but to date not yet determined. The Plaintiff also initiated a
declaratory judgment action in the same court against Alpha Gulf and its
insurance carriers seeking a determination as to the liability of such carriers
under the insurance policies issued by the carriers to Alpha Gulf and the
Company for any damages found against Alpha Gulf in the primary litigation up to
the policy limits. The declaratory judgment action appears to have been brought
in response to issues raised by the primary insurance carrier as to timely
notice of the incident and possible spoilation of evidence. Subsequently, the
primary insurance carrier initiated its own declaratory judgment action against
Alpha Gulf and the Company (Commerce & Industry Company v. Alpha Gulf Coast,
Inc. and Alpha Hospitality Corporation, Inc.: United States District Court for
the Southern District of Mississippi, Jackson Division) seeking a determination
that it is not liable under the subject insurance policy. The declaratory
judgment action instituted by Plaintiff was dismissed in June 1996. The
declaratory judgment action instituted by the primary insurance carrier was
voluntarily dismissed as to the Company by the insurance carrier. That action,
in which Alpha Gulf is now the sole defendant, is now in the initial stages of
litigation. A settlement has been reached between Plaintiff and the Company's
insurance carrier with respect to the underlying personal liability action in
the amount of $5,125, covering all issues. The principal insurance carrier has
paid the settlement and may assert that the Company and Alpha Gulf have an
obligation to reimburse it for payment of the settlement amount. Alpha Gulf
intends to vigorously defend against the insurance carrier's claim and believes
it has meritorious defenses. Accordingly, no provision for any liability that
may result upon adjudication has been made in the accompanying consolidated
financial statements.
10
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED
PARTY TRANSACTIONS - (Continued)
In January 1996, the Company was named as a defendant in an action brought
in the Circuit Court of Hinds County, Mississippi (Amos vs Alpha Gulf Coast,
Inc.; Batiste vs Alpha Gulf Coast, Inc., Dycre vs Alpha Gulf Coast, Inc.;
Johnston vs Alpha Gulf Coast, Inc.; Rainey vs Alpha Gulf Coast, Inc.). Based on
the theory of "liquor liability" for the service of alcohol to a customer,
Plaintiffs alleged that on January 16, 1995, a vehicle operated by Mr. Amos
collided with a vehicle negligently operated by Mr. Rainey, an individual that
was alledgedly served alcoholic beverages by the Company. Plaintiffs alleged
that they suffered personal injuries and seek compensatory damages aggregating
$17.1 million and punitive damages aggregating $37.5 million. The ultimate
outcome of this litigation cannot presently be determined as this case is
presently in the early phases of discovery. Accordingly, no provision for
liability to the Company that may result upon adjudication has been made in the
accompanying consolidated financial statements. The Company believes that the
risk referred to in this paragraph is adequately covered by insurance.
In August 1996, Alpha Gulf was named as a defendant in an action brought in
the United States District Court for the Southern District of Mississippi
(Joseph R. Cure, Joseph E. Cure, Jr., Cynthia Cure Rutherford, Michael Cure and
Susan Cure Gollot vs. Alpha Gulf Coast, Inc.) for alleged past due and future
accelerated rentals and other costs under an operating lease relative to real
property located in Lakeshore, Mississippi. Plaintiffs seek past due rentals of
approximately $967 and future rentals of $800 annually through March 31, 2000
and $950 annually through July 31, 2011. The consolidated financial statements
include a provision for the liability on past due rents of $627 at September 30,
1996. The ultimate outcome of this litigation cannot presently be determined as
this case is in the early phases of discovery. Accordingly, no provision for
liability to the Company, except as mentioned above, that may result upon
adjudication has been made in the accompanying consolidated financial
statements.
In September 1996, the Company and Alpha Gulf were named as defendants in
an action brought in the Circuit Court of Hancock County, Mississippi (Durward
Dunn, Inc. vs. Alpha Hospitality Corporation; Durward Dunn, Inc. vs. Alpha Gulf
Coast, Inc.) for alleged failure to make payments pursuant to a construction
contract. Plaintiff seeks actual and compensatory damages of approximately
$1,200. The consolidated financial statements include a provision for the
liability of $928 for this contract at September 30, 1996. The ultimate outcome
of this litigation cannot presently be determined as this case is presently in
the early phases of discovery. Accordingly, no provision for liability to the
Company, except as mentioned above, that may result upon adjudication has been
made in the accompanying consolidated financial statements.
The Company is a party to various other legal actions which arise in the
normal course of business. In the opinion of the Company's management, the
resolution of these other matters will not have a material adverse effect on the
financial position of the Company.
11
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 8 - AMOUNT DUE UNDER REDEMPTION AGREEMENT
Effective October 15, 1995, the Company restructured certain equipment
notes, aggregating approximately $9,000, with unrelated parties. Pursuant to the
restructuring requirements, the Company will repay approximately $6,500 in 48
monthly installments of $166, which includes interest of 10% per annum. The
balance of $2,500 bears interest at 10% per annum, is due on November 15, 1999,
and may either be partially or fully repaid, pursuant to an escrow agreement,
from the net proceeds from the sale of approximately 701 shares of the Company's
common stock held in escrow. To the extent that the net proceeds exceeds $2,500
plus accrued interest, the excess will be applied to the $6,500 portion of the
debt. However, if the net proceeds are less than the $2,500 plus accrued
interest, then the Company will be required to remit the balance due at
maturity. The escrow agreement provides for the unrelated party to have full
voting rights pertaining to the escrowed shares and the right to sell any or all
of the shares. The Company has the right of first refusal to purchase the shares
that the unrelated party desires to sell. The debt is collateralized by the
Company's barge and certain gaming equipment.
At September 30, 1996, the amount due under the redemption agreement is
$1,024, which includes $235 of accrued interest resulting from the decrease in
the fair value of the stock at September 30, 1996 ($2.375) and the price at the
date of the agreement ($3.50).
NOTE 9 - STOCKHOLDERS' EQUITY
Effective June 26, 1996, the Company issued 694 and 44 shares,
respectively, of its preferred stock, in settlement of $19,165 and $1,222,
respectively, of their unsecured debt with Bryanston and an unrelated third
party (see Notes 5 and 7). The Company was charged a five percent transaction
fee of approximately $1,020, which was also converted into shares of the
Company's preferred stock. The conversion rate was based on the fair market
value of the Company's common stock at the date of conversion ($3.625). Each
preferred share is convertible into eight shares of the Company's common stock
after December 31, 1996 and carries voting rights of one vote per preferred
share. The preferred stock also carries a dividend of $3.05 per share, payable
quarterly, which increases to $3.77 per share if the cash dividend is not paid
within 30 days of the end of each fiscal year. In such event, the dividend will
be payable in common stock.
Changes in stockholders' equity during the nine months ended September 30,
1996 include the net loss of $22,718, an accrued preferred dividend of $535,
common stock with a value of $2,454 issued to a creditor and placed in escrow,
pursuant to the October 15, 1995 restructuring of certain equipment notes,
preferred stock issued in settlement of unsecured debt aggregating $21,406 and
an increase in the amount due under the redemption agreement of $789.
12
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 10 - INCOME TAXES
The Company and all of its subsidiaries file a consolidated federal income
tax return. Income tax expense is allocated pursuant to the separate tax
attributes of each subsidiary. At September 30, 1996 and December 31, 1995, the
Company's deferred federal tax asset is comprised of the tax benefit (cost)
associated with the following items based on the 35% tax rate currently in
effect (dollars in thousands):
September 30 December 31
1996 1995
-------- --------
Pre-opening costs currently deducted
for financial reporting and amortized
over 5 years for tax purposes ............ $ 1,805 $ 1,788
Net operating loss carry forward ........... 19,791 11,524
Differences between financial and
tax depreciation methods ................. (1,862) (2,077)
Differences between financial and
tax basis of assets and
liabilities .............................. 1,795 1,737
Interest capitalized for financial
reporting and expensed for tax
purposes ................................. (213) (224)
Other ...................................... (23) (77)
-------- --------
Deferred tax asset ......................... 21,293 12,671
Valuation allowance on deferred
tax asset ................................ (21,293) (12,671)
-------- --------
$ -- $ --
======== ========
The Company has available for federal income tax purposes, a net operating
loss carryover of approximately $37,450 of which $883, $7,407, $24,637 and
$23,619 will expire in the years 2008, 2009, 2010 and 2011, respectively.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations - Casinos
Results of Operations - Alpha Gulf
The following table sets forth the statement of operations for the Alpha
Gulf's casino operations before income taxes for the nine months and three
months ended September 30, 1996 and 1995 (in thousands):
Nine Months Three Months
Ended September 30 Ended September 30
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Casino ........................ $ 27,901 $ 19,312 $ 8,980 $ 6,665
Food, beverage and other ...... 794 966 224 328
-------- -------- -------- --------
Total revenues ............ 28,695 20,278 9,204 6,993
======== ======== ======== ========
Operating expenses:
Casino ........................ 9,770 9,785 3,173 3,311
Food, beverage and other ...... 1,053 1,286 290 424
Selling, general and
administration .............. 12,417 10,832 3,921 4,043
-------- -------- -------- --------
Total operating expenses .. 23,240 21,903 7,384 7,778
======== ======== ======== ========
Income (loss) from operations ... 5,455 (1,625) 1,820 (785)
-------- -------- -------- --------
Other expenses:
Interest ...................... 1,537 1,601 502 517
Buyout of marketing agreement . 1,500 1,500
Write-off at unamortized
discount on mortgage
note payable ................ 931 931
Depreciation and amortization . 3,622 2,963 1,238 1,008
-------- -------- -------- --------
Total other expense ....... 5,159 6,995 1,740 3,956
-------- -------- -------- --------
Income (loss) before intercompany
charges and deferred income
tax credit .................... $ 296 $ (8,620) $ 80 $ (4,741)
======== ======== ======== ========
Nine Months Ended September 30, 1996 and 1995:
Alpha Gulf generated revenues of $28,695 and $20,278 in 1996 and 1995,
respectively. Casino revenues were $27,901 and $19,312 in 1996 and 1995,
respectively. Food, beverage and other revenues were $794 and $966 in 1996 and
1995, respectively. The increase in casino revenues is primarily due to the
relocation of the Alpha Gulf's Bayou Caddy's Jubilee Casino from Lakeshore,
Mississippi to Greenville, Mississippi in November 1995. During this period the
Jubilee Casino achieved 50% market share in the Greenville market. In addition
the Greenville market increased by 4.2% over the same period last year.
At the locations referred to above, Alpha Gulf's casino operating expenses
were $9,770 and $9,785, (35% and 51% of casino revenues) in 1996 and 1995,
respectively. Food, beverage and other expenses were $1,053 and $1,286 (133% of
food, beverage and other revenues) in 1996 and 1995, respectively.
The reduced casino expenses in 1996 when compared to 1995 of $15 was the
net result of reduced staffing levels ($246), the decrease in the costs related
to food and beverages provided gratuitously to customers ($820), which is the
direct result of the reduction of gratuitous food and beverages provided to
casino customers and the related costs thereto, an increase in gaming taxes
($965) and an increase in customer slot payouts ($419), which are directly
related to increased revenues and a decrease in operating expenses ($333), which
is the result of management operating more efficiently.
14
<PAGE>
Food and beverage revenue does not include the retail value of food and
beverage of approximately $2,232 and $2,788 provided gratuitously to customers
in 1996 and 1995, respectively.
The reduction of food, beverage and other costs are directly related to the
reduced volume of food and beverage revenues.
Selling, general and administrative expenses consists of payroll and
related benefits of approximately $4,249 and $4,456, marketing and advertising
of approximately $4,985 and $2,720, occupancy costs of approximately $1,914 and
$2,309, and operating expenses of approximately $1,537 and $1,348 in 1996 and
1995, respectively. The reduced payroll and related costs of $207 was a direct
result of management's cost-cutting measures instituted during the first quarter
of 1995. The $2,265 increase in marketing and advertising is directly related to
the increased volume of business and management's introduction of marketing
programs focused on identifying new customers. The reduction of occupancy costs
of $395 is primarily due to reduced insurance costs. The increase in operating
expenses of $189 was directly related to the increased volume of business.
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $3,622 and $2,963 in 1996 and 1995,
respectively. The increase was the direct result of an increase in capital
expenditures related to the relocation of the gaming vessel to Greenville,
Mississippi and the purchase of equipment and fixtures.
Three Months Ended September 30, 1996 and 1995:
Alpha Gulf generated revenues of $9,204 and $6,993 in 1996 and 1995,
respectively. Casino revenues were $8,980 and $6,665 in 1996 and 1995,
respectively. Food, beverage and other revenues were $224 and $328 in 1996 and
1995, respectively. The increase in casino revenues is primarily due to the
relocation of the Alpha Gulf's Bayou Caddy's Jubilee Casino from Lakeshore,
Mississippi to Greenville, Mississippi in November 1995.
At the locations referred to above, Alpha Gulf's casino operating expenses
were $3,173 and $3,311, (35% and 50% of casino revenues) in 1996 and 1995,
respectively. Food, beverage and other expenses were $290 and $424 (129% of
food, beverage and other revenues) in 1996 and 1995, respectively.
The decreased casino expenses in 1996, when compared to 1995 of $138, is
the net result of decreased staffing levels ($154), due to management operating
more efficiently, the decrease in the costs related to food and beverages
provided gratuitously to customers ($231), which is a direct result of the
reduction of gratuitous food and beverages provided to casino customers and the
related costs thereto and an increase in gaming taxes ($253), which is the
direct result of increased revenues.
Food and beverage revenue does not include the retail value of food and
beverage of approximately $740 and $1,001 provided gratuitously to customers in
1996 and 1995, respectively.
The reduction of food, beverage and other costs are directly related to the
reduced volume of food and beverage revenues.
Selling, general and administrative expenses consists of payroll and
related benefits of approximately $1,423 and $1,481, marketing and advertising
of approximately $1,462 and $1,102, occupancy costs of approximately $666 and
$965 and operating expenses of $372 and $494 in 1996 and 1995, respectively. The
reduced payroll and related costs of $58 was a direct result of management's
cost-cutting measures instituted during the first quarter of 1995. The $360
increase in marketing and advertising is directly related to the increased
volume of business and management's introduction of marketing programs focused
on identifying new customers. The reduction of occupancy costs of $299 is
primarily due to reduced insurance costs and a decrease in rent due to moving to
a less expensive location. The decrease in operating expenses of $122 was the
direct result of management operating more efficiently.
15
<PAGE>
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $1,238 and $1,008 in 1996 and 1995,
respectively. The increase was a direct result of an increase in capital
expenditures related to the relocation of the gaming vessel to Greenville,
Mississippi and the purchase of equipment and fixtures.
Future Operations - Alpha Gulf
Alpha Gulf's Bayou Caddy's Jubilee Casino operating results have improved
since its relocation to Greenville. The gaming revenues achieved to date by the
Jubilee Casino in Greenville far exceed the revenues of its predecessor gaming
vessel at that site. Alpha Gulf's casino operations in Greenville have become a
major factor in the Greenville market and has helped to expand that market.
A third gaming vessel opened November 6, 1996 in Greenville. Historically,
addition of gaming facilities expands local gaming markets in Mississippi. It is
unknown at this time what impact this third gaming vessel will have on the
Greenville casino market. Management believes that this third gaming vessel will
negatively impact Alpha Gulf's current market achievement but to what extent
this act will have on future revenues is uncertain at this time.
Results of Operations - Jubilation
The Company acquired the Jubilation gaming vessel (formerly known as the
Cotton Club) on October 26, 1995. The vessel's operations in Greenville was
terminated on October 30, 1995. After its relocation to Lakeshore, Mississippi
the Jubilation reopened for business December 21, 1995. The following table sets
forth the statement of operations for the Jubilation casino operations before
income taxes and intercompany charges for the nine months and three months ended
September 30, 1996 (in thousands):
Nine Months Three Months
Ended Ended
September 30, September 30,
1996 1996
-------- --------
Revenues:
Casino ............................ $ 6,913 $ 513
Food, beverage and other .......... 303 67
-------- --------
Total revenues ................ 7,216 580
-------- --------
Expenses:
Casino ............................ 3,559 81
Food, beverage and other .......... 381 35
Selling, general and administrative 6,641 1,572
-------- --------
Total operating expenses ...... 10,581 1,688
-------- --------
Loss from operations ................ (3,365) (1,108)
-------- --------
Other expenses:
Interest .......................... 748 234
Write-off of leasehold and
improvements .................... 14,507
Depreciation and amortization ..... 1,166 106
-------- --------
Total and other expenses ...... 16,421 340
-------- --------
Loss before intercompany charges and
deferred income tax credit ........ $(19,786) $ (1,448)
======== ========
16
<PAGE>
Nine Months and Three Months Ended September 30, 1996
Jubilation experienced a loss from operations of $3,365 and $1,108 during
the nine months and three months ended September 30, 1996, respectively. During
the second quarter of 1996, management became uncertain as to whether the
Jubilation Casino would be profitable during the remainder of fiscal 1996.
Management reduced operating costs and monitored the operation very closely. To
overcome the Jubilation Casino's declining revenues, the Company would have to
construct additional amenities which would require a substantial investment of
funds. Since revenues did not improve during May and June 1996, which are part
of the peak season, a continued decline was expected by management in the third
quarter. Therefore, on July 2, 1996, the Company notified the Mississippi Gaming
Commission (the "Commission") and the employees of the Jubilation Casino of its
plans to close the Jubilation Casino by the end of August 1996. In connection
with the plan to close the Jubilation Casino, the realizability of the capital
leasehold and improvements related to the Jubilation Casino were reassessed.
Effective for the second quarter ended June 30, 1996, management recorded an
impairment loss of $14,507 to property and equipment, representing the
unamortized balance of these leasehold improvements.
On July 16, 1996, operation of the Jubilation Casino was suspended in
compliance with a directive of the Commission which raised that the working
capital available to the Jubilation Casino was not sufficient. The Commission
required that the Jubilation Casino's working capital be increased. This working
capital requirement was reviewed by Jubilation Lakeshore in light of its
previously announced plan to close the Jubilation Casino during August 1996 and
the costs which would be incurred to reopen the Jubilation Casino. Based on this
review, Jubilation Lakeshore decided not to reopen the Jubilation Casino.
Casino Development
New York - Alpha Monticello
On January 19, 1996, the Company, through its subsidiaries, entered into a
memorandum of understanding with Catskill Development, L.L.C. ("Catskill")
regarding the development and management of a casino to be built adjacent to the
Monticello Raceway in Sullivan County, New York. The development and management
of this casino will be undertaken by Mohawk Management L.L.C., of which the
Company's wholly-owned subsidiary, Alpha Monticello, owns 50%, and will be
responsible for the day-to-day operations. It is intended that the casino will
be owned by the St. Regis Mohawk Tribe and will be located on land to be placed
in trust for the benefit of the Tribe.
On August 2, 1996, Mohawk Management L.L.C. executed an agreement with the
St. Regis Mohawk Tribe for the management of the proposed casino referred to
above. The Tribe has submitted this agreement to the National Indian Gaming
Commission for its approval.
During 1996 and 1995, Alpha Monticello incurred approximately $516 and $20,
respectively, of costs primarily associated with its participation with
Catskill.
During 1996, Alpha Monticello incurred $496 related to corporate
expenditures for casino development.
Missouri - Alpha Missouri
Alpha Missouri has not commenced operations. Alpha Missouri has
applications pending for site approval and a gaming license with respect to the
development of a riverboat gaming facility in Louisiana, Missouri. It has
incurred development costs of approximately $87 and $179 in 1996 and 1995,
respectively, related to its proposed development of a riverboat casino in
Louisiana, Missouri.
During 1996, Alpha Missouri also incurred $496 related to corporate
expenditures for casino development.
17
<PAGE>
Hotel Management - Alpha Hotel Management Company, Inc. ("Alpha Hotel")
The following table sets forth selected financial data of Alpha Hotel
Management Company, Inc. (Alpha Hotel) for the nine months and three months
ended September 30, 1996 and 1995 (in thousands):
Nine Months Three Months
Ended Ended
September 30 September 30
--------------- ---------------
1996 1995 1996 1995
------ ------ ------ ------
Income Statement Data:
Management fees ........... $1,489 $2,035 $ 440 $ 697
------ ------ ------ ------
Operating expenses:
Direct payroll and
related expenses ...... 885 931 288 295
Selling, general and
administrative ........ 78 182 39 59
------ ------ ------ ------
Total operating expenses 963 1,113 327 354
------ ------ ------ ------
Income from management fees
before intercompany charges
and income taxes .......... $ 526 $ 922 $ 113 $ 343
====== ====== ====== ======
Results of Operations
Nine Months Ended September 30, 1996 and 1995:
Total management fees decreased during the nine months ended September 30,
1996 compared to the nine months ended September 30, 1995 by approximately $546
(26.8%). The decrease was principally from the net result of $54 increase in
fees from continuing management agreements and a decrease of $600 related to the
loss of five management agreements (which related to hotels whose ownership
changed) and one management agreement which expired. The increase in fees earned
was the result of increases in the hotels' gross revenues on which the
management fees are based. The factors that influence such gross revenues are
general economic conditions, competitive changes in geographic regions, foreign
exchange rates relative to the strength of the U.S. dollar, the price of
gasoline, air fares and general weather conditions.
Direct payroll and related costs decreased 4.9% to $885 for the nine months
ended September 30, 1996 from $931 for the nine months ended September 30, 1995.
The decrease was the result of a reduction in staffing to accommodate the
decrease in management contracts being serviced.
Selling, general and administrative expenses decreased to $78 for the nine
months ended September 30, 1996 from $182 for the nine months ended September
30, 1995. This decrease is a result of office relocation to a less expensive
area.
Three Months Ended September 30, 1996 and 1995
Total management fees decreased during the three months ended September 30,
1996 compared to the three months ended September 30, 1995 by approximately $257
(36.9%). The decrease was principally from the result of $28 decrease in fees
from continuing management agreements and a decrease of $229 related to the loss
of three management agreements (which related to hotels whose ownership changed)
and the loss of one management agreement which expired.
Direct payroll and related costs decreased 2.4% to $288 for the three
months ended September 30, 1996 from $295 for the three months ended September
30, 1995. The decrease was the result of a reduction in staffing to accommodate
the decrease in management contracts being serviced.
Selling, general and administrative expenses decreased to $39 for the three
months ended September 30, 1996 from $59 for the three months ended September
30, 1995. This decrease is a result of office relocation to a less expensive
area.
18
<PAGE>
Liquidity and Capital Resources
For the nine months ended September 30, 1996, the Company achieved net cash
provided by operating activities of $859. During this period, the Company
experienced a net loss of $22,681. The positive aggregate net cash flow from
operating activities resulted from non-cash expenses of $20,159 and a positive
net change in operating assets and liabilities of $3,418. Non-cash expenses
primarily consisted of depreciation and amortization of $4,788, debt conversion
fee of $1,019 and the write-off of the Lakeshore leasehold improvements of
$14,507. The change in operating assets and liabilities primarily consisted of a
decrease in prepaid insurance of $1,670, a decrease in other current assets of
$1,085, a decrease in accounts payable and other accrued expenses of $1,097 and
an increase in accrued payroll and related liabilities of $1,137.
Cash used in investing activities of $2,290 consisted of $1,421 in
purchases of property and equipment primarily related to the relocation of
casinos to each of their current sites and $869 in payments for deposits and
other assets primarily attributable to $607 in deferred costs relating to casino
development in Missouri and New York.
Cash provided by financing activities of $476 was attributable to $3,220 in
net advances under the $20,000 non-revolving promissory note with Bryanston and
the principal reduction of notes payable and long-term debt of approximately
$2,850.
In October 1994, Alpha Gulf was named as a defendant in an action brought
in the United States District Court for the Southern District of Mississippi
(Susan E. Wolff, et al. v. James C. Zamecnik, et al.) on the theory of "liquor
liability." A settlement has been reached between Plaintiff and the Company's
insurance carrier with respect to the underlying personal liability action in
the amount of $5,125, covering all issues. The principal insurance carrier has
paid the settlement and has asserted that Alpha Gulf has an obligation to
reimburse it for payment of the settlement amount. Alpha Gulf intends to
vigorously defend against such claim and believes it has meritorious defenses.
Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying consolidated financial statements.
In January 1996, Alpha Gulf was named as a defendant in an action brought
in the Circuit Court of Hinds County, Mississippi (Amos vs Alpha Gulf Coast,
Inc.; Batiste vs Alpha Gulf Coast, Inc.; Dycre vs Alpha Gulf Coast, Inc.,
Johnston vs Alpha Gulf Coast, Inc.; Rainey vs Alpha Gulf Coast, Inc.) based on
the theory of "liquor liability." The ultimate outcome of this litigation cannot
presently be determined as this case is presently in the early phases of
discovery. Accordingly, no provision for liability that may result upon
adjudication has been made in the accompanying consolidated financial
statements. The Company believes that the risk referred to in this paragraph is
adequately covered by insurance.
In August 1996, Alpha Gulf was named as a defendant in an action brought in
the United States District Court for the Southern District of Mississippi
(Joseph R. Cure, Joseph E. Cure, Jr., Cynthia Cure Rutherford, Michael Cure and
Susan Cure Gollot vs. Alpha Gulf Cost, Inc.) for alleged past due and future
accelerated rentals and other costs under an operating lease relative to real
property located in Lakeshore, Mississippi. The ultimate outcome of this
litigation cannot presently be determined as this case is in the early phases of
discovery. The consolidated financial statements include a provision for the
liability on past due rents of $627 at September 30, 1996, which management
feels is sufficient to cover the outcome of this litigation.
In September 1996, the Company and Alpha Gulf were named as defendants in
an action brought in the Circuit Court of Hancock County, Mississippi (Durward
Dunn, Inc. vs. Alpha Hospitality Corporation; Durward Dunn, Inc. vs. Alpha Gulf
Coast, Inc.) for alleged failure to make payments pursuant to a construction
contract. The ultimate outcome of this litigation cannot presently be determined
as this case is presently in the early phases of discovery. The consolidated
financial statements include a provision for the liability of $928 for this
contract at September 30, 1996, which management feels is sufficient to cover
the outcome of this litigation.
19
<PAGE>
Effective June 26, 1996 the Company issued 738 shares of its preferred
stock (convertible into common stock of the Company on the basis of eight common
shares per preferred share) to (a) liquidate a loan payable in the amount of
$1,283 (including accrued interest of $41 and a transaction fee of $61); and (b)
partially liquidat?e the non-revolving promissory note issued to Bryanston. The
amount of the Bryanston note liquidated was $20,123 (including a transaction fee
of $958). The principal amount of $1,416 plus accrued interest remain
outstanding under the Bryanston note.
At September 30, 1996, the Company was in default of (i) its mortgage notes
payable aggregating approximately $11,456 for non-payment, (ii) the equipment
notes relating to the Jubilation Casino aggregating approximately $3,433 for the
breach of several loan covenants and (iii) a loan payable to Bryanston of
approximately $2,474 for non-payment. The Company received a waiver of the
defaults of the loan payable and the $7,800 mortgage note payable to Bryanston.
Accordingly, the mortgage note payable in the amount of $3,656 and the equipment
notes payable ($3,433), relating to the Jubilation Casino, are reflected in
current liabilities at September 30, 1996.
The Company continues to suffer significant losses from operations and has
a working capital deficit and accumulated deficit. In addition, the Company was
not in compliance with certain long-term debts which are included in current
liabilities. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management has minimized continuing
losses from the Jubilation Casino by closing the operation in July 1996.
Management is currently working with the Jubilation Casino's unsecured creditors
regarding future payment of its obligations. Management is also in discussion
with the Jubilation Casino's secured creditors in an attempt to settle its
outstanding obligations.
Management's plans include operating the Jubilee Casino profitably and
maintaining positive cash flow. Management is currently seeking a source of
refinancing its Jubilee Casino debt. There is no assurance that a source for
refinancing will be obtained. Management will also be seeking sources of
financing for casino development projects, if certain approvals are received.
Management believes that financing will be available, however, there are no
assurances that financing will be obtained.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 on file with the Securities and Exchange Commission.
In August 1996, Alpha Gulf was named as a defendant in an action brought in
the United States District Court for the Southern District of Mississippi
(Joseph R. Cure, Joseph E. Cure, Jr., Cynthia Cure Rutherford, Michael Cure and
Susan Cure Gollot vs. Alpha Gulf Coast, Inc.) for alleged past due and future
accelerated rentals and other costs under an operating lease relative to real
property located in Lakeshore, Mississippi. Plaintiffs seek past due rentals of
approximately $967 and future rentals of $800 annually through March 31, 2000
and $950 annually through July 31, 2011. The consolidated financial statements
include a provision for the liability on past due rents of $627 at September 30,
1996. The ultimate outcome of this litigation cannot presently be determined as
this case is in the early phases of discovery. Accordingly, no provision for
liability to the Company, except as mentioned above, that may result upon
adjudication has been made in the accompanying consolidated financial
statements.
In September 1996, the Company and Alpha Gulf were named as defendants in
an action brought in the Circuit Court of Hancock County, Mississippi (Durward
Dunn, Inc. vs. Alpha Hospitality Corporation; Durward Dunn, Inc. vs. Alpha Gulf
Coast, Inc.) for alleged failure to make payments pursuant to a construction
contract. Plaintiff seeks actual and compensatory damages of approximately
$1,200. The consolidated financial statements include a provision for the
liability of $928 for this contract at September 30, 1996. The ultimate outcome
of this litigation cannot presently be determined as this case is presently in
the early phases of discovery. Accordingly, no provision for liability to the
Company, except as mentioned above, that may result upon adjudication has been
made in the accompanying consolidated financial statements.
There have been no other material developments during such period to any
existing legal proceeding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of November 14, 1996, the Company was in default of its Lakeshore
mortgage note payable of approximately $3,656,000 and its Lakeshore equipment
notes payable aggregating approximately $3,433,000, for non-payment. The total
arrearage of principal and interest payments on the aforementioned debt is
approximately $3,482,000.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14, 1996 /s/ THOMAS W. ARO
-------------------------------------
Thomas W. Aro
Vice President
Dated: November 14, 1996 /s/ JAMES A. CUTLER
-------------------------------------
James A. Cutler
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Alpha Hospitality Corporation Form 10-Q for the Quarter Ended September 30, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,361
<SECURITIES> 0
<RECEIVABLES> 652
<ALLOWANCES> 432
<INVENTORY> 320
<CURRENT-ASSETS> 2,291
<PP&E> 57,159
<DEPRECIATION> 16,227
<TOTAL-ASSETS> 44,847
<CURRENT-LIABILITIES> 27,963
<BONDS> 26,349
0
7
<COMMON> 135
<OTHER-SE> 1,617
<TOTAL-LIABILITY-AND-EQUITY> 44,847
<SALES> 0
<TOTAL-REVENUES> 37,400
<CGS> 0
<TOTAL-COSTS> 36,021
<OTHER-EXPENSES> 20,531<F1>
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 3,529
<INCOME-PRETAX> (22,681)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,681)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> 0.00
<FN>
<F1> Amount includes depreciation and amortization of $4,788 development costs
of $217, debt conversion fee of $1,019 and write-off of Lakeshore leasehol
improvement of $14,507.
</FN>
</TABLE>
